**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

| ***(Mark One)***                                                                                                                                                                                                   |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                                                                                                               |       |   |   |
| **ý**                                                                                                                                                                                                         | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** | ** ** |
|                                                                                                                                                                                                               |       |   |   |
| **For the fiscal year ended December 30, 2005**                                                                                                                                                                    |
|                                                                                                                                                                                                               |       |   |   |
| **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 ofregistrant as specified in its charter)

 

| **Delaware**                     | ** ** | **36-3831568**                        |
|----------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  |       |                                  |

 

| **One Tellabs Center, 1415 West Diehl Road,  Naperville, Illinois** | ** ** | **60563**  |
|---------------------------------------------------------------------|------------|------------|
| (Address of  principal executive offices)                           |       | (Zip Code) |

 

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

 

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

 

Securities registered pursuant to Section 12(g) of the Act:

**Common stock, $0.01 par value**

(Title of Class)

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.

Yes ý No o

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.

Yes o No ý

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes ý No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(229.405) is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. ý

 

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large Accelerated Filerý |   | Accelerated Filero |   | Non-Accelerated Filero |
|-------------------------------|--------|--------------------|--------|------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).

Yes o No ý

 

----

 

The approximate aggregatemarket value of voting and non-voting common equity held by non-affiliates ofthe Registrant computed as of July 1, 2005 was $3,835,000,000. (Solely for thepurpose of calculating the preceding amount, all directors and executive officersof the Registrant are deemed to be affiliates.)

 

As of February 27, 2006,there were 450,392,827 shares of the Registrant’s common stock outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Certain portions of the Registrant’sAnnual Report to Stockholders for the fiscal year ended December 30, 2005, areincorporated by reference into Parts I, II and III, and portions of the Registrant’sProxy Statement dated March 20, 2006, are incorporated by reference into PartIII.

 

2

----

 

**TELLABS,INC.**

**ANNUALREPORT ON FORM 10-K**

**FOR THEYEAR ENDED DECEMBER 30, 2005**

 

**TABLE OFCONTENTS**

 
| ** **   | ** ** | ** **                                                                                                          | ** ** | **Page** |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   |
|         |       |                                                                                                                |       |     |   |
| Item 1.      |       | Business                                                                                                            |       |     | 4-12 |
| Item 1A.     |       | Risk Factors                                                                                                        |       |     | 12-18 |
| Item 1B      |       | Unresolved Staff  Comments                                                                                          |       |     | 18 |
| Item 2.      |       | Properties                                                                                                          |       |     | 18 |
| Item 3.      |       | Legal Proceedings                                                                                                   |       |     | 18-19 |
| Item 4.      |       | Submission  of Matters to a Vote of Security Holders                                                                |       |     | 19 |
|         |       |                                                                                                                |       |     |   |
| **PART II**  |
|         |       |                                                                                                                |       |     |   |
| Item 5.      |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       |     | 20 |
| Item 6.      |       | Selected Financial  Data                                                                                            |       |     | 20 |
| Item 7.      |       | Management’s  Discussion and Analysis of Results of Operations and Financial Condition                         |       |     | 20 |
| Item 7A.     |       | Quantitative  and Qualitative Disclosures about Market Risk                                                         |       |     | 20-23 |
| Item 8.      |       | Financial  Statements and Supplementary Data                                                                        |       |     | 23 |
| Item 9.      |       | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               |       |     | 23 |
| Item 9A.     |       | Controls and  Procedures                                                                                            |       |     | 23 |
| Item 9B.     |       | Other Information                                                                                                   |       |     | 23 |
|         |       |                                                                                                                |       |     |   |
| **PART III** |
|         |       |                                                                                                                |       |     |   |
| Item 10.     |       | Directors  and Executive Officers of the Registrant                                                                 |       |     | 23 |
| Item 11.     |       | Executive  Compensation                                                                                             |       |     | 23 |
| Item 12.     |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |       |     | 23 |
| Item 13.     |       | Certain  Relationships and Related Transactions                                                                     |       |     | 24 |
| Item 14.     |       | Principal  Accountant Fees and Services                                                                             |       |     | 24 |
|         |       |                                                                                                                |       |     |   |
| **PART IV**  |
|         |       |                                                                                                                |       |     |   |
| Item 15.     |       | Exhibits and  Financial Statement Schedules                                                                         |       |     | 24-26 |
|         |       |                                                                                                                |       |     |   |
|         |       | Signatures                                                                                                          |       |     | 27-28 |
|         |       | Schedule II –  Valuation and Qualifying Accounts and Reserves                                                  |       |     | 29 |
|         |       | Exhibit Index                                                                                                       |       |     | 30 |
|         |       | Annual Report to  Shareholders                                                                                      |       |     |   |
|         |       | List of Subsidiaries                                                                                                |       |     |   |
|         |       | Consent of Independent  Registered Public Accounting Firm                                                           |       |     |   |
|         |       | Section 302  Certification of CEO                                                                                   |       |     |   |
|         |       | Section 302  Certification of CFO                                                                                   |       |     |   |
|         |       | Section 906  Certification of CEO                                                                                   |       |     |   |
|         |       | Section 906  Certification of CFO                                                                                   |       |     |   |

 

3

----

 

**PART I**

** **

**ITEM I.BUSINESS**

 

*We define the industry and technicalterms used in this Form 10-K in the**Glossary, which appears at the end of Item 1.*

 

Tellabs, Inc., was incorporated in 1975 as an Illinoiscorporation and was converted to a Delaware corporation in 1992. We design andmarket equipment to providers of telecommunications services worldwide. We alsoprovide installation and professional services that support our productofferings.

 

Our products and services provide solutions to deliverwireline services, wireless services and broadband data networking for businessand residential customers and bundled voice, video and high-speed Internet/dataservices. We sell our products in the domestic and international marketplaces, underthe Tellabs name and trademarks, through our global field sales force, partnersand distributors. Our customer base includes incumbent local exchange carriers(ILECs) such as the regional Bell operating companies (RBOCs), wireless serviceoperators, post telephone and telegraph administrations (PTTs), independentoperating companies (IOCs), original equipment manufacturers (OEMs), cable andmultiple system operators (MSOs), competitive local exchange carriers (CLECs), systemintegrators and alternate service providers.

 

The markets for our products have undergone dynamicchange over the last few years. Following years of unprecedented growth in ourindustry, the demand for telecommunications equipment began a precipitousdecline in early 2001. Deregulation spawned hundreds of new competitive serviceproviders, overcrowding the market. Expectations of unrelenting growth hadpushed capital spending by telecommunications service providers tounsustainable levels. The result was industry overcapacity, excessive debtloads that led to a number of bankruptcies, restructurings and aggressivespending reductions by most of our customers. As a consequence, we experienceda significant revenue decline from 2001 through 2003, and we incurred a netloss in each of those years. Some stability appeared in 2003 and continued into2005, fueled significantly by growing demand for mobile services and thedeveloping market for residential voice, data and video services overfiber-optic facilities.

 

As market conditions deteriorated, we took actions tomatch capacity and expenses with demand to restore profitability and renewgrowth. We closed portions of our manufacturing facilities in each of 2001 and2002, and we reduced our workforce by more than half from 2001 to 2003. Withfewer employees we vacated a significant portion of the office space that weleased and owned in the United States, and we consolidated the majority of ourU.S.-based workforce into our headquarters facility in Naperville, Illinois. Wealso reviewed our product portfolio and cut back or stopped development effortson some products. At the end of 2003, we outsourced the majority of ourremaining manufacturing operations to contract manufacturers.

 

As market conditions improved in 2003, Tellabs set athree-part strategy to achieve sustainable and profitable long-term growth:energize our transport business, establish (then expand) a presence in data andexpand into adjacent markets. We made steady progress on these strategies in2003, 2004 and 2005.

 

In June 2003, we acquired Vivace Networks, Inc., adeveloper of flexible, high performance multiservice routers. This acquisitionbrought us two complementary data networking products that enabled us to expandinto the global service provider multiservice router market. We expect themarket for these products will take time to develop as our customers determineoptimal network configurations and the potential role for our products in theirnetworks.

 

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

 

In November 2004, we expanded into adjacent markets byacquiring Advanced Fibre Communications (AFC), a leading supplier of accessproducts in North America. We believe this acquisition gave us a strongposition in the developing market for delivering residential voice, data andvideo services over fiber-optic facilities. In addition, in December 2004, weacquired Vinci Systems (Vinci), a privately held developer of optical network terminals(ONTs) for Fiber to the Premises (FTTP). This acquisition accelerated ourability to deliver cost-reduced and feature-enhanced components of the FTTPsolution we acquired with AFC.

 

4

----

 

In 2006, we expect capital spending by our customersto increase in North America and to be stable internationally. We believe that wirelessoperators globally will continue to build out next-generation networks todeliver new, data-oriented services. In North America, we expect the ILECs toupgrade the access portion of their networks with fiber technology to deliverbroadband services to their customers. We also expect that customers will beginto accelerate spending on broadband data infrastructure equipment globally. Wehave products either currently available or in development to take advantage ofthese opportunities.

 

During 2004 we recategorized our product offeringsinto four areas to better reflect our business dynamics: transport, managedaccess, voice-quality enhancement and broadband data. In December 2004, weadded a fifth product category, access, to incorporate the products we obtainedthrough our acquisitions of AFC and Vinci. Beginning in 2006 we will includethe results of our voice-quality enhancement products within the transport categoryto reflect the integration of Tellabs’ voice-quality enhancement technologyinto our Tellabs® 5500 digital cross-connect system.

 

**TRANSPORT SYSTEMS**

 

Our transport systems enable service providers tomanage bandwidth. Product offerings include the Tellabs® 5000 seriesof digital cross-connect systems, the Tellabs® 5500 NGX transportswitch, the Tellabs® 6500 transport switch, and the Tellabs®7100 optical transport system.

 

A digital cross-connect system is a high-speed datachannel switch that connects transmission paths based on network needs, ratherthan call-by-call. Digital cross-connect systems manage and route networktraffic and combine, consolidate and segregate signals to maximize efficiency.They also provide a centralized point of control for network performancemonitoring and testing, as well as converting different signal formats. Telecommunicationsmanagers utilize digital cross-connect systems to generate revenue and toreduce cycle time while minimizing capital and operating expenses. Keyapplications include centralized and remote testing of transmission facilities,grooming of voice, data and video signals, automated provisioning of newservices and restoration of failed facilities. The Tellabs® 5000systems operate under software control and typically are used to build andcontrol the narrowband and wideband transmission infrastructure oftelecommunication service providers. They have evolved to integrate voicequality enhancement as well as Ethernet transmission. These systems augment theability of service providers to provide current, emerging and future wirelineand wireless services to business and residential customers, given the ubiquityof the Tellabs® 5000 systems’ presence in the network as well as thecontinued importance of the narrowband and wideband transport layers.

 

Our digital cross-connect systems vary in switchingrate and facility interface speed. Our flagship Tellabs® 5500digital cross-connect system is one of the industry’s highest capacity wideband(T1-speed granularity) digital cross-connects. The system efficiently groomsvoice and data traffic over a SONET-based network. With its scalability andcarrier-class architecture, the Tellabs® 5500 system helps serviceproviders reduce equipment and maintenance costs while maximizing networkprofitability. In 2005, we added narrowband grooming, Ethernet transportcapabilities and integrated voice-quality enhancement technology from theTellabs® 3000 voice-quality enhancement system to the Tellabs®5500 systems.

 

The Tellabs® 5500 NGX transport switch isdesigned for use in optical networks. The Tellabs® 5500 NGX switchincreases network utilization efficiency by integrating cross-connecttechnology, add-drop multiplexing (ADM) and data switching.

 

The Tellabs® 6500 transport switch is abroadband transport platform that performs ADM and cross-connections at higherspeeds than the Tellabs®5500 system. The Tellabs® 6500switch’s redundant, carrier-class architecture ensures reliability duringoperation and service continuity during system expansion.

 

The Tellabs® 7100 optical transport systemis designed for use in the metro optical networking market. It enables serviceproviders to deliver high-speed wavelength services and helps alleviatebandwidth bottlenecks. The system uses dense wavelength-division multiplexing(DWDM) technology to increase the capacity of a network. DWDM is the process ofincreasing the amount of traffic a single fiber can carry by carryingsimultaneous data streams over different wavelengths or colors of light. TheTellabs® 7100 system uses DWDM to increase an individual fiber’scapacity up to 44 times and enables end-to-end fiber and light-path management.In 2005 we added tunable lasers and reconfigurable optical add/dropmultiplexing (ROADM) to the Tellabs® 7100 system. This addedfunctionality enables the Tellabs® 7100 system to dynamicallyprovision wavelengths for use in high-speed optical backbone networks that, forexample, can deliver high-speed Ethernet connections for business customers orvoice, data and video services to consumers.

 

Transport products accounted for approximately 34% ofrevenue in 2005, 48% in 2004 and 43% in 2003.

 

5

----

 

**ACCESS PRODUCTS**

 

Tellabs’ access portfolio includes the Tellabs®1000 multi-service access series, the Tellabs® 1100 multi-serviceaccess series, and the Tellabs® 1600 ONT series. These productsenable service providers to deliver the “triple play” of bundled voice, videoand high-speed Internet/data services over fiber-based networks. The Tellabs®1000 series can be configured as a digital loop carrier (DLC), a digitalsubscriber loop access multiplexer (DSLAM), or a passive optical network(PON)-based Fiber-to-the-Premises (FTTP) solution. The Tellabs® 1100series can be configured as a DLC or a remote DSLAM in a Fiber-to-the-Curb(FTTC) architecture. Finally, the Tellabs® 1600 series consists ofremote terminal devices located at the premises in the FTTP architecture. Thesedevices are used in conjunction with the Tellabs® 1000 PON-basedFTTP solution.

 

Access products accounted for 33% of revenue in 2005.In 2004, these products were included in our results of operations beginning inDecember 2004, and accounted for approximately 4% of revenue.

 

**MANAGED ACCESS SYSTEMS**

 

Our managed access systems category includes theTellabs® 8100 managed access system, the Tellabs® 6300managed transport systems, and the Tellabs® 2300 cable telephony distributionsystem. The Tellabs® 8100 and 6300 systems accommodate EuropeanTelecommunications Standards Institute (ETSI) interface standards not generallyused in North America. The Tellabs® 2300 product can be usedanywhere in the world.

 

The Tellabs® 8100 system is designed forthe connectivity services segment of the overall Europe, Middle East, Africa,Asia Pacific and Latin America business services market, which includesbusiness-class Internet connectivity and managed data networks for enterprisesand service providers. The Tellabs® 8100 system also is a leadingmobile transmission system, used primarily for cell-site aggregation andbackhaul. Additionally, the Tellabs® 8000 network manager providesfull-featured network management and real-time control over the Tellabs®8100, Tellabs® 8600 and Tellabs® 6300 network elements.

 

The Tellabs® 6300 series of managedtransport systems serve wireline and wireless operators in Europe, Middle East,Africa, Asia Pacific and Latin America. In addition, the Tellabs®6300 series provides SDH capacity extensions to embedded Tellabs®8100 networks, facilitated by fully integrated management capabilities.

 

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

 

Managed access systems products accounted forapproximately 19% of revenue in 2005, 27% in 2004 and 34% in 2003.

 

**BROADBAND DATA SYSTEMS**

 

The Tellabs® 8800 multi-service router(MSR) series enables service providers to leverage existing infrastructure toseamlessly and cost-effectively integrate Frame Relay, ATM, Ethernet and IPdata networks onto a converged MPLS infrastructure. These capabilities affordoperators the ability to leverage their existing services while enabling newones, and to have full service interoperability while honoring the specificservice demands of each individual customer. The series includes the Tellabs®8820, the Tellabs® 8830, the Tellabs® 8840 and Tellabs®8860 MSRs, which are unique in their ability to route IP traffic, switch Ethernetpackets and perform ATM/Frame Relay.

 

The Tellabs® 8600 managed edge system is anIP/MPLS-based platform that includes advanced service management tools. It is optimizedfor use as an aggregation platform for next-generation wireless services andholds particular advantages for existing Tellabs® 8100 and Tellabs®6300 system users, given its full management integration with these platformsunder the Tellabs® 8000 network management system.

 

Broadband data systems products accounted forapproximately 3% of revenue in 2005 and 1% of revenue in both 2004 and 2003.

 

**VOICE-QUALITY ENHANCEMENT PRODUCTS**

 

Our voice-quality enhancement systems consistprimarily of the Tellabs® 3000 family of broadband and narrowbandecho cancellers and Tellabs voice-quality enhancement solutions. These productsenable service providers to improve voice quality in wireless, long distanceand private communications networks. The Tellabs® 3000 series ofecho cancellers operates in a variety of network environments to ensure that asubscriber’s phone call is echo-free and

 

6

----

 

without other voice impairments. Wireless operatorshave directly attributed revenue accretion to this higher quality service. Italso holds promise for more advanced services like Voice over Internet Protocol(VoIP).

 

In addition to standalone echo-canceller systems,Tellabs provides integrated echo-cancellation and voice quality-enhancementproducts to manufacturers of telecommunications products worldwide, whointegrate these solutions into third-party systems such as voice switches. In2005 Tellabs began to integrate its voice-quality enhancement technology intothe Tellabs® 5500 system. To reflect this shift from standalone tointegrated voice-quality enhancement, Tellabs will include its voice-qualityenhancement results within the transport product category beginning in 2006. Morethan 300 customers in 70 countries rely on Tellabs echo-canceller and VQEsolutions. Voice-quality enhancement products accounted for approximately 2% ofrevenue in 2005 and 7% of revenue in 2004 and 2003.

 

**SERVICES**

 

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

 

Tellabs’ network deployment services enable ourspecialists to be a single point of contact for customers, focusing on programmanagement, engineering, material procurement, installation labor andsupervision, and acceptance testing.

 

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

 

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

 

Our professional services group offers a variety oftailored programs to meet all phases of a network life cycle includingoperations integration services, highly customizable solutions designed forspecific customer needs that enhance the overall effectiveness of operations,and management systems integration services, which help network serviceproviders improve their operations by extending the capability and performanceof our network management systems.

 

We provide warranties forall of our products.  The specific terms and conditions of thosewarranties vary depending upon the product sold.  We provide a basiclimited warranty, including parts and labor, for all products other than accessproducts for a period generally ranging from 90 days to 5 years.  Thebasic limited warranty for access products covers parts and labor for periodsgenerally ranging from 2 to 6 years.

 

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

 

Services accounted for approximately 9% of revenue in2005, 13% in 2004 and 15% in 2003.

 

# **COMPETITION**

# ** **

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

 

Tellabs’ competition comes primarily from telecommunicationsand data networking infrastructure vendors that include a small number of largeand vertically integrated companies with substantially greater technicalresources, sales and marketing capacities, and established relationships withincumbent service providers. Tellabs’ competition also includes several smallerand early-stage companies that compete directly or indirectly with ourofferings or that are developing and deploying advanced technology that couldoffer advantages over our solutions.

 

**SALES ORGANIZATION**

 

Our global sales group includes direct sales personneland sales support personnel located throughout the United States, Canada, LatinAmerica, Europe, the Middle East, Africa and Asia Pacific. Our North Americasales organization

 

7

----

 

(United States and Canada) is structured by customersegment (e.g., ILECs, wireless). Our international sales organizations arestructured to support activities on a regional basis: Latin America, EMEA(Europe, Middle East and Africa) and Asia Pacific.

 

We generate revenue through our direct salesorganization and selected distributors. We have arrangements with a number ofdistributors of telecommunications equipment, both in North America andinternationally, some of whom maintain inventories of our products tofacilitate prompt delivery. These distributors provide information on ourproducts through their catalogs and through trade-show demonstrations. Ourfield sales force also provides technical support to our distributors. Revenuegenerated through our direct sales organizations and selected distributors in2005 was as follows:

 
| ** **    | ** ** | **Direct Sales** | ** ** | **Distributors** | ** ** |
|---------------|------------|-----------------------|------------|------------------|------------|
| North America |       | 97                    | %          | 3                | %          |
| International |       | 54                    | %          | 46               | %          |
| Consolidated  |       | 87                    | %          | 13               | %          |

 

**CUSTOMERS**

 

Revenue from customers within North America wasapproximately 75% of consolidated revenue in 2005, 66% in 2004 and 61% in 2003.Revenue from international customers was approximately 25% of consolidatedrevenue in 2005, 34% in 2004 and 39% in 2003. The largest single customer groupis the RBOCs, which includes Verizon, BellSouth, and SBC (now AT&T). Revenuefrom RBOCs was approximately 35% of consolidated revenue in 2005, 22% in 2004and 22% in 2003.

 

Revenue from Verizon (including Verizon Wireless) was24% of consolidated revenue in 2005, 27% in 2004 and 21% in 2003. In 2005,revenue from BellSouth was 16% of consolidated revenue. No other customer in2005, 2004 or 2003 accounted for more than 10% of consolidated revenue.

 

**BACKLOG**

 

Total product and service backlog was approximately$354 million at December 30, 2005, and approximately $301 million at December31, 2004. We expect to ship the entire December 30, 2005, backlog in 2006. Weconsider backlog to be an indicator, but not the sole predictor, of futurerevenue.

 

**RESEARCH AND DEVELOPMENT**

 

Tellabsbelieves that the enhancement of existing products and the development of newproducts are vital to our long-term success. As of December 30, 2005, researchand development employees totaled 1,512, representing approximately 42% of ourtotal workforce. We conduct research and development at several facilitiesaround the world. In addition to our internal efforts to develop new products,we undertake research and development-oriented acquisitions andproduct-oriented alliances to provide access to technology that is important tothe future of our customers. Research and development expenses were $344.0million in 2005, $250.3 million in 2004 and $286.1 million in 2003.

 

**MANUFACTURING**

 

We have outsourced our printed circuit board assemblymanufacturing operations to contract manufacturers. We outsourced our printedcircuit board assembly manufacturing operations in North America in the fourthquarter of 2003. We outsourced our international printed circuit board assemblymanufacturing operations in January 2004. We are active in the order,configuration, and system assembly operations for our products. We currentlyhave four sites where this activity is performed.

 

We handle and dispose of any hazardous waste materialfrom our manufacturing activities in compliance with all Federal, State andlocal provisions. The cost of complying with environmental regulations has nothad a material impact on capital expenditures, earnings or our competitiveposition.

 

Our products contain components that generally areavailable from multiple suppliers, as well as components of proprietary designthat currently are sourced from a single supplier. In some cases, long leadtimes would be required to develop alternative sources for proprietary components.If supplies of components become limited, which has

 

8

----

 

occurred on occasion in the past, or if a supplier ofa proprietary component is unable to meet Tellabs’ requirements, the resultingshortages could result in production delays that may adversely affect ourbusiness.

 

**EMPLOYEES**

 

AtDecember 30, 2005, we had 3,609 employees. Approximately 1,253 individuals wereemployed in the sales, sales support, customer service and marketing areas;1,512 in research and product development; and 844 in support activities. Weconsider our employee relations to be good. We are not a party to collectivebargaining agreements.

 

**INTELLECTUAL PROPERTY**

 

We have various trade and service marks, bothregistered and unregistered, in the United States and in numerous foreigncountries (collectively, “Marks”). All of these Marks are important becausethey differentiate our products and services within the industry throughbrand-name recognition. We are not aware of any factor that would affect ourability to use any of our major Marks.

 

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

 

Throughvarious licensing arrangements we grant certain rights to our intellectualproperty and receive certain rights to intellectual property of others. Weexpect to maintain current licensing arrangements and to secure licensingarrangements in the future, as needed and to the extent available on reasonableterms and conditions, to support continued development and marketing of ourproducts. Some of these licensing arrangements require or may require thepayment of royalties. The amount of these payments may depend upon variousfactors, including but not limited to: the structure of royalty payments, offsettingconsiderations, if any, and the degree of use of the licensed technology in anyof our products or otherwise.

 

**BUSINESS SEGMENT AND GEOGRAPHICALINFORMATION**

 

Wemanage our business in one segment. Information on our revenue by productgroup, revenue by country and net long-lived assets by country for the fiscalyears ended December 30, 2005, December 31, 2004, and January 2, 2004, is setforth in the footnotes to our consolidated financial statements in our 2005Annual Report, included herein as Exhibit 13, and is incorporated herein byreference.

 

**HOW TO OBTAIN OUR SEC REPORTS**

 

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

 

Our website is located at www.tellabs.com. Copies ofour most recent annual stockholder report and proxy statement are availabledirectly on the SEC’s website free of charge as soon as reasonably practicableafter we furnish the material to the SEC. Our website includes direct links tothe SEC’s website for our annual and quarterly filings.

 

Copies of our annual, quarterly and current reports,proxy statements and certain other information filed with the SEC, as well asamendments thereto, are available on our website free of charge. We willprovide this information either electronically or in paper form free of chargeupon request.

 

**GLOSSARY OF TECHNICAL TERMS**

 

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

 

**2.5G Wireless** —Software and hardware overlays on a 2G network that provide faster speeds andbetter service for voice and data.

 

**3G Wireless** —Wireless networks built for digital voice and high-speed data, including video.

 

**4G Wireless** —The future generation of wireless networks, which will provide high-speedservices universally.

 

9

----

 

**Access** —Equipment that provides a connection between service providers’ central officesand homes, businesses and other end-user locations.

 

**ATM (Asynchronous Transfer Mode)**— A high-speed, high-bandwidth transmission technology that carries datatraffic in fixed-size cells.

 

**Bandwidth** — Thecarrying capacity of a communications channel.

 

**Broadband** — Ahigh-bandwidth fiber optic, coaxial or hybrid line with more capacity than avoice-grade phone line (64 kilobits per second), which is capable of carryingnumerous voice, data and video channels at once.

 

**Carrier-grade Ethernet**— Industry standards for Ethernet services that enable service providers torapidly create services, smoothly scale up to speed of 10 gigabits per second,offer robust service level agreements and flexibly support various types oftraffic.

 

**Circuit** — Aconnection between two points on a communications network.

 

**Connectivity** —Network capability that enables different devices to communicate with eachother.

 

**Data** — Anynetwork traffic other than voice phone calls. Increasingly, phone calls andvideo are encoded and transported as data.

 

**Digital** —Systems that transport information in the binary 1s and 0s format, likecomputer code, to improve clarity and quality.

 

**Digital Cross-Connect**— A specialized high-speed data channel switch that connects transmission pathsbased on network needs (rather than call by call). Digital cross-connectsmanage and reroute network traffic, and combine, consolidate and segregatesignals to maximize efficiency.

 

**DSL (Digital Subscriber Line)**— A broadband, high-speed Internet connection to a home or business deliveredover copper wires.

 

**Echo Boomers** —The generation born between the early 1980s and the mid-1990s, children of theBaby Boomers. There are more than 250 million Echo Boomers worldwide, who areheavy users of broadband Internet services.

 

**Ethernet** — Adata network standard to connect computers, printers, workstations, terminalsand servers.

 

**FTTC, FTTN, FTTP (Fiber to theCurb, Fiber to the Node, Fiber to the Premises)** — Fiber-opticcable extended directly to homes or neighborhoods to deliver broadbandcommunications services, including voice, data and video.

 

**Fiber-Optic Cable**— High-capacity cable that transmits communications along a glass fiber usinglaser light.

 

**Frame Relay** —Switching interface standard that transmits bursts of data over wide-areasnetworks (WANs).

 

**Gbps (gigabits per second)**— A way to measure data transfer speeds across a network. A gigabit is onethousand million bits of data.

 

**HDTV (High-Definition Television)**— A standard designed to deliver sharper pictures and better-quality sound fortelevisions.

 

**Internet** —Theworld’s largest decentralized network of computers and network servers.

 

**IP (Internet Protocol)**— Rules that enable cooperating computers to share information across a network.

 

**IPTV (Internet ProtocolTelevision)** — Technology that enables video and otherentertainment services over two-way broadband networks.

 

**Mbps (megabits per second)**— A way to measure data transfer speeds across a network. A megabit is 1million bits of data.

 

**Metro Ethernet Forum**— A non-profit organization of service providers, equipment companies andothers with the mission of accelerating worldwide adoption of carrier-classEthernet networks and services.

 

10

----

 

**Mobile** —Wireless communications networks that use radio frequencies rather than cables.

 

**MSPP (Multiservice ProvisioningPlatform)** — A system that consolidates the number of separatedevices needed to provide transport, switching and routing services.

 

**MPLS (MultiProtocol LabelSwitching)** — A packet-switching standard that assigns levelsof priority to multiple traffic types within a data stream to assure quality ofservice (QoS).

 

**Multiplexing** —Transmitting two or more signals over a single communications channel.

 

**Multiservice** —Handles various communications services at once, such as ATM, Ethernet and IP.

 

**Multiservice Router**— A network switch that handles both data and the real-time transmission ofvideo and voice with high reliability and quality.

 

**Network** — Asystem of equipment and connections for the transmission of signals that carryvoice, video and data.

 

**ONT (Optical Network Terminal)**— A device that connects a fiber-access network to a home or business todeliver voice, data and video services.

 

**Optical Transport**— Technology that transmits communications traffic in the form of laser lightover fiber-optic cable.

 

**QoS (Quality of Service)**— Measurement of the integrity of traffic moving over a network. QoS isespecially important for real-time transmissions such as financialtransactions, voice and video.

 

**RF (Radio Frequency)****Overlay** — The transmission of videoover radio wavelengths, which is used in cable TV and fiber-access networks.

 

**ROADM (Reconfigurable OpticalAdd/Drop Multiplexer)** — A system that enables the remoteconfiguration of any wavelength on any network element, thereby reducing theneed for technicians to be dispatched.

 

**SDH (Synchronous DigitalHierarchy)** — Transport format for transmitting high-speeddigital information over fiber-optic facilities outside of North America,comparable to SONET.

 

**SLA (Service Level Agreement)**— An agreement between an end-user and a service provider that establishesmetrics for QoS and measures the service provided to ensure the agreement ismet.

 

**SONET (Synchronous OpticalNETwork)** — Transport format for sending high-speed digitalsignals through fiber optics in North America, comparable to SDH.

 

**Switch** — Adevice that establishes and routes communications paths.

 

**T-1** — Ahigh-speed network connection.

 

**Transport** — Theprocess of moving voice, data or video across communications networks.

 

**Triple-Play Services**— Offering of voice, video and data from a single service provider.

 

**VQE(Voice-Quality Enhancement)** —A technique that improves sound quality by isolating andfiltering out unwanted signals and sounds such as echoes and background noise.

 

**VoD (Video on Demand)**— A service that enables consumers to watch a video program when they chooseto.

 

**VoIP (Voice over InternetProtocol)** — The transmission of phone calls over data orInternet links.

 

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

 

**WAN (Wide Area Network)**— A computer network covering a wide geographical area.

 

11

----

 

**Wireless** —Mobile networks that use radio frequency rather than cables.

 

**Wireline** —Networks that use cables rather than radio frequency.

 

**ITEM1A RISK FACTORS**

 

***Our operatingresults will fluctuate, which may cause volatility in our stock price.***

 

Our operating results have varied significantly fromquarter to quarter, and those results may continue to fluctuate due to avariety of factors, many of which are beyond our control. These factorsinclude, but are not limited to:

 

•   changingconditions in the telecommunications market and in the U.S. and global economy;

 

•   thevolume and timing of orders from and shipments to customers;

 

•   thetiming of, and our ability to obtain, new customer contracts;

 

•   theability to maintain solid and healthy customer relationships and favorablecontract terms;

 

•   thetiming of, and our ability to recognize revenue for, product and service sales;

 

•   thepotential deferral of customer acceptance of new products compared to ourexisting products;

 

•   themarket acceptance of new and enhanced versions of our products and services;

 

•   variationsin the mix of products and services we sell, and the demand and marketacceptance of those products and services;

 

•   ourutilization of production capacity and employees and our ability to manufactureand ship products efficiently;

 

•   theavailability and cost of key components;

 

•   theability to obtain reliable and high quality components for our products;

 

•   theability to maintain good relationships and favorable contract terms with our customersand suppliers;

 

•   introductionsor announcements of new products by competitors;

 

•   changesin accounting rules, such as expensing employee stock option grants;

 

•   ourability to integrate and operate acquired businesses and technologies;

 

•   seasonality,which has often caused revenues to differ from quarter to quarter; and

 

•   theability to satisfy and comply with applicable laws, rules and regulations inthe various locations in which we operate our business and sell our productsand services, including international locations.

 

Our recent operating results may not be a goodpredictor of our results in future periods. Our expense levels are based inpart on expectations of future revenues. If revenue levels in a particularperiod are lower than expected, our operating results will be adverselyaffected. The failure to meet the expectations of the investment community maycause our stock price to decline, possibly substantially. A significant stockprice decline could result in litigation, which could be costly, lengthy anddivert management’s attention and resources from business operations.

 

***The market forcommunications equipment products and services is rapidly changing and remainsvery competitive.***

 

The market for communications network equipment,software and integration services is rapidly changing. Our success will dependin part on our ability to develop and introduce new products successfully andsuccessfully compete with telecommunications equipment providers that havelower cost structures and therefore product and service prices, particularly thosein Asia. We are not able to predict with certainty technological trends or newproducts in the market, something that our competitors may be able to do moreaccurately and rapidly than us. In addition, we are not able to predict whetherour products and services will meet with market acceptance or profitability. Thismay lead to an inability to successfully compete, which may adversely affectour business, financial condition, operating results or prospects.

 

***Demand for ourproducts may decrease if we do not anticipate and adapt rapidly to changingtechnology and customer requirements.***

 

Communications companies face evolving industrystandards, changing market conditions and frequent new product and serviceintroductions and enhancements. The introduction of new products using newtechnologies or the adoption

 

12

----

 

of new industry standards can make existing productsor products under development obsolete or unmarketable. To grow and remaincompetitive, we must adapt to these rapidly changing technologies, enhance ourexisting solutions and introduce new solutions to address our customers’changing demands.

 

In addition, new product developments often requirelong-term forecasting of market trends, development and implementation of newtechnologies and processes, and a substantial capital commitment. We haveinvested, and will continue to invest, substantial resources for thedevelopment of new products. We often must make these investments beforeknowing if the resulting new product will meet with market acceptance orgenerate revenue. We are currently incurring costs and expenses in preparationfor the deployment of several new broadband and transport systems, which costswill precede the generation of revenues and profits from those systems.

 

We may experience difficulties that could delay orprevent the successful design, development, introduction or marketing of newproduct solutions. These new solutions and enhancements must meet therequirements of current and prospective customers and must achieve significantmarket acceptance. In addition, some of our customer agreements, particularlythose with large customers, may contain provisions for payments that are tiedto the availability of new product features.

 

The success of new products depends on severalfactors, including proper new product definition, component costs, timelycompletion and introduction of these products, differentiation of new productsfrom those of our competitors, and market acceptance of these products. Therecan be no assurance that we will successfully identify new productopportunities, develop and bring new products to market in a timely manner, orachieve market acceptance of our products or that products and technologiesdeveloped by others will not render our products or technologies obsolete ornoncompetitive. Specifically, the products and technologies that we pursue maynot prove to have the market success we anticipate, and we may not successfullyidentify and invest in other advanced technologies. If we fail to anticipate orrespond on a cost-effective and timely basis to technological developments,changes in industry standards or customer requirements, if we have anysignificant delays in product development or introduction, or if our productsare not accepted in the market place to the extent we expect, our business,financial condition, operating results or prospects could be adverselyaffected.

 

***Our new productswill be early in their life cycles and will face challenges for marketacceptance.***

 

We have made and will continue to make significantinvestments in new products. These new products are early in their life cyclesand are subject to uncertain market demand. They also may face obstacles inmanufacturing and deployment and competitive response. Customers may not investthe additional capital required for initial system deployment. Additionally, ascustomers complete infrastructure deployments, they may require greater levelsof service, support and financing than we provided in the past. There is noassurance that we can provide products, services, support and financing toeffectively compete for these market opportunities.

 

***A limited number ofour customers represents a large portion of our revenues. Any decrease in revenuefrom these customers could have an adverse effect on our business, financialcondition, operating results and prospects.***

 

A large portion of our revenue likely will depend onsales to a limited number of customers in specific geographic areas. The largestcustomer groups are independent local exchange carriers (ILECs), which includeBellSouth, Qwest Communications, SBC (now AT&T) and Verizon and wirelesscustomers, which include T-Mobile, Cingular and Verizon Wireless. Sales to eachof Verizon (including Verizon Wireless) and BellSouth currently constitute morethan 10% of our revenue. These customers primarily operate in the United States.There is no assurance that these customers will continue to purchase productsfrom us. If a significant existing customer merges with another company, thereis no assurance that it will continue to purchase our products. The loss of oneor more large existing customers or a decrease in the level of purchases fromthese customers could have a material adverse effect on our business, financialcondition, operating results and prospects. Due to our dependence on a largeportion of our revenue from a limited number of customers, our bargaining powerwith respect to prices and contractual terms are often limited.

 

***Our revenues dependon the capital spending programs and financial capabilities of our customersand ultimately on the demand for new telecommunications services from endusers.***

 

Our customers are telecommunications service providersand, in the United States, include, without limitation, incumbent localexchange carriers, independent operating companies, regional Bell operatingcompanies (RBOCs) and wireless carriers. Our ability to generate revenues willdepend upon the capital spending patterns and financial capabilities of thesecustomers, which in turn depends upon the stage of completion of expandingnetwork infrastructures; the availability of funding; and the extent to whichour customers are affected by regulatory, economic, and business conditions inthe geographic areas where they operate. Additionally, our customers typicallyhave long implementation cycles; require a broader range of service includingdesign services; demand that vendors take on a larger share of risks; and oftenrequire acceptance provisions, which can lead to a delay in revenue recognition.The

 

13

----

 

telecommunications industry recently was affected byfinancial problems and reduced capital spending by carriers. These conditionsadversely affected our operating results in prior fiscal years and, if theseconditions return, could have a material adverse effect on our business,operating results, and financial condition. Further, there is no assurance thatcarriers, foreign governments or other customers will pursue infrastructureupgrades that require the products and solutions we offer. Infrastructureimprovements may be delayed or prevented by a variety of factors includingcost, industry competition, regulatory obstacles, mergers, lack of consumerdemand for advanced telecommunications services and alternative approaches toservice delivery. Reductions in capital expenditures by companies in thetelecommunications industry could seriously harm our revenues, net income andcash flows.

 

***We operate in ahighly competitive industry.***

 

Our products and services continue to face competitivepressures. Our success in competing with other communications equipmentproviders will depend primarily on the following:

 

•      ourengineering, manufacturing and marketing skills;

 

•      theprice, quality and reliability of our products;

 

•      ourdelivery and service capabilities;

 

•      ourcontrol of operating expenses and management of assets; and

 

•      ourability to integrate acquired businesses effectively with ours.

 

We also may face more intense competition in certainmarkets as a reaction to our larger presence. Pricing pressures could increasefrom current and future competitors and customers. Many current competitorshave, and future competitors also may have, more engineering, manufacturing,marketing, financial and personnel resources available to them, may have betteraccess to such resources and may be better able to attract and retain highlyqualified personnel resources. Competition also may be affected by consolidationamong communications equipment providers as well as entrants into thecommunications equipment market. As a result, other providers may respond morequickly to new or emerging technologies and changes in customer requirements.In addition, technological change, the increasing addition of Internet, data,video, voice and other services to networks, the possibility of regulatorychanges and industry consolidation are likely to continue to cause rapidevolution in the competitive environment. The full scope and nature of thesechanges are difficult to predict. Increased competition, particularly from Asiabased competitors, could lead to price cuts, reduced gross margins and loss ofmarket share, which may adversely affect our business, operating results andfinancial condition.

 

***Conditions ininternational markets could affect our operations.***

 

Approximately 25% of our revenues were derived fromsales outside of North American in 2005 with 34% derived from sales outside ofNorth America in 2004. Due to the scope of our international sales and ourinternational operations and research and development organizations, we aresubject to the risks of conducting business internationally. These risksinclude:

 

•   localeconomic and market conditions;

 

•   politicaland economic instability;

 

•   relianceon third parties, who may be competitors, to sell and service our products incertain applications in certain countries;

 

•   unexpectedchanges in legislative or regulatory requirements;

 

•   fluctuationsin currency exchange rates;

 

•   tariffsand other barriers and restrictions, including established relationshipsbetween government-controlled carriers and local equipment vendors;

 

•   longerpayment cycles;

 

•   difficultiesin enforcing intellectual property and contract rights;

 

•   greaterdifficulty in accounts receivable collection;

 

•   potentiallyadverse taxes, including any U.S. taxes imposed upon our actual or deemedrepatriation of earnings of foreign subsidiaries;

 

•   potentiallylower margins and less certainty of support for customer relationships whereforeign sales are made through local distributors; and

 

•   theburdens of complying with a variety of foreign laws and telecommunicationsstandards.

 

14

----

 

We also are subject to general geopolitical risks,such as political and economic instability and changes in diplomatic and traderelationships. We maintain business operations and have sales in manyinternational markets. Economic conditions in many of these markets representsignificant risks. We cannot predict whether sales and business operations inthese markets will be adversely affected by these conditions. Instability inforeign markets, particularly in Asia, Latin America and the Middle East, couldhave a negative impact on our business, financial condition and operatingresults. In addition to the effect of international economic instability onforeign sales, domestic sales to U.S. customers with significant foreignoperations could be adversely impacted by these economic conditions, which mayadversely affect our business, financial condition and operating results in thefuture.

 

***We are exposed to fluctuations in currency exchange rates that couldnegatively impact our financial results and cash flows.***

 

Becausea portion of our business is conducted outside the United States, we faceexposure to adverse movements in foreign currency exchange rates. Theseexposures may change over time as business practices evolve, and they couldhave a material adverse impact on our financial results and cash flows. Additionally,we have exposures to emerging market currencies, which can have extremecurrency volatility. An increase in the value of the dollar could increase thereal cost to our customers of our products in those markets outside the UnitedStates where we sell in U.S. dollars, and a weakened U.S. dollar could increasethe cost of local operating expenses and procurement of raw materials to theextent that we must purchase components in foreign currencies.

 

Currently, we enter into foreign exchange forwardcontracts to minimize the short-term impact of foreign currency fluctuations oncertain foreign currency receivables, investments, and payables. In addition,we periodically hedge anticipated foreign currency cash flows. Our attempts tohedge against these risks may not be successful, resulting in an adverse impacton our net income.

 

***We may encounterdifficulties obtaining necessary raw materials and supplies.***

 

Our ability to make and service our products and meetcustomer demands depends upon our ability to obtain timely deliveries ofimportant raw materials and supplies within certain quality standards. Theavailability of these raw materials and supplies is subject to market forcesbeyond our control. From time to time there may not be sufficient quantities ofraw materials and supplies in the marketplace to meet the customer demand forour products. In addition, the costs to obtain these raw materials and suppliesare subject to price fluctuations. Many companies use the same raw materialsand supplies to produce their products that we use to produce our products.Companies with more resources may have a competitive advantage in obtaining rawmaterials and supplies due to greater buying power. In addition, we currentlypurchase certain key components from sole or limited-source vendors, and mostof our component purchases are on a purchase-order basis without guaranteedsupply arrangements. If supply is disrupted, we may be unable to find analternative source in a timely manner, at favorable prices or of acceptablequality. These circumstances may limit our ability to meet scheduled deliveriesto customers and may increase our expenses. Reduced supply or higher prices forraw materials and supplies may adversely affect our business, operating resultsand financial condition.

 

***We depend oncontract manufacturers and third-party service providers.***

 

We have purchase agreements with contractmanufacturers that require them to purchase component parts used inmanufacturing our products and authorize them to buy components in accordancewith agreed-upon lead times. As customers increasingly demand shorter deliverytimeframes, the difficulty of accurately forecasting component needs createsadditional risk. Failing to estimate requirements accurately can lead tomonetary penalties, excess or obsolete inventory or disruptions inmanufacturing. Further, since our contract manufacturers purchase many of thecomponents for our products, we are subject to and dependent on the terms ofthe agreements between the contract manufacturer and the supplier. As a result,if a component were to fail or be outside of the quality standards that we set,our ability to take legal action against that supplier is limited. In addition,the contract manufacturers may not allocate sufficient resources to the timelycompletion of our orders in accordance with our quality standards. Qualifying anew contract manufacturer is costly and time-consuming and could result insignificant interruptions in the supply of products to our customers.

 

We rely on a small number of contract manufacturers toperform the majority of our product manufacturing. The qualification of thesemanufacturers is an expensive and time-consuming process, and thesemanufacturers build products for other companies, including our competitors. Weare constantly reviewing their manufacturing capability to ensure they meet ourproduction requirements in terms of cost, capacity and quality. Periodically,we may decide to transfer the manufacturing of a product from one contractmanufacturer to another to better meet our production needs. It is possiblethat we may not effectively manage this transition or the new contractmanufacturer may not perform as well as expected and, as a result, we may notbe able to fill orders in a timely manner, which could harm our business.

 

15

----

 

These limitations and the failure to deliver productson time may adversely affect our business, operating results and financialcondition.

 

We rely on the use of third-party customer serviceproviders to deliver, install and turn-up products. We depend on suchthird-party agents to perform key on-site services for our customers. We cannotcontrol the availability of such resources or the quality of the servicesprovided by such third parties. Scarcity of resources, price fluctuations, orquality or delivery issues may adversely affect our business, operating resultsand financial condition.

 

***We may be unable tosell customer-specific inventory, which could result in lower gross profitmargins and net income.***

 

Some customers’ order specifications require us todesign and build systems and purchase parts that are unique to a singlecustomer. In many cases, we forecast and purchase components in advance andallocate resources to design and manufacture the systems. If customers’requirements change or if they delay or cancel orders, we may be unable tocost-effectively rework system configurations or return parts to inventory asavailable-for-sale. Writedowns and accruals for unrealizable inventory willnegatively impact our gross profit margins and net income.

 

***Intellectualproperty rights may not be adequate to protect our business.***

 

Our future success depends in part upon our proprietarytechnology. Although we have attempted to protect our proprietary technologythrough various mechanisms including patents, copyrights, trademarks,contractual obligations and trade secrets, third parties may attempt to use ourtechnology without authorization. It is difficult to police the unauthorizeduse of products and technologies, particularly in certain foreign countries,whose laws may not protect intellectual property rights to the same extent asthe laws of the United States. Litigation may be necessary to enforce ourintellectual property rights, which could be costly and disruptive while notguaranteeing a successful result. In addition, competitors may developcompetitive technology independently without violating our proprietary rights.Any inability to protect or enforce proprietary rights and information couldresult in loss of competitive advantage, loss of customer orders and decreasedrevenues.

 

***We may be subjectto intellectual property infringement claims that are costly and time consumingto defend. These claims could limit our ability to use some technologies in thefuture.***

 

As competition in the communications equipmentindustry increases and the functionality of the products in our industryconverges, companies in the communications equipment industry increasinglybecome the target of infringement claims and other intellectual propertydisputes. We are likely to remain subject to claims based upon third-partypatents or other proprietary rights, including claims that may originate fromcompetitors. Any such third parties may choose to litigate their claims, or wemay pursue litigation to determine the scope and validity of such third parties’rights. We may be unsuccessful in any such litigation. We may be unable tosecure, on commercially reasonable terms, any licenses that we may seek tosecure. Third-party claims, whether with or without merit, potentially canresult in:

 

•   costlylitigation;

 

•   divertingmanagement’s time, attention and resources;

 

•   delayingor halting product shipments;

 

•   requiringus to pay damages;

 

•   requiringus to enter into royalty-bearing licensing arrangements or to obtain substitutetechnology of lower quality or higher cost; or

 

•   otherwiseimposing obligations or restrictions that could adversely affect our business,financial condition and operating results.

 

***Product quality orperformance problems could impact our business.***

 

The development and production of new products withhigh technology content often involves problems with software, components andmanufacturing methods. If significant reliability, quality or networkmonitoring problems develop, including those due to defects in software orfaulty components, a number of negative effects on our business could result,including:

 

•   coststo fix software or hardware defects;

 

•   highservice and warranty expenses;

 

16

----

 

•   paymentof liquidated damages for performance failures;

 

•   highinventory obsolescence expense;

 

•   highlevels of product returns;

 

•   delaysor interruptions in product turn-up;

 

•   delaysin collecting accounts receivable;

 

•   reducedorders from existing customers; and

 

•   declininginterest from potential customers.

 

***We may not realizeexpected benefits from any restructuring initiatives.***

 

In response to industry and market conditions, we haverestructured businesses and reduced our workforce. In light of the rapidlychanging market for communications equipment, we may have to restructure in thefuture to achieve certain cost savings and to strategically realign ourresources. We cannot predict whether we will realize expected synergies andimproved operating performance as a result of any restructuring andstreamlining of operations. We also cannot predict whether any restructuringand streamlining of operations will adversely affect our ability to retain keyemployees, which, in turn, would adversely affect our operating results.Further, in the event the market fluctuates up or down, we may not have theappropriate level of resources and personnel to appropriately react to thechange.

 

***We may be unable toidentify or complete strategic acquisitions, investments and dispositions.***

 

Our long-term growth strategy includes building valuefor the company through a variety of methods, including acquisition of,investment by us in, or joint ventures in, complementary businesses, products,services or technologies and potential divestitures of certain portions of ourbusiness. We cannot assure that we will be able to identify suitable thirdparties for these transactions. Even if we identify suitable third parties toparticipate in these transactions, we cannot assure that we will be able tomake them on commercially acceptable terms, if at all. If we acquire a company,it may be difficult to assimilate its businesses, products, services,technologies and personnel into our operations. These difficulties could disruptour ongoing business, distract our management and workforce, increase ourexpenses and adversely affect our operating results. In addition, we may incurdebt or be required to issue equity securities to pay for future acquisitionsor investments. The issuance of any equity securities could be dilutive to ourstockholders. We also may need to make further investments to support theacquired company and may have difficulty identifying and acquiring theappropriate resources. If we divest or otherwise exit certain portions of ourbusiness, we may be required to record accrued liabilities for special one-timecharges, such as workforce reduction costs, closure of excess facilities andexcess inventory write-offs. Furthermore, estimates with respect to the usefullife and ultimate recoverability of our carrying basis of assets, includinggoodwill and purchased intangible assets, could change as a result of suchdisposition.

 

***We are subject tonumerous and changing industry regulations and standards.***

 

Our products must comply with a significant number ofcommunications industry technological regulations and standards, which varybetween U.S. and international markets, and must interoperate with otherproducts. Testing to ensure compliance with technological standards andinteroperability requires significant investments of time and money. If we failto ensure compliance with evolving standards and regulations in a timely manneror fail to maintain interoperability with equipment from other companies, wecould experience customer contract penalties or delayed or lost customerorders, decreased revenues and reduced net income that may adversely affect ourbusiness, financial condition and operating results. To remain competitive, wealso must comply with industry certifications such as ISO and TL 9000.

 

***We operate in anenvironment subject to changing governmental regulations.***

 

The communications equipment industry is subject togovernmental regulation in the United States and other countries. Our businessdepends upon the continued growth of the telecommunications industry in theUnited States and internationally. Federal and state regulatory agenciesregulate most of our domestic customers, and foreign customers also are subjectto regulation. In particular, there may be future changes in U.S.telecommunications regulations that could slow the expansion of serviceproviders’ network infrastructures and adversely affect our business, operatingresults and financial condition. Future changes in tariffs by regulatory agenciesor application of tariff requirements to currently untariffed services couldadversely affect the sales of our products for certain classes of customers.Moreover, uncertainty regarding future legislation and governmental policiescombined with emerging competition also may affect the demand for our products.Competition could intensify as a result of future regulatory changes or new

 

17

----

 

regulations in the United States or internationally,which could adversely affect our business, operating results and financialcondition.

 

***Our failure to comply with applicable environmental laws andregulations worldwide could adversely impact our business and results ofoperations.***

 

The manufacture, assemblyand testing of our products may require the use of hazardous materials that aresubject to a broad array of environmental, health and safety laws andregulations. Our failure to comply with any of these applicable laws orregulations could result in:

 

•   regulatorypenalties, fines and legal liabilities;

 

•   suspensionof production; or

 

•   curtailmentof our operations or sales.

 

In addition, our failureto properly manage the use, transportation, emission, discharge, storage,recycling or disposal of hazardous materials could subject us to increasedcosts or future liabilities. Existing and future environmental laws andregulations may restrict our use of certain materials in our manufacturing,assembly and test processes or products. Any of these consequences couldadversely impact our business and results of operations by increasing ourexpenses and/or requiring us to alter our manufacturing processes.

 

***Our business would be adversely affected if we are unable to attractand retain key personnel.***

 

Our success depends in large part on our ability toattract and retain highly skilled technical, managerial, sales, and marketingpersonnel. Competition for these personnel is intense. The loss of services ofany of our key personnel, the inability to retain and attract qualifiedpersonnel in the future, or delays in hiring required personnel, particularlyengineering and sales personnel, could make it difficult to meet keyobjectives, such as timely and effective product introductions.

 

**ITEM 1B.UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM 2. PROPERTIES**

 

Our corporateheadquarters is located in Naperville, Illinois, approximately 35 miles west ofChicago. During 2005 we operated 51 facilities globally, totaling 2.2 millionsquare feet, in support of:

 

•      Corporate,administrative, and research and development: 1.6 million square feet.

 

•      Operations:476,000 square feet.

 

•      Sales andservice functions: 148,000 square feet.

 

We own 1.2 million squarefeet of that total, which includes our headquarters facility and fourfacilities in Espoo, Finland. We lease facilities in 25 countries that total 1million square feet, which includes 18 facilities in North America; 16facilities in Europe, the Middle East and Africa; 10 facilities in the AsiaPacific region and 2 facilities in South America.

 

Our significant leases are833,000 square feet in North America and 125,000 square feet in Europe, MiddleEast and Africa.

 

We own substantially allof the equipment used in our business, other than that related to outsourcedactivities. We believe our facilities are adequate and suitable additionalspace and equipment will be available to accommodate expansion.

 

**ITEM 3. LEGAL PROCEEDINGS**

 

On June 18, 2002, a classaction complaint was filed in the United States District Court of the NorthernDistrict of Illinois against Tellabs, Michael Birck, and Richard Notebaert(former CEO, President and Director of Tellabs).  Thereafter, eightsimilar complaints were also filed in the United States District Court of theNorthern District of Illinois.  All nine of these actions weresubsequently consolidated, and on December 3, 2002, a consolidated amendedclass action complaint was filed against Tellabs, Mr. Birck, Mr. Notebaert, andcertain other of our current or former officers and/or directors.  The consolidatedamended complaint alleged that during the class period (December 11,

 

18

----

 

2000-June 19, 2001) thedefendants violated the federal securities laws by making materially false andmisleading statements, including, among other things, allegedly providingrevenue forecasts that were false and misleading, misrepresenting demand forour products, and reporting overstated revenues for the fourth quarter 2000 inour financial statements.  Further, certain of the individual defendantswere alleged to have violated the federal securities laws by trading oursecurities while allegedly in possession of material, non-public informationabout us pertaining to these matters.

 

On January 17, 2003,Tellabs and the other named defendants filed a motion to dismiss theconsolidated amended class action complaint in its entirety.  On May 19,2003, the Court granted our motion and dismissed all counts of the consolidatedamended complaint, while affording plaintiffs an opportunity to replead. On July 11, 2003, plaintiffs filed a second consolidated amended class actioncomplaint against Tellabs, Messrs. Birck and Notebaert, and many (although notall) of the other previously named individual defendants, realleging claims similarto those contained in the previously dismissed consolidated amended classaction complaint.  We filed a second motion to dismiss on August 22, 2003,seeking the dismissal with prejudice of all claims alleged in the secondconsolidated amended class action complaint.  On February 19, 2004, theCourt issued an order granting that motion and dismissed the action withprejudice.  On March 18, 2004, the plaintiffs filed a Notice of Appeal tothe United States Federal Court of Appeal for the Seventh Circuit appealing thedismissal.  The appeal was fully briefed and oral argument was heard onJanuary 21, 2005.  On January 25, 2006, the Seventh Circuit issued anopinion affirming in part and reversing in part the judgment of the districtcourt, and remanding for further proceedings.  On February 8, 2006,defendants filed with the Seventh Circuit a petition for rehearing withsuggestion for rehearing en banc and the parties are awaiting a decision.

 

**ITEM 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**FORWARD-LOOKINGSTATEMENTS**

 

Except for historicalinformation, the matters discussed or incorporated by reference in Part I ofthis report may include forward-looking statements made pursuant to the safeharbor provisions of Section 21E of the Securities Exchange Act of 1934, asamended. These statements reflect management’s expectations, estimates andassumptions, based on the information available at the time the document wasprepared. These forward-looking statements include, but are not limited to,statements regarding future events, plans, goals, objectives and expectations. Thewords “anticipate,” “believe,” “estimate,” “target,” “expect,” “predict,” “plan,”“possible,” “intend,” “likely,” “will,” “should,” “could” and similarexpressions are intended to identify forward-looking statements. Forward-lookingstatements are not guarantees of future performance and involve risks,uncertainties and other factors that may cause our actual performance orachievements to be materially different from any future results, performance orachievements expressed or implied by those statements. Important factors thatcould cause our actual results to differ materially from those inforward-looking statements include, but are not limited to: economic changesimpacting the telecommunications industry; financial condition oftelecommunication service providers and equipment vendors, including any impactof bankruptcies; the impact of customer and vendor consolidation; new productacceptance; product demand and industry capacity; competitive products andpricing; competitive pressures from new entrants to the telecommunicationsindustry; manufacturing efficiencies; research and new product development;protection and access to intellectual property, patents and technology; abilityto attract and retain highly qualified personnel; availability of componentsand critical manufacturing equipment and capacity; foreign economic conditions,including currency rate fluctuations; the regulatory and trade environment;availability and terms of future acquisitions, divestitures and investments;uncertainties relating to synergies, charges, and expenses associated withbusiness combinations and other transactions; and other risks and futurefactors that may be detailed from time to time in the Company’s filings withthe SEC. For a further description of such risks and future factors, see Item1A of this Form 10-K. Our actual future results could differ materially fromthose predicted in such forward-looking statements. In light of the foregoingrisks, uncertainties and other factors, investors should not place unduereliance on the forward-looking statements in determining whether to buy, sellor hold any of our securities. We undertake no obligation to publicly update orrevise any forward-looking statements to reflect changed assumptions, theoccurrence of anticipated or unanticipated events or changes to future resultsover time. The foregoing discussion should be read in conjunction with thefinancial statements and related notes and management’s discussion and analysisincluded in our 2005 Annual Report included herein as Exhibit 13 andincorporated in this report by reference.

 

19

----

 

**PART II**

 

**ITEM 5. MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

Tellabs’ common stock islisted on the NASDAQ National Market under the symbol “TLAB.”  As of February 27, 2006, there wereapproximately 8,262 stockholders of record and 450,392,827 outstanding shares.

 

The section entitled “CommonStock Market Data” in our 2005 Annual Report included herein as Exhibit 13 isincorporated herein by reference. We have never paid cash dividends and do notanticipate paying a cash dividend in the foreseeable future.

 

OnFebruary 2, 2005, we announced that our Board of Directors authorized thepurchase of up to $300.0 million in shares of our outstanding common stock,with no expiration date to the authorization. We may make purchases of commonshares from time-to-time on the open market or in private transactions and willrecord them as treasury stock. Through December 30, 2005, we purchased $192.6million (approximately 24.4 million shares) of our common stock. In January,2006, our Board of Directors authorized the additional purchase of up to $100.0million in shares of our outstanding common stock.

 

***Repurchases of Common Stock in 2005:***

 
| **Period of Purchases** | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Purchase Price  of Shares** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs** | ** ** | **Remaining Dollar  Value of Shares  Available to be  Purchased Under  the Plan  (In Millions)** | ** ** |
|-----------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                              |       |                                         |       |                                             |       |                                                                                                                             |       |                                                                                                                                     |       |
| 1/1/05 through  2/4/05            |       | —                                       |       | —                                           |       | —                                                                                                                           |       | $                                                                                                                                        | 300.0      |   |
| 2/5/05 through  3/4/05            |       | 16,455,000                                   |       | $                                                | 7.21       |                                                                                                                             | 16,455,000 |                                                                                                                                     | $          | 181.3 |   |
| 3/5/05 through  4/1/05            |       | —                                       |       | —                                           |       | —                                                                                                                           |       | $                                                                                                                                        | 181.3      |   |
| 4/2/05 through  5/6/05            |       | 2,413                                        |       | $                                                | 7.28       |                                                                                                                             | —     |                                                                                                                                     | $          | 181.3 |   |
| 5/7/05 through  6/3/05            |       | 1,700,000                                    |       | $                                                | 8.16       |                                                                                                                             | 1,700,000  |                                                                                                                                     | $          | 167.4 |   |
| 6/4/05 through  7/1/05            |       | —                                       |       | —                                           |       | —                                                                                                                           |       | $                                                                                                                                        | 167.4      |   |
| 7/2/05 through  8/5/05            |       | 502,540                                      |       | $                                                | 9.73       |                                                                                                                             | 500,000    |                                                                                                                                     | $          | 162.5 |   |
| 8/6/05 through  9/2/05            |       | 2,177,899                                    |       | $                                                | 9.17       |                                                                                                                             | 2,177,500  |                                                                                                                                     | $          | 142.5 |   |
| 9/3/05 through  9/30/05           |       | —                                       |       | —                                           |       | —                                                                                                                           |       | $                                                                                                                                        | 142.5      |   |
| 10/1/05 through  11/4/05          |       | 1,508,292                                    |       | $                                                | 10.14      |                                                                                                                             | 1,500,000  |                                                                                                                                     | $          | 127.8 |   |
| 11/5/05 through  12/2/05          |       | 2,050,000                                    |       | $                                                | 9.95       |                                                                                                                             | 2,050,000  |                                                                                                                                     | $          | 107.4 |   |
| 12/3/05 through  12/30/05         |       | 18,303                                       |       | $                                                | 9.40       |                                                                                                                             | —     |                                                                                                                                     | $          | 107.4 |   |
| Total                             |       | 24,414,447                                   |       | $                                                | 7.92       |                                                                                                                             | 24,382,500 |                                                                                                                                     |       |   |

 

**ITEM 6. SELECTEDFINANCIAL DATA**

 

The five years ofselected financial data is included in the 11-Year Summary of SelectedFinancial Data in our 2005 Annual Report, included herein as Exhibit 13, isincorporated herein by reference.

 

**ITEM 7. MANAGEMENT’SDISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION**

 

The Management’sDiscussion and Analysis of Results of Operations and Financial Condition in our2005 Annual Report, included herein as Exhibit 13, are incorporated herein byreference.

 

**ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

*Investmentsin Marketable Securities*

 

During the normal courseof business, we invest a portion of our cash and cash equivalents in marketablesecurities for a discussion of our investments in marketable securities for thefiscal years ended December 30, 2005, and December 31, 2004, see the notes toour consolidated financial statements in our 2005 Annual Report, includedherein as Exhibit 13, and incorporated herein by reference.

 

*FinancialInstruments and Market Risk*

 

We conduct business on aglobal basis in several major currencies and are subject to risks associatedwith fluctuating foreign exchange rates. In response to this risk, we developeda foreign currency exposure management policy to

 

20

----

 

mitigate financialexposure to changing foreign exchange rates resulting from nonfunctionalcurrency receivables and payables that are expected to be settled in one yearor less. In 2005, we expanded our policy to include hedging of currencyexposures anticipated within the year. We used foreign currency forwardcontracts and a limited number of currency options to manage our foreigncurrency exposure. We enter into derivative foreign exchange contracts only tothe extent necessary to meet our overall goal of minimizing nonfunctionalforeign currency exposures. We do not enter into hedging transactions forspeculative purposes.

 

**Non-designated Hedges**

 

We do not engage inhedging specific individual transactions when addressing currency risksassociated with nonfunctional monetary assets and liabilities that are re-measuredthrough income. Instead, we use derivatives to manage overall exposure levelsfor specific currencies. In accordance with SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, we record allrelated forward foreign exchange contracts on the balance sheet at fair value. Forwardforeign exchange contracts receivable are included in *MiscellaneousReceivables and Other Current Assets*, while forward foreign exchangecontracts payable are included as part of *Other Accrued Liabilities*in the Consolidated Balance Sheet. Changes in the fair value of theseinstruments are included in earnings as part of *OtherExpense, Net*. We had a net loss on forward foreign exchangecontracts of $23.3 million in 2005, a net gain of $14.4 million in 2004 and anet gain of $17.0 million in 2003.

 

**Cash Flow Hedges**

 

In 2005, we identifiedand quantified currency risks associated with European operations whereoperations and product costs were denominated in Euros and the related revenuewas denominated in U.S. dollars. To mitigate some of this risk, we entered intoforward and option currency contracts designated as cash flow hedges. Throughoutthe year, we conducted effectiveness tests on derivatives designated as cashflow hedges on a spot to spot basis (excluding time value), with the time-valueportion recorded in *Other Expense, Net*.We reclassified the effective gains and losses accumulated in *Accumulated Other Comprehensive Income*to *Operating Expenses* when the hedged transaction wasrecognized in earnings. We reclassified all derivative-hedged exposures forperiods less than 12 months and all of our $0.7 million loss accumulated in *Accumulated**Other Comprehensive Income*to operating expenses by our 2005 year-end. We did not hold any derivativesdesignated as cash flow hedges at year-end.

 

Derivativefinancial instruments involve elements of market and credit risk not recognizedin the financial statements. The market risk that results from theseinstruments relates to changes in foreign currency exchange rates, which are generallyoffset by changes in the value of the underlying assets or liabilities beingheld. Credit risk relates to the risk of nonperformance by a counterparty toone of our derivative contracts. We do not believe there is a significantcredit risk associated with our hedging activities because the counterpartiesare all large international financial institutions with high credit ratings. Inaddition, we also limit the aggregate notional amount of agreements enteredinto with any one financial institution to mitigate credit risk.

 

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

 
| **Dollars in millions**                                | ** ** | **Weighted Average  Contract Rate** | ** ** | **Notional Value of  Forward Contracts  Maturing in 2006** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
|                                                             |       |                                          |       |                                                                                |       |
| Forward  contracts at 12/30/05:                                  |       |                                          |       |                                                                                |       |
| Forward  contracts to sell foreign currencies for Euro:          |       |                                          |       |                                                                                |       |
| United States  dollar                                            |       | 1.1884                                        |       | $                                                                                   | 121.0      |   |
| Other currencies                                                 |       |                                          |       | 4.9                                                                                 |       |
|                                                             |       |                                          |       | $                                                                                   | 125.9      |   |
|                                                             |       |                                          |       |                                                                                |       |
| Forward  contracts to buy foreign currencies for Euro:           |       |                                          |       |                                                                                |       |
| British pound                                                    |       | 1.4620                                        |       | $                                                                                   | 6.4        |   |
| Other currencies                                                 |       |                                          |       | 1.9                                                                                 |       |
|                                                             |       |                                          |       | $                                                                                   | 8.3        |   |
|                                                             |       |                                          |       |                                                                                |       |
| Forward  contracts to sell foreign currencies for Danish kroner: |       |                                          |       |                                                                                |       |
| United States  dollar                                            |       | 6.2839                                        |       | $                                                                                   | 7.1        |   |
|                                                             |       |                                          |       |                                                                                |       |
| Forward  contracts to sell foreign currencies for British pound: |       |                                          |       |                                                                                |       |

 

21

----

 
| Euro                                                           |   | 1.4588   |   | $      | 13.6   |   |
|----------------------------------------------------------------|--------|----------|--------|--------|--------|--------|
|                                                           |   |     |   |   |   |
| Forward  contracts to sell foreign currencies for U.S. dollar: |   |     |   |   |   |
| Mexican peso                                                   |   | 10.6735  |   | $      | 13.3   |   |
| Euro                                                           |   | 1.1854   |   | 3.4    |   |
| British pound                                                  |   | 1.7328   |   | 10.6   |   |
| Other currencies                                               |   |     |   | 1.1    |   |
|                                                           |   |     |   | $      | 28.4   |   |
|                                                           |   |     |   |   |   |
| Forward  contracts to buy foreign currencies for U.S. dollar:  |   |     |   |   |   |
| Singapore dollar                                               |   | .6007    |   | 2.2    |   |
| Japanese yen                                                   |   | 116.6200 |   | $      | 1.6    |   |
| Other currencies                                               |   |     |   | 0.5    |   |
|                                                           |   |     |   | $      | 4.3    |   |
|                                                           |   |     |   |   |   |
| Forward  contracts to buy foreign currencies for Thai baht:    |   |     |   |   |   |
| United States  dollar                                          |   | 40.885   |   | $      | 3.3    |   |
|                                                           |   |     |   |   |   |
| Total contracts  outstanding at December 30, 2005:             |   |     |   | $      | 190.9  |   |

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

 

22

----

 

Pursuantto our policy, we entered into most of the above contracts immediately prior tothe respective year-ends. Accordingly, the carrying value of such contracts atDecember 30, 2005, and December 31, 2004, approximates fair value.

 

**ITEM 8. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

The ConsolidatedFinancial Statements and Notes, Report of Independent Registered PublicAccounting Firm and Report of Independent Registered Public Accounting Firm onInternal Control over Financial Reporting in our 2005 Annual Report includedherein as Exhibit 13 are incorporated herein by reference.

 

**ITEM9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE**

 

None.

 

**ITEM 9A.CONTROLS AND PROCEDURES**

 

As of the end of theperiod covered by this report our Chief Executive Officer (“CEO”) and ChiefFinancial Officer (“CFO”) carried out an evaluation under their supervision andwith the participation of our management, of the effectiveness of our disclosurecontrols and procedures and internal control over financial reporting. Based onthat evaluation, the CEO and CFO concluded that our disclosure controls andprocedures are effective and there were no changes in our internal control overfinancial reporting that has materially affected or is reasonably likely tomaterially affect our internal control over financial reporting. Our managementreport on internal control over financial reporting is set forth in our 2005Annual Report included herein as Exhibit 13 and is incorporated herein byreference. In addition, the attestation report of Ernst and Young LLP, ourindependent registered public accounting firm, on management’s assessment ofthe effectiveness of our internal control over financial reporting and the effectivenessof our internal control over financial reporting is set forth in our 2005Annual Report and is incorporated herein by reference.

 

**ITEM 9B. OTHER INFORMATION**

 

None.

 

**PART III**

 

**ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The information requiredis incorporated herein by reference to the sections entitled “Election ofDirectors,” “Committees of the Board-Audit and Ethics Committee,” and “Section16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement dated March20, 2006, and the sections entitled “Officers,” “Code of Ethics,” and “Certificateof Incorporation and Bylaws” in our 2005 Annual Report included herein asExhibit 13 and is incorporated herein by reference.

 

**ITEM 11.EXECUTIVE COMPENSATION**

 

The information requiredis incorporated herein by reference to the sections entitled “ExecutiveCompensation,” “Director Compensation,” “Executive Compensation - EmploymentAgreements,” “Executive Compensation - Compensation Committee Interlocks andInsider Participation,” “Executive Compensation - Compensation Committee Reporton Executive Compensation” and “Performance Graph” in our Proxy Statement datedMarch 20, 2006.

 

**ITEM12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT****AND RELATED STOCKHOLDER MATTERS**

 

The information requiredis incorporated herein by reference to the sections entitled “SecurityOwnership of Management” and “Security Ownership of Certain Beneficial Owners”in our Proxy Statement dated March 20, 2006. Securities authorized for issuanceunder equity compensation plans is included in the notes to our 2005 AnnualReport, included herein as Exhibit 13, and is incorporated herein by reference.

 

**EquityCompensation Plan Table**

 

The following tablesummarizes information as of December 31, 2005, relating to equitycompensation plans of the Company pursuant to which Common Stock is authorizedfor issuance:

 
| **Plan Category**                                                   | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights   (a)** | ** ** | **Weighted-average  exercise price of  outstanding  options, warrants  and rights   (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding securities  reflected in column (a))   (c)** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | ** **                                                                                                | ** ** | ** **                                                                                | ** ** | ** **                                                                                                                                                 | ** ** |
| **Equity compensation plans approved by security  holders**         |       | 37,739,858                                                                                                |       | $                                                                                         | 17.82      |                                                                                                                                                       | 27,761,668 |   |
| ** **                                                          |       |                                                                                                      |       |                                                                                      |       |                                                                                                                                                       |       |
| **Equity compensation plans not approved by  security holders (1)** |       | 17,580,407                                                                                                |       | $                                                                                         | 11.77      |                                                                                                                                                       | 0          |   |
| ** **                                                          |       |                                                                                                      |       |                                                                                      |       |                                                                                                                                                       |       |
| **Total**                                                           |       | 55,320,265                                                                                                |       | $                                                                                         | 15.90      |                                                                                                                                                       | 27,761,668 |   |

 

----

(1)          Allof these options were issued pursuant to option plans that were assumed inmerger transactions. The Company has not made, and will not make, any futuregrants or awards of equity securities under these plans.

 

23

----

 

**ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

The information requiredis incorporated herein by reference to the section entitled “Transactions withExecutive Officers, Directors and Others” in our Proxy Statement dated March 20,2006.

 

# **ITEM14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

# ** **

The information requiredis incorporated herein by reference to the section entitled “IndependentAuditor’s Fees and Services” in our Proxy Statement dated March 20, 2006.

 

**PART IV**

 

**ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

**(a) 1. Financial Statements:**

 

The followingConsolidated Financial Statements of Tellabs, Inc., and Subsidiaries, includedin the registrant’s 2005 Annual Report included herein as Exhibit 13, werepreviously incorporated by reference in Item 8:

 

Report of Independent RegisteredPublic Accounting Firm

 

Consolidated BalanceSheets: December 30, 2005, and December 31, 2004

 

Consolidated Statementsof Operations: Years ended December 30, 2005, December 31, 2004, and January 2,2004

 

Consolidated Statementsof Stockholders’ Equity: Years ended December 30, 2005, December 31, 2004, and January2, 2004

 

Consolidated Statementsof Cash Flows: Years ended December 30, 2005, December 31, 2004, and January 2,2004

 

Notes to ConsolidatedFinancial Statements

 

**2. Financial Statement Schedule:**

 

The followingConsolidated Financial Statement Schedule of Tellabs, Inc., and Subsidiariesand related Report of Independent Registered Public Accounting Firm are includedherein pursuant to Item 15(d):

 

Schedule II. Valuationand Qualifying Accounts and Reserves

 

Other schedules have beenomitted because they are not applicable or the required information is shown inthe consolidated Financial Statements or Notes thereto.

 

**(b) Exhibits**:

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                         |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                    |
| 2.1                 |       | Agreement and Plan of  Merger and Reorganization by Tellabs, Inc., Vivace Networks, Inc. and Venice  Acquisition Corp. 15/                                                                                                                                                              |
| 2.2                 |       | Amendment to Agreement  and Plan of Merger and Reorganization between Tellabs, Inc. and Vivace  Networks, Inc. 15/                                                                                                                                                                      |
| 2.3                 |       | Agreement and Plan of  Merger among Tellabs, Inc., Chardonnay Merger Corp. and Advanced Fibre  Communications, Inc., 21/                                                                                                                                                                |
| 2.4                 |       | Agreement and Plan of  Merger, as amended and restated as of September 7, 2004, among Tellabs,  Inc., Chardonnay Merger Corp. and Advanced Fibre Communications, Inc., 22/                                                                                                         |
| 2.5                 |       | Stock Purchase Agreement dated as of December 30, 2004, among  Tellabs, Inc. and the Stockholders and Option holders of Vinci Systems, Inc.,  23/                                                                                                                                       |
| 2.6                 |       | Asset and Sale  Agreement dated January 5, 2004, as amended, by and among Marconi  Communications, Inc., Marconi Intellectual Property (Ringfence) Inc., Marconi  Corporation plc, Advanced Fibre Communications, Inc. and Advanced Fibre  Communications North America, Inc., 23/ |

 

24

----

 
| 3.1    |   | Restated Certificate of  Incorporation and Amendments 21/                                                                                    |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2    |   | Certificate of  Amendment to Restated Certificate of Incorporation 23/                                                                       |
| 3.3    |   | Amended and Restated  By-Laws, as amended and restated on December 1, 2004                                                                   |
| 10.1   |   | Tellabs Operations,  Inc. Deferred Compensation Plan, as amended and its related trust, as amended  3/                                       |
| 10.2   |   | Tellabs, Inc. Deferred  Income Plan, as amended 14/                                                                                          |
|   |   |                                                                                                                                         |
| 10.3   |   | 1986 Non-Qualified  Stock Option Plan, as amended and restated 1/                                                                            |
| 10.4   |   | Amendment to Tellabs,  Inc. 1986 Non-Qualified Stock Option Plan (As Amended and Restated June 26,  1992) 9/                                 |
| 10.5   |   | 1987 Stock Option Plan  for Non-Employee Corporate Directors, as amended and restated 1/                                                     |
| 10.6   |   | Amendment to Tellabs,  Inc. 1987 Stock Option Plan for Non-Employee Corporate Directors (As Amended  and Restated June 26, 1992) 9/          |
| 10.7   |   | Tellabs, Inc. 1989  Stock Option Plan, as amended and restated 1/                                                                            |
| 10.8   |   | Amendment to Tellabs,  Inc. 1989 Stock Option Plan (As Amended and Restated June 26, 1992) 9/                                                |
| 10.9   |   | Employee Quality Stock  Award Program 2/                                                                                                     |
| 10.10  |   | 1991 Stock Option Plan,  as amended and restated 1/                                                                                          |
| 10.11  |   | Amendment to Tellabs,  Inc. 1991 Stock Option Plan (As Amended and Restated June 26, 1992) 9/                                                |
| 10.12  |   | Amendment to the  Coherent Communications Systems Corporation Amended and Restated 1993 Equity  Compensation Plan 9/                         |
| 10.14  |   | Amendment to the  Coherent Communications Systems Corporation 1993 Equity Compensation Plan 11/                                              |
| 10.15  |   | 1994 Stock Option Plan  3/                                                                                                                   |
| 10.16  |   | Amendment to the  Tellabs, Inc. 1994 Stock Option Plan 9/                                                                                    |
| 10.17  |   | NetCore Systems, Inc.  1997 Stock Option Plan 6/                                                                                             |
| 10.18  |   | Amendment to the  NetCore Systems, Inc. 1997 Stock Option Plan 9/                                                                            |
| 10.19  |   | Tellabs, Inc. 1998  Stock Option Plan 5/                                                                                                     |
| 10.20  |   | Amendment to the  Tellabs, Inc. 1998 Stock Option Plan 9/                                                                                    |
| 10.21  |   | 1999 Tellabs, Inc.,  Stock Bonus Plan 8/                                                                                                     |
| 10.22  |   | SALIX Technologies,  Inc. 1998 Omnibus Stock Plan and Option Agreement Dated as of December 1,  1997 7/                                      |
| 10.23  |   | Amendment to the SALIX  Technologies, Inc. Omnibus Stock Plan 9/                                                                             |
| 10.24  |   | Employment Agreement –  President and Chief Executive Officer 20/                                                                       |
| 10.25  |   | Employment Agreement –  Chairman of the Board 20/                                                                                       |
| 10.26  |   | Future Networks, Inc.  Stock Incentive Plan 10/                                                                                              |
| 10.27  |   | Tellabs, Inc. 2001  Stock Option Plan 11/                                                                                                    |
| 10.28  |   | Form of Executive  Agreement for Corporate Officers 17/                                                                                      |
| 10.29  |   | Form of Executive  Agreement for Senior Executives 17/                                                                                       |
| 10.30  |   | Ocular Networks, Inc.  Amended and Restated 2000 Stock Incentive Plan 12/                                                                    |
| 10.31  |   | Tellabs Advantage Plan,  as amended and restated 19/                                                                                         |
| 10.32  |   | First Amendment to the  Tellabs Advantage Plan 19/                                                                                           |
| 10.33  |   | Second Amendment to the  Tellabs Advantage Plan 19/                                                                                          |
| 10.34  |   | 2004 Amendment to the  Tellabs Advantage Plan 23/                                                                                            |
| 10.35  |   | Vivace Networks, Inc.  1999 Equity Incentive Plan, as amended 17/                                                                            |
| 10.36  |   | Tellabs, Inc. 2004  Incentive Compensation Plan 18/                                                                                          |
| 10.37  |   | Forms of Stock Award  Statement and Stock Award Agreement pertaining to Tellabs, Inc. 2004  Incentive Compensation Plan 23/                  |
| 10.38  |   | Advanced Fibre  Communication, Inc.’s 1993 Stock Option/ Stock Issuance Plan, as amended 23/                                            |
| 10.39  |   | Form of Stock Option  Agreement pertaining to the Advanced Fibre Communication, Inc. 1993 Plan 23/                                           |
| 10.40  |   | Form of Notice of Grant  of Stock Option pertaining to the Advanced Fibre Communication, Inc. 1993  Plan 23/                                 |
| 10.41  |   | Form of Stock Purchase  Agreement pertaining to the Advanced Fibre Communication, Inc. 1993 Plan 23/                                         |
| 10.42  |   | Advanced Fibre  Communication, Inc.’s 1996 Stock Incentive Plan 23/                                                                     |
| 10.43  |   | Form of Stock Option  Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan 23/                                           |
| 10.44  |   | Form of Automatic Stock  Option Agreement pertaining to the Advanced Fibre Communication, Inc. 1996  Plan 23/                                |
| 10.45  |   | Form of Notice of Grant  of Stock Option pertaining to the Advanced Fibre Communication, Inc. 1996  Plan 23/                                 |
| 10.46  |   | Form of Notice of Grant  of Non-Employee Director Automatic Stock Option pertaining to the Advanced  Fibre Communication, Inc. 1996 Plan 23/ |
| 10.47  |   | Form of Stock Issuance  Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan 23/                                         |

 

25

----

 
| 10.48 |   | 2005 Tellabs, Inc.  Employee Stock Purchase Plan 24/                              |
|-------|--------|-----------------------------------------------------------------------------------|
| 10.49 |   | Tellabs, Inc. Executive  Continuity and Protection Program 24/                    |
| 13    |   | Annual Report to  Stockholders                                                    |
| 21    |   | Subsidiaries of  Tellabs, Inc.                                                    |
| 23    |   | Consent of Independent  Registered Public Accounting Firm                         |
| 31.1  |   | CEO Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2  |   | CFO Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1  |   | CEO Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2  |   | CFO Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

Exhibits 10.1 through 10.49contain, among other documents, management contracts or compensatory plans orarrangements required to be filed as an Exhibit to this Form 10-K pursuant toItem 15(b) hereof.

 

(c) Schedules: See Item15(a)2 above.

 

1/  Incorporated by reference from Tellabs, Inc. Post-effectiveAmendment No. 1 on Form S-8 to Form S-4 filed on or about June 29, 1992 (File No. 33-45788).

 

2/  Incorporated by reference from Tellabs, Inc. Form10-Q Quarterly Report for the quarter ended April 1, 1988 (File No. 0-9692).

 

3/  Incorporated by reference from Tellabs, Inc.Form 10-K Annual Report for the year ended December 31, 1993 (File No. 0-9692).

 

4/  Incorporated by reference from Tellabs, Inc. Form10-K Annual Report for the year ended December 29, 1995 and Form 10-Q QuarterlyReport for the quarter ended September 26, 1997. The Deferred Income PlanAmendment is incorporated by reference from Tellabs, Inc. Form 10-K AnnualReport for the year ended January 1, 1999 (File No. 0-9692).

 

5/  Incorporated by reference from Tellabs, Inc.Definitive Proxy Statement filed on or about March 16, 1998 (File No. 0-9692).

 

6/  Incorporated by reference from Tellabs, Inc.Post-Effective Amendment No. 1 on Form S-8 to Form S-4, filed on September 17,1999 (File No. 33-83509).

 

7/  Incorporated by reference from Tellabs, Inc.Post-Effective Amendment No. 1 on Form S-8 to Form S-4, filed on March 13, 2000(File No. 33-95135).

 

8/  Incorporated by reference from Tellabs, Inc.Form 10-K Annual Report for the year ended December 31, 1999 (File No. 0-9692).

 

9/  Incorporated by reference from Tellabs, Inc.Form 10-Q Quarterly Report for the quarter ended June 30, 2000 (File No.0-9692).

 

10/  Incorporated by reference from Tellabs, Inc.Form S-8 filed on March 5, 2001 (File No. 333-56546).

 

11/  Incorporated by reference from Tellabs, Inc.Form 10-Q Quarterly Report for the quarter ended March 30, 2001 (File No.0-9692).

 

12/  Incorporated by reference from Tellabs, Inc.Form S-8 filed on January 25, 2002 (File No. 333-81360).

 

13/  Incorporated by reference from Tellabs, Inc.Pre-Effective Amendment No. 1 to Form S-4, filed on August 5, 1999 (File No.33-83509).

 

14/  Incorporated by reference from Tellabs, Inc.Form 10-Q Quarterly Report for the quarter ended March 29, 2002 (File No.0-9692).

 

15/  Incorporated by reference from Tellabs, Inc.Form 10-Q Quarterly Report for the quarter ended June 27, 2003 (File No.0-9692).

 

16/  Incorporated by reference from Tellabs, Inc.Form 10-K Annual Report for the year ended December 27, 2002 (File No. 0-9692).

 

17/ Incorporated byreference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter endedSeptember 26, 2003 (File No.0-9692).

 

18/ Incorporated byreference from Tellabs, Inc. Definitive Proxy Statement filed March 19, 2004(File No. 0-9692).

 

19/ Incorporated byreference from Tellabs, Inc. Form 10-K Annual Report for the year ended January2, 2004 (File No. 09692).

 

20/ Incorporated byreference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter endedApril 2, 2004 (File No. 0-9692).

 

21/  Incorporated by reference from Tellabs, Inc.Form S-4 filed June 23, 2004 (File No. 333-116794).

 

22/  Incorporated by reference from Tellabs, Inc.amended S-4 filed September 20, 2004 (File No. 333-116794).

 

23/  Incorporated by reference from Tellabs, Inc.Form 10-K Annual Report for the year ended December 31, 2004 (File No.0 – 9692).

 

24/ Incorporated byreference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter endedMarch 31, 2005 (File No. 09692).

 

26

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| ** **     | ** ** | **TELLABS,  INC.**                                |
|----------------|------------|---------------------------------------------------|
| ** **     | ** ** | ** **                                        |
|           |       | By ***/s/ Krish A. Prabhu***                      |   |
| March 13, 2006 |       | Krish A. Prabhu                                   |
|           |       | President, Chief  Executive Officer  and Director |
|           |       | (Principal Executive  Officer)                    |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 

 
| ***/s/ Krish A. Prabhu***                                                                           | *** *** |           |
|----------------------------------------------------------------------------------------------------------|--------------|----------------|
| Krish A. Prabhu   President, Chief Executive Officer and Director  (Principal Executive Officer)         |         | March 13, 2006 |
|                                                                                                     |         |           |
|                                                                                                     |         |           |
| ***/s/ Timothy J. Wiggins***                                                                        |         |           |
| Timothy J. Wiggins  Executive Vice President and Chief Financial  Officer  (Principal Financial Officer) | *** *** | March 13, 2006 |
|                                                                                                     |         |           |
|                                                                                                     |         |           |
| ***/s/ James A. Dite***                                                                                  |         |           |
| James A. Dite  Vice President and Controller  (Principal Accounting Officer)                             | *** *** | March 13, 2006 |
|                                                                                                     |         |           |
|                                                                                                     |         |           |
| ***/s/ Michael J. Birck***                                                                               |         |           |
| Michael J. Birck  Chairman and Director                                                                  |         | March 13, 2006 |

 

27

----

 
| ***/s/ Linda Beck***                    |         |           |
|-----------------------------------------|--------------|----------------|
| Linda Beck  Director                    | *** *** | March 13, 2006 |
|                                    |         |           |
|                                    |         |           |
| ***/s/ Bo Hedfors***               |         |           |
| Bo Hedfors  Director                    | *** *** | March 13, 2006 |
|                                    |         |           |
|                                    |         |           |
| ***/s/ Frank Ianna***              |         |           |
| Frank Ianna  Director                   | *** *** | March 13, 2006 |
|                                    |         |           |
|                                    |         |           |
| ***/s/ Frederick A. Krehbiel***         |         |           |
| Frederick A. Krehbiel  Director         | *** *** | March 13, 2006 |
|                                    |         |           |
|                                    |         |           |
| ***/s/ Michael E. Lavin***         |         |           |
| Michael E. Lavin  Director              | *** *** | March 13, 2006 |
|                                    |         |           |
|                                    |         |           |
| ***/s/ Stephanie Pace Marshall***  |         |           |
| Stephanie Pace Marshall  Director       |         | March 13, 2006 |
|                                    |         |           |
|                                    |         |           |
| ***/s/ William F. Souders***       |         |           |
| William F. Souders  Director            |         | March 13, 2006 |
|                                    |         |           |
|                                    |         |           |
| ***/s/ Jan H. Suwinski***               |         |           |
| Jan H. Suwinski  Director               |         | March 13, 2006 |

 

28

----

 

**TELLABS,INC. AND SUBSIDIARIES**

**SCHEDULEII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES**

 

Three Years Ended December30, 2005, December 31, 2004, and January 2, 2004

 
| **(In millions)**                             | ** ** | **Balance at  Beginning  of Year** | ** ** | **Net Additions  Charged to Costs and  Expenses** | ** ** | **Deductions (A)** | ** ** | **Acquisitions (B)** | ** ** | **Balance at  End of Year** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|--------------------------------------------|------------|
| 2005  Accounts receivable returns & allowances |       | $                                            | 14.8       |                                                        | $          | (1.4                    | )          | $                         | 1.2        |                                       | $          | (3.8 | ) | $ | 8.4 |   |
| 2004  Accounts receivable returns & allowances |       | $                                            | 5.4        |                                                        | $          | 3.3                     |       | $                         | (0.1       | )                                          | $          | 6.0 |   | $ | 14.8 |   |
| 2003  Accounts receivable returns & allowances |       | $                                            | 19.0       | (C)                                                         | $          | (0.7                    | )(D)       | $                         | 12.9       |                                       | $          | 0.0 |   | $ | 5.4 |   |

 

----

NOTE:

(A) – Net uncollectible accounts charged off (recovered).

(B) – This amount represents the acquisition of AFC in2004 and purchase price adjustments in 2005.

(C) – $12.2 millionallowance for current receivables (netted against *AccountsReceivable-Net of Returns and Allowances*) and $6.8 million allowancefor long-term receivables (netted against *Other Assets*).

(D) – These amounts represent net reserve reversals.

 
| **(In millions)**                          | ** ** | **Balance at  Beginning  of Year** | ** ** | **Net  Additions Charged to  Costs and Expenses** | ** ** | **Deductions (A)** | ** ** | **Acquisitions (B)** | ** ** | **Balance at  End of Year** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|--------------------------------------------|------------|
| 2005  Reserve for excess and obsolete inventory |       | $                                            | 77.7       |                                                        | $          | 17.3                    |       | $                         | (29.9      | )                                          | $          | 0.0 |   | $ | 65.1 |   |
| 2004  Reserve for excess and obsolete inventory |       | $                                            | 55.3       |                                                        | $          | 16.0                    |       | $                         | (29.6      | )                                          | $          | 36.0 |   | $ | 77.7 |   |
| 2003  Reserve for excess and obsolete inventory |       | $                                            | 60.0       |                                                        | $          | 38.2                    |       | $                         | (42.9      | )                                          | $          | 0.0 |   | $ | 55.3 |   |

 

----

NOTE:

(A) – Inventory scrapped.

(B) – This amountrepresents the acquisition of AFC in 2004.

 

29

----

 

**ExhibitIndex**

** **
| 13   |   | Annual Report to  Stockholders                                                    |
|------|--------|-----------------------------------------------------------------------------------|
| 21   |   | Subsidiaries of  Tellabs, Inc.                                                    |
| 23   |   | Consent of Independent  Registered Public Accounting Firm                         |
| 31.1 |   | CEO Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 |   | CFO Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 |   | CEO Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2 |   | CFO Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

30

----