**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM10-Q**

 

| **(Mark  One)**                                        |
|--------------------------------------------------------|
| ** **                                             |
| **ý**                                             | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                   |
| **For the quarterly period ended September  30, 2005** |
|                                                   |
| **OR**                                                 |
|                                                   |
| **o**                                                  | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                   to                  **

 

**Commission file Number: 0-09692**

 

**TELLABS,INC.**

(Exact name of registrant as specified in its charter)

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

 

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

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.              YES ý        NO o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct). YES ýNO o

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct). o YES  ý NO

 

Common Shares, $0.01 Par Value –448.5 million shares outstanding on September 30, 2005.

 

 

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**TELLABS, INC.INDEX**

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

 

2

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**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

 

**TELLABS,INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(In millions, except per-share  data)**                                                                                                     | ** ** | **9/30/05**            | ** ** | **10/1/04**           | ** ** | **9/30/05** | ** ** | **10/1/04** | ** ** |
| **Revenue**                                                                                                                                   |       |                   |       |                  |       |   |   |   |   |
| Products                                                                                                                                      | ** ** | **$**                  | **420.2**  |                  | $          | 239.7 | ** ** | **$** | **1,238.8** |   | $ | 735.3 |   |
| Services                                                                                                                                      | ** ** | **43.7**               |       | 44.6                  | ** ** | **123.2** |   | 117.1 |   |
| ** **                                                                                                                                    |       | **463.9**              |       | 284.3                 | ** ** | **1,362.0** |   | 852.4 |   |
| **Cost of  Revenue**                                                                                                                          |       |                   |       |                  |       |   |   |   |   |
| Products                                                                                                                                      | ** ** | **213.0**              |       | 104.6                 | ** ** | **665.1** |   | 298.1 |   |
| Services                                                                                                                                      | ** ** | **33.2**               |       | 26.6                  | ** ** | **90.1** |   | 75.9 |   |
| ** **                                                                                                                                    |       | **246.2**              |       | 131.2                 | ** ** | **755.2** |   | 374.0 |   |
| **Gross  Profit**                                                                                                                             | ** ** | **217.7**              |       | 153.1                 | ** ** | **606.8** |   | 478.4 |   |
|                                                                                                                                          |       |                   |       |                  |       |   |   |   |   |
| Gross profit  as a percentage of revenue                                                                                                      | ** ** | **46.9**               | **%**      | 53.9                  | %          | **44.6** | **%** | 56.1 | % |
|                                                                                                                                          |       |                   | ** ** |                  |       |   | ** ** |   |   |
| Gross profit  as a percentage of revenue - products                                                                                           | ** ** | **49.3**               | **%**      | 56.4                  | %          | **46.3** | **%** | 59.5 | % |
| Gross profit  as a percentage of revenue - services                                                                                           | ** ** | **24.0**               | **%**      | 40.4                  | %          | **26.9** | **%** | 35.2 | % |
|                                                                                                                                          |       |                   |       |                  |       |   |   |   |   |
| **Operating  Expenses**                                                                                                                       |       |                   |       |                  |       |   |   |   |   |
| Research and development                                                                                                                      | ** ** | **84.7**               |       | 59.5                  | ** ** | **256.4** |   | 182.5 |   |
| Sales and marketing                                                                                                                           | ** ** | **42.2**               |       | 35.9                  | ** ** | **133.8** |   | 112.3 |   |
| General and administrative                                                                                                                    | ** ** | **25.2**               |       | 21.1                  | ** ** | **69.9** |   | 59.6 |   |
| Restructuring and other charges                                                                                                               | ** ** | **(0.2**               | **)**      | (0.2                  | )          | **14.2** |   | 14.0 |   |
| Amortization of purchased intangibles                                                                                                         | ** ** | **7.9**                |       | 3.9                   | ** ** | **28.1** |   | 11.7 |   |
| ** **                                                                                                                                    |       | **159.8**              |       | 120.2                 | ** ** | **502.4** |   | 380.1 |   |
|                                                                                                                                          |       |                   |       |                  |       |   |   |   |   |
| **Operating  Earnings**                                                                                                                       | ** ** | **57.9**               |       | 32.9                  | ** ** | **104.4** |   | 98.3 |   |
|                                                                                                                                          |       |                   |       |                  |       |   |   |   |   |
| **Other  Income**                                                                                                                             |       |                   |       |                  |       |   |   |   |   |
| Interest income, net                                                                                                                          | ** ** | **6.8**                |       | 7.4                   | ** ** | **18.9** |   | 19.6 |   |
| Other income (expense), net                                                                                                                   | ** ** | **0.8**                |       | 1.9                   | ** ** | **(3.6** | **)** | (0.1 | ) |
| ** **                                                                                                                                    |       | **7.6**                |       | 9.3                   | ** ** | **15.3** |   | 19.5 |   |
|                                                                                                                                          |       |                   |       |                  |       |   |   |   |   |
| **Earnings  Before Income Tax**                                                                                                               | ** ** | **65.5**               |       | 42.2                  | ** ** | **119.7** |   | 117.8 |   |
| Income tax (expense) benefit                                                                                                                  | ** ** | **(23.6**              | **)**      | 3.7                   | ** ** | **(36.0** | **)** | (8.9 | ) |
| **Net  Earnings**                                                                                                                             | ** ** | **$**                  | **41.9**   |                  | $          | 45.9 | ** ** | **$** | **83.7** |   | $ | 108.9 |   |
|                                                                                                                                          |       |                   |       |                  |       |   |   |   |   |
| **Net  Earnings Per Share**                                                                                                                   |       |                   |       |                  |       |   |   |   |   |
| Basic                                                                                                                                         | ** ** | **$**                  | **0.09**   |                  | $          | 0.11 | ** ** | **$** | **0.19** |   | $ | 0.26 |   |
| Diluted                                                                                                                                       | ** ** | **$**                  | **0.09**   |                  | $          | 0.11 | ** ** | **$** | **0.18** |   | $ | 0.26 |   |
|                                                                                                                                          |       |                   |       |                  |       |   |   |   |   |
| **Weighted  Average Shares Outstanding**                                                                                                      |       |                   |       |                  |       |   |   |   |   |
| Basic                                                                                                                                         |       | 447.8                  |       | 416.7                 |       | 450.4 |   | 416.0 |   |
| Diluted                                                                                                                                       |       | 453.2                  |       | 420.7                 |       | 454.5 |   | 420.0 |   |
|                                                                                                                                          |       |                   |       |                  |       |   |   |   |   |
| **Amortization  of deferred stock compensation related to acquisitions is included in the  following cost and expense categories by period:** |
|                                                                                                                                          |       |                   |       |                  |       |   |   |   |   |
| Cost of  revenue                                                                                                                              | ** ** | **$**                  | **0.1**    |                  | $          | — | ** ** | **$** | **0.3** |   | $ | — |   |
| Research and  development                                                                                                                     | ** ** | **2.4**                |       | 1.1                   | ** ** | **7.5** |   | 3.9 |   |
| Sales and  marketing                                                                                                                          | ** ** | **—**             |       | —                | ** ** | **0.2** |   | 0.1 |   |
| General and  administrative                                                                                                                   | ** ** | **0.1**                |       | —                | ** ** | **0.3** |   | — |   |
| ** **                                                                                                                                    |       | **$**                  | **2.6**    |                  | $          | 1.1 | ** ** | **$** | **8.3** |   | $ | 4.0 |   |

 

The accompanying notes are an integral part of these statements.

 

3

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**TELLABS,INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

** **
| **(In millions, except share  amounts)**                                                                                                | ** ** | **9/30/05**     | ** **  | **12/31/04** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|-------------|--------------|------------|
| ** **                                                                                                                              | ** ** | **(Unaudited)** | ** **  | ** **   | ** ** |
|                                                                                                                                    |       |            |        |         |       |
| **Assets**                                                                                                                              |       |            |        |         |       |
| **Current  Assets**                                                                                                                     |       |            |        |         |       |
| Cash and cash equivalents                                                                                                               | ** ** | **$**           | **640.2**   |         | $          | 292.9 |   |
| Investments in marketable securities                                                                                                    | ** ** | **448.1**       |        | 823.3        |       |
| ** **                                                                                                                              |       | **1,088.3**     |        | 1,116.2      |       |
|                                                                                                                                    |       |            |        |         |       |
| Other marketable securities - Cisco stock                                                                                               | ** ** | **189.2**       |        | 204.0        |       |
| Accounts receivable, net of returns and  allowances of $16.9 and $16.6                                                                  | ** ** | **312.3**       |        | 309.4        |       |
| Inventories                                                                                                                             |       |            |        |         |       |
| Raw materials                                                                                                                           | ** ** | **31.3**        |        | 39.2         |       |
| Work in process                                                                                                                         | ** ** | **10.5**        |        | 13.6         |       |
| Finished goods                                                                                                                          | ** ** | **71.6**        |        | 63.6         |       |
| ** **                                                                                                                              |       | **113.4**       |        | 116.4        |       |
| Income taxes                                                                                                                            | ** ** | **23.6**        |        | 38.9         |       |
| Miscellaneous receivables and other current  assets                                                                                     | ** ** | **48.5**        |        | 50.0         |       |
| **Total  Current Assets**                                                                                                               | ** ** | **1,775.3**     |        | 1,834.9      |       |
|                                                                                                                                    |       |            |        |         |       |
| **Property,  Plant and Equipment**                                                                                                      | ** ** | **606.4**       |        | 619.1        |       |
| Less:  accumulated depreciation                                                                                                         | ** ** | **(309.7**      | **)**       | (290.3       | )          |
| ** **                                                                                                                              |       | **296.7**       |        | 328.8        |       |
| **Goodwill**                                                                                                                            | ** ** | **1,119.8**     |        | 1,092.3      |       |
| **Intangible  Assets, Net of Amortization**                                                                                             | ** ** | **129.0**       |        | 156.0        |       |
| **Other  Assets**                                                                                                                       | ** ** | **110.2**       |        | 133.1        |       |
| **Total  Assets**                                                                                                                       | ** ** | **$**           | **3,431.0** |         | $          | 3,545.1 |   |
|                                                                                                                                    |       |            |        |         |       |
| **Liabilities  and Stockholders’ Equity**                                                                                          |       |            |        |         |       |
| **Current  Liabilities**                                                                                                                |       |            |        |         |       |
| Accounts payable                                                                                                                        | ** ** | **$**           | **80.7**    |         | $          | 96.3 |   |
| Accrued liabilities                                                                                                                     | ** ** | **195.4**       |        | 206.4        |       |
| Restructuring and other charges                                                                                                         | ** ** | **8.6**         |        | 13.4         |       |
| Cisco stock loan                                                                                                                        | ** ** | **189.2**       |        | 204.0        |       |
| Income taxes                                                                                                                            | ** ** | **37.9**        |        | 15.9         |       |
| **Total  Current Liabilities**                                                                                                          | ** ** | **511.8**       |        | 536.0        |       |
|                                                                                                                                    |       |            |        |         |       |
| **Long-Term  Restructuring Liabilities**                                                                                                | ** ** | **26.1**        |        | 33.0         |       |
| **Income  Taxes**                                                                                                                       | ** ** | **118.4**       |        | 127.9        |       |
| **Other  Long-Term Liabilities**                                                                                                        | ** ** | **70.0**        |        | 51.0         |       |
|                                                                                                                                    |       |            |        |         |       |
| **Stockholders’  Equity**                                                                                                          |       |            |        |         |       |
| Preferred stock: authorized 5,000,000  shares of $0.01 par value; no shares issued and outstanding                                      | ** ** | **—**      | ** **  | **—**   | ** ** |
| Common stock: authorized 1,000,000,000  shares of $0.01 par value; 472,539,085 and 466,910,981 shares issued,  including treasury stock | ** ** | **4.7**         |        | 4.7          |       |
| Additional paid-in capital                                                                                                              | ** ** | **1,185.8**     |        | 1,145.9      |       |
| Deferred compensation expense                                                                                                           | ** ** | **(15.7**       | **)**       | (21.8        | )          |
| Treasury stock, at cost: 24,087,852 and  3,250,000 shares                                                                               | ** ** | **(287.1**      | **)**       | (129.6       | )          |
| Retained earnings                                                                                                                       | ** ** | **1,755.8**     |        | 1,672.1      |       |
| Accumulated other comprehensive income                                                                                                  | ** ** | **61.2**        |        | 125.9        |       |
| **Total  Stockholders’ Equity**                                                                                                    | ** ** | **2,704.7**     |        | 2,797.2      |       |
| **Total  Liabilities and Stockholders’ Equity**                                                                                    | ** ** | **$**           | **3,431.0** |         | $          | 3,545.1 |   |

 

The accompanying notes are an integral part of these statements.

 

4

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**TELLABS,INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW**

**(Unaudited)**

 
| ** **                                                                           | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(in millions)**                                                                    | ** ** | **9/30/05**           | ** ** | **10/1/04** | ** ** |
| **Operating  Activities**                                                            |       |                  |       |   |   |
| Net Earnings                                                                         | ** ** | **$**                 | **83.7**   |   | $ | 108.9 |   |
| Adjustments to reconcile net earnings to  net cash provided by operating activities: |       |                  |       |   |   |
| Depreciation and amortization                                                        | ** ** | **96.5**              |       | 58.8 |   |
| Deferred compensation amortization                                                   | ** ** | **11.7**              |       | 7.9 |   |
| Restructuring and other charges                                                      | ** ** | **14.2**              |       | 11.0 |   |
| Deferred taxes                                                                       | ** ** | **(2.5**              | **)**      | 3.2 |   |
|                                                                                 |       |                  |       |   |   |
| Net change in assets and liabilities, net  of effects from acquisitions:             |       |                  |       |   |   |
| Accounts receivable                                                                  | ** ** | **(15.3**             | **)**      | 23.0 |   |
| Inventories                                                                          | ** ** | **(1.1**              | **)**      | (22.7 | ) |
| Income tax receivable                                                                | ** ** | **3.7**               | ** ** | 22.4 |   |
| Miscellaneous receivables and other current  assets                                  | ** ** | **1.0**               | ** ** | 73.4 |   |
| Other assets                                                                         | ** ** | **(1.2**              | **)**      | (4.3 | ) |
| Accounts payable                                                                     | ** ** | **(16.3**             | **)**      | 3.1 |   |
| Accrued liabilities                                                                  | ** ** | **(60.7**             | **)**      | (11.9 | ) |
| Restructuring and other charges                                                      | ** ** | **(22.2**             | **)**      | (46.8 | ) |
| Income taxes                                                                         | ** ** | **31.2**              | ** ** | (7.7 | ) |
| Long-term liabilities                                                                | ** ** | **18.6**              | ** ** | (4.0 | ) |
| **Net Cash  Provided by Operating Activities**                                       | ** ** | **141.3**             | ** ** | 214.3 |   |
|                                                                                 |       |                  | ** ** |   |   |
| **Investing  Activities**                                                            |       |                  | ** ** |   |   |
| Capital expenditures                                                                 | ** ** | **(35.3**             | **)**      | (27.7 | ) |
| Disposals of property, plant and equipment                                           | ** ** | **16.0**              | ** ** | 30.0 |   |
| Payments for purchases of investments                                                | ** ** | **(568.5**            | **)**      | (897.5 | ) |
| Proceeds from sales and maturities of  investments                                   | ** ** | **947.9**             | ** ** | 934.5 |   |
| **Net Cash  Provided by Investing Activities**                                       | ** ** | **360.1**             | ** ** | 39.3 |   |
|                                                                                 |       |                  | ** ** |   |   |
| **Financing  Activities**                                                            |       |                  | ** ** |   |   |
| Proceeds from issuance of common stock  under option plans                           | ** ** | **32.8**              | ** ** | 8.1 |   |
| Repurchase of common stock                                                           | ** ** | **(157.5**            | **)**      | **—** |   |
| **Net Cash  (Used) Provided by Financing Activities**                                | ** ** | **(124.7**            | **)**      | 8.1 |   |
| **Effect  of Exchange Rate Changes on Cash**                                         | ** ** | **(29.4**             | **)**      | (1.3 | ) |
| **Net  Increase in Cash and Cash Equivalents**                                       | ** ** | **347.3**             | ** ** | 260.4 |   |
| **Cash and  Cash Equivalents at Beginning of Year**                                  | ** ** | **292.9**             | ** ** | 245.9 |   |
| **Cash and  Cash Equivalents at End of Period**                                      | ** ** | **$**                 | **640.2**  | ** ** | $ | 506.3 |   |

 

The accompanying notes are an integral part of these statements.

 

5

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**TELLABS, INC.****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**1. Basisof Presentation**

 

Our accompanying unauditedcondensed consolidated financial statements were prepared in accordance withgenerally accepted accounting principles for interim financial statements andthe requirements of Form 10-Q and applicable rules of Regulation S-X andaccordingly do not include all disclosures normally required by generallyaccepted accounting principles for complete financial statements. Accordingly,the financial statements and notes herein are to be read in conjunction with ourAnnual Report on Form

10-K for the year ended December31, 2004.

 

In our opinion, theaccompanying unaudited condensed consolidated financial statements include alladjustments (consisting of normal recurring accruals) that are necessary for afair presentation. We reclassified certain prior period amounts to conform tothe current period presentation.  Operatingresults for interim periods are not necessarily indicative of operating resultsfor the full year.

 

**2. NewAccounting Pronouncements**

 

In December 2004, the Financial AccountingStandards Board (FASB) issued Statement No. 123 (revised 2004), *Share-Based Payment* (SFAS 123(R)), which requires themeasurement and recognition of compensation expense for all stock-based compensationpayments and supersedes our current accounting under APB 25. SFAS 123(R) iseffective at the beginning of our fiscal 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin (SAB) No. 107 relating to theadoption of SFAS 123(R).  We arecurrently evaluating the impact of SFAS 123(R) and SAB No. 107 on our operatingresults and financial condition, which we believe will be material.  An important element in determining theimpact on our financial statements is choosing an appropriate method to valuestock-based compensation.  We arecurrently evaluating alternative valuation methods and expect to finalize ourselection prior to adopting SFAS 123(R).

 

In June 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections*, which supercedesAPB Opinion No. 20, *Accounting Changes*and SFAS No. 3, *Reporting Accounting Changes in InterimFinancial Statements*.  Thisnew standard requires retrospective application to prior periods’ financialstatements of a voluntary change in accounting principle unless impracticable.This statement also requires a change in depreciation, amortization, ordepletion method for long-lived, non-financial assets be treated as a change inaccounting estimate effected by a change in accounting principle.  SFAS No. 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December15, 2005.  We will adopt this statement onits effective date.

 

In June 2005, theFASB issued FSP 143-1, *Accounting for ElectronicEquipment Waste Obligations.* FSP 143-1 was issued to address the accounting for obligationsassociated with Directive 2002/96/EC on Waste Electrical and ElectronicEquipment (the “Directive”) adopted by the European Union.  The Directive obligates a commercial user toincur costs associated with the retirement of a specified asset that qualifiesas historical waste equipment effective August 13, 2005.  FSP 143-1 requires commercial users to applythe provisions of SFAS 143, *Accounting for ConditionalAsset Retirement Obligations,* and the related FASB InterpretationNo. 47, *Accounting for Conditional Asset RetirementObligations*, to the obligation associated with historicalwaste.  It is effective the later of thefirst reporting period ending after June 8, 2005 or the date of the adoption ofthe law by the applicable European Union member.  We adopted FSP 143-1 and it did not have amaterial impact on our financial statements.

 

**3. Acquisition**

 

In November 2004, we acquired100% of the outstanding common stock of Advanced Fibre Communications (AFC), aleader in access products, for 0.504 shares of our common stock and $12.00 incash for each AFC share, for a total value of approximately $1.6 billion($794.5 million, net of cash acquired). We issued approximately 44.8 million shares of our common stock for theacquisition, with the cash portion financed with U.S.-based cash and cashequivalents, including AFC’s.  Theoperating results of AFC have been included in our consolidated financialstatements from the acquisition date.

 

During the first nine months of2005, we made adjustments to purchase cost of $13.6 million for costs to exitfacilities, and costs for employee severance and relocation (exit costs).  In addition, we made adjustments of $17.5million related to other liabilities assumed in the acquisition.  During 2005, the accrual for exit costs wascharged $8.4, ending in a remaining balance of $9.1 million at September 30,2005.  The purchase price allocation forAFC has not been finalized pending completion of final adjustments toliabilities assumed in the acquisition, and the completion of integration plansand valuation reports.

 

6

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**4. Restructuringand Other Charges**

 

In the fourth quarter of 2004and first quarter of 2005, we initiated plans to reorganize our operations inDenmark and Finland to improve profitability. Implementation of these plans is substantially complete and resulted inworkforce reductions, facility closures and asset disposals.  We recorded a charge of $15.7 million relatedto these plans, principally in the first two quarters of 2005.  During the third quarter of 2005, we mademinor adjustments to prior accruals to reflect current expectations. We do notexpect additional charges to these plans to be material.

 

In the second quarter of 2005,we initiated a plan to outsource our North American prototype lab to ourcurrent manufacturing vendor.  Ourcurrent expected restructuring charges under the plan, which are primarily forseverance and asset disposals, are estimated to be $0.6 million.  This amount was updated from our previousexpectation due to a more current estimate for proceeds from the sale of assetsunder the plan.  To date, we haveincurred $0.5 million of these costs with $0.3 million of this incurred duringthe third quarter. 

 

Excluding restructuring charges, cost savings from the above mentionedplans were achieved beginning in the first quarter of this year. These plansare part of our goal to reduce the combined annual expenditures of Tellabs andAFC by $30 million in 2005 and beyond, and an additional $15 million in annualexpense savings from other sources, primarily operating expenses.

 

**Thefollowing table summarizes restructuring and other charges recorded during the thirdquarter and year-to-date periods of 2005 and 2004 related to the above-mentionedplans as well as adjustments to reserves recorded for prior restructurings:**

 

| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(In millions)**                           | ** ** | **9/30/05**            | ** ** | **10/1/04**           | ** ** | **9/30/05** | ** ** | **10/1/04** | ** ** |
| Facility and  other exit costs              |       | $                      | (0.2       | )                     | $          | 0.2 |   | $ | 2.2 |   | $ | 13.0 |   |
| Severance  and other termination benefits   |       | —                 |       | —                |       | 11.5 |   | 3.8 |   |
| Contractual  commitments and other          |       | —                 |       | 0.1                   |       | 0.5 |   | (5.8 | ) |
| Total  restructuring and other charges      |       | (0.2                   | )          | 0.3                   |       | 14.2 |   | 11.0 |   |
| Total of  above items in cost of revenue    |       | $                      | —     |                  | $          | 0.5 |   | $ | — |   | $ | (3.0 | ) |
| Total of  above items in operating expenses |       | $                      | (0.2       | )                     | $          | (0.2 | ) | $ | 14.2 |   | $ | 14.0 |   |

 

**2005**

 

Facility and other exit costsinclude $3.3 million during the first nine months related to equipmentdisposals in Denmark and Finland and a reduction to accruals under priorrestructuring plans for excess leased facilities by $1.1 million primarily dueto favorable subleasing experience.  Duringthe third quarter, we made minor adjustments related to prior restructuringplans.

 

Employee severance and othertermination benefits in the first nine months include $11.0 million for staffreductions in Denmark and Finland, and severance of $0.5 million attributableto outsourcing the North American prototype lab.

 

Contractual commitments andother costs include a $0.4 million charge for non-cancelable software licensesdue to headcount reductions in Denmark and Finland.

 

**2004**

 

The following discussionrelates to pre-2005 restructuring plans not previously discussed that aresubstantially complete or expected to have immaterial adjustments to theirreserves:

 

Facility and other exit costsinclude $1.9 million during the first nine months for the closure of excessleased facilities, offset by a reduction for the final settlement ofobligations associated with previously vacated facilities.  These amounts also include an $18.2 million impairmentcharge for property, plant and equipment, partially offset by $5.2 million inproceeds from the sale of property, plant and equipment in excess of ouroriginal estimate.

 

Employee severance and othertermination benefits include additional charges of $5.0 million and a $1.2million reduction for pre-2004 restructuring plans.  The reduction was primarily attributable tochanges in our estimates of the amount of severance benefits that would be paidto each employee and the number of employees that would be terminated andreceive severance payments.

 

7

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Contractual commitments andother costs include a $12.0 million reduction of a reserve for excess purchasecommitments due to a favorable settlement with a vendor, partially offset by anaccrual of $2.3 million for the revaluation of inventories related tointernational manufacturing outsourcing. Also included is $3.9 million in additional accruals for contracttermination and other charges.

 

**Thefollowing tables summarize our restructuring and other charges activity duringthe third quarter and first nine months of 2005 and the status of the reservesat September 30, 2005:**

 
| **(in millions)**                        | ** ** | **Balance at  07/01/05** | ** ** | **Charges/  (Reversals)** | ** ** | **Cash  Payments** | ** ** | **Non-Cash  Settlements and  Other  Adjustments (a)** | ** ** | **Balance at  9/30/05** | ** ** |
|------------------------------------------|------------|--------------------------|------------|---------------------------|------------|--------------------|------------|-------------------------------------------------------|------------|-------------------------|------------|
| Facility and  other exit costs           |       | $                        | 36.0       |                      | $          | (0.2               | )          | $                                                     | (2.9       | )                       | $          | 0.5 |   | $ | 33.4 |   |
|                                     |       |                     |       |                      |       |               |       |                                                  |       |                    |       |
| Severance and other termination benefits |       | 3.2                      |       | —                    |       | (2.2               | )          | —                                                |       | 1.0                     |       |
|                                     |       |                     |       |                      |       |               |       |                                                  |       |                    |       |
| Contractual  commitments and other       |       | 0.8                      |       | —                    |       | (0.5               | )          | —                                                |       | 0.3                     |       |
| Total                                    |       | $                        | 40.0       |                      | $          | (0.2               | )          | $                                                     | (5.6       | )                       | $          | 0.5 |   | $ | 34.7 |   |
|                                     |       |                     |       |                      |       |               |       |                                                  |       |                    |       |
| **(in millions)**                        | ** ** | **Balance at  12/31/04** | ** ** | **Charges/  (Reversals)** | ** ** | **Cash  Payments** | ** ** | **Non-Cash  Settlements and  Other  Adjustments (a)** | ** ** | **Balance at  9/30/05** | ** ** |
| Facility and  other exit costs           |       | $                        | 41.8       |                      | $          | 2.2                |       | $                                                     | (7.6       | )                       | $          | (3.0 | ) | $ | 33.4 |   |
|                                     |       |                     |       |                      |       |               |       |                                                  |       |                    |       |
| Severance and other termination benefits |       | 2.0                      |       | 11.5                      |       | (11.8              | )          | (0.7                                                  | )          | 1.0                     |       |
|                                     |       |                     |       |                      |       |               |       |                                                  |       |                    |       |
| Contractual  commitments and other       |       | 2.6                      |       | 0.5                       |       | (2.8               | )          | —                                                |       | 0.3                     |       |
| Total                                    |       | $                        | 46.4       |                      | $          | 14.2               |       | $                                                     | (22.2      | )                       | $          | (3.7 | ) | $ | 34.7 |   |

 

Note (a):  Non-Cash Settlements and Other Adjustmentsinclude the effects of currency translation on balances, write-downs of propertyplant and equipment to be disposed, and other changes in the reserve balancethat do not flow through the income statement.

 

**5. StockOptions**

 

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

 
| ** **                                                                                                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(In millions, except per-share  amounts)**                                                                                                | ** ** | **9/30/05**            | ** ** | **10/1/04**           | ** ** | **9/30/05** | ** ** | **10/1/04** | ** ** |
| Net earnings as reported                                                                                                                    |       | $                      | 41.9       |                  | $          | 45.9 |   | $ | 83.7 |   | $ | 108.9 |   |
|                                                                                                                                        |       |                   |       |                  |       |   |   |   |   |
| Add: stock-based employee compensation  expense included in reported net earnings, net of related tax effects                               |       | 4.8                    |       | 2.3                   |       | 11.9 |   | 7.9 |   |
|                                                                                                                                        |       |                   |       |                  |       |   |   |   |   |
| Less: total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (21.7                  | )          | (5.3                  | )          | (66.2 | ) | (27.0 | ) |
| Net earnings pro forma                                                                                                                      |       | $                      | 25.0       |                  | $          | 42.9 |   | $ | 29.4 |   | $ | 89.8 |   |
|                                                                                                                                        |       |                   |       |                  |       |   |   |   |   |
| Net earnings per share - Basic:                                                                                                             |       |                   |       |                  |       |   |   |   |   |
| As reported                                                                                                                                 |       | $                      | 0.09       |                  | $          | 0.11 |   | $ | 0.19 |   | $ | 0.26 |   |
| Pro forma                                                                                                                                   |       | $                      | 0.06       |                  | $          | 0.10 |   | $ | 0.07 |   | $ | 0.22 |   |
|                                                                                                                                        |       |                   |       |                  |       |   |   |   |   |
| Net earnings per share – Diluted:                                                                                                      |       |                   |       |                  |       |   |   |   |   |
| As reported                                                                                                                                 |       | $                      | 0.09       |                  | $          | 0.11 |   | $ | 0.18 |   | $ | 0.26 |   |
| Pro forma                                                                                                                                   |       | $                      | 0.06       |                  | $          | 0.10 |   | $ | 0.06 |   | $ | 0.21 |   |

 

8

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We estimated the fair value ofoptions on the date of grant using the Black-Scholes option-pricing model withthe following weighted-average assumptions for grants in 2005 and 2004:

 

| ** **               | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|--------------------------|------------|-----------|------------|-----------|------------|
| Expected  volatility     |       | 52.5      | %          | 71.2      | %          |
| Risk-free  interest rate |       | 3.8       | %          | 3.7       | %          |
| Expected  life           |       | 4.0 years |       | 4.8 years |       |
| Expected  dividend yield |       | 0.0       | %          | 0.0       | %          |

 

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

 

**6. Retiree Medical Plan**

 

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

 

| ** **                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(In millions)**                   | ** ** | **9/30/05**            | ** ** | **10/1/04**           | ** ** | **9/30/05** | ** ** | **10/1/04** | ** ** |
| Service cost                        |       | $                      | 0.2        |                  | $          | 0.2 |   | $ | 0.8 |   | $ | 0.5 |   |
| Interest  cost                      |       | 0.2                    |       | 0.1                   |       | 0.5 |   | 0.4 |   |
| Expected  return on plan assets     |       | (0.1                   | )          | (0.1                  | )          | (0.3 | ) | (0.4 | ) |
| Amortization  of prior service cost |       | 0.1                    |       | —                |       | 0.1 |   | 0.1 |   |
| Amortization  of net (gain) loss    |       | —                 |       | —                |       | — |   | — |   |
| Net periodic benefit cost           |       | $                      | 0.4        |                  | $          | 0.2 |   | $ | 1.1 |   | $ | 0.6 |   |

 

During the third quarter weevaluated the funding status of the plan and determined that we would not makea contribution to the plan this year.

 

**7. Product Warranties**

 

We provide warranties for allof our products.  The specific terms andconditions of those warranties vary depending upon the product sold.  We provide a basic limited warranty,including parts and labor, for all products other than access products for aperiod ranging from 90 days to 5 years. The basic limited warranty for access products covers parts and laborfor periods generally ranging from 2 to 6 years.

 

Factors that enter into ourestimate of our warranty liability include the number of units shipped,historical and anticipated rates of warranty claims, and cost per claim.  We periodically assess the adequacy of ourrecorded warranty liabilities and adjust the amounts as necessary.  On the Consolidated Balance Sheets, theshort-term portion of the warranty reserve is included in *TotalCurrent Liabilities*, while the long-term portion is included in *Other Long-Term Liabilities*. Our product warranty liabilities are as follows:

 

9

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| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(In millions)**                              | ** ** | **9/30/05**            | ** ** | **10/1/04**           | ** ** | **9/30/05** | ** ** | **10/1/04** | ** ** |
| Balance at  beginning of period                |       | $                      | 46.9       |                  | $          | 18.8 |   | $ | 41.1 |   | $ | 19.5 |   |
| Accruals for  product warranties issued        |       | 3.6                    |       | 1.3                   |       | 21.1 |   | 4.0 |   |
| Settlements  made during the period            |       | (8.0                   | )          | (1.2                  | )          | (19.7 | ) | (4.6 | ) |
| Balance at  the end of the period              |       | $                      | 42.5       |                  | $          | 18.9 |   | $ | 42.5 |   | $ | 18.9 |   |
|                                           |       |                   |       |                  |       |   |   |   |   |
| Balance  sheet classification at end of period |       |                   |       |                  |       |   |   |   |   |
| Total  current liabilities                     |       |                   |       |                  |       | $ | 22.3 |   | $ | 7.3 |   |
| Other  long-term liabilities                   |       |                   |       |                  |       | 20.2 |   | 11.6 |   |
| Total  product warranty liabilities            |       |                   |       |                  |       | $ | 42.5 |   | $ | 18.9 |   |

 

The $8.0 million settlementsfor the third quarter of 2005 include $3.8 million related to charges againstpurchase cost liabilities from the acquisition of AFC and therefore had noimpact on our operating results.

 

**8.Repurchases of Common Stock**

 

On February 2, 2005, our Board of Directorsauthorized the purchase of up to $300.0 million in shares of our outstandingcommon stock.  We may purchase commonstock from time-to-time on the open market or in private transactions andrecord them as treasury stock.  As ofSeptember 30, 2005, we have purchased $157.5 million (20.8 million shares) ofour common stock, of which we purchased $24.9 million (2.7 million shares) duringthe third quarter of 2005.

 

**9.Comprehensive Income (Loss)**

 

Comprehensive income (loss) isan expression of our net earnings (loss) in the condensed consolidatedstatements of operations, adjusted for foreign currency translation adjustments,net unrealized gains or losses on available-for-sale securities and fair valueadjustments of cash flow hedges.  Ourcomprehensive income (loss) was as follows:

 

| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(In millions)**                                            | ** ** | **9/30/05**            | ** ** | **10/1/04**           | ** ** | **9/30/05** | ** ** | **10/1/04** | ** ** |
| Net Earnings                                                 |       | $                      | 41.9       |                  | $          | 45.9 |   | $ | 83.7 |   | $ | 108.9 |   |
| Other Comprehensive Income (Loss)                            |       |                   |       |                  |       |   |   |   |   |
| Cumulative translation adjustment                            |       | (1.3                   | )          | 11.1                  |       | (64.1 | ) | (7.5 | ) |
| Unrealized net gain (loss) on  available-for-sale-securities |       | (0.6                   | )          | 1.0                   |       | (0.6 | ) | (3.0 | ) |
| Fair value adjustments of cash flow hedges                   |       | 0.4                    |       | —                |       | — |   | — |   |
|                                                         |       |                   |       |                  |       |   |   |   |   |
| Comprehensive Income                                         |       | $                      | 40.4       |                  | $          | 58.0 |   | $ | 19.0 |   | $ | 98.4 |   |

 

During the quarter, we chargedto *Other income (expense), net* $0.6 millionin cumulative translation adjustments related to the sale of a long-term equityinvestment.

 

**10.Derivative Financial Instruments**

 

We enter into foreign exchange forward andoption contracts with maturities of less than 12 months to mitigate the impactof currency fluctuations on existing foreign currency asset and liabilitybalances.  In addition, beginning in2005, we are using foreign exchange forward and option contracts of less than12 months to reduce the risk to earnings and cash flows associated with anticipatedforeign currency net expenditures.  We recordall derivatives on the balance sheet at fair value in accordance with SFAS No.133, *Accounting for Derivative Instruments and HedgingActivities*.

 

In regard to the cash flow hedges, wecalculate each hedge’s effectiveness monthly, excluding time value.  We determine a forward contract’seffectiveness by comparing the cumulative change in the fair value on aspot-to-spot rate basis to the spot-to-spot rate cumulative change in theanticipated transaction.  We record theeffective portion of the hedge in other comprehensive income.  Similarly, we calculate an option contract’seffectiveness by comparing cumulative changes in the contract’s intrinsic valueon a spot rate basis to cumulative losses in value of the anticipatedtransaction measured on a spot-rate basis. When we recognize the hedged revenue transaction to income, the totalchange in the hedges effective value, which we accumulate in othercomprehensive income, we reclassify to operating margin.  We record any ineffectiveness, along with theexcluded time value of the forward and option contracts, in *Other income (expense), net*. We reclassify the gains or losses on the related cash flow hedges from *Other*

 

10

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*Comprehensive Income* (*OCI*) to *Other income (expense), net* at the time it becomes probablethat a hedged anticipated transaction will not occur*.*

 

The following table summarizes the impact ofcash flow hedges on *OCI* (net oftax) during the period:

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(In millions)**                      | ** ** | **9/30/05**            | ** ** | **10/1/04**           | ** ** | **9/30/05** | ** ** | **10/1/04** | ** ** |
| Balance at  beginning of the period    |       | $                      | 0.4        |                  | $          | — |   | $ | — |   | $ | — |   |
| Net loss on  cash flow hedges          |       | (0.1                   | )          | —                |       | 0.7 |   | — |   |
| Reclassification  to operating expense |       | (0.3                   | )          | —                |       | (0.7 | ) | — |   |
| Balance at  end of the period          |       | $                      | —     |                  | $          | — |   | $ | — |   | $ | — |   |

 

We also manage the foreign currency riskassociated with foreign currency denominated assets and liabilities usingforeign exchange forward contracts.  Werecognize changes in the fair value of these derivatives in the*Other expense, net*caption in our Condensed ConsolidatedStatements of Operations to substantially offset the remeasurement gains andlosses associated with the foreign currency denominated assets and liabilities.

 

**11. Income Taxes**

 

For the third quarter of 2005, we recorded atax expense of $23.6 million.   Our taxexpense for the quarter includes $15.4 million associated with the decision torepatriate $600.0 million of foreign earnings in accordance with the AmericanJobs Creation Act of 2004.

 

Forthe third quarter of 2005, we recorded a tax expense of $23.6 million.   Our tax expense for the quarter includes$15.4 million associated with the decision to repatriate $600.0 million offoreign earnings in accordance with the American Jobs Creation Act of2004.  Excluding the one-time provisionimpact associated with our repatriation in the fourth quarter, we recorded atax expense of ****$8.1 million**** compared with a taxexpense of ****$3.7**** million in the third quarter of2004.

 

Overall, our tax expense continues to beaffected by changes in the mix of income from domestic and foreignsources.   In addition, our consolidatedtax expense reflects a favorable impact on domestic tax expense from thereversal of a portion of our valuation allowance on domestic deferred taxassets.  At September 30, 2005, thevaluation allowance was ****$35.4**** million, reflectingreductions resulting from the reversal of a portion of valuation allowance ondomestic tax assets, and increases related to additional deferred tax assetsrecorded in accounting for the purchase of AFC and adjustments related to our2004 domestic tax liability.  We expectto reverse additional portions of our valuation allowance to the extent wecontinue to experience profitable results. In addition, when we have achieved a sufficient history of profitabilityas determined under the rules of SFAS 109, we will reverse all or most of thevaluation allowance remaining at that time. During the fourth quarter we willreview our recent profitability in light of the rules of SFAS 109 and determineif sufficient evidence exists to conclude that it is more likely than not thatour domestic deferred tax assets will be realized in future periods.  If we reach such a conclusion, then we willreverse the appropriate additional amount of our remaining valuation allowance.

 

**Item 2.Management’s Discussion and Analysis of Results of Operations and FinancialCondition**

 

**Introduction and Overview ofBusiness**

 

Tellabs designs, develops, deploys and supports telecommunicationnetworking products around the world. Our product portfolio includes solutionsfor wireline and wireless transport, access networking, broadband data, opticaltransport and voice quality enhancement.

 

We generate revenue principally through the sale of telecommunicationproducts, both as stand-alone products and as elements of integrated systems,to many of the world’s largest telecommunications service providers. Inaddition, we generate

revenue by providing installation and professional services relatedprimarily to our own products and systems. Our revenue is generated through our global sales channels supported byour global operations and customer service organizations.

 

Within North America we derive the majority of our product revenue fromtransport products, principally digital cross-connect systems that manage androute network traffic and combine, consolidate and segregate signals tomaximize efficiency; and access products that support the delivery of voice,data and video services to residential and commercial consumers over copperwire and fiber optic cable. Demand for transport products is sensitive toend-user demand for wireline and wireless services, bandwidth, industrycapacity utilization, service provider capital expenditure budgets andcompeting technologies. Demand for access products is driven by consumer demandfor voice, data and video services and the competition among traditionaltelecommunications companies and cable service operators to be the sole sourceprovider of voice, data and video services (referred to as the “triple play”).According to industry analysts, Tellabs has a market-leading position in theU.S. bandwidth management and access markets.

 

Outside North America, we earn the majority of our product revenue frommanaged access and transport systems that control the flow of voice and dataacross communications networks. Demand comes primarily from business servicesfor voice and high-speed data, and network transport services for wirelesscommunications. Demand for these products is sensitive to end-user demand forbandwidth, industry capacity utilization, service provider capital expenditurebudgets and competing technologies.

 

11

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Globally, we earn services revenue from network construction, supportagreements and other professional services. Network construction revenue, whichconstitues more than half of services revenue, arises primarily from sales ofour transport products in North America and tends to lag product sales byapproximately one fiscal quarter. Revenue from support agreements arisesprimarily from sales of our managed access and transport systems, with approximatelyhalf coming from outside of North America. Other professional services offeredby the company include network deployment, traffic management and training.

 

The markets for our products have undergone dynamic change over thelast few years. Beginning in 2001, carrier overcapacity, a softening economyand other factors caused our customers to reduce their capital spendingsignificantly. The impact on Tellabs was a dramatic decline in revenue for eachof the years 2001 through 2003 with year-over-year growth returning in 2004. Inaddition, we were faced with excess manufacturing capacity, excess inventoriesand a cost structure that could not be supported by our smaller revenue base.We responded by closing manufacturing facilities, reducing global headcount,consolidating office space, exiting certain product lines and instituting costcontrols across the organization. We also reviewed our product portfolio andcut back or stopped development efforts on some products. In addition, at theend of 2003, we moved to outsource the majority of our remaining manufacturingoperations to third-party electronics manufacturing services providers to takeadvantage of their greater purchasing power and other efficiencies. Theseactions caused us to record material charges in 2001 through 2005 for excessand obsolete inventory and excess purchase commitments, severance costs, facilitiesshutdown costs, including accelerated depreciation on certain manufacturing andoffice building and equipment due to shortened useful lives, and variouscontractual obligations. We also recorded charges for other impaired andsurplus assets.

 

Market stability began in 2003 and continued in 2004 and 2005 ascarriers invested in their networks at levels at or above 2003. This stabilityenabled us to post year-over-year revenue growth in 2004 for the first timesince fiscal 2000. Growing demand for wireless services, including third-generation(3G) services drove capital investments by both wireless and wireline carriersand helped drive sales of our transport and managed access products.

 

Fiscal 2005 began with and continues to havebroad-based revenue growth.  We have benefited from increasing wirelessand data traffic by selectively enhancing our transport and managed access productswith new features. In addition, we are addressing new, evolving growthopportunities with our broadband data networking and access products.  Forthe remainder of 2005, we will continue to focus on maximizing the synergiesfrom our integration of AFC and will continue to review our spending, assetutilization and product development roadmap opportunities to optimize revenue,improve asset utilization and contain spending.

 

**RESULTS OF OPERATIONS**

 

For the third quarter of 2005, our revenuegrew by 63% to $463.9 million and year-to-date revenue increased 60% to$1,362.0 million compared with 2004.  Revenuefrom access products grew for the third straight quarter of 2005.  We also saw improvement in most other productcategories, driven by continued demand from both wireless and wirelinecustomers.  On a geographic basis, NorthAmerica revenue was 76.8% and 75.0% of total revenue in the third quarter andyear-to-date period, respectively, in 2005 compared with 66.0% and 67.1% forthe comparable periods in 2004.  Wecontinued to control our operating expenses, which declined as a percentage ofrevenue in both the quarter and year-to-date periods. Lower gross margins weredue primarily to the addition of the access products, which have gross marginsbelow our average. In the third quarter, we recorded a one-time tax expense of$15.4 million related to our decision to repatriate $600 million of cash heldoutside the United States. We earned $41.9 million or $0.09 per share in thethird quarter of 2005, compared with $45.9 million or $0.11 per share in thethird quarter of 2004. Net earnings year to date were $83.7 million or $0.18per share, compared with $108.9 million or $0.26 per share in the same periodof 2004.

 

***Revenue***

 
| ** **                     | ** **   | **Third Quarter** | ** **   | **Year-to-Date** | ** **   |
|--------------------------------|--------------|-------------------|--------------|------------------|--------------|
| ** **                     | ** **   | **2005**          | ** **   | **2004**         | ** **   | **Change** | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** |
| **Transport**                  | ** **   | **$**             | **151.1**    | ** **       | **$**        | **139.8** | *** *** | ***8*** | **%** | **$** | **467.9** | ** ** | **$** | **440.6** | *** *** | ***6*** | ***%*** |
| **Access**                     | ** **   | **165.7**         | ** **   | **—**       | ** **   | **N/M** | ** ** | **437.0** | ** ** | **—** | *** *** | ***N/M*** | *** *** |
| **Managed  Access**            | ** **   | **84.3**          | ** **   | **73.0**         | *** *** | ***15*** | **%** | **273.8** | ** ** | **218.8** | *** *** | ***25*** | ***%*** |
| **Voice  Quality Enhancement** | ** **   | **5.0**           | ** **   | **18.4**         | *** *** | ***(73*** | ***)%*** | **30.9** | ** ** | **61.7** | *** *** | ***(50*** | ***)%*** |
| **Broadband  Data**            | ** **   | **14.0**          | ** **   | **8.5**          | ** **   | **65** | **%** | **29.1** | ** ** | **14.2** | *** *** | ***105*** | ***%*** |
| **Services**                   | ** **   | **43.8**          | ** **   | **44.6**         | *** *** | ***(2*** | ***)%*** | **123.3** | ** ** | **117.1** | *** *** | ***5*** | ***%*** |
| **Total**                      | ** **   | **$**             | **463.9**    | ** **       | **$**        | **284.3** | *** *** | ***63*** | **%** | **$** | **1,362.0** | ** ** | **$** | **852.4** | *** *** | ***60*** | ***%*** |
| *** ***                   | *** *** | *** ***      | *** *** | *** ***     | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| **North  America**             | ** **   | **$**             | **356.1**    | ** **       | **$**        | **187.5** | *** *** | ***90*** | **%** | **$** | **1,022.1** | ** ** | **$** | **572.3** | *** *** | ***79*** | ***%*** |
| **International**              | ** **   | **$**             | **107.8**    | ** **       | **$**        | **96.8** | *** *** | ***11*** | **%** | **$** | **339.9** | ** ** | **$** | **280.1** | *** *** | ***21*** | ***%*** |

 

Transport revenue for the third-quarter andyear-to-date periods of 2005 increased 8% and 6%, respectively, over the comparableperiods of 2004.  Shipments to our NorthAmerican wireless customers accounted for approximately 52% of all transportproduct revenue compared with 48% in the third quarter of last year.  Approximately 20% of third-quarter revenuefrom wideband cross connect products, which constitutes the majority oftransport revenue, came from new systems, system expansions and software

 

12

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upgrades, which we believe indicates that ourcustomers continue to invest in this platform. The remaining 80% consisted ofport-card equipment growth on installed base and compares with approximately82% in the third quarter of 2004.  Weshipped approximately 1.7 million T-1 equivalents during the third quarter of2005 compared with 1.4 million T-1 equivalents in the third quarter of 2004.

 

Revenue from access products reached $165.7million and $437.0 million for the quarter and year-to-date periods,respectively, in 2005.  Approximately halfof access products third-quarter revenue was related to fiber-to-the-premisesand fiber-to-the-curb deployments, with most of the balance coming fromcopper-based access solutions.

 

Revenue from managed access productsincreased 15% and 25% for the third quarter and first nine months of 2005,respectively, over the comparable periods in 2004.  The increases were due primarily to strengthin sales of our managed transport systems and managed access systems driven by 3Gwireless network build-outs and Ethernet-over-SDH applications.

 

Revenue from voice quality enhancement (VQE)products declined to $5.0 million from $18.4 million in the third quarter of2004, and to $30.9 million from $61.7 million in the first nine months of2004.  Across the industry, VQE ismigrating from a technology that is sold as stand-alone products to atechnology that is integrated into transport, switching and other platforms. Infact, we have integrated voice quality capability into our 5500 wideband crossconnect platform. Because of this migration, we expect that shipments ofstand-alone VQE products will decline to a level that is not material to ourresults of operations.   As this transition continues, it is likely wewill include all VQE revenue in the transport product category beginning nextyear.

 

Broadband data revenue increased to $14.0million during the third quarter compared with $8.5 million in the thirdquarter of 2004, and increased to $29.1 million on a year-to-date basis from$14.2 million in the comparable period in 2004. We continued to gain traction with our broadband data platform as wecontinued to add customers, including expanding into wireless and cableoperations.  We recognized revenue fromfive new customers during the quarter and our customer base has expanded toinclude wireless carriers and cable operators. Overall, we are currently in 13live networks versus four at this time last year.

 

Revenue from services in the third quarterwas essentially flat compared to the third quarter of 2004.  Year to date, services revenue was up 5%compared with 2004, principally related to higher revenue from supportagreements.

 

***Gross Margin***

 
| ** **               | ** ** | **Third Quarter** | ** ** | **Year-to-Date** | ** ** |
|--------------------------|------------|-------------------|------------|------------------|------------|
| ** **               | ** ** | **2005**          | ** ** | **2004**         | ** ** | **Change** | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** |
| **Consolidated  Margin** | ** ** | **46.9**          | **%**      | **53.9**         | **%**      | ***(7.0*** | ***)%*** | **44.6** | **%** | **56.1** | **%** | ***(11.5*** | ***)%*** |
| **Products  Margin**     | ** ** | **49.3**          | **%**      | **56.4**         | **%**      | ***(7.1*** | ***)%*** | **46.3** | **%** | **59.5** | **%** | ***(13.2*** | ***)%*** |
| **Services  Margin**     | ** ** | **24.0**          | **%**      | **40.4**         | **%**      | ***(16.4*** | ***)%*** | **26.9** | **%** | **35.2** | **%** | ***(8.3*** | ***)%*** |

 

Consolidated margin

 

When we acquired AFC in the fourth quarter of2004, its access products and related services had average gross margins thatwere substantially below the average for Tellabs products and services.Although each product in the access category has a margin below Tellabs averagemargin, one component, the 610x ONT (optical networking terminal for FTTPapplications), has a cost that is substantially in excess of its selling price.However, beginning in the current quarter, a portion of our ONT revenue camefrom shipments of a new version of the ONT, the 611 ONT, which has a cost thatis much closer to breakeven.

 

Gross margin on access products pulled downour third-quarter consolidated margin by about 7.9 percentage points and lowermargins from services caused an additional decline of about 2.6 percentagepoints. Their combined impact was partially offset, however, by higher marginson other Tellabs products due to changes in product and customer mix. For theyear-to-date period, lower margins on access products accounted for about 10.2percentage points of the year-over-year decline, while the balance was dueprimarily to lower margins on services.

 

Product margin

 

Product margins in the third quarter of 2005declined by 7.1 percentage points compared with the third quarter of 2004. Thedecline was due to the inclusion of access products (10.8 percentage points) primarilyoffset by a more favorable product and customer mix on other Tellabs products(3.8 percentage points).

 

Product margins declined in the year-to-dateperiod by 13.2 percentage points compared with 2004. Substantially all of thechange was due to the inclusion of access products as previously described.

 

Services margin

The addition of access-product related servicesin 2005 reduced services gross margin in each of the third quarter andyear-to-date periods compared with 2004 by approximately five percentagepoints.  The majority of the balance ofthe decline in the third quarter was due to the impact of lower revenue fromconstruction services (excluding access services revenue) and a write-down ofinventory.

 

13

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***Operating Expenses***

 
| ** **                                      | ** **   | **Third Quarter** | ** ** | **Year-to-Date** | ** **   |
|-------------------------------------------------|--------------|-------------------|------------|------------------|--------------|
| ** **                                      | ** **   | **2005**          | ** ** | **2004**         | ** **   | **Change** | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** |
| **Total Operating Expenses**                    | ** **   | **$**             | **159.8**  | ** **       | **$**        | **120.2** | ** ** | ***$*** | ***39.6*** | ** ** | **$** | **502.4** | ** ** | **$** | **380.1** | ** ** | ***$*** | ***122.3*** | *** *** |
| **Items included in the total:**                | *** *** | ** **        | ** ** | ** **       | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Restructuring and other charges**             | ** **   | **(0.2**          | **)**      | **(0.2**         | **)**        | ***—*** | ** ** | **14.2** | ** ** | **14.0** | *** *** | ***0.2*** | *** *** |
| **Amortization of purchased intangibles**       | ** **   | **7.9**           | ** ** | **3.9**          | *** *** | ***4.0*** | ** ** | **28.1** | ** ** | **11.7** | *** *** | ***16.4*** | *** *** |
| **Amortization of deferred stock compensation** | ** **   | **2.5**           | ** ** | **1.1**          | *** *** | ***1.4*** | ** ** | **8.0** | ** ** | **4.0** | *** *** | ***4.0*** | *** *** |
| **All other**                                   | ** **   | **$**             | **149.6**  | ** **       | **$**        | **115.4** | *** *** | ***$*** | ***34.2*** | ** ** | **$** | **452.1** | ** ** | **$** | **350.4** | *** *** | ***$*** | ***101.7*** | *** *** |

 

Although our operating expenses increased ascompared to the same periods in 2004 due to the addition of expenses from theacquisitions of AFC and Vinci, our focus on spending control enabled us toreduce operating expenses as a percentage of revenue.

 

The increase in the amortization of purchasedintangibles and deferred stock compensation is primarily due to theacquisitions of AFC and Vinci Systems, both in the fourth quarter of 2004.

 

***Other Income***

 
| ** **                       | ** ** | **Third Quarter** | ** ** | **Year-to-Date** | ** **   |
|----------------------------------|------------|-------------------|------------|------------------|--------------|
| ** **                       | ** ** | **2005**          | ** ** | **2004**         | ** **   | **Change** | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** |
| **Interest  income, net**        | ** ** | **$**             | **6.8**    | ** **       | **$**        | **7.4** | *** *** | ***$*** | ***(0.6*** | ***)*** | **$** | **18.9** | ** ** | **$** | **19.6** | *** *** | ***$*** | ***(0.7*** | ***)*** |
| **Other  income (expense), net** | ** ** | **0.8**           | ** ** | **1.9**          | *** *** | ***(1.1*** | ***)*** | **(3.6** | **)** | **(0.1** | **)** | ***(3.5*** | ***)*** |
| **Total**                        | ** ** | **$**             | **7.6**    | ** **       | **$**        | **9.3** | *** *** | ***$*** | ***(1.7*** | ***)*** | **$** | **15.3** | ** ** | **$** | **19.5** | *** *** | ***$*** | ***(4.2*** | ***)*** |

 

Other income for the quarter and year-to-dateperiods includes $1.8 million of losses from the sale of short-term investmentsheld outside the United States, related to the repatriation of cash planned forthe fourth quarter.

 

**IncomeTaxes**

 

TheAmerican Jobs Creation Act of 2004 (AJCA) creates a one-time incentive for U.S.corporations to repatriate foreign earnings by providing an 85% dividendsreceived deduction with respect to qualifying dividends.  In the third quarter, we recorded an incometax expense of $15.4 million associated with our decision to repatriateapproximately $600 million under the AJCA. We completed this repatriation in the fourth quarter using existingforeign cash balances.  We intend tocontinue to reinvest unrepatriated foreign earnings outside the United Statesfor the foreseeable future and therefore have not recognized any U.S. taxexpense on those earnings.

 

Forthe third quarter and first nine months of 2005, we recorded a tax expense of$23.6 million and $36.0 million, respectively, compared with a tax benefit of$3.7 million and a tax expense of $8.9 million in the third quarter and firstnine months, respectively, of 2004.  Theincrease in our tax provision compared with 2004 is substantially the result ofthe tax associated with our repatriation, and an increase in our non-U.S.earnings.  In addition, the third quarterof 2004 included a tax benefit related to resolving an IRS audit.  Our effective tax rates for the third quarterand first nine months of 2005 were 36.0% and 30.1%, respectively, compared witha tax benefit of 8.8% and tax expense of 7.6% for the third quarter and firstnine months of 2004, respectively.

 

Overall, our tax expense continues to beaffected by changes in the mix of income from domestic and foreignsources.   In addition, our consolidatedtax expense reflects a favorable impact on domestic tax expense from thereversal of a portion of our valuation allowance on domestic deferred taxassets.  At September 30, 2005, the valuationallowance was ****$35.4**** million, reflectingreductions resulting from the reversal of a portion of valuation allowance ondomestic tax assets, and increases related to additional deferred tax assetsrecorded in accounting for the purchase of AFC and adjustments related to our2004 domestic tax liability.  We expectto reverse additional portions of our valuation allowance to the extent wecontinue to experience profitable results. In addition, when we have achieved a sufficient history of profitabilityas determined under the rules of SFAS 109, we will reverse all or most of thevaluation allowance remaining at that time. During the fourth quarter we willreview our recent profitability in light of the rules of SFAS 109 and determineif sufficient evidence exists to conclude that it is more likely than not thatour domestic deferred tax assets will be realized in future periods.  If we reach such a conclusion, then we willreverse the appropriate additional amount of our remaining valuation allowance.

 

14

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**Financial Condition, Liquidity& Capital Resources**

Our principal source of liquidity remainedour cash, cash equivalents and marketable securities of $1,088.3 million, whichincreased by approximately $41.0 million during the quarter and decreased $27.9million since year-end.  The increase inthe third quarter was driven by cash from operating activities, while theyear-to-date decrease reflects $157.5 million used to repurchase 20.8 millionshares under our previously discussed stock repurchase program.  This program allows us to repurchase up to$300.0 million in shares of our common stock. During the third quarter of 2005, we repurchased $24.9 million or 2.7million shares of our common stock.

 

We believe that the current level of workingcapital, particularly cash and marketable securities, is sufficient to meet ournormal operating requirements for the foreseeable future. Further, we believethat sufficient resources exist to support our future growth and strategicneeds. Future sources of working capital may be from cash-on-hand, cashgenerated from future operations, short-term or long-term financing, equityofferings or any combination of these sources.

 

Our current policy is to retain our earningsto provide funds to enhance stockholder value by expanding our business,repurchasing our common stock and for operating activities.  We do not anticipate paying a cash dividendin the foreseeable future.

 

***Off-Balance Sheet Arrangements***

 

None.

 

***Critical Accounting Policies***

 

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

 

***Outlook***

 

We expect continued demand in the fourthquarter of 2005 from sales of our products to wireless and wireline customersworldwide.  For the foreseeable future,wireless carriers will remain an important part of our business as theycontinue building out their networks to support increased minutes of use anddeliver new data-oriented services.  Wecontinue, however, to have limited long-term visibility to the amount andtiming of carrier spending and the impact of future industry consolidation asit relates to demand for our products and services.  For the fourth quarter of 2005, we expectrevenue to increase in a range between five percent and seven percent, withsome potential for upside, as compared with the third quarter of 2005.  Gross margin in the fourth quarter of 2005 isexpected to be at about the same levels as the third quarter of 2005, dependingon product and customer mix.

 

**Forward-Looking Statements**

 

This Management’s Discussion and Analysis andother sections of this Form 10-Q contain forward-looking statements madepursuant to the safe harbor provisions of Section 27A of the Securities Act of1933, as amended, and 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.The words “anticipate,” “believe,” “estimate,” “target,” “expect,” “predict,” “plan,”“possible,” “intend,” “likely,” “will,” “would,” “should,” “could,” “may” andsimilar expressions are intended to identify forward-looking statements.Forward-looking statements are not guarantees of future performance and involverisks, 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 and end user demand, and industry capacity; competitiveproducts and pricing; competitive pressures from new entrants to thetelecommunications industry; margin impact of lower cost competitors enteringour markets; research and new product development; protection and access tointellectual property, patents and technology; ability to attract and retainhighly qualified personnel; availability of components and criticalmanufacturing equipment and capacity; foreign economic conditions, including currencyrate fluctuations; the regulatory and trade environment; availability and termsof future acquisitions; uncertainties relating to synergies, charges, andexpenses associated with business combinations and other transactions andrestructurings; the ability to successfully integrate new businesses andtechnologies; various risks associated with our acquisitions of othercompanies and the impact on our business; and other risks and future factorsthat may be detailed from time to time in our filings with the SEC. For afurther description of such risks and future factors, see Exhibit 99.1 to Form10-K for the fiscal year ended December 31, 2004, filed with the SECon March 15, 2005.  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.

 

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**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

There has been no materialchange to our market risks during the quarter.

 

**Item 4. Controls and Procedures**

 

Our management, under thesupervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer, has evaluated the effectiveness of our disclosure controlsand procedures as of September 30, 2005. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that our disclosure controls and proceduresare effective.  There were no changesduring the period covered by this Form 10-Q in our internal control overfinancial reporting that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II.OTHER INFORMATION**

 

**Item1.  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.  Theconsolidated amended complaint alleged that during the class period (December11, 2000-June 19, 2001) the defendants violated the federal securities laws bymaking materially false and misleading statements, including, among otherthings, allegedly providing revenue forecasts that were false and misleading,misrepresenting demand for our products, and reporting overstated revenues forthe fourth quarter 2000 in our financial statements.  Further, certain ofthe individual defendants were alleged to have violated the federal securitieslaws by trading our securities while allegedly in possession of material,non-public information about us pertaining to these matters.

 

On January 17, 2003, Tellabsand the other named defendants filed a motion to dismiss the consolidatedamended class action complaint in its entirety.  On May 19, 2003, theCourt granted our motion and dismissed all counts of the consolidated amendedcomplaint, while affording plaintiffs an opportunity to replead.  On July11, 2003, plaintiffs filed a second consolidated amended class action complaintagainst Tellabs, Messrs. Birck and Notebaert, and many (although not all) ofthe other previously named individual defendants, realleging claims similar tothose contained in the previously dismissed consolidated amended class actioncomplaint.  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, oral argument was heard onJanuary 21, 2005, and the parties are awaiting a decision.

 

**Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds**

 

***Repurchases of Common Stock:***

 
| **Period of Purchases** | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Purchase Price  of Shares** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs** | ** ** | **Remaining Dollar  Value of Shares  Available to be  Purchased Under  the Plan** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **              | ** ** | ** **                              | ** ** | ** **                             | ** ** | ** **                                                                               | ** ** | **(In Millions)**                                                                 | ** ** |
|                    |       |                                    |       |                                   |       |                                                                                     |       |                                                                              |       |
| 1/1/05  through 2/4/05  |       | —                                  |       | $                                      | —     |                                                                                     | —     |                                                                              | $          | 300.0 |   |
| 2/5/05  through 3/4/05  |       | 16,455,000                              |       | $                                      | 7.21       |                                                                                     | 16,455,000 |                                                                              | $          | 181.3 |   |
| 3/5/05  through 4/1/05  |       | —                                  |       | $                                      | —     |                                                                                     | —     |                                                                              | $          | 181.3 |   |
| 4/2/05  through 5/6/05  |       | —                                  |       | $                                      | —     |                                                                                     | —     |                                                                              | $          | 181.3 |   |
| 5/7/05  through 6/3/05  |       | 1,702,413                               |       | $                                      | 8.16       |                                                                                     | 1,702,413  |                                                                              | $          | 167.4 |   |
| 6/4/05  through 7/1/05  |       | —                                  |       | $                                      | —     |                                                                                     | —     |                                                                              | $          | 167.4 |   |
| 7/2/05  through 8/5/05  |       | 502,540                                 |       | $                                      | 9.73       |                                                                                     | 502,540    |                                                                              | $          | 162.5 |   |
| 8/6/05  through 9/2/05  |       | 2,177,899                               |       | $                                      | 9.17       |                                                                                     | 2,177,899  |                                                                              | $          | 142.5 |   |
| 9/3/05  through 9/30/05 |       | —                                  |       | $                                      | —     |                                                                                     | —     |                                                                              |       |   |
| Total                   |       | 20,837,852                              |       | $                                      | 7.56       |                                                                                     | 20,837,852 |                                                                              |       |   |

 

On February 2,2005, the company announced that its Board of Directors authorized the purchaseof up to $300.0 million in shares of our outstanding common stock, with noexpiration date to the authorization. We may make purchases of common sharesfrom time-to-time on the open market or in private transactions and will recordthem as treasury stock. As of September 30, 2005, we have purchased $157.5million (approximately 20.8 million shares) of our common stock.

 

16

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

 

None

 

**Item 6. Exhibits**

 

**(A) Exhibits**

 
| 11     | Computation  of Per Share Earnings                                           |
|--------|------------------------------------------------------------------------------|
|   |                                                                         |
| 31.1   | CEO  Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 |
|   |                                                                         |
| 31.2   | CFO  Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 |
|   |                                                                         |
| 32.1   | CEO Certification pursuant to Section 906  of the Sarbanes Oxley Act of 2002 |
|   |                                                                         |
| 32.2   | CFO  Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002 |

 

17

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**SIGNATURE**

 

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

 
| ** ** | **TELLABS,  INC.** |                                                         |
|------------|--------------------|--------------------------------------------------------------|
| ** ** | (Registrant)       |
| ** ** | ** **         |
|       |               | /s/ JAMES A.  DITE                                           |   |
|       |               | James A. Dite                                                |
|       |               | Vice President and  Controller                               |
|       |               | (Principal Accounting  Officer  and duly authorized officer) |
|       |               |                                                         |
|       |               | November 9, 2005                                             |
|       |               | (Date)                                                       |
|            |                    |                                                              |  |  |

 

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