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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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

For the quarterly period ended September 28, 2007

OR



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

For the transition period from  to

Commission file Number: 0-09692



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TELLABS, INC.

(Exact name of registrant as specified in its charter)



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|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 36-3831568                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)



|                                                             |  |           
|------------------------------------------------------------ |  | ----------
|One Tellabs Center, 1415 W. Diehl Road, Naperville, Illinois |  | 60563     
|(Address of Principal Executive Offices)                     |  | (Zip Code)

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



---

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  x    Accelerated Filer ̈Non-Accelerated Filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES ̈NO  x

Common
Shares, $0.01 Par Value  439,165,292 shares outstanding on October 26, 2007.



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##### Table of Contents

TELLABS, INC.

INDEX



|          |  |                                                                                       |  |     
|--------- |  | ------------------------------------------------------------------------------------- |  | ----
|          |  |                                                                                       |  | PAGE
|PART I.   |  | FINANCIAL INFORMATION                                                                 |  |     
|          |  |                                                                                      
|Item 1.   |  | Financial Statements                                                                  |  |     
|          |  |                                                                                      
|          |  | Consolidated Statements of Income                                                     |  | 3   
|          |  |                                                                                      
|          |  | Consolidated Balance Sheets                                                           |  | 4   
|          |  |                                                                                      
|          |  | Consolidated Statements of Cash Flow                                                  |  | 5   
|          |  |                                                                                      
|          |  | Notes to Consolidated Financial Statements                                            |  | 6   
|          |  |                                                                                      
|Item 2.   |  | Management's Discussion and Analysis of Results of Operations and Financial Condition |  | 14  
|          |  |                                                                                      
|Item 3.   |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 19  
|          |  |                                                                                      
|Item 4.   |  | Controls and Procedures                                                               |  | 19  
|          |  |                                                                                      
|PART II.  |  | OTHER INFORMATION                                                                     |  |     
|          |  |                                                                                      
|Item 1.   |  | Legal Proceedings                                                                     |  | 19  
|          |  |                                                                                      
|Item 1A.  |  | Risk Factors                                                                          |  | 20  
|          |  |                                                                                      
|Item 2.   |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 20  
|          |  |                                                                                      
|Item 6.   |  | Exhibits                                                                              |  | 22  
|          | 
|SIGNATURE |  | 23                                                                                   



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##### Table of Contents

TELLABS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



|                                                 |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|------------------------------------------------ |  | ------------- | ----- | - | ----------- | - | ----- | ------- |  | - | ------- | - |  | - | ------- | -
|                                                 |  | Third Quarter |       |   | Nine Months |  
|In millions, except per-share data               |  | 9/28/07       |       |   | 9/29/06     |   |       | 9/28/07 |  |   | 9/29/06 |  
|Revenue                                          |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Products                                         |  | $             | 402.4 |   |             | $ | 476.1 |         |  | $ | 1,281.4 |   |  | $ | 1,450.8 |  
|Services                                         |  |               | 55.5  |   |             |   | 46.4  |         |  |   | 162.9   |   |  |   | 135.7   |  
|                                                 |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|                                                 |  |               | 457.9 |   |             |   | 522.5 |         |  |   | 1,444.3 |   |  |   | 1,586.5 |  
|                                                 |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Cost of Revenue                                  |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Products                                         |  |               | 274.6 |   |             |   | 239.3 |         |  |   | 814.7   |   |  |   | 746.0   |  
|Services                                         |  |               | 39.0  |   |             |   | 29.5  |         |  |   | 111.8   |   |  |   | 90.3    |  
|                                                 |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|                                                 |  |               | 313.6 |   |             |   | 268.8 |         |  |   | 926.5   |   |  |   | 836.3   |  
|                                                 |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Gross Profit                                     |  |               | 144.3 |   |             |   | 253.7 |         |  |   | 517.8   |   |  |   | 750.2   |  
|                                                 |  |               |       |  
|Gross profit as a percentage of revenue          |  |               | 31.5  | % |             |   | 48.6  | %       |  |   | 35.9    | % |  |   | 47.3    | %
|                                                 |  |               |       |  
|Gross profit as a percentage of revenueproducts |  |               | 31.8  | % |             |   | 49.7  | %       |  |   | 36.4    | % |  |   | 48.6    | %
|Gross profit as a percentage of revenueservices |  |               | 29.7  | % |             |   | 36.4  | %       |  |   | 31.4    | % |  |   | 33.5    | %
|                                                 |  |               |       |  
|Operating Expenses                               |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Research and development                         |  |               | 86.6  |   |             |   | 89.6  |         |  |   | 256.4   |   |  |   | 274.2   |  
|Sales and marketing                              |  |               | 41.8  |   |             |   | 43.5  |         |  |   | 132.0   |   |  |   | 133.5   |  
|General and administrative                       |  |               | 23.5  |   |             |   | 27.7  |         |  |   | 74.8    |   |  |   | 84.3    |  
|Intangible asset amortization                    |  |               | 5.6   |   |             |   | 6.5   |         |  |   | 16.9    |   |  |   | 20.6    |  
|Restructuring and other charges                  |  |               | 5.6   |   |             |   | (0.1  | )       |  |   | 5.6     |   |  |   | 1.9     |  
|                                                 |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|                                                 |  |               | 163.1 |   |             |   | 167.2 |         |  |   | 485.7   |   |  |   | 514.5   |  
|                                                 |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Operating (Loss) Earnings                        |  |               | (18.8 | ) |             |   | 86.5  |         |  |   | 32.1    |   |  |   | 235.7   |  
|                                                 |  |               |       |  
|Other Income                                     |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Interest income, net                             |  |               | 13.1  |   |             |   | 11.3  |         |  |   | 38.3    |   |  |   | 33.2    |  
|Other income (expense), net                      |  |               | (2.4  | ) |             |   | (1.0  | )       |  |   | (1.8    | ) |  |   | (7.0    | )
|                                                 |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|                                                 |  |               | 10.7  |   |             |   | 10.3  |         |  |   | 36.5    |   |  |   | 26.2    |  
|                                                 |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|(Loss) Earnings Before Income Tax                |  |               | (8.1  | ) |             |   | 96.8  |         |  |   | 68.6    |   |  |   | 261.9   |  
|Income tax benefit (expense)                     |  |               | 11.7  |   |             |   | (37.7 | )       |  |   | (9.9    | ) |  |   | (96.9   | )
|                                                 |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Net Earnings                                     |  | $             | 3.6   |   |             | $ | 59.1  |         |  | $ | 58.7    |   |  | $ | 165.0   |  
|                                                 |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Net Earnings Per Share                           |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Basic                                            |  | $             | 0.01  |   |             | $ | 0.13  |         |  | $ | 0.13    |   |  | $ | 0.37    |  
|                                                 |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Diluted                                          |  | $             | 0.01  |   |             | $ | 0.13  |         |  | $ | 0.13    |   |  | $ | 0.36    |  
|                                                 |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Weighted Average Shares Outstanding              |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Basic                                            |  |               | 439.2 |   |             |   | 445.5 |         |  |   | 438.5   |   |  |   | 447.7   |  
|                                                 |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Diluted                                          |  |               | 444.5 |   |             |   | 451.2 |         |  |   | 443.8   |   |  |   | 456.9   |  
|                                                 |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  

The accompanying notes are an integral part of these statements.



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TELLABS, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                            |  |           |         |   |          |   |         |  
|----------------------------------------------------------------------------------------------------------- |  | --------- | ------- | - | -------- | - | ------- | -
|                                                                                                            |  | 9/28/07   |         |   | 12/29/06 |  
|In millions, except share data                                                                              |  | Unaudited |         |   |          |  
|Assets                                                                                                      |  |           |         |   |          |   |         |  
|Current Assets                                                                                              |  |           |         |   |          |   |         |  
|Cash and cash equivalents                                                                                   |  | $         | 244.0   |   |          | $ | 153.6   |  
|Investments in marketable securities                                                                        |  |           | 1,127.9 |   |          |   | 1,146.5 |  
|                                                                                                            |  |           |         |   |          |   |         |  
|                                                                                                            |  |           | 1,371.9 |   |          |   | 1,300.1 |  
|                                                                                                            |  |          
|Other marketable securities                                                                                 |  |           | 349.8   |   |          |   | 288.6   |  
|Accounts receivable, net of allowances of $3.9 and $3.8                                                     |  |           | 352.3   |   |          |   | 411.0   |  
|Inventories                                                                                                 |  |           |         |   |          |   |         |  
|Raw materials                                                                                               |  |           | 37.2    |   |          |   | 34.5    |  
|Work in process                                                                                             |  |           | 17.4    |   |          |   | 19.7    |  
|Finished goods (includes costs of $9.4 and $28.6 related to deferred revenue)                               |  |           | 112.1   |   |          |   | 112.8   |  
|                                                                                                            |  |           |         |   |          |   |         |  
|                                                                                                            |  |           | 166.7   |   |          |   | 167.0   |  
|Income taxes                                                                                                |  |           | 15.4    |   |          |   | 10.7    |  
|Miscellaneous receivables and other current assets                                                          |  |           | 55.9    |   |          |   | 55.2    |  
|                                                                                                            |  |           |         |   |          |   |         |  
|Total Current Assets                                                                                        |  |           | 2,312.0 |   |          |   | 2,232.6 |  
|                                                                                                            |  |          
|Property, Plant and Equipment                                                                               |  |           |         |   |          |   |         |  
|Land                                                                                                        |  |           | 21.1    |   |          |   | 20.8    |  
|Buildings and improvements                                                                                  |  |           | 208.4   |   |          |   | 205.5   |  
|Equipment                                                                                                   |  |           | 431.5   |   |          |   | 411.2   |  
|                                                                                                            |  |           |         |   |          |   |         |  
|                                                                                                            |  |           | 661.0   |   |          |   | 637.5   |  
|Accumulated depreciation                                                                                    |  |           | (363.3  | ) |          |   | (329.6  | )
|                                                                                                            |  |           |         |   |          |   |         |  
|                                                                                                            |  |           | 297.7   |   |          |   | 307.9   |  
|Goodwill                                                                                                    |  |           | 1,110.0 |   |          |   | 1,107.4 |  
|Intangible Assets, net of amortization                                                                      |  |           | 72.7    |   |          |   | 89.6    |  
|Other Assets                                                                                                |  |           | 162.5   |   |          |   | 184.9   |  
|                                                                                                            |  |           |         |   |          |   |         |  
|Total Assets                                                                                                |  | $         | 3,954.9 |   |          | $ | 3,922.4 |  
|                                                                                                            |  |           |         |   |          |   |         |  
|Liabilities and Stockholders Equity                                                                        |  |           |         |   |          |   |         |  
|Current Liabilities                                                                                         |  |           |         |   |          |   |         |  
|Accounts payable                                                                                            |  | $         | 84.0    |   |          | $ | 119.5   |  
|Accrued compensation                                                                                        |  |           | 51.4    |   |          |   | 70.7    |  
|Restructuring and other charges                                                                             |  |           | 12.4    |   |          |   | 7.8     |  
|Income taxes                                                                                                |  |           | 57.3    |   |          |   | 97.9    |  
|Stock loan                                                                                                  |  |           | 349.8   |   |          |   | 288.6   |  
|Deferred revenue                                                                                            |  |           | 34.5    |   |          |   | 55.4    |  
|Other accrued liabilities                                                                                   |  |           | 114.6   |   |          |   | 122.3   |  
|                                                                                                            |  |           |         |   |          |   |         |  
|Total Current Liabilities                                                                                   |  |           | 704.0   |   |          |   | 762.2   |  
|                                                                                                            |  |          
|Long-Term Restructuring Liabilities                                                                         |  |           | 16.1    |   |          |   | 22.3    |  
|Income Taxes                                                                                                |  |           | 116.9   |   |          |   | 128.2   |  
|Other Long-Term Liabilities                                                                                 |  |           | 83.8    |   |          |   | 71.4    |  
|                                                                                                            |  |          
|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; 493,748,776 and 489,034,812 shares issued |  |           | 4.9     |   |          |   | 4.9     |  
|Additional paid-in capital                                                                                  |  |           | 1,449.2 |   |          |   | 1,395.3 |  
|Treasury stock, at cost: 54,605,837 and 49,919,908 shares                                                   |  |           | (649.7  | ) |          |   | (598.7  | )
|Retained earnings                                                                                           |  |           | 2,107.0 |   |          |   | 2,042.0 |  
|Accumulated other comprehensive income                                                                      |  |           | 122.7   |   |          |   | 94.8    |  
|                                                                                                            |  |           |         |   |          |   |         |  
|Total Stockholders Equity                                                                                  |  |           | 3,034.1 |   |          |   | 2,938.3 |  
|                                                                                                            |  |           |         |   |          |   |         |  
|Total Liabilities and Stockholders Equity                                                                  |  | $         | 3,954.9 |   |          | $ | 3,922.4 |  
|                                                                                                            |  |           |         |   |          |   |         |  

The accompanying notes are an integral part of these statements.



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TELLABS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)



|                                                                                    |  |             |        |   |         |   |          |  
|----------------------------------------------------------------------------------- |  | ----------- | ------ | - | ------- | - | -------- | -
|                                                                                    |  | Nine Months |       
|                                                                                    |  | 9/28/07     |        |   | 9/29/06 |  
|In millions                                                                         |  |             |        |   |         |  
|Operating Activities                                                                |  |             |        |   |         |   |          |  
|Net earnings                                                                        |  | $           | 58.7   |   |         | $ | 165.0    |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |             |        |   |         |   |          |  
|Depreciation and amortization                                                       |  |             | 68.6   |   |         |   | 76.9     |  
|Stock-based compensation                                                            |  |             | 23.7   |   |         |   | 43.7     |  
|Deferred income taxes                                                               |  |             | 14.9   |   |         |   | 65.9     |  
|Excess tax benefits from stock-based compensation                                   |  |             | (0.9   | ) |         |   | (16.2    | )
|Restructuring and other charges                                                     |  |             | 5.6    |   |         |   | 1.9      |  
|Net changes in assets and liabilities:                                              |  |             |        |   |         |   |          |  
|Accounts receivable                                                                 |  |             | 73.9   |   |         |   | (62.4    | )
|Inventories                                                                         |  |             | 6.0    |   |         |   | (48.0    | )
|Miscellaneous receivables and other current assets                                  |  |             | (2.5   | ) |         |   | (6.0     | )
|Other assets                                                                        |  |             | 12.6   |   |         |   | 22.2     |  
|Accounts payable                                                                    |  |             | (40.3  | ) |         |   | (13.4    | )
|Restructuring and other charges                                                     |  |             | (7.2   | ) |         |   | (7.3     | )
|Deferred revenue                                                                    |  |             | (20.9  | ) |         |   | 7.2      |  
|Other accrued liabilities                                                           |  |             | (31.4  | ) |         |   | (26.5    | )
|Income taxes                                                                        |  |             | (39.5  | ) |         |   | (0.9     | )
|Other long-term liabilities                                                         |  |             | 3.1    |   |         |   | 0.5      |  
|                                                                                    |  |             |        |   |         |   |          |  
|Net Cash Provided by Operating Activities                                           |  |             | 124.4  |   |         |   | 202.6    |  
|                                                                                    |  |             |        |   |         |   |          |  
|Investing Activities                                                                |  |             |        |   |         |   |          |  
|Capital expenditures                                                                |  |             | (37.5  | ) |         |   | (49.4    | )
|Disposals of property, plant and equipment                                          |  |             | 1.7    |   |         |   | 1.4      |  
|Payments for purchases of investments                                               |  |             | (686.1 | ) |         |   | (1,313.5 | )
|Proceeds from sales and maturities of investments                                   |  |             | 706.0  |   |         |   | 520.0    |  
|                                                                                    |  |             |        |   |         |   |          |  
|Net Cash Used for Investing Activities                                              |  |             | (15.9  | ) |         |   | (841.5   | )
|                                                                                    |  |             |        |   |         |   |          |  
|Financing Activities                                                                |  |             |        |   |         |   |          |  
|Proceeds from issuance of common stock under stock plans                            |  |             | 30.4   |   |         |   | 88.4     |  
|Repurchase of common stock                                                          |  |             | (51.0  | ) |         |   | (233.1   | )
|Excess tax benefits from stock-based compensation                                   |  |             | 0.9    |   |         |   | 16.2     |  
|                                                                                    |  |             |        |   |         |   |          |  
|Net Cash Used for Financing Activities                                              |  |             | (19.7  | ) |         |   | (128.5   | )
|                                                                                    |  |             |        |   |         |   |          |  
|Effect of Exchange Rate Changes on Cash                                             |  |             | 1.6    |   |         |   | 11.2     |  
|                                                                                    |  |             |        |   |         |   |          |  
|Net Increase (Decrease) in Cash and Cash Equivalents                                |  |             | 90.4   |   |         |   | (756.2   | )
|Cash and Cash EquivalentsBeginning of Year                                         |  |             | 153.6  |   |         |   | 880.8    |  
|                                                                                    |  |             |        |   |         |   |          |  
|Cash and Cash EquivalentsEnd of Period                                             |  | $           | 244.0  |   |         | $ | 124.6    |  
|                                                                                    |  |             |        |   |         |   |          |  

The accompanying notes are an integral part of these statements.



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##### Table of Contents

TELLABS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

IN MILLIONS EXCEPT SHARE AND PER-SHARE DATA

1. Basis of
Presentation

We prepared our accompanying unaudited consolidated financial statements in accordance with U.S. generally accepted accounting principles
(GAAP) for interim financial statements, the requirements of Form 10-Q and applicable rules of the U.S. Securities and Exchange Commissions Regulation S-X. Therefore, they do not include all disclosures normally required by generally accepted
accounting principles for complete financial statements. Accordingly, the financial statements and notes herein are to be read in conjunction with our Annual Report on Form 10-K for the year ended December 29, 2006.

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

2. New
Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157, Fair Value Measurements, which
defines fair value, creates a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. We will adopt SFAS 157 on its effective date. Currently, we are not able to estimate the impact SFAS 157 will have on our financial statements.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits all entities to choose to measure eligible items at fair value on specified
election dates. The associated unrealized gains and losses on the items for which the fair value option has been elected shall be reported in earnings. SFAS 159 is effective for financial statements issued for fiscal years beginning after
November 15, 2007. We will adopt SFAS 159 on its effective date. Currently, we are not able to estimate the impact SFAS 159 will have on our financial statements.

3. Restructuring and Other Charges

Under a plan announced on September 27, 2007, we initiated restructuring
activities to better align our operating expenses with current revenue and market conditions. The cost of the plan is expected to be $5.9 million, which includes $5.8 million in cash severance expense and $0.1 million in facility related charges. We
currently expect to realize annualized savings of $17.0 million from reduced salaries and related benefits.

We recorded $5.5 million related to these
restructuring activities in the third quarter of 2007, of which $5.4 million is severance expenses and $0.1 million is facility related expenses. In addition, we recorded changes to restructuring expense in the third quarter of $0.1 million,
including $0.2 million in facility related charges offset by a $0.1 million reduction in severance related costs, both due to a change in estimate from previous restructuring plans. In the fourth quarter, we will incur an additional $0.4 million of
severance expense in the Broadband segment.

As of September 28, 2007, we had $28.6 million accrued for restructuring plans. The 2007 restructuring
plan balance of $5.6 million primarily consists of cash severance that we expect to pay through the first quarter of 2008. The $23.0 million balance for previous restructuring plans relate to net lease obligations that expire by 2012.

The following table summarizes our restructuring and other charges activity, by segments, for the third quarter and nine months of 2007, and the status of the reserves
at September 28, 2007:



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|                                |  |                   |                      |                        |   |                   |   |  |                   |      |   |  |   |     |  |   |     
|------------------------------- |  | ----------------- | -------------------- | ---------------------- | - | ----------------- | - |  | ----------------- | ---- | - |  | - | --- |  | - | ----
|                                |  | Balance at6/29/07 |                      | Third Quarter Activity |   | Balance at9/28/07
|                                |  |                   | RestructuringExpense |                        |   | CashPayments      |   |  | OtherActivities 1 |     
|2007 Restructuring Plans        |  |                   |                      |                        |   |                   |   |  |                   |      |   |  |   |     |  |   |     
|Broadband                       |  | $                 |                     |                        | $ | 4.8               |   |  | $                 |     |   |  | $ | 0.1 |  | $ | 4.9 
|Transport                       |  |                   |                     |                        |   | 0.7               |   |  |                   |     |   |  |   |    |  |   | 0.7 
|                                |  |                   |                      |                        |   |                   |   |  |                   |      |   |  |   |     |  |   |     
|Subtotal 2007 Restructuring     |  |                   |                     |                        |   | 5.5               |   |  |                   |     |   |  |   | 0.1 |  |   | 5.6 
|                                |  |                   |                      |                        |   |                   |   |  |                   |      |   |  |   |     |  |   |     
|Previous Restructuring Plans    |  |                   |                      |                        |   |                   |   |  |                   |      |   |  |   |     |  |   |     
|Broadband                       |  |                   | 5.9                  |                        |   | 0.7               |   |  |                   | (0.6 | ) |  |   |    |  |   | 6.0 
|Transport                       |  |                   | 20.2                 |                        |   | (0.6              | ) |  |                   | (2.6 | ) |  |   |    |  |   | 17.0
|                                |  |                   |                      |                        |   |                   |   |  |                   |      |   |  |   |     |  |   |     
|Subtotal Previous Restructuring |  |                   | 26.1                 |                        |   | 0.1               |   |  |                   | (3.2 | ) |  |   |    |  |   | 23.0
|                                |  |                   |                      |                        |   |                   |   |  |                   |      |   |  |   |     |  |   |     
|Total All Restructuring Plans   |  | $                 | 26.1                 |                        | $ | 5.6               |   |  | $                 | (3.2 | ) |  | $ | 0.1 |  | $ | 28.6
|                                |  |                   |                      |                        |   |                   |   |  |                   |      |   |  |   |     |  |   |     



|                                |  |                    |                      |                      |   |                   |   |  |                   |      |   |  |   |     |  |   |     
|------------------------------- |  | ------------------ | -------------------- | -------------------- | - | ----------------- | - |  | ----------------- | ---- | - |  | - | --- |  | - | ----
|                                |  | Balance at12/29/06 |                      | Nine Months Activity |   | Balance at9/28/07
|                                |  |                    | RestructuringExpense |                      |   | CashPayments      |   |  | OtherActivities 1 |     
|2007 Restructuring Plans        |  |                    |                      |                      |   |                   |   |  |                   |      |   |  |   |     |  |   |     
|Broadband                       |  | $                  |                     |                      | $ | 4.8               |   |  | $                 |     |   |  | $ | 0.1 |  | $ | 4.9 
|Transport                       |  |                    |                     |                      |   | 0.7               |   |  |                   |     |   |  |   |    |  |   | 0.7 
|                                |  |                    |                      |                      |   |                   |   |  |                   |      |   |  |   |     |  |   |     
|Subtotal 2007 Restructuring     |  |                    |                     |                      |   | 5.5               |   |  |                   |     |   |  |   | 0.1 |  |   | 5.6 
|                                |  |                    |                      |                      |   |                   |   |  |                   |      |   |  |   |     |  |   |     
|Previous Restructuring Plans    |  |                    |                      |                      |   |                   |   |  |                   |      |   |  |   |     |  |   |     
|Broadband                       |  |                    | 7.3                  |                      |   | 0.7               |   |  |                   | (2.0 | ) |  |   |    |  |   | 6.0 
|Transport                       |  |                    | 22.8                 |                      |   | (0.6              | ) |  |                   | (5.2 | ) |  |   |    |  |   | 17.0
|                                |  |                    |                      |                      |   |                   |   |  |                   |      |   |  |   |     |  |   |     
|Subtotal Previous Restructuring |  |                    | 30.1                 |                      |   | 0.1               |   |  |                   | (7.2 | ) |  |   |    |  |   | 23.0
|                                |  |                    |                      |                      |   |                   |   |  |                   |      |   |  |   |     |  |   |     
|Total All Restructuring Plans   |  | $                  | 30.1                 |                      | $ | 5.6               |   |  | $                 | (7.2 | ) |  | $ | 0.1 |  | $ | 28.6
|                                |  |                    |                      |                      |   |                   |   |  |                   |      |   |  |   |     |  |   |     

---

|1 | Other activities include
the effects of currency translation.
|- | -------------------------------------------------------------

As of December 29, 2006, in addition to the aforementioned restructuring plans and
related accruals, we had a $3.7 million accrual remaining for exit costs related to our 2004 acquisition of Advanced Fibre Communications, Inc. (AFC). During the third quarter of 2007, this accrual was charged $0.5 million. Total charges against
this accrual were $1.5 million for the first nine months of 2007, leaving a balance of $2.2 million at September 28, 2007. These remaining exit costs are related to lease liabilities that expire by the end of 2009.

4. Stock-Based Plans

The Tellabs, Inc. 2004 Incentive Compensation
Plan provides for the grant of short-term and long-term incentives, including stock options and stock appreciation rights (SARs), restricted stock and performance stock units. We approved 39,139,977 shares for grant under the plan, of which
21,870,413 remain available for grant at September 28, 2007. Under the 2004 plan and predecessor plans, we granted awards at market value on the date of grant.

Stock Options

Stock options granted in the first nine months of 2007 and 2006 generally vest over three years
from the date of the grant. We recognize compensation expense on a straight-line basis over the service period based on the fair value of the stock options on the grant date. Compensation expense was $4.4 million for the third quarter of 2007, $17.3
million for the first nine months of 2007, $7.6 million for the third quarter of 2006 and $29.8 million for the first nine months of 2006. Options granted but unexercised generally expire 10 years from the grant date.

We estimate the fair value of stock options using the Black-Scholes option-pricing model. This model requires the use of assumptions that will have a significant impact
on the fair value estimate. The following table summarizes the assumptions used to compute the weighted-average fair value of current period stock option grants:



|                         |  |             |   |  |         |  
|------------------------ |  | ----------- | - |  | ------- | -
|                         |  | Nine Months |  
|                         |  | 9/28/07     |   |  | 9/29/06 |  
|Expected volatility      |  | 41.3        | % |  | 46.3    | %
|Risk-free interest rate  |  | 4.6         | % |  | 4.8     | %
|Expected term (in years) |  | 4.6         |   |  | 4.5     |  
|Expected dividend yield  |  | 0.0         | % |  | 0.0     | %



7



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##### Table of Contents

We based our calculation of expected volatility on a combination of historical and implied volatility for options granted
in the first nine months of 2007 and 2006. We based the risk-free interest rate on the U.S. Treasury yield curve in effect at the date of grant. We estimated the expected term of the options using their vesting period, post-vesting employment
termination behavior and historical exercise patterns.

The following is a summary of the activity in our stock options and stock-settled SARs during 2007
as of September 28, 2007:



|                                                                  |  |            |   |  |                                |       |                                                     |     |                         |   |     
|----------------------------------------------------------------- |  | ---------- | - |  | ------------------------------ | ----- | --------------------------------------------------- | --- | ----------------------- | - | ----
|                                                                  |  | Shares     |   |  | Weighted-AverageExercise Price |       | Weighted-AverageRemainingContractual Term(in years) |     | AggregateIntrinsicValue
|Outstanding  beginning of year                                   |  | 41,699,013 |   |  | $                              | 16.91 |                                                     |     |                         |   |     
|Granted                                                           |  | 1,716,419  |   |  | $                              | 10.57 |                                                     |     |                         |   |     
|Exercised                                                         |  | (3,648,913 | ) |  | $                              | 7.59  |                                                     |     |                         |   |     
|Forfeited/expired                                                 |  | (1,488,746 | ) |  | $                              | 19.62 |                                                     |     |                         |   |     
|                                                                  |  |            |   |  |                                |       |                                                     |     |                         |   |     
|Outstanding  end of period                                       |  | 38,277,773 |   |  | $                              | 17.41 |                                                     | 5.1 |                         | $ | 35.4
|                                                                  |  |            |   |  |                                |       |                                                     |     |                         |   |     
|Exercisable  end of period                                       |  | 33,024,508 |   |  | $                              | 18.49 |                                                     | 4.6 |                         | $ | 33.9
|Shares expected to vest                                           |  | 37,537,757 |   |  | $                              | 17.54 |                                                     | 5.1 |                         | $ | 35.2
|Weighted-average fair value of options granted during the quarter |  |            |   |  | $                              | 4.32  |                                                     |     |                         |   |     

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our
closing stock price as of September 28, 2007, that the option holders would have received had all holders exercised their options as of that date. The aggregate intrinsic value of exercised stock options during the third quarter of 2007 was
$6.1 million.

As of September 28, 2007, we had $21.4 million of unrecognized compensation cost related to stock options that we expect to recognize
over a weighted-average period of 1.6 years.

Cash-Settled Stock Appreciation Rights

Our 2004 Incentive Compensation Plan also provides for the granting of cash-settled SARs in conjunction with, or independent of, the stock options under the plans. These
SARs allow the holder to receive in cash the difference between the cash-settled SARs grant price (market value of our stock on the grant date) and the market value of our stock on the date the holder exercises the SAR. These cash payments
were negligible in the third quarter and first nine months of 2007, negligible in the third quarter of 2006 and $0.1 million in the first nine months of 2006. The cash-settled SARs are generally assigned 10-year terms. Cash-settled SARs generally
vest over three years from the grant date. At September 28, 2007, there were 200,397 cash-settled SARs outstanding with exercise prices that ranged from $6.01 to $70.06. The weighted-average price of the 114,743 cash-settled SARs granted in the
first nine months of 2007 was $10.70 and the weighted average price of the 43,200 cash-settled SARs granted in the first nine months of 2006 was $12.13.

Restricted Stock

We granted 1,350,421 restricted shares in the third quarter of 2007 and 986,971 in the third quarter of 2006. We
granted 1,450,146 restricted shares in the first nine months of 2007 and 1,111,577 restricted shares in the first nine months of 2006. Of the shares granted in the first nine months of 2007, 1,415,146 shares vest over a two-year period and 35,000
shares vest over a one-year period. Of the shares granted in the first nine months of 2006, 1,046,971 shares vest over a two-year period and 64,606 shares vest over a one-year period. We recognize compensation expense on a straight-line basis over
the vesting periods based on the market price of our stock on the grant date. Compensation expense was $2.8 million for the third quarter of 2007, $6.3 million for the first nine months of 2007, $2.0 million for the third quarter of 2006 and $6.5
million for the first nine months of 2006. The weighted-average issuance price of restricted stock granted in the first nine months of 2007 was $10.50 per share and the weighted-average issuance price of restricted stock granted in the first nine
months of 2006 was $12.99 per share. Our non-vested stock award activity for 2007 follows:



8



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##### Table of Contents

|                               |  |             |   |  |                                        |      
|------------------------------ |  | ----------- | - |  | -------------------------------------- | -----
|                               |  | Nine Months
|                               |  | 9/28/07    
|                               |  | Shares      |   |  | Weighted-Average Grant Date Fair
Value
|Non-vested  beginning of year |  | 1,339,308   |   |  | $                                      | 12.22
|Granted                        |  | 1,450,146   |   |  | $                                      | 10.50
|Vested                         |  | (789,402    | ) |  | $                                      | 11.83
|Forfeited                      |  | (90,777     | ) |  | $                                      | 11.68
|                               |  |             |   |  |                                        |      
|Non-vested  end of period     |  | 1,909,275   |   |  | $                                      | 11.10
|                               |  |             |   |  |                                        |      

As of September 28, 2007, we had $16.7 million of unrecognized compensation cost related to restricted stock
that we expect to recognize over a weighted-average period of 0.8 years.

Performance Stock Units

We granted 375,000 performance stock units (PSUs) in the third quarter of 2007 and 270,000 PSUs in the third quarter of 2006 to executive officers. We did not grant
performance stock units (PSUs) in the first six months of 2007 or 2006. The PSUs granted in the third quarter of 2007 entitle the recipients to receive shares of our common stock commencing in March 2008, contingent on the achievement of company
operating income and revenue-based targets for the 2007 fiscal year. Following achievement of these financial measures and subject to continued employment, one-third of such shares will be issued in annual installments in March 2008, March 2009
and March 2010. At minimum target performance, we will issue one-half share for each PSU granted and at maximum target performance, two shares will be granted for each PSU granted.

The PSUs granted in the third quarter of 2006 entitle the recipients to receive shares of our common stock in March 2008, contingent on the achievement of cumulative company operating income and revenue-based targets
for the 2006 and 2007 fiscal years. At minimum target performance, we will issue one-half share for each PSU granted and at maximum target performance, three shares will be granted for each PSU granted. At September 28, 2007, there were 620,000
PSUs outstanding, which reflects a reduction of 25,000 shares forfeited in the first quarter of 2007. Due to a decline in operating performance relative to targets, compensation expense for PSUs was a credit of $0.6 million for the third quarter of
2007 and a credit of $0.4 million for the first nine months of 2007. Compensation expense was $0.5 million for the third quarter of 2006.

Employee
Stock Purchase Plan

Under the 2005 Tellabs, Inc. Employee Stock Purchase Plan, there were no shares of common stock purchased in the third quarter
of 2007, and no shares of stock were purchased during the third quarter of 2006. As of September 28, 2007, we had 8,845,990 shares available for purchase. Compensation expense for the plan was $0.4 million for the first nine months of 2007, and
$0.8 million for the first nine months of 2006. Effective April 25, 2007, we suspended the 2005 plan. The final purchase for employees enrolled through the date of suspension occurred on April 30, 2007.

Stock-Based Compensation Expense

The following table sets
forth the total stock-based compensation expense resulting from stock options, stock appreciation rights, restricted stock, performance stock units and our employee stock purchase plan:



|                                                          |  |               |     |             |   |         |  |         |      |  |   |     
|--------------------------------------------------------- |  | ------------- | --- | ----------- | - | ------- |  | ------- | ---- |  | - | ----
|                                                          |  | Third Quarter |     | Nine Months
|                                                          |  | 9/28/07       |     | 9/29/06     |   | 9/28/07 |  | 9/29/06
|Cost of revenue  products                                |  | $             | 0.5 |             | $ | 0.8     |  | $       | 1.8  |  | $ | 2.0 
|Cost of revenue  services                                |  |               | 0.8 |             |   | 1.0     |  |         | 2.6  |  |   | 3.4 
|Research and development                                  |  |               | 2.7 |             |   | 3.4     |  |         | 9.2  |  |   | 15.1
|Sales and marketing                                       |  |               | 1.4 |             |   | 2.1     |  |         | 4.8  |  |   | 7.4 
|General and administrative                                |  |               | 1.2 |             |   | 2.7     |  |         | 5.3  |  |   | 13.4
|                                                          |  |               |     |             |   |         |  |         |      |  |   |     
|Stock-based compensation expense before income taxes      |  |               | 6.6 |             |   | 10.0    |  |         | 23.7 |  |   | 41.3
|Income tax benefit                                        |  |               | 2.2 |             |   | 3.7     |  |         | 8.1  |  |   | 12.6
|                                                          |  |               |     |             |   |         |  |         |      |  |   |     
|Total stock-based compensation expense after income taxes |  | $             | 4.4 |             | $ | 6.3     |  | $       | 15.6 |  | $ | 28.7
|                                                          |  |               |     |             |   |         |  |         |      |  |   |     



9



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##### Table of Contents

5. Retiree Medical Plan

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



|                                   |  |               |      |   |             |   |      |         |  |   |         |   |  |   |      |  
|---------------------------------- |  | ------------- | ---- | - | ----------- | - | ---- | ------- |  | - | ------- | - |  | - | ---- | -
|                                   |  | Third Quarter |      |   | Nine Months |  
|                                   |  | 9/28/07       |      |   | 9/29/06     |   |      | 9/28/07 |  |   | 9/29/06 |  
|Service cost                       |  | $             | 0.2  |   |             | $ | 0.3  |         |  | $ | 0.8     |   |  | $ | 0.8  |  
|Interest cost                      |  |               | 0.2  |   |             |   | 0.2  |         |  |   | 0.6     |   |  |   | 0.5  |  
|Expected return on plan assets     |  |               | (0.1 | ) |             |   | (0.2 | )       |  |   | (0.3    | ) |  |   | (0.4 | )
|Amortization of prior service cost |  |               |     |   |             |   |     |         |  |   |        |   |  |   | 0.1  |  
|                                   |  |               |      |   |             |   |      |         |  |   |         |   |  |   |      |  
|Net periodic benefit cost          |  | $             | 0.3  |   |             | $ | 0.3  |         |  | $ | 1.1     |   |  | $ | 1.0  |  
|                                   |  |               |      |   |             |   |      |         |  |   |         |   |  |   |      |  

We currently do not anticipate contributing to the plan in 2007, as it is adequately funded at this time.

6. Product Warranties

We provide warranties for all
of our products. The specific terms and conditions of those warranties vary depending on the product. We provide a basic limited warranty, including parts and labor, for all products except access products, for periods ranging from 90 days to 5
years. The basic limited warranty for access products covers parts and labor for periods generally ranging from 2 to 6 years.

Our estimate of warranty
liability involves many factors, including the number of units shipped, historical and anticipated rates of warranty claims and cost per claim. We periodically assess the adequacy of our recorded warranty liability and adjust the amounts as
necessary. We classify the portion of our warranty liability that we expect to incur in the next 12 months as a current liability. We classify the portion of our warranty liability that we expect to incur more than 12 months in the future as a
long-term liability. Our product warranty liabilities are as follows:



|                                           |  |               |      |   |             |   |      |                   |  |   |                    |   |  |   |       |  
|------------------------------------------ |  | ------------- | ---- | - | ----------- | - | ---- | ----------------- |  | - | ------------------ | - |  | - | ----- | -
|                                           |  | Third Quarter |      |   | Nine Months |  
|                                           |  | 9/28/07       |      |   | 9/29/06     |   |      | 9/28/07           |  |   | 9/29/06            |  
|Balance  beginning of period              |  | $             | 46.6 |   |             | $ | 48.7 |                   |  | $ | 45.0               |   |  | $ | 49.2  |  
|Accruals for product warranties issued     |  |               | 6.4  |   |             |   | 5.2  |                   |  |   | 15.3               |   |  |   | 18.0  |  
|Settlements                                |  |               | (4.5 | ) |             |   | (6.3 | )                 |  |   | (11.8              | ) |  |   | (19.6 | )
|                                           |  |               |      |   |             |   |      |                   |  |   |                    |   |  |   |       |  
|Balance  end of period                    |  | $             | 48.5 |   |             | $ | 47.6 |                   |  | $ | 48.5               |   |  | $ | 47.6  |  
|                                           |  |               |      |   |             |   |      |                   |  |   |                    |   |  |   |       |  
|                                           |  |               |      |  
|Balance sheet classificationend of period |  |               |      |   |             |   |      | Balance at9/28/07 |  |   | Balance at 9/29/06 |  
|Other accrued liabilities                  |  |               |      |   |             |   |      |                   |  | $ | 22.7               |   |  | $ | 27.9  |  
|Other long-term liabilities                |  |               |      |   |             |   |      |                   |  |   | 25.8               |   |  |   | 19.7  |  
|                                           |  |               |      |   |             |   |      |                   |  |   |                    |   |  |   |       |  
|Total product warranty liabilities         |  |               |      |   |             |   |      |                   |  | $ | 48.5               |   |  | $ | 47.6  |  
|                                           |  |               |      |   |             |   |      |                   |  |   |                    |   |  |   |       |  

7. Stock Repurchase Programs

On January 25, 2007, our Board of Directors authorized a one-year extension of the purchase of our outstanding stock under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. We intend to continue to
use cash generated by employee stock option exercises (other than those of company officers and board members) to repurchase stock in the manner provided under this program. As of September 28, 2007, we purchased 7.0 million shares of our
common stock under this program at a total cost of $89.9 million, including $13.6 million (1.2 million shares) in the third quarter of 2007 and $27.8 million (2.5 million shares) in the first nine months of 2007.

On July 31, 2006, our Board of Directors authorized a repurchase program of up to $300 million of our outstanding common stock. As of September 28, 2007, we
purchased 11.9 million shares of our common stock under the program at a total cost of $123.9 million, with no shares purchased in the third quarter of 2007 and $21.0 million (2.0 million shares) in the first nine months of 2007. We may
continue to repurchase shares under this program from time to time during open trading windows and when we do not possess material non-public information.

In addition, in the third quarter of 2007, we purchased 141,662 shares for $1.6 million to cover withholding taxes on shares issued under employee stock plans. In the first nine months of 2007, we purchased 195,510 shares for $2.2 million
under this program. We record repurchased shares as Treasury stock.



10



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##### Table of Contents

8. Comprehensive Income

Comprehensive income (net of tax) for the third quarter and nine months presented consists of the following:



|                                                        |  |               |      |         |             |      |         |  |   |         |   |  |   |       |  
|------------------------------------------------------- |  | ------------- | ---- | ------- | ----------- | ---- | ------- |  | - | ------- | - |  | - | ----- | -
|                                                        |  | Third Quarter |      |         | Nine Months |     
|                                                        |  | 9/28/07       |      | 9/29/06 |             |      | 9/28/07 |  |   | 9/29/06 |  
|Net Earnings                                            |  | $             | 3.6  |         | $           | 59.1 |         |  | $ | 58.7    |   |  | $ | 165.0 |  
|Other comprehensive income:                             |  |               |      |         |             |      |         |  |   |         |   |  |   |       |  
|Foreign currency translation adjustments                |  |               | 19.8 |         |             | 4.7  |         |  |   | 27.7    |   |  |   | 21.6  |  
|Unrealized gain (loss) on available-for-sale-securities |  |               | 3.1  |         |             | 5.8  |         |  |   | (0.1    | ) |  |   | 4.7   |  
|Fair value adjustments of cash flow hedges              |  |               | 0.2  |         |             | (0.5 | )       |  |   | 0.3     |   |  |   | (0.4  | )
|                                                        |  |               |      |         |             |      |         |  |   |         |   |  |   |       |  
|Comprehensive income                                    |  | $             | 26.7 |         | $           | 69.1 |         |  | $ | 86.6    |   |  | $ | 190.9 |  
|                                                        |  |               |      |         |             |      |         |  |   |         |   |  |   |       |  

9. Derivative Financial Instruments

Financial Instruments and Market Risk

We conduct business on a global basis in U.S. and foreign currencies;
therefore, our financial results are subject to risks associated with fluctuating foreign exchange rates. To mitigate these risks, we have a foreign currency exposure management program, which uses derivative foreign exchange contracts to address
nonfunctional currency exposures that we expect to settle in one year or less. We enter into derivative foreign exchange contracts only to the extent necessary to meet our goal of mitigating nonfunctional foreign currency exposures. We do not enter
into hedging transactions for speculative purposes. The derivative foreign exchange contracts consist primarily of foreign currency forward and option contracts.

Derivative financial instruments involve elements of market and credit risk not recognized in the financial statements. The market risk that results from these instruments relates to changes in foreign currency exchange rates, which
generally are offset by changes in the value of the underlying assets or liabilities being held. Credit risk relates to the risk of nonperformance by a counterparty to one of our derivative contracts. We do not believe there is a significant credit
risk associated with our hedging activities because the counterparties are all large international financial institutions with high credit ratings. In addition, we also limit the aggregate notional amount of agreements entered into with any one
financial institution to mitigate credit risk.

Non-designated Hedges

We use derivative contracts to manage overall foreign currency exposures that are remeasured through income. We record these contracts on the balance sheet at fair value. Changes in the fair value of these contracts
are included in earnings as part of Other income (expense), net. Receivables resulting from the contracts are included in Miscellaneous receivables and other current assets, while payables from the contracts are included as part of
Other accrued liabilities. We do not engage in hedging specific individual transactions.

Cash Flow Hedges

We use derivative contracts designated as cash flow hedges to mitigate currency risk related to an imbalance of nonfunctional currency denominated costs and related
revenue. We conducted effectiveness tests on a spot-to-spot basis (excluding time value), with the time-value portion recorded in Other income (expense), net. We reclassified the effective gains and losses recorded in Accumulated other
comprehensive incometo Operating Expenses when the hedged transaction was recognized in earnings. We record any ineffectiveness of the forward contracts in Other income (expense), net. When it becomes probable that an anticipated
transaction that is hedged will not occur, we immediately reclassify the gains or losses related to that hedge from Accumulated other comprehensive incometoOther income (expense), net. At September 28, 2007, we had a credit
balance of $0.4 million in Accumulated Other Comprehensive Income. We held derivatives designated as cash flow hedges at the end of the quarter.

The following table summarizes the impact of cash flow hedges on Accumulated Other Comprehensive Income:



|                                        |  |               |      |   |             |   |      |         |  |   |         |   |  |   |      |  
|--------------------------------------- |  | ------------- | ---- | - | ----------- | - | ---- | ------- |  | - | ------- | - |  | - | ---- | -
|                                        |  | Third Quarter |      |   | Nine Months |  
|                                        |  | 9/28/07       |      |   | 9/29/06     |   |      | 9/28/07 |  |   | 9/29/06 |  
|Balance at beginning of the period      |  | $             | 0.3  |   |             | $ | 0.1  |         |  | $ | 0.2     |   |  | $ |     |  
|Net change on cash flow hedges          |  |               | 0.2  |   |             |   | (0.2 | )       |  |   | 0.3     |   |  |   | (0.3 | )
|Reclassifications to operating expenses |  |               | (0.1 | ) |             |   | (0.2 | )       |  |   | (0.1    | ) |  |   |     |  
|                                        |  |               |      |   |             |   |      |         |  |   |         |   |  |   |      |  
|Balance at end of period                |  | $             | 0.4  |   |             | $ | (0.3 | )       |  | $ | 0.4     |   |  | $ | (0.3 | )
|                                        |  |               |      |   |             |   |      |         |  |   |         |   |  |   |      |  



11



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##### Table of Contents

10. Income Taxes

For
the first nine months of 2007, we recorded a tax expense of $9.9 million at an effective tax rate of 14.4%. For the third quarter of 2007, we recorded a tax benefit of $11.7 million. Our effective rate differs from the U.S. federal statutory
rate of 35% due to the impact of research and development tax credits and the generation of a greater percentage of our earnings from foreign operations that are taxed at lower rates.

We adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes,on December 30, 2006. As a result, we recognized a decrease of approximately $5.7 million in the liability for unrecognized
tax benefits, which we accounted for as a cumulative effective increase of $6.3 million to retained earnings and an increase of $0.6 million to goodwill balances as of December 30, 2006. The total amount of unrecognized tax benefits as of
December 30, 2006, was $76.5 million. This amount includes an accrual of $62.0 million of unrecognized tax benefits that if recognized, would affect the effective tax rate, and $14.5 million of unrecognized tax benefits that, if recognized,
would decrease goodwill associated with prior acquisitions. We continue to recognize interest and penalties related to income tax matters as part of our income tax expense. Our tax provision included $1.2 million of interest and penalties for the
third quarter of 2007 and $3.7 million for the first nine months of 2007. The balance of interest and penalties accrued was $11.7 million as of December 30, 2006, and $15.4 million as of September 28, 2007.

It is reasonably possible that unrecognized benefits related to federal income taxes will decrease by approximately $47 million to $48 million as a result of the
settlement of audits or the expiration of statute of limitations within the next 12 months.

It is reasonably possible that unrecognized benefits related
to the deductibility of certain foreign expenses will decrease by approximately $15 million to $16 million as a result of the settlement of audits or the expiration of statute of limitations within the next 12 months.

We file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. We are no longer subject to U.S. federal, state and local, or
non-U.S. income tax examinations by tax authorities in our major jurisdictions for years before 2001. Our major jurisdictions currently include the United States, California, Illinois, Finland, Denmark and Mexico. The Internal Revenue Service (IRS)
has completed its audit of our U.S. income tax returns for years 2001 through 2003 and has proposed various adjustments that could result in additional tax of $48.2 million, primarily related to the disallowance of a loss claimed with respect to an
investment in a subsidiary. We do not agree with the proposed adjustments and are appealing this decision. We estimate that the issue will be resolved in the next 12 to 15 months. In addition, the IRS is examining our federal income tax returns for
the 2004 and 2005 periods as well as the 2002 through 2004 pre-acquisition years of a subsidiary. We expect these examinations will be completed in 2008.

11. Operating Segments

We report operating results for three segments: Broadband, Transport and Services.

Our Broadband segment includes access, managed access and data product portfolios that facilitate the delivery of
bundled voice, video and high-speed Internet/data services over copper-based and/or fiber-based networks. These products enable service providers to deliver business and next-generation wireline and wireless services to their customers. Access
offerings include the Tellabs® 1000 multiservice access platform, the Tellabs® 1100 multiservice access platform, the
Tellabs® 8865 service-aware optical line terminal and the Tellabs® 1600 optical network terminal (ONT) series. Managed access
products include the Tellabs® 2300 cable telephony distribution system, the Tellabs® 6300 managed transport system and the
Tellabs® 8100 managed access system. Data products include the Tellabs® 8600 managed edge system and the Tellabs® 8800 multiservice router series.

Our
Transport segment includes solutions that enable service providers to transport service and manage optical bandwidth by adding capacity when and where its needed. Wireline and wireless carriers use these products primarily within the
metropolitan portion of their transport networks to support wireless services, business services for enterprise customers, and triple-play voice, video and data services for residential customers. Product offerings include the Tellabs® 3000 voice-quality enhancement products, the Tellabs® 5000 series of digital cross-connect systems, the Tellabs® 5500 NGX transport switch and the Tellabs® 7100 optical transport system (OTS).

Our Services segment delivers deployment, support, professional consulting, training and systems integration services to our customers. These services support all phases
of the network: planning, building and operating.



12



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We define segment profit as gross profit less research and development expenses. Segment profit excludes sales and
marketing expenses, general and administrative expenses, the amortization of purchased deferred stock compensation, intangibles, restructuring, and other charges, and the impact of equity-based compensation (which includes restricted stock and
performance stock units granted after June 30, 2006, and stock options).

Financial information for each operating segment is as follows:

Revenue



|              |  |               |       |             |   |         |  |         |         |  |   |        
|------------- |  | ------------- | ----- | ----------- | - | ------- |  | ------- | ------- |  | - | -------
|              |  | Third Quarter |       | Nine Months
|              |  | 9/28/07       |       | 9/29/06     |   | 9/28/07 |  | 9/29/06
|Broadband     |  | $             | 279.2 |             | $ | 273.0   |  | $       | 744.3   |  | $ | 831.1  
|Transport     |  |               | 123.2 |             |   | 203.1   |  |         | 537.1   |  |   | 619.7  
|Services      |  |               | 55.5  |             |   | 46.4    |  |         | 162.9   |  |   | 135.7  
|              |  |               |       |             |   |         |  |         |         |  |   |        
|Total revenue |  | $             | 457.9 |             | $ | 522.5   |  | $       | 1,444.3 |  | $ | 1,586.5
|              |  |               |       |             |   |         |  |         |         |  |   |        

Segment Profit and Reconciliation to Operating Earnings (Loss)



|                                                                                         |  |               |       |   |             |   |       |         |  |   |         |   |  |   |        |  
|---------------------------------------------------------------------------------------- |  | ------------- | ----- | - | ----------- | - | ----- | ------- |  | - | ------- | - |  | - | ------ | -
|                                                                                         |  | Third Quarter |       |   | Nine Months |  
|                                                                                         |  | 9/28/07       |       |   | 9/29/06     |   |       | 9/28/07 |  |   | 9/29/06 |  
|Broadband                                                                                |  | $             | 23.1  |   |             | $ | 41.4  |         |  | $ | 7.5     |   |  | $ | 100.9  |  
|Transport                                                                                |  |               | 21.5  |   |             |   | 110.2 |         |  |   | 213.4   |   |  |   | 345.1  |  
|Services                                                                                 |  |               | 17.1  |   |             |   | 17.6  |         |  |   | 53.4    |   |  |   | 48.2   |  
|                                                                                         |  |               |       |   |             |   |       |         |  |   |         |   |  |   |        |  
|Total segment profit                                                                     |  |               | 61.7  |   |             |   | 169.2 |         |  |   | 274.3   |   |  |   | 494.2  |  
|Sales and marketing expenses                                                             |  |               | (41.8 | ) |             |   | (43.5 | )       |  |   | (132.0  | ) |  |   | (133.5 | )
|General and administrative expenses                                                      |  |               | (23.5 | ) |             |   | (27.7 | )       |  |   | (74.8   | ) |  |   | (84.3  | )
|Equity based compensation and deferred stock compensation not included in segment profit |  |               | (4.0  | ) |             |   | (5.1  | )       |  |   | (12.9   | ) |  |   | (18.2  | )
|Intangible asset amortization                                                            |  |               | (5.6  | ) |             |   | (6.5  | )       |  |   | (16.9   | ) |  |   | (20.6  | )
|Restructuring and other charges                                                          |  |               | (5.6  | ) |             |   | 0.1   |         |  |   | (5.6    | ) |  |   | (1.9   | )
|                                                                                         |  |               |       |   |             |   |       |         |  |   |         |   |  |   |        |  
|Operating earnings (loss)                                                                |  | $             | (18.8 | ) |             | $ | 86.5  |         |  | $ | 32.1    |   |  | $ | 235.7  |  
|                                                                                         |  |               |       |   |             |   |       |         |  |   |         |   |  |   |        |  

Our segments use many of the same assets. For internal reporting purposes, we do not allocate assets by segment
and therefore no asset, depreciation and amortization, or capital expenditure by segment information is provided to our chief operating decision maker.



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##### Table of Contents

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

Introduction and Overview of Business

Tellabs designs, develops and supports telecommunications networking products
around the world. Our product portfolio includes solutions for wireline and wireless transport, access networking, broadband data, optical transport and voice-quality enhancement.

We generate revenue principally through the sale of telecommunication products and services, both as stand-alone products and as elements of integrated systems, to many of the worlds telecommunications service
providers. In addition, we generate revenue by providing services related primarily to our own products and systems. In 2006, we began reporting results under three reporting segments: Broadband, Transport and Services.

Our Broadband segment includes the access, managed access and data product portfolios that facilitate the delivery of bundled triple-play services. These products enable
service providers to deliver business and next-generation wireline and wireless services to their customers. We earn revenue from our Broadband segment globally. We earn a majority of our access products revenue in North America for the support of
copper-based and fiber-based networks. Driving demand for access products are consumer demand for the triple-play of bundled voice, video and high-speed Internet/data services in addition to competition among traditional telecommunications companies
and cable service operators to be the sole provider of triple-play services. We generate the majority of our managed access product revenue outside North America. Driving demand for managed access products are business services for voice and
high-speed data as well as network transport services for wireless communications. We earn revenue from our data products globally. Driving demand for data products are user demand for wireless and wireline carriers to deliver business services and
next-generation wireless services.

Our Transport segment includes digital cross-connect systems, voice quality enhancement products, and converged
transport systems. These products enable service providers to manage bandwidth, improve voice quality, and transport traffic by adding capacity when and where it is needed. We earn revenue from our Transport segment primarily in North America.
Driving demand for transport products are the needs of wireline and wireless service providers to support wireless services, business services for enterprises and triple-play voice, video and data services for consumers.

Our Services segment delivers deployment, support, professional consulting, training and systems integration services to Tellabs customers. These services support
various phases of the network including planning, installation and on-going support. We earn revenue from our Services segment globally. Deployment service revenue makes up almost half of our Services revenue, arises primarily from sales of our
transport products in North America and tends to lag product sales by approximately one fiscal quarter. In the third quarter of 2007, revenue from support agreements (which includes professional consulting, systems integration and training) covers
all of Tellabs products. The majority of support agreement revenue covers digital cross connects and managed access products.

We operate in a dynamic industry in which both our customers and competitors have consolidated, creating more pricing pressure and more competition. In the third quarter of 2007, North American wireless customers
spent less, particularly on the Tellabs® 5500 digital cross-connect system, compared with the third quarter of 2006, thus adversely affecting our overall revenue and profitability. It is
not clear whether or when these customers will resume spending at previous levels.

We are transforming the company from a business based primarily on the
circuit-switched Time Division Multiplexing (TDM) technology used in our digital cross-connect and managed access products to a business based on packet-switching and Internet Protocol (IP) technology used in our converged transport, access and
multi-service data products. In the third quarter of 2007, about half of our revenue came from converged transport, access and multi-service data products. Some of these products carry gross profit margins lower than our corporate average. The mix
of our products can affect overall profitability in any given quarter.

In light of these factors, management continues to prepare and implement
initiatives to improve our overall gross profit margins, which may include further restructuring, impairment, and/or other charges. Management is also reviewing plans to reduce operating expenses and to further diversify our customer base to keep us
highly competitive in a changing marketplace.

RESULTS OF OPERATIONS

For the third quarter of 2007, our revenue was $457.9 million, down 12.4% from $522.5 million in the third quarter of 2006. Year to date, revenue was $1,444.3 million, down 9.0% from $1,586.5 million in 2006.
Consolidated gross margin decreased 17.1 percentage points to 31.5% in the third quarter compared with 48.6% in the third quarter of 2006. On a nine-month basis, consolidated gross margin was down 11.4 percentage points to 35.9% from 47.3% in 2006.
Operating expenses decreased by $4.1 million to $163.1 million in the third quarter of 2007, from $167.2 million in the third quarter of 2006. For the first nine months of 2007, operating



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##### Table of Contents

expenses were $485.7 million, a decrease of $28.8 million from $514.5 million in 2006. Net earnings for the third quarter of 2007 were $3.6 million or $0.01
per share (basic and diluted) compared with $59.1 million or $0.13 per share (basic and diluted) in the same period of 2006. Net earnings for the nine-month period in 2007 were $58.7 million or $0.13 per share (basic and diluted) compared with
$165.0 million or $0.37 per basic share and $0.36 per diluted share for the first nine months in 2006.

Revenue (in millions)



|              |  |               |       |      |             |        |  |       |      |  |      |         |        |   |         |  |       |   
|------------- |  | ------------- | ----- | ---- | ----------- | ------ |  | ----- | ---- |  | ---- | ------- | ------ | - | ------- |  | ----- | --
|              |  | Third Quarter |       |      | Nine Months |       
|              |  | 2007          |       | 2006 |             | Change |  |       | 2007 |  | 2006 |         | Change |  
|Products      |  | $             | 402.4 |      | $           | 476.1  |  | (15.5 | )%   |  | $    | 1,281.4 |        | $ | 1,450.8 |  | (11.7 | )%
|Services      |  |               | 55.5  |      |             | 46.4   |  | 19.6  | %    |  |      | 162.9   |        |   | 135.7   |  | 20.0  | % 
|              |  |               |       |      |             |        |  |       |      |  |      |         |        |   |         |  |       |   
|Total revenue |  | $             | 457.9 |      | $           | 522.5  |  | (12.4 | )%   |  | $    | 1,444.3 |        | $ | 1,586.5 |  | (9.0  | )%
|              |  |               |       |      |             |        |  |       |      |  |      |         |        |   |         |  |       |   

In 2007, product revenue declined 15.5% in the third
quarter and 11.7% on a nine-month basis compared with 2006. The decrease was primarily due to reduced product revenue for our Tellabs® 5500 digital cross-connect from North American
wireless service providers.

In 2007, services revenue increased 19.6% in the third quarter and 20.0% on a nine-month basis compared with the same periods
in 2006. The increase was primarily due to higher revenue from deployment, support and professional services.

On a geographic basis, revenue from
customers in North America was $325.0 million in the third quarter of 2007, down 17.5% from a year ago. Revenue from customers outside North America was $132.9 million in the third quarter of 2007, up 3.3% from a year ago. On a nine-month basis,
North America revenue was $1,079.6 million, down 12.3% from a year ago. Revenue from customers outside North America was $364.7 million, up 2.5% from a year ago.

Gross Margin



|             |  |               |   |  |             |   |  |               |    |  |      |   |  |      |   |  |                |   
|------------ |  | ------------- | - |  | ----------- | - |  | ------------- | -- |  | ---- | - |  | ---- | - |  | -------------- | --
|             |  | Third Quarter |   |  | Nine Months |  
|             |  | 2007          |   |  | 2006        |   |  | % PointChange |    |  | 2007 |   |  | 2006 |   |  | % Point Change |   
|Products     |  | 31.8          | % |  | 49.7        | % |  | (17.9         | )% |  | 36.4 | % |  | 48.6 | % |  | (12.2          | )%
|Services     |  | 29.7          | % |  | 36.4        | % |  | (6.7          | )% |  | 31.4 | % |  | 33.5 | % |  | (2.1           | )%
|Consolidated |  | 31.5          | % |  | 48.6        | % |  | (17.1         | )% |  | 35.9 | % |  | 47.3 | % |  | (11.4          | )%

In 2007, our product margin decreased in the third quarter
and for the first nine months compared with the same periods in 2006. The decrease was due to a product mix shift with fewer Tellabs® 5500 digital cross-connects, more Tellabs® 7100 Optical Transport Systems (OTS) and more of our Optical Network Terminals (ONT), which are currently lower-margin products.

Our services margin decreased in the third quarter and first nine months of 2007 compared with 2006. Our margin decreased due to a higher proportion of revenue from lower-margin deployment services.

Operating Expenses (in millions)



|                                |  |               |       |      |                   |       |        |  |   |      |   |  |      |   |  |      |  
|------------------------------- |  | ------------- | ----- | ---- | ----------------- | ----- | ------ |  | - | ---- | - |  | ---- | - |  | ---- | -
|                                |  | Third Quarter |       |      | Percent ofRevenue |      
|                                |  | 2007          |       | 2006 |                   |       | Change |  |   | 2007 |   |  | 2006 |  
|Research and development        |  | $             | 86.6  |      | $                 | 89.6  |        |  | $ | (3.0 | ) |  | 18.9 | % |  | 17.2 | %
|Sales and marketing             |  |               | 41.8  |      |                   | 43.5  |        |  |   | (1.7 | ) |  | 9.1  | % |  | 8.3  | %
|General and administrative      |  |               | 23.5  |      |                   | 27.7  |        |  |   | (4.2 | ) |  | 5.2  | % |  | 5.3  | %
|                                |  |               |       |      |                   |       |        |  |   |      |   |  |      |   |  |      |  
|Subtotal                        |  |               | 151.9 |      |                   | 160.8 |        |  |   | (8.9 | ) |  | 33.2 | % |  | 30.8 | %
|                                |  |               |       |      |                  
|Intangible asset amortization   |  |               | 5.6   |      |                   | 6.5   |        |  |   | (0.9 | ) |  |      |   |  |      |  
|Restructuring and other charges |  |               | 5.6   |      |                   | (0.1  | )      |  |   | 5.7  |   |  |      |   |  |      |  
|                                |  |               |       |      |                   |       |        |  |   |      |   |  |      |   |  |      |  
|Total Operating Expenses        |  | $             | 163.1 |      | $                 | 167.2 |        |  | $ | (4.1 | ) |  |      |   |  |      |  
|                                |  |               |       |      |                   |       |        |  |   |      |   |  |      |   |  |      |  



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|                                |  |             |       |      |                    |        |  |   |       |   |  |      |   |  |      |  
|------------------------------- |  | ----------- | ----- | ---- | ------------------ | ------ |  | - | ----- | - |  | ---- | - |  | ---- | -
|                                |  | Nine Months |       |      | Percent of Revenue |       
|                                |  | 2007        |       | 2006 |                    | Change |  |   | 2007  |   |  | 2006 |  
|Research and development        |  | $           | 256.4 |      | $                  | 274.2  |  | $ | (17.8 | ) |  | 17.8 | % |  | 17.3 | %
|Sales and marketing             |  |             | 132.0 |      |                    | 133.5  |  |   | (1.5  | ) |  | 9.1  | % |  | 8.4  | %
|General and administrative      |  |             | 74.8  |      |                    | 84.3   |  |   | (9.5  | ) |  | 5.2  | % |  | 5.3  | %
|                                |  |             |       |      |                    |        |  |   |       |   |  |      |   |  |      |  
|Subtotal                        |  |             | 463.2 |      |                    | 492.0  |  |   | (28.8 | ) |  | 32.1 | % |  | 31.0 | %
|Intangible asset amortization   |  |             | 16.9  |      |                    | 20.6   |  |   | (3.7  | ) |  |      |   |  |      |  
|Restructuring and other charges |  |             | 5.6   |      |                    | 1.9    |  |   | 3.7   |   |  |      |   |  |      |  
|                                |  |             |       |      |                    |        |  |   |       |   |  |      |   |  |      |  
|Total Operating Expenses        |  | $           | 485.7 |      | $                  | 514.5  |  | $ | (28.8 | ) |  |      |   |  |      |  
|                                |  |             |       |      |                    |        |  |   |       |   |  |      |   |  |      |  

Operating expenses decreased by $4.1 million to $163.1 million in the third quarter of 2007, compared with $167.2
million in the third quarter of 2006. For the first nine months of 2007, operating expenses decreased by $28.8 million to $485.7 million compared with the same period in 2006. The reduction in our operating expenses for the quarter and nine months
is primarily due to reduced accruals for incentive compensation plans, partially offset by higher restructuring charges.

Our restructuring and other
charges for the third quarter of 2007 reflect a plan to better align our operating expenses with current revenue and market conditions. The charges were for headcount-related costs.

Other Income (in millions)



|                            |  |               |      |   |             |   |      |        |  |   |      |   |  |      |      |   |        |   |      |   |  |   |     
|--------------------------- |  | ------------- | ---- | - | ----------- | - | ---- | ------ |  | - | ---- | - |  | ---- | ---- | - | ------ | - | ---- | - |  | - | ----
|                            |  | Third Quarter |      |   | Nine Months
|                            |  | 2007          |      |   | 2006        |   |      | Change |  |   | 2007 |   |  | 2006 |      |   | Change
|Interest income, net        |  | $             | 13.1 |   |             | $ | 11.3 |        |  | $ | 1.8  |   |  | $    | 38.3 |   |        | $ | 33.2 |   |  | $ | 5.1 
|Other income (expense), net |  |               | (2.4 | ) |             |   | (1.0 | )      |  |   | (1.4 | ) |  |      | (1.8 | ) |        |   | (7.0 | ) |  |   | 5.2 
|                            |  |               |      |   |             |   |      |        |  |   |      |   |  |      |      |   |        |   |      |   |  |   |     
|Total                       |  | $             | 10.7 |   |             | $ | 10.3 |        |  | $ | 0.4  |   |  | $    | 36.5 |   |        | $ | 26.2 |   |  | $ | 10.3
|                            |  |               |      |   |             |   |      |        |  |   |      |   |  |      |      |   |        |   |      |   |  |   |     

Interest income, net, was higher in the third quarter and the first nine months of 2007, compared with 2006 due to
larger invested balances and higher interest rates. Other income (expense), net, declined in the third quarter of 2007 compared with the third quarter of 2006 due to foreign exchange losses in the current year. Other income (expense), net, improved
for the first nine months of 2007 compared with the same period in 2006 when we incurred a loss of $6.1 million related to other-than-temporary impairments on long-term investments.

Income Taxes

For the first nine months of 2007, we recorded a tax expense of $9.9 million at an effective tax
rate of 14.4%, compared with a tax expense of $96.9 million and a tax rate of 37.0% for the first nine months of 2006. For the third quarter of 2007 we recorded a tax benefit of $11.7 million, which reflects the impact of a decrease in our annual
effective tax rate, compared with a tax expense of $37.7 million for the third quarter of 2006. The reduction in our tax expense and tax rate is primarily attributable to a decrease in income earned from domestic operations and the inclusion of a
benefit for U.S. research and development credits in the current year.

We adopted the provisions of FIN 48, Accounting for Uncertainty in Income
Taxes, on December 30, 2006. The liability for unrecognized tax benefits as of December 30, 2006, as determined under FIN 48 was $76.5 million. Although we cannot reliably estimate the periods of cash settlement, we expect that the
resolution of tax issues related to $12 million to $14 million of unrecognized tax benefits could be reached in the next 12 months, resolution of tax issues with respect to approximately $48 million could be reached in the next 12 to 15 months. We
cannot reliably estimate the period of cash settlement with respect to the remaining balance of $14.5 million to $16.5 million of unrecognized tax benefits, as such settlement will depend on examination of returns by various jurisdictions, the
amounts and timing of which are uncertain.

Segments

Revenue (in millions)



|              |  |               |       |      |             |        |  |       |      |  |      |         |        |   |         |  |       |   
|------------- |  | ------------- | ----- | ---- | ----------- | ------ |  | ----- | ---- |  | ---- | ------- | ------ | - | ------- |  | ----- | --
|              |  | Third Quarter |       |      | Nine Months |       
|              |  | 2007          |       | 2006 |             | Change |  |       | 2007 |  | 2006 |         | Change |  
|Broadband     |  | $             | 279.2 |      | $           | 273.0  |  | 2.3   | %    |  | $    | 744.3   |        | $ | 831.1   |  | (10.4 | )%
|Transport     |  |               | 123.2 |      |             | 203.1  |  | (39.3 | )%   |  |      | 537.1   |        |   | 619.7   |  | (13.3 | )%
|Services      |  |               | 55.5  |      |             | 46.4   |  | 19.6  | %    |  |      | 162.9   |        |   | 135.7   |  | 20.0  | % 
|              |  |               |       |      |             |        |  |       |      |  |      |         |        |   |         |  |       |   
|Total revenue |  | $             | 457.9 |      | $           | 522.5  |  | (12.4 | )%   |  | $    | 1,444.3 |        | $ | 1,586.5 |  | (9.0  | )%
|              |  |               |       |      |             |        |  |       |      |  |      |         |        |   |         |  |       |   



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##### Table of Contents

Segment Profit * (in millions)



|                     |  |               |      |      |             |        |  |       |      |  |      |       |        |   |       |  |       |   
|-------------------- |  | ------------- | ---- | ---- | ----------- | ------ |  | ----- | ---- |  | ---- | ----- | ------ | - | ----- |  | ----- | --
|                     |  | Third Quarter |      |      | Nine Months |       
|                     |  | 2007          |      | 2006 |             | Change |  |       | 2007 |  | 2006 |       | Change |  
|Broadband            |  | $             | 23.1 |      | $           | 41.4   |  | (44.2 | )%   |  | $    | 7.5   |        | $ | 100.9 |  | (92.6 | )%
|Transport            |  |               | 21.5 |      |             | 110.2  |  | (80.5 | )%   |  |      | 213.4 |        |   | 345.1 |  | (38.2 | )%
|Services             |  |               | 17.1 |      |             | 17.6   |  | (2.8  | )%   |  |      | 53.4  |        |   | 48.2  |  | 10.8  | % 
|                     |  |               |      |      |             |        |  |       |      |  |      |       |        |   |       |  |       |   
|Total segment profit |  | $             | 61.7 |      | $           | 169.2  |  | (63.5 | )%   |  | $    | 274.3 |        | $ | 494.2 |  | (44.5 | )%
|                     |  |               |      |      |             |        |  |       |      |  |      |       |        |   |       |  |       |   

---

|* | We define segment profit as gross profit less research and development expenses. Segment profit excludes sales and marketing expenses, general and administrative expenses, the
amortization of purchased deferred stock compensation and intangibles, restructuring and other charges, and the impact of equity-based compensation (which contains restricted stock and performance stock units granted after June 30, 2006, and
stock options).
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Broadband

Revenue

Revenue from our Broadband segment was $279.2 million in the third quarter of 2007, up $6.2 million from the prior-year quarter. For the first nine
months, revenue from our Broadband segment was $744.3 million, down $86.8 million from the first nine months of 2006. While our access and managed access revenue decreased for both time-period comparisons, our data product revenue increased.

Third quarter access revenue decreased to $157.0 million in 2007 from $161.1 million in 2006. On a nine-month basis, access revenue decreased to $412.8
million in 2007 from $515.0 million in 2006. Revenue was lower in both time periods due to lower unit prices on our single-family ONTs, partially offset by higher ONT unit volume; lower revenue from Fiber-to-the-Curb platforms; and lower revenue
from independent operating companies for copper-based platforms. Approximately 72% of access revenue came from fiber-based platforms, with the balance coming from copper-based platforms.

Managed access revenue declined to $65.2 million in the third quarter of 2007 from $80.0 million in the same quarter of 2006. For the first nine months of 2007, managed access revenue declined to $211.0 million from
$240.0 million in the first nine months of 2006. Revenue decreased in both time periods due to lower demand in our Europe, Middle East and Africa (EMEA) region. On a nine-month basis, our decrease was partially offset by revenue from a project in
the Asia Pacific region.

Data product revenue was $57.0 million in the third quarter of 2007, up 78.7% from the year-ago quarter. Data product revenue was
$120.5 million for the first nine months of 2007, up 58.3% compared with the first nine months of 2006. Our revenue increase came from existing and new customers, as well as from completion of the second phase of a large project in the Asia Pacific
region.

Segment Profit

Our Broadband segment
produced a profit of $23.1 million in the third quarter of 2007 compared with a profit of $41.4 million in the third quarter of 2006. For the first nine months of 2007, our Broadband segment produced a profit of $7.5 million, down $93.4 million from
a profit of $100.9 million in the comparable period of 2006. The decrease in both time periods resulted from a shift in our product mix toward lower-margin products, including our single-family ONT, and lower segment revenue.

Transport

Revenue

Revenue from our Transport segment was $123.2 million in the third quarter of 2007, compared with $203.1 million in
the third quarter of 2006. On a nine-month basis, transport revenue was $537.1 million, down from $619.7 million in the comparable period of 2006. Our revenue declined due to fewer Tellabs®
5500 digital cross-connects sold to North American wireless service providers. This decrease was partially offset by higher revenue from the rollout of our Tellabs® 7100 OTS with a
reconfigurable optical add/drop multiplexer (ROADM).

During the third quarter of 2007,
approximately 28% of the Tellabs® 5500 digital cross-connect product revenue came from new systems, system expansions and system upgrades. The remaining balance of 72% consisted of
port-card growth on the installed base. We shipped approximately 1.0 million T-1 equivalents during the third quarter of 2007 and approximately 5.3 million in the first nine months of 2007. In 2006, we shipped approximately
2.8 million in the third quarter and approximately 8.3 million in the first nine months.

Segment Profit

Our Transport segment profit was $21.5 million in the third quarter of 2007, down from $110.2 million in the third quarter of 2006. Our segment profit for the first nine
months was $213.4 million, compared with $345.1 million in the same time period in 2006. The



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decreases for the quarter and the first nine months were due to lower segment revenue primarily from our Tellabs® 5500 digital cross-connect and a shift in our product mix, which includes higher amounts of Tellabs® 7100 OTS revenue.

Services

Revenue

Revenue from our Services segment grew by $9.1 million to $55.5 million for the third quarter of 2007, compared
with $46.4 million in the third quarter of 2006. On a nine-month basis, revenue from our Services segment was $162.9 million in 2007, up $27.2 million from the first nine months of 2006. During both time periods, our revenue from deployment services
increased, primarily due to the rollout of our Tellabs® 7100 OTS product. Our revenue increase also came from support and professional services.

Segment Profit

Our Services segment profit was $17.1 million
for the third quarter of 2007, down $0.5 million from the third quarter of 2006. The decrease for the quarter was due to a higher proportion of revenue from lower-margin deployment services. For the first nine months, Services segment profit was
$53.4 million in 2007, up $5.2 million from $48.2 million in 2006. The increase for the first nine months was due to a higher proportion of revenue from higher-margin support services.

Financial Condition, Liquidity & Capital Resources

Our principal source of liquidity remained our cash,
cash equivalents and marketable securities of $1,371.9 million as of the end of the third quarter of 2007, which increased by $52.9 million during the quarter and $71.8 million since year-end 2006. The increase in the third quarter was primarily
driven by cash from operating activities of $64.6 million, which was positively impacted by reduced working capital balances and the Euro strengthening against the U.S. dollar. The year-to-date increase reflects an increase of cash from operating
activities of $124.4 million, partially offset by cash used to repurchase our common stock and for the purchase of capital equipment.

Under a previously
announced share repurchase program, we repurchased 1.2 million shares of our common stock at a cost of $13.6 million during the third quarter of 2007. For the first nine months of 2007, we repurchased 4.5 million shares of our common stock
at a cost of $48.8 million.

Tellabs Board of Directors and management are assessing our stock repurchase programs. We provide no assurance that we
will continue or change our repurchase activity, and we cannot estimate the timing of any such change or the impact on our cash, cash equivalents and marketable securities.

We believe that the current level of working capital, particularly cash and marketable securities, is sufficient to meet our normal operating requirements for the foreseeable future. Further, we believe that
sufficient resources exist to support our future growth and strategic needs. Future available sources of working capital include cash-on-hand, cash generated from future operations, short-term or long-term financing, equity offerings or any
combination of these sources. Our current policy is to retain our earnings to provide funds to enhance stockholder value by continuing to expand our business and support our operating activities. We may also utilize our funds for the repurchase of
our common stock. We do not anticipate paying a cash dividend in the foreseeable future.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies

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

Outlook for Fourth Quarter

Exclusive of restructuring charges, we expect revenue, gross margin and operating
expense in the fourth quarter to be about the same as third quarter 2007. We are assuming a similar product mix.

Forward-Looking Statements

This Managements Discussion and Analysis and other sections of this Form 10-Q, including the statements under the caption Outlook for
Fourth Quarter, contain forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These
statements reflect managements expectations, estimates and assumptions, based on the information available at the time the document was prepared. These forward-looking statements include, but are not limited to, statements regarding future
events, plans, goals, objectives and expectations. The words anticipate, believe, foreseeable, estimate, target, expect, predict, plan,
project, intend, likely, possible, will, would, should, could, may, continue, and similar expressions are intended to identify
forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors that may cause our actual performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by those statements. Important factors that could cause our actual results to differ materially from



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those in forward-looking statements include, but are not limited to: economic changes impacting the telecommunications industry; financial condition of
telecommunications service providers and equipment vendors, including any impact of bankruptcies; the impact of customer and vendor consolidation; new product acceptance; product demand and industry capacity; competitive products and pricing;
competitive pressures from new entrants to the telecommunications industry; initiatives to improve profitability that may have financial consequences including further restructuring charges, exiting businesses and product areas; impairment charges
and other cost cutting initiatives and related charges and costs; manufacturing efficiencies; research and new product development; protection of and access to intellectual property, patents and technology; ability to attract and retain highly
qualified personnel; availability of components and critical manufacturing equipment and capacity; foreign economic conditions, including currency rate fluctuations; the regulatory and trade environment; the impact of new or revised accounting rules
or interpretations, including revenue recognition requirements; availability and terms of future acquisitions; divestitures and investments; uncertainties relating to synergies, charges and expenses associated with business combinations and other
transactions; and other risks and future factors that may be detailed from time to time in the Companys filings with the SEC. For a further description of such risks and future factors, see Part I, Item 1A of our Annual Report on Form
10-K for the fiscal year ended December 29, 2006, filed with the SEC on February 26, 2007 as well as Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 30, 2007, filed with the SEC on
May 9, 2007. Our actual future results could differ materially from those predicted in such forward-looking statements. In light of the foregoing risks, uncertainties and other factors, investors should not place undue reliance on
forward-looking statements in determining whether to buy, sell or hold any of our securities. These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the operations, performance, development and
results of our business. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to future results over time.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

As of
September 28, 2007, there were no material changes to our market risks disclosure in our Annual Report on Form 10-K for the year ended December 29, 2006.



|Item 4. | Controls and Procedures
|------- | -----------------------

Our management, under the supervision and
with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 28, 2007. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures are effective. There were no changes during the period covered by this Form 10-Q in our internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

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

On January 17, 2003, Tellabs and the other named defendants filed a motion to dismiss the consolidated amended class action complaint in its entirety. On May 19, 2003, the Court granted our motion and
dismissed all counts of the consolidated amended complaint, while affording plaintiffs an opportunity to replead. On July 11, 2003, plaintiffs filed a second consolidated amended class action complaint against Tellabs, Messrs. Birck and
Notebaert, and many (although not all) of the other previously named individual defendants, realleging claims similar to those contained in the previously dismissed consolidated amended class action complaint. We filed a second motion to
dismiss on August 22, 2003, seeking the dismissal with prejudice of all claims alleged in the second consolidated amended class action complaint. On February 19, 2004, the Court issued an order granting that motion and dismissed the
action with prejudice. On March 18, 2004, the plaintiffs filed a Notice of Appeal to the United States Federal Court of Appeal for the Seventh Circuit, appealing the dismissal. The appeal was fully briefed and oral argument was heard
on January 21, 2005. On January 25, 2006, the Seventh Circuit issued an opinion affirming in part and reversing in part the judgment of the district court, and



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remanding for further proceedings. On February 8, 2006, defendants filed with the Seventh Circuit a petition for rehearing with suggestion for
rehearing en banc. On April 19, 2006, the Seventh Circuit ordered plaintiffs to file an answer to the petition for rehearing, which was filed by the plaintiffs on May 3, 2006. On July 10, 2006, the Seventh Circuit denied the petition
for rehearing with a minor modification to its opinion. On September 22, 2006, defendants filed a motion in the district court to dismiss some (but not all) of the remaining claims. On October 3, 2006, the defendants filed with the United
States Supreme Court a petition for a writ of certiorari seeking to appeal the Seventh Circuits decision. On January 5, 2007, the defendants petition was granted. The United States Supreme Court heard oral arguments on
March 28, 2007. On June 21, 2007, the United States Supreme Court vacated the Seventh Circuits judgment and remanded the case for further proceedings. On November 1, 2007, the Seventh Circuit heard oral arguments for the
remanded case. We believe the case is without merit.

On April 5, 2006, a class action complaint was filed in the United States District Court of the
Northern District of Illinois against Tellabs, Michael Birck, Richard Notebaert and current or former Tellabs employees who, during the alleged class period of December 11, 2000 to July 1, 2003, participated on the Tellabs Investment and
Administrative Committees of the Tellabs, Inc. Profit Sharing and Savings Plan (Plan). Thereafter, two similar complaints were filed in the United States District Court of the Northern District of Illinois.

The complaints allege that during the alleged class period, the defendants allegedly breached their fiduciary duties under the Employee Retirement Income Security Act
by, among other things, continuing to offer Tellabs common stock as a Plan investment option when it was imprudent to do so and allegedly misrepresenting and failing to disclose material information necessary for Plan participants to make informed
decisions concerning the Plan. Further, certain of the defendants allegedly failed to monitor the fiduciary activities of the fiduciaries they appointed and certain of the defendants allegedly breached their duty of loyalty by trading Tellabs stock,
while taking no protective action on behalf of Plan participants. The complaints seek unspecified restitution, damages and other relief.

On June 28,
2006, the Court consolidated all three actions and on August 14, 2006, plaintiffs filed a consolidated class action complaint. On September 15, 2006, defendants filed a Motion to Dismiss, or in the Alternative, for Summary Judgment seeking
the dismissal with prejudice of all claims in the consolidated amended class action complaint. On February 13, 2007, the court denied defendants motion. Based on the courts decision, the defendants requested that the court certify
an issue for interlocutory appeal to the United States Federal Court of Appeal for the Seventh Circuit; the court denied defendants request. Plaintiffs moved to certify a class, discovery was conducted to determine the propriety of class
certification, and Tellabs opposed class certification. On September 20, 2007, the court granted plaintiffs motion to certify a class. Tellabs may appeal class certification, and if no appeal occurs, discovery on the merits may proceed.
We believe the case is without merit.

Apart from the matters described above, we are subject to various legal proceedings, claims and litigation arising
in the ordinary course of business. Based on our historical experience for these types of litigation, we do not expect that the ultimate costs to resolve these matters will have a material effect on our results of operations, financial position or
cash flows.



|Item 1A. | Risk Factors
|-------- | ------------

In addition to the other information set forth in
this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 29, 2006, and in Part II, Item 1A. Risk Factors in our
Quarterly Report on Form 10-Q for the quarter ended March 30, 2007. The risk factors described in our Annual Report and Quarterly Report could materially adversely affect our business, financial condition or future results. The risks described
in our Annual Report and Quarterly Report are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently consider immaterial also may materially adversely affect our business, financial
condition and/or operating results.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

Repurchases of Common Stock:



|                        |  |                                |  |                                |       |                                                                              |           |                                                                                            |   |      
|----------------------- |  | ------------------------------ |  | ------------------------------ | ----- | ---------------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------------------------ | - | -----
|Period of Purchases     |  | Total Number ofSharesPurchased |  | AveragePurchase PricePer Share |       | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor
Programs |           | Remaining DollarValue of SharesAvailable to
bePurchased Underthe Programs (In Millions)(1)
|12/30/06 through 2/2/07 |  | 522,931                        |  | $                              | 10.12 |                                                                              | 522,931   |                                                                                            | $ | 193.1
|2/3/07 through 3/2/07   |  | 1,793,207                      |  | $                              | 10.70 |                                                                              | 1,793,207 |                                                                                            | $ | 176.1
|3/3/07 through 3/30/07  |  | 73,509                         |  | $                              | 10.12 |                                                                              | 73,509    |                                                                                            | $ | 176.1
|3/31/07 through 5/4/07  |  | 362,569                        |  | $                              | 10.69 |                                                                              | 362,569   |                                                                                            | $ | 176.1
|5/5/07 through 6/1/07   |  | 328,216                        |  | $                              | 11.03 |                                                                              | 328,216   |                                                                                            | $ | 176.1
|6/2/07 through 6/29/07  |  | 230,467                        |  | $                              | 10.80 |                                                                              | 230,467   |                                                                                            | $ | 176.1
|6/30/07 through 8/3/07  |  | 934,498                        |  | $                              | 11.82 |                                                                              | 934,498   |                                                                                            | $ | 176.1
|8/4/07 through 8/31/07  |  | 117,842                        |  | $                              | 10.62 |                                                                              | 117,842   |                                                                                            | $ | 176.1
|9/01/07 through 9/28/07 |  | 127,180                        |  | $                              | 10.49 |                                                                              | 127,180   |                                                                                            | $ | 176.1
|                        |  |                                |  |                                |       |                                                                              |           |                                                                                            |   |      
|Total                   |  | 4,490,419                      |  | $                              | 10.88 |                                                                              | 4,490,419 |                                                                                            |   |      
|                        |  |                                |  |                                |       |                                                                              |           |                                                                                            |   |      



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---

|(1) | The amounts in this column represent the remaining amounts under the current $300 million program described
below. The Rule10b5-1 repurchase program described below does not have a repurchase amount limit; therefore, it is not included in the remaining value of shares.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On January 25, 2007, our Board of Directors authorized a one-year extension of the purchase of our outstanding stock under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. We intend to continue to
use cash generated by employee stock option exercises (other than those of company officers and board members) to repurchase stock in the manner provided under this program. As of September 28, 2007, we purchased 7.0 million shares of our
common stock under this program at a total cost of $89.9 million, including $13.6 million (1.2 million shares) in the third quarter of 2007 and $27.8 million (2.5 million shares) in the first nine months of 2007.

On July 31, 2006, our Board of Directors authorized a repurchase program of up to $300 million of our outstanding common stock. As of September 28, 2007, we
purchased 11.9 million shares of our common stock under the program at a total cost of $123.9 million, with no shares purchased in the third quarter of 2007 and $21.0 million (2.0 million shares) in the first nine months of 2007. We may
continue to repurchase shares under this program from time to time during open trading windows and when we do not possess material non-public information.

In addition, in the third quarter of 2007, we purchased 141,662 shares for $1.6 million to cover withholding taxes on shares issued under employee stock plans and in the first nine months of 2007, we purchased 195,510 shares for $2.2
million.

We record repurchased shares as Treasury stock.



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|Item 6. | Exhibits
|------- | --------

(A) Exhibits



|      |  |                                                                                                                                                                                              
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2   |  | Second Amended and Restated By-Laws dated July 24, 2007 (incorporated by reference to Exhibit 3.2 of Tellabs, Inc. Form 8-K filed with the SEC on July 26, 2007)                             
|      | 
|10.40 |  | Description of Grants of Performance Stock Units to Executive Officers of Tellabs, Inc. (incorporated by reference to Item 101 of Tellabs, Inc. Form 8-K filed with the SEC on July 26,
2007.
|      | 
|10.41 |  | 401(k) Plan as Amended and Restated Effective January 1, 2007                                                                                                                                
|      | 
|10.42 |  | Addendum Incorporating Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) to Tellabs 401(k) Plan                                                                             
|      | 
|11    |  | Computation of Per Share Earnings                                                                                                                                                            
|      | 
|31.1  |  | CEO Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002                                                                                                                  
|      | 
|31.2  |  | CFO Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002                                                                                                                  
|      | 
|32.1  |  | CEO Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002                                                                                                                  
|      | 
|32.2  |  | CFO Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002                                                                                                                  



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SIGNATURE

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



TELLABS, INC.(Registrant)/s/ Tom MinichielloTom MinichielloVice President of Finance and Chief Accounting Officer(Principal Accounting Officer and duly authorized officer)November 5, 2007(Date)




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