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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 29, 2006

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



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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  441,783,822 shares outstanding on October 27, 2006.



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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                            |  | 18  
|          |  |                                                                                      
|Item 4.   |  | Controls and Procedures                                                               |  | 18  
|          |  |                                                                                      
|PART II.  |  | OTHER INFORMATION                                                                     |  |     
|          |  |                                                                                      
|Item 1.   |  | Legal Proceedings                                                                     |  | 18  
|          |  |                                                                                      
|Item 1A.  |  | Risk Factors                                                                          |  | 19  
|          |  |                                                                                      
|Item 2.   |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 19  
|          |  |                                                                                      
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                   |  | 20  
|          |  |                                                                                      
|Item 6.   |  | Exhibits                                                                              |  | 20  
|          | 
|SIGNATURE |  | 21                                                                                   



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##### Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TELLABS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



|                                                   |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|-------------------------------------------------- |  | ------------- | ----- | - | ----------- | - | ----- | ------- |  | - | ------- | - |  | - | ------- | -
|                                                   |  | Third Quarter |       |   | Nine Months |  
|In millions, except per-share data                 |  | 9/29/06       |       |   | 9/30/05     |   |       | 9/29/06 |  |   | 9/30/05 |  
|Revenue                                            |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Products                                           |  | $             | 476.1 |   |             | $ | 420.2 |         |  | $ | 1,450.8 |   |  | $ | 1,238.8 |  
|Services                                           |  |               | 46.4  |   |             |   | 43.7  |         |  |   | 135.7   |   |  |   | 123.2   |  
|                                                   |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|                                                   |  |               | 522.5 |   |             |   | 463.9 |         |  |   | 1,586.5 |   |  |   | 1,362.0 |  
|Cost of Revenue                                    |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Products                                           |  |               | 239.3 |   |             |   | 213.0 |         |  |   | 746.0   |   |  |   | 665.1   |  
|Services                                           |  |               | 29.5  |   |             |   | 33.2  |         |  |   | 90.3    |   |  |   | 90.1    |  
|                                                   |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|                                                   |  |               | 268.8 |   |             |   | 246.2 |         |  |   | 836.3   |   |  |   | 755.2   |  
|                                                   |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Gross Profit                                       |  |               | 253.7 |   |             |   | 217.7 |         |  |   | 750.2   |   |  |   | 606.8   |  
|                                                   |  |               |       |  
|Gross profit as a percentage of revenue            |  |               | 48.6  | % |             |   | 46.9  | %       |  |   | 47.3    | % |  |   | 44.6    | %
|                                                   |  |               |       |  
|Gross profit as a percentage of revenue - products |  |               | 49.7  | % |             |   | 49.3  | %       |  |   | 48.6    | % |  |   | 46.3    | %
|Gross profit as a percentage of revenue - services |  |               | 36.4  | % |             |   | 24.0  | %       |  |   | 33.5    | % |  |   | 26.9    | %
|                                                   |  |               |       |  
|Operating Expenses                                 |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Research and development                           |  |               | 89.6  |   |             |   | 84.7  |         |  |   | 274.2   |   |  |   | 256.4   |  
|Sales and marketing                                |  |               | 43.5  |   |             |   | 42.2  |         |  |   | 133.5   |   |  |   | 133.8   |  
|General and administrative                         |  |               | 27.7  |   |             |   | 25.2  |         |  |   | 84.3    |   |  |   | 69.9    |  
|Intangible asset amortization                      |  |               | 6.5   |   |             |   | 7.9   |         |  |   | 20.6    |   |  |   | 28.1    |  
|Restructuring and other charges                    |  |               | (0.1  | ) |             |   | (0.2  | )       |  |   | 1.9     |   |  |   | 14.2    |  
|                                                   |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|                                                   |  |               | 167.2 |   |             |   | 159.8 |         |  |   | 514.5   |   |  |   | 502.4   |  
|                                                   |  |               |       |  
|Operating Earnings                                 |  |               | 86.5  |   |             |   | 57.9  |         |  |   | 235.7   |   |  |   | 104.4   |  
|                                                   |  |               |       |  
|Other Income                                       |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Interest income, net                               |  |               | 11.3  |   |             |   | 6.8   |         |  |   | 33.2    |   |  |   | 18.9    |  
|Other income (expense), net                        |  |               | (1.0  | ) |             |   | 0.8   |         |  |   | (7.0    | ) |  |   | (3.6    | )
|                                                   |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|                                                   |  |               | 10.3  |   |             |   | 7.6   |         |  |   | 26.2    |   |  |   | 15.3    |  
|                                                   |  |               |       |  
|Earnings Before Income Tax                         |  |               | 96.8  |   |             |   | 65.5  |         |  |   | 261.9   |   |  |   | 119.7   |  
|Income tax expense                                 |  |               | (37.7 | ) |             |   | (23.6 | )       |  |   | (96.9   | ) |  |   | (36.0   | )
|                                                   |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Net Earnings                                       |  | $             | 59.1  |   |             | $ | 41.9  |         |  | $ | 165.0   |   |  | $ | 83.7    |  
|                                                   |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Net Earnings Per Share                             |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Basic                                              |  | $             | 0.13  |   |             | $ | 0.09  |         |  | $ | 0.37    |   |  | $ | 0.19    |  
|                                                   |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Diluted                                            |  | $             | 0.13  |   |             | $ | 0.09  |         |  | $ | 0.36    |   |  | $ | 0.18    |  
|                                                   |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Weighted Average Shares Outstanding                |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Basic                                              |  |               | 445.5 |   |             |   | 447.8 |         |  |   | 447.7   |   |  |   | 450.4   |  
|                                                   |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  
|Diluted                                            |  |               | 451.2 |   |             |   | 453.2 |         |  |   | 456.9   |   |  |   | 454.5   |  
|                                                   |  |               |       |   |             |   |       |         |  |   |         |   |  |   |         |  

The accompanying notes are an integral part of these statements.



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TELLABS, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                            |  |                     |         |   |          |   |         |  
|----------------------------------------------------------------------------------------------------------- |  | ------------------- | ------- | - | -------- | - | ------- | -
|                                                                                                            |  | 9/29/06 (Unaudited) |         |   | 12/30/05 |  
|In millions, except share data                                                                              |  |                    
|Assets                                                                                                      |  |                     |         |   |          |   |         |  
|Current Assets                                                                                              |  |                     |         |   |          |   |         |  
|Cash and cash equivalents                                                                                   |  | $                   | 124.6   |   |          | $ | 880.8   |  
|Investments in marketable securities                                                                        |  |                     | 1,106.4 |   |          |   | 308.9   |  
|                                                                                                            |  |                     |         |   |          |   |         |  
|                                                                                                            |  |                     | 1,231.0 |   |          |   | 1,189.7 |  
|Other marketable securities - Cisco stock                                                                   |  |                     | 242.7   |   |          |   | 180.8   |  
|Accounts receivable, net of returns and allowances of $7.6 and $8.4                                         |  |                     | 378.5   |   |          |   | 319.4   |  
|Inventories                                                                                                 |  |                     |         |   |          |   |         |  
|Raw materials                                                                                               |  |                     | 38.3    |   |          |   | 28.3    |  
|Work in process                                                                                             |  |                     | 11.3    |   |          |   | 11.7    |  
|Finished goods                                                                                              |  |                     | 105.9   |   |          |   | 69.1    |  
|                                                                                                            |  |                     |         |   |          |   |         |  
|                                                                                                            |  |                     | 155.5   |   |          |   | 109.1   |  
|Income taxes                                                                                                |  |                     | 27.9    |   |          |   | 15.9    |  
|Miscellaneous receivables and other current assets                                                          |  |                     | 50.4    |   |          |   | 58.1    |  
|                                                                                                            |  |                     |         |   |          |   |         |  
|Total Current Assets                                                                                        |  |                     | 2,086.0 |   |          |   | 1,873.0 |  
|                                                                                                            |  |                    
|Property, Plant and Equipment                                                                               |  |                     |         |   |          |   |         |  
|Land                                                                                                        |  |                     | 20.6    |   |          |   | 20.3    |  
|Buildings and improvements                                                                                  |  |                     | 203.0   |   |          |   | 190.5   |  
|Equipment                                                                                                   |  |                     | 427.9   |   |          |   | 403.2   |  
|                                                                                                            |  |                     |         |   |          |   |         |  
|                                                                                                            |  |                     | 651.5   |   |          |   | 614.0   |  
|Accumulated depreciation                                                                                    |  |                     | (355.2  | ) |          |   | (313.9  | )
|                                                                                                            |  |                     |         |   |          |   |         |  
|                                                                                                            |  |                     | 296.3   |   |          |   | 300.1   |  
|Goodwill                                                                                                    |  |                     | 1,113.5 |   |          |   | 1,111.9 |  
|Intangible Assets, Net of Amortization                                                                      |  |                     | 96.7    |   |          |   | 117.2   |  
|Other Assets                                                                                                |  |                     | 133.5   |   |          |   | 112.7   |  
|                                                                                                            |  |                     |         |   |          |   |         |  
|Total Assets                                                                                                |  | $                   | 3,726.0 |   |          | $ | 3,514.9 |  
|                                                                                                            |  |                     |         |   |          |   |         |  
|Liabilities and Stockholders' Equity                                                                        |  |                     |         |   |          |   |         |  
|Current Liabilities                                                                                         |  |                     |         |   |          |   |         |  
|Accounts payable                                                                                            |  | $                   | 84.9    |   |          | $ | 97.1    |  
|Accrued compensation                                                                                        |  |                     | 66.0    |   |          |   | 83.8    |  
|Restructuring and other charges                                                                             |  |                     | 6.3     |   |          |   | 7.2     |  
|Income taxes                                                                                                |  |                     | 84.5    |   |          |   | 28.9    |  
|Cisco stock loan                                                                                            |  |                     | 242.7   |   |          |   | 180.8   |  
|Other accrued liabilities                                                                                   |  |                     | 133.4   |   |          |   | 127.4   |  
|                                                                                                            |  |                     |         |   |          |   |         |  
|Total Current Liabilities                                                                                   |  |                     | 617.8   |   |          |   | 525.2   |  
|                                                                                                            |  |                    
|Long-Term Restructuring Liabilities                                                                         |  |                     | 19.5    |   |          |   | 24.0    |  
|Income Taxes                                                                                                |  |                     | 114.7   |   |          |   | 95.9    |  
|Other Long-Term Liabilities                                                                                 |  |                     | 55.6    |   |          |   | 55.1    |  
|                                                                                                            |  |                    
|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; 487,933,877 and 477,045,901 shares issued |  |                     | 4.9     |   |          |   | 4.8     |  
|Additional paid-in capital                                                                                  |  |                     | 1,376.1 |   |          |   | 1,238.7 |  
|Deferred compensation expense                                                                               |  |                     |        |   |          |   | (10.9   | )
|Treasury stock, at cost: 46,282,738 and 27,661,859 shares                                                   |  |                     | (558.4  | ) |          |   | (322.8  | )
|Retained earnings                                                                                           |  |                     | 2,012.9 |   |          |   | 1,847.9 |  
|Accumulated other comprehensive income                                                                      |  |                     | 82.9    |   |          |   | 57.0    |  
|                                                                                                            |  |                     |         |   |          |   |         |  
|Total Stockholders' Equity                                                                                  |  |                     | 2,918.4 |   |          |   | 2,814.7 |  
|                                                                                                            |  |                     |         |   |          |   |         |  
|Total Liabilities and Stockholders' Equity                                                                  |  | $                   | 3,726.0 |   |          | $ | 3,514.9 |  
|                                                                                                            |  |                     |         |   |          |   |         |  

The accompanying notes are an integral part of these statements.



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TELLABS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)



|                                                                                    |  |             |          |   |         |   |        |  
|----------------------------------------------------------------------------------- |  | ----------- | -------- | - | ------- | - | ------ | -
|                                                                                    |  | Nine Months |         
|In millions                                                                         |  | 9/29/06     |          |   | 9/30/05 |  
|Operating Activities                                                                |  |             |          |   |         |   |        |  
|Net earnings                                                                        |  | $           | 165.0    |   |         | $ | 83.7   |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |             |          |   |         |   |        |  
|Depreciation and amortization                                                       |  |             | 76.9     |   |         |   | 96.5   |  
|Stock-based compensation                                                            |  |             | 43.7     |   |         |   | 11.7   |  
|Deferred income taxes                                                               |  |             | 65.9     |   |         |   | (2.5   | )
|Excess tax benefits from stock-based compensation                                   |  |             | (16.2    | ) |         |   |       |  
|Restructuring and other charges                                                     |  |             | 1.9      |   |         |   | 14.2   |  
|Net changes in assets and liabilities, net of effects from acquisitions:            |  |             |          |   |         |   |        |  
|Accounts receivable                                                                 |  |             | (62.4    | ) |         |   | (15.3  | )
|Inventories                                                                         |  |             | (48.0    | ) |         |   | (1.1   | )
|Miscellaneous receivables and other current assets                                  |  |             | (6.0     | ) |         |   | 4.7    |  
|Other assets                                                                        |  |             | 22.2     |   |         |   | (1.2   | )
|Accounts payable                                                                    |  |             | (13.4    | ) |         |   | (16.3  | )
|Restructuring and other charges                                                     |  |             | (7.3     | ) |         |   | (22.2  | )
|Other accrued liabilities                                                           |  |             | (19.3    | ) |         |   | (60.7  | )
|Income taxes                                                                        |  |             | (0.9     | ) |         |   | 31.2   |  
|Other long-term liabilities                                                         |  |             | 0.5      |   |         |   | 18.6   |  
|                                                                                    |  |             |          |   |         |   |        |  
|Net Cash Provided by Operating Activities                                           |  |             | 202.6    |   |         |   | 141.3  |  
|                                                                                    |  |            
|Investing Activities                                                                |  |             |          |   |         |   |        |  
|Capital expenditures                                                                |  |             | (49.4    | ) |         |   | (35.3  | )
|Disposals of property, plant and equipment                                          |  |             | 1.4      |   |         |   | 16.0   |  
|Payments for purchases of investments                                               |  |             | (1,313.5 | ) |         |   | (568.5 | )
|Proceeds from sales and maturities of investments                                   |  |             | 520.0    |   |         |   | 947.9  |  
|                                                                                    |  |             |          |   |         |   |        |  
|Net Cash (Used For) Provided by Investing Activities                                |  |             | (841.5   | ) |         |   | 360.1  |  
|                                                                                    |  |            
|Financing Activities                                                                |  |             |          |   |         |   |        |  
|Proceeds from issuance of common stock under option plans                           |  |             | 88.4     |   |         |   | 32.8   |  
|Repurchase of common stock                                                          |  |             | (233.1   | ) |         |   | (157.5 | )
|Excess tax benefits from stock-based compensation                                   |  |             | 16.2     |   |         |   |       |  
|                                                                                    |  |             |          |   |         |   |        |  
|Net Cash (Used for) Financing Activities                                            |  |             | (128.5   | ) |         |   | (124.7 | )
|Effect of Exchange Rate Changes on Cash                                             |  |             | 11.2     |   |         |   | (29.4  | )
|                                                                                    |  |             |          |   |         |   |        |  
|Net (Decrease) Increase in Cash and Cash Equivalents                                |  |             | (756.2   | ) |         |   | 347.3  |  
|Cash and Cash Equivalents - Beginning of Year                                       |  |             | 880.8    |   |         |   | 292.9  |  
|                                                                                    |  |             |          |   |         |   |        |  
|Cash and Cash Equivalents - End of Period                                           |  | $           | 124.6    |   |         | $ | 640.2  |  
|                                                                                    |  |             |          |   |         |   |        |  

The accompanying notes are an integral part of these statements.



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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 generally accepted accounting principles for
interim financial statements, the requirements of Form 10-Q and applicable rules of 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 30, 2005.

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 July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes(FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective for years beginning after December 15, 2006. We will adopt FIN 48 on its effective date. Currently, we are not able to estimate the impact FIN 48 will have on our financial
statements.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS 157), which defines fair value, creates a
framework for measuring fair value in generally accepted accounting principles (GAAP), 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
September 2006, the FASB issued Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158), which requires an employer to recognize the overfunded or underfunded status of a
defined benefit postretirement plan as an asset or liability in its statement of financial position. The changes in funded status of the plan must be recognized through comprehensive income. SFAS 158 is effective for fiscal years ending after
December 15, 2006. We will adopt SFAS 158 on its effective date. Based on the funded status of Tellabs Retiree Medical Plan at December 31, 2005, the adoption of SFAS 158 will result in the following estimated impacts: the
recognition of a $1.4 million liability, a deferred tax asset of $0.5 million and a $0.9 million other comprehensive loss.

3. Restructuring and Other
Charges

During the second quarter of 2006, we initiated restructuring activities to reduce costs and better align our resources with our internal needs
and our customers requirements. The activities include consolidation of our two order configuration and distribution centers in North America into a single location, and a reduction of headcount in both the Transport and Broadband segments of
our business. We will reduce headcount by approximately 130 employees by the end of 2006, and we will close or consolidate two leased facilities as a result of those reductions. We expect to save $17.0 million annually, primarily from reduced
salaries and related benefits, and lease savings.

We expect the total expense of the restructuring activities will be in the range of $11 million to $12
million, which includes approximately $2.5 million in severance costs, $8.5 million in facility related charges and $0.2 million in asset disposals. To date, we have recorded charges of $2.4 million, including $0.1 million in the third quarter,
related to these activities. We expect to record the balance of the charges during the fourth quarter of this year.

Through the first nine months, we have
recorded adjustments of $0.5 million, including a $0.2 million adjustment in the third quarter, for previous restructuring plans because of a change in estimate for the costs to be incurred regarding severance related activities.



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##### Table of Contents

The following table summarizes restructuring and other charges:



|                                         |  |               |      |   |             |   |      |         |  |         |     |  |   |      
|---------------------------------------- |  | ------------- | ---- | - | ----------- | - | ---- | ------- |  | ------- | --- |  | - | -----
|                                         |  | Third Quarter |      |   | Nine Months
|                                         |  | 9/29/06       |      |   | 9/30/05     |   |      | 9/29/06 |  | 9/30/05
|Severance and other termination benefits |  | $             | (0.1 | ) |             | $ |     |         |  | $       | 1.9 |  | $ | 11.5 
|Facility and other exit costs            |  |               |     |   |             |   | (0.2 | )       |  |         |    |  |   | 2.7  
|                                         |  |               |      |   |             |   |      |         |  |         |     |  |   |      
|Total restructuring and other charges    |  | $             | (0.1 | ) |             | $ | (0.2 | )       |  | $       | 1.9 |  |   | $14.2
|                                         |  |               |      |   |             |   |      |         |  |         |     |  |   |      



The following table summarizes our
restructuring and other charges activity for the third quarter of 2006 and the status of the reserves at September 29, 2006:



|                                         |  |                    |      |                     |   |      |              |  |   |                   |   |  |   |     
|---------------------------------------- |  | ------------------ | ---- | ------------------- | - | ---- | ------------ |  | - | ----------------- | - |  | - | ----
|Third Quarter                            |  | Balance at6/30/06  |      | Charges/(Reversals) |   |      | CashPayments |  |   | Balance at9/29/06
|Facility and other exit costs            |  | $                  | 25.6 |                     | $ |     |              |  | $ | (0.9              | ) |  | $ | 24.7
|Severance and other termination benefits |  |                    | 2.8  |                     |   | (0.1 | )            |  |   | (1.6              | ) |  |   | 1.1 
|                                         |  |                    |      |                     |   |      |              |  |   |                   |   |  |   |     
|Total restructuring and other charges    |  | $                  | 28.4 |                     | $ | (0.1 | )            |  | $ | (2.5              | ) |  | $ | 25.8
|                                         |  |                    |      |                     |   |      |              |  |   |                   |   |  |   |     
|                                         |  |                    |      |                    
|Nine Months                              |  | Balance at12/30/05 |      | Charges/(Reversals) |   |      | CashPayments |  |   | Balance at9/29/06
|Facility and other exit costs            |  | $                  | 29.7 |                     | $ |     |              |  | $ | (5.0              | ) |  | $ | 24.7
|Severance and other termination benefits |  |                    | 1.5  |                     |   | 1.9  |              |  |   | (2.3              | ) |  |   | 1.1 
|                                         |  |                    |      |                     |   |      |              |  |   |                   |   |  |   |     
|Total restructuring and other charges    |  | $                  | 31.2 |                     | $ | 1.9  |              |  | $ | (7.3              | ) |  | $ | 25.8
|                                         |  |                    |      |                     |   |      |              |  |   |                   |   |  |   |     

As of December 30, 2005, in addition to the aforementioned restructuring plans and related accruals, we had a
$10.0 million accrual remaining for exit costs related to our 2004 acquisition of AFC. During the third quarter of 2006, this accrual was charged $2.8 million. Total charges against this accrual were $4.6 million for the first nine months of 2006,
leaving a balance of $5.4 million at September 29, 2006. We expect to complete these restructuring plans by the end of 2006, with the exception of lease liabilities that we expect to fully utilize by the end of 2009.

4. Employee Stock 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 24,938,966 remain available for grant at September 29, 2006. Under the 2004 plan and predecessor plans, we granted awards at market value on the date of grant.

Under the 2005 Tellabs, Inc. Employee Stock Purchase Plan, employees can elect to withhold a portion of their compensation to purchase Tellabs common stock at 85% of the stocks closing price on the date of
purchase. Shares are purchased under this 2005 plan in April and October. When shares are issued under these plans, they are new shares, not treasury stock.

At the beginning of our first quarter of 2006, we adopted the provisions of SFAS 123(R) requiring us to recognize expense related to the fair value of our stock-based compensation awards. We elected to use the modified prospective
transition method, and therefore have not restated prior periods. In addition, we eliminated the balance of deferred compensation expense in Stockholders Equity against Additional Paid-in-Capital on December 31, 2005, as required by this
statement.

Stock Options and Stock-Settled Stock Appreciation Rights

Stock options and stock-settled SARs granted in the first nine months of 2006 and all of 2005 generally vest over 36 months from the date of the grant. Options granted in 2004 and 2003 generally become exercisable at
a rate of 20% on each of the first two annual anniversaries and 60% on the third anniversary of the grant date. AFC options that converted to Tellabs options on the acquisition date of November 30, 2004, vest over 3 to 4 years. Options granted
but unexercised expire 10 years from the date of grant.



7



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##### Table of Contents

We estimated the fair value of stock options and stock-settled SARs 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 and
stock-settled SARs:



|                         |  |             |   |  |         |  
|------------------------ |  | ----------- | - |  | ------- | -
|                         |  | Nine Months |  
|                         |  | 9/29/06     |   |  | 9/30/05 |  
|Expected volatility      |  | 46.3        | % |  | 52.5    | %
|Risk-free interest rate  |  | 4.8         | % |  | 3.8     | %
|Expected term (in years) |  | 4.5         |   |  | 4.0     |  
|Expected dividend yield  |  | 0.0         | % |  | 0.0     | %

We based our calculation of expected volatility on a combination of historical and implied volatility for options
and stock-settled SARs granted in the first nine months of 2006 and on historical volatility for options granted in the first nine months of 2005. If we had determined the expected volatility for the first nine months of 2005 using a combination of
historical and implied volatility, the expected volatility would have been 49.4%. We based the risk-free interest rate on the U.S. Treasury yield curve in effect at the date of grant, and we estimated the expected term of the options and
stock-settled SARs 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 2006 and status at the end of the quarter ended September 29, 2006:



|                                                                 |  |            |   |  |                               |       |                                                     |     |                         |   |     
|---------------------------------------------------------------- |  | ---------- | - |  | ----------------------------- | ----- | --------------------------------------------------- | --- | ----------------------- | - | ----
|                                                                 |  | Shares     |   |  | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractual Term(in years) |     | AggregateIntrinsicValue
|Outstanding - beginning of year                                  |  | 55,320,265 |   |  | $                             | 15.90 |                                                     |     |                         |   |     
|Granted                                                          |  | 2,444,949  |   |  |                               | 13.34 |                                                     |     |                         |   |     
|Exercised                                                        |  | (9,910,981 | ) |  |                               | 8.93  |                                                     |     |                         |   |     
|Forfeited/expired                                                |  | (4,945,317 | ) |  |                               | 19.41 |                                                     |     |                         |   |     
|                                                                 |  |            |   |  |                               |       |                                                     |     |                         |   |     
|Outstanding - end of period                                      |  | 42,908,916 |   |  |                               | 16.96 |                                                     | 6.1 |                         | $ | 79.2
|                                                                 |  |            |   |  |                               |       |                                                     |     |                         |   |     
|Exercisable - end of period                                      |  | 32,931,168 |   |  |                               | 19.01 |                                                     | 5.3 |                         |   | 65.1
|Shares expected to vest                                          |  | 42,342,228 |   |  |                               | 17.04 |                                                     | 6.1 |                         |   | 78.5
|Weighted-average fair value of options granted during the period |  |            |   |  |                               | 5.88  |                                                     |     |                         |   |     

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on
Tellabs closing stock price as of September 29, 2006, that would have been received by the option and stock-settled SARs holders had all holders exercised their options as of that date. The aggregate intrinsic value of exercised stock
options during the first nine months of 2006 was $46.9 million.

As of September 29, 2006, we had $39.3 million of unrecognized compensation cost
related to stock options and stock-settled SARs that we expect to recognize over a weighted-average period of one year.

Cash-Settled Stock
Appreciation Rights

Tellabs plans also provide 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 SARs grant price (market value of Tellabs stock on the date of grant) and the market value of Tellabs stock on the date the
holder exercises the SAR. The cash-settled SARs are generally assigned 10-year terms. Cash-settled SARs generally vest over 36 months from the date of the grant. At September 29, 2006, there were 83,197 cash-settled SARs outstanding with
exercise prices that ranged from $6.01 to $70.06. The weighted-average price of the 43,200 cash-settled SARs granted in the first nine months of 2006 was $12.13. The weighted average price of the 16,720 cash-settled SARs granted in the first nine
months of 2005 was $8.38.

Restricted Stock

We
granted 1,111,577 restricted shares in the first nine months of 2006 and 939,484 restricted shares in the first nine months of 2005. Of the 1,111,577 shares granted in the first nine months of 2006, 1,046,971 shares vest over a two-year period and
64,606 shares vest



8



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##### Table of Contents

over a one-year period. Of the 939,484 shares granted in the first nine months of 2005, 214,500 shares vest over a two-year period and 724,984 shares vest
over a one-year period. We generally recognize compensation cost on a straight-line basis over the vesting periods, which range from one to three years, based on the market price of Tellabs stock on the date of grant. Compensation expense for
restricted stock was $6.5 million in the first nine months of 2006 and $3.6 million in the first nine months of 2005. The weighted-average issuance price of restricted stock granted in the first nine months of 2006 was $12.99 per share. The
weighted-average issuance price of restricted stock granted in the first nine months of 2005 was $8.43 per share. Our non-vested stock award activity for the first nine months of 2006 follows:



|                               |  |                      |   |  |                                      |      
|------------------------------ |  | -------------------- | - |  | ------------------------------------ | -----
|                               |  | Nine Months 09/29/06
|                               |  | Shares               |   |  | Weighted-Average Grant DateFairValue
|Non-vested - beginning of year |  | 1,287,677            |   |  | $                                    | 8.67 
|Granted                        |  | 1,111,577            |   |  |                                      | 12.99
|Vested                         |  | (897,401             | ) |  |                                      | 8.62 
|Forfeited                      |  | (140,477             | ) |  |                                      | 8.82 
|                               |  |                      |   |  |                                      |      
|Non-vested - end of period     |  | 1,361,376            |   |  |                                      | 12.22
|                               |  |                      |   |  |                                      |      

As of September 29, 2006, we had $11.0 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 270,000 performance stock units (PSUs) in the third quarter of 2006 to executive officers. We did not grant PSUs previously. These PSUs entitle the recipients
to receive shares of Tellabs common stock in March 2008, contingent upon 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 we will issue three shares for each PSU granted. The weighted average issuance price of the PSUs was $11.37 per share. Compensation expense for performance stock units was $0.5 million for
the third quarter.

Employee Stock Purchase Plan

Under the 2005 Tellabs, Inc. Employee Stock Purchase Plan, 218,178 shares of common stock were purchased during the first nine months of 2006 at an average price of $13.47. No shares were purchased under the plan during the first nine
months of 2005. As of September 29, 2006, we had 9,559,344 shares available for purchase.

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:



|                                                          |  |                     |      |                   |   |     
|--------------------------------------------------------- |  | ------------------- | ---- | ----------------- | - | ----
|                                                          |  | ThirdQuarter9/29/06 |      | NineMonths9/29/06
|Cost of revenue  products                                |  | $                   | 0.8  |                   | $ | 2.0 
|Cost of revenue  services                                |  |                     | 1.0  |                   |   | 3.4 
|Research and development                                  |  |                     | 3.4  |                   |   | 15.1
|Sales and marketing                                       |  |                     | 2.1  |                   |   | 7.4 
|General and administrative                                |  |                     | 2.7  |                   |   | 13.4
|                                                          |  |                     |      |                   |   |     
|Stock-based compensation expense before income taxes      |  |                     | 10.0 |                   |   | 41.3
|Income tax benefit                                        |  |                     | 3.7  |                   |   | 12.6
|                                                          |  |                     |      |                   |   |     
|Total stock-based compensation expense after income taxes |  | $                   | 6.3  |                   | $ | 28.7
|                                                          |  |                     |      |                   |   |     

Due to the adoption of SFAS 123(R), our net earnings in the third quarter of 2006 were $4.7 million lower or $0.01
per share (basic and diluted) and our net earnings for the first nine months of 2006 were $19.2 million lower or $0.04 per share (basic and diluted). Prior to the adoption of SFAS 123(R), we accounted for stock-based compensation plans under
Accounting Principles Board Opinion No. 25. If compensation cost for our stock-based compensation plans had been determined using the fair value at the grant dates for



9



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##### Table of Contents

awards under those plans consistent with the method required by SFAS No. 123(R) for our third quarter of 2005, our net earnings and net earnings per
share would have been as follows:



|                                                                                                                                          |  |                      |       |   |                    |   |       |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ----- | - | ------------------ | - | ----- | -
|                                                                                                                                          |  | ThirdQuarter09/30/05 |       |   | NineMonths09/30/05 |  
|Net earnings as reported                                                                                                                  |  | $                    | 41.9  |   |                    | $ | 83.7  |  
|Add: stock-based employee compensation expense included in reported net earnings, net of related tax effects                              |  |                      | 4.8   |   |                    |   | 11.9  |  
|                                                                                                                                          |  |                     
|Less: total stock-based employee compensation expense determined under fair value based method for all grants, net of related tax
effects |  |                      | (21.7 | ) |                    |   | (66.2 | )
|                                                                                                                                          |  |                      |       |   |                    |   |       |  
|Pro forma net earnings                                                                                                                    |  | $                    | 25.0  |   |                    | $ | 29.4  |  
|                                                                                                                                          |  |                      |       |   |                    |   |       |  
|Net earnings per share:                                                                                                                   |  |                      |       |   |                    |   |       |  
|As reported  basic                                                                                                                       |  | $                    | 0.09  |   |                    | $ | 0.19  |  
|                                                                                                                                          |  |                      |       |   |                    |   |       |  
|Pro forma - basic                                                                                                                         |  | $                    | 0.06  |   |                    | $ | 0.07  |  
|                                                                                                                                          |  |                      |       |   |                    |   |       |  
|As reported  diluted                                                                                                                     |  | $                    | 0.09  |   |                    | $ | 0.18  |  
|                                                                                                                                          |  |                      |       |   |                    |   |       |  
|Pro forma - diluted                                                                                                                       |  | $                    | 0.06  |   |                    | $ | 0.06  |  
|                                                                                                                                          |  |                      |       |   |                    |   |       |  

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 |  
|                                   |  | 9/29/06       |      |   | 9/30/05     |   |      | 9/29/06 |  |   | 9/30/05 |  
|Service cost                       |  | $             | 0.3  |   |             | $ | 0.2  |         |  | $ | 0.8     |   |  | $ | 0.8  |  
|Interest cost                      |  |               | 0.2  |   |             |   | 0.2  |         |  |   | 0.5     |   |  |   | 0.5  |  
|Expected return on plan assets     |  |               | (0.2 | ) |             |   | (0.1 | )       |  |   | (0.4    | ) |  |   | (0.3 | )
|Amortization of prior service cost |  |               |     |   |             |   | 0.1  |         |  |   | 0.1     |   |  |   | 0.1  |  
|                                   |  |               |      |   |             |   |      |         |  |   |         |   |  |   |      |  
|Net periodic benefit cost          |  | $             | 0.3  |   |             | $ | 0.4  |         |  | $ | 1.0     |   |  | $ | 1.1  |  
|                                   |  |               |      |   |             |   |      |         |  |   |         |   |  |   |      |  

Based on the current funding of the plan, we will not contribute to the plan in 2006.

6. Product Warranties

We provide warranties for all of our products.
The specific terms and conditions of those warranties vary depending upon the product sold. We provide a basic limited warranty, including parts and labor, for all products except access products, for periods generally 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 |  
|                                             |  | 09/29/06      |      |   | 9/30/05     |   |      | 9/29/06 |  |   | 9/30/05 |  
|Balance - beginning of period                |  | $             | 48.7 |   |             | $ | 46.9 |         |  | $ | 49.2    |   |  | $ | 41.1  |  
|Accruals for product warranties issued       |  |               | 5.2  |   |             |   | 3.6  |         |  |   | 18.0    |   |  |   | 21.1  |  
|Settlements                                  |  |               | (6.3 | ) |             |   | (8.0 | )       |  |   | (19.6   | ) |  |   | (19.7 | )
|                                             |  |               |      |   |             |   |      |         |  |   |         |   |  |   |       |  
|Balance - end of period                      |  | $             | 47.6 |   |             | $ | 42.5 |         |  | $ | 47.6    |   |  | $ | 42.5  |  
|                                             |  |               |      |   |             |   |      |         |  |   |         |   |  |   |       |  
|Balance sheet classification - end of period |  |               |      |   |             |   |      |         |  |   |         |   |  |   |       |  
|Other accrued liabilities                    |  |               |      |   |             |   |      |         |  | $ | 27.9    |   |  | $ | 22.3  |  
|Other long-term liabilities                  |  |               |      |   |             |   |      |         |  |   | 19.7    |   |  |   | 20.2  |  
|                                             |  |               |      |   |             |   |      |         |  |   |         |   |  |   |       |  
|Total product warranty liabilities           |  |               |      |   |             |   |      |         |  | $ | 47.6    |   |  | $ | 42.5  |  
|                                             |  |               |      |   |             |   |      |         |  |   |         |   |  |   |       |  



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##### Table of Contents

7. Repurchases of Common Stock

On February 2, 2005, Tellabs Board of Directors authorized the purchase of up to $300.0 million of our outstanding common stock. As of August 2, 2006, we purchased approximately 32.0 million shares of
our common stock at a total cost of $300.0 million, including $107.4 million (7.6 million shares) year-to-date and $1.3 million (0.1 million shares) in the third quarter of 2006.

On January 26, 2006, Tellabs Board of Directors authorized the purchase of up to $100.0 million of our outstanding stock under Rule 10b5-1 of the Securities Exchange Act of 1934. On April 27, 2006,
Tellabs Board of Directors authorized the removal of the $100.0 million cap from the share repurchase program. 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 under this plan. We record these repurchased shares as treasury stock. As of September 29, 2006, we purchased 4.0 million shares of our common stock under this plan at a total cost of $56.8 million including
$7.1 million (0.7 million shares) in the third quarter of 2006.

On July 31, 2006, Tellabs Board of Directors authorized a new share repurchase
program of up to $300 million of our outstanding common stock. As of September 29, 2006, we have purchased approximately 6.8 million shares of our common stock under the new program at a total cost of $67.9 million. We may repurchase
shares of our common stock from time to time on the open market or in private transactions and record purchases as treasury stock.

8. Comprehensive
Income

Comprehensive income is an expression of our net earnings in the consolidated statements of operations, adjusted for foreign-currency
translation adjustments, net unrealized gains or losses on available-for-sale securities and fair value adjustments of cash flow hedges. Our comprehensive income was:



|                                                            |  |               |      |   |             |   |      |         |  |   |         |   |  |   |       |  
|----------------------------------------------------------- |  | ------------- | ---- | - | ----------- | - | ---- | ------- |  | - | ------- | - |  | - | ----- | -
|                                                            |  | Third Quarter |      |   | Nine Months |  
|                                                            |  | 09/29/06      |      |   | 9/30/05     |   |      | 9/29/06 |  |   | 9/30/05 |  
|Net Earnings                                                |  | $             | 59.1 |   |             | $ | 41.9 |         |  | $ | 165.0   |   |  | $ | 83.7  |  
|Other comprehensive income (loss):                          |  |               |      |   |             |   |      |         |  |   |         |   |  |   |       |  
|Cumulative translation adjustment                           |  |               | 4.7  |   |             |   | (1.3 | )       |  |   | 21.6    |   |  |   | (64.1 | )
|Net unrealized gain (loss) on available-for-sale-securities |  |               | 5.8  |   |             |   | (0.6 | )       |  |   | 4.7     |   |  |   | (0.6  | )
|Fair value adjustments of cash flow hedges                  |  |               | (0.5 | ) |             |   | 0.4  |         |  |   | (0.4    | ) |  |   |      |  
|                                                            |  |               |      |   |             |   |      |         |  |   |         |   |  |   |       |  
|Comprehensive income                                        |  | $             | 69.1 |   |             | $ | 40.4 |         |  | $ | 190.9   |   |  | $ | 19.0  |  
|                                                            |  |               |      |   |             |   |      |         |  |   |         |   |  |   |       |  

9. Derivative Financial Instruments

We enter into foreign-exchange forward and option contracts with maturities of less than 12 months to mitigate the impact of currency fluctuations on existing foreign currency asset and liability balances (referred to
as balance sheet hedges). In addition, from time to time, we use foreign-exchange forward and option contracts of less than 12 months to reduce the risk to earnings and cash flows associated with anticipated foreign currency net expenditures
(referred to as cash flow hedges). We record all derivatives on the balance sheet at fair value in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.

In regards to balance sheet hedges, we recognize changes in the fair value of these derivatives in Other Income (Expense),Netcaption in our Consolidated
Statements of Income to mitigate the impact of remeasurement gains and losses associated with the foreign currency assets and liabilities.

In
regard to cash flow hedges, we calculate each hedges effectiveness quarterly, excluding time value. We determine a forward contracts effectiveness by comparing the cumulative change in the fair value on a spot-to-spot rate basis with the
spot-to-spot rate cumulative change in the anticipated transaction. We record the effective portion of the hedge in Accumulated Other Comprehensive Income(OCI). Similarly, we calculate an option contracts effectiveness by comparing
cumulative changes in the contracts intrinsic value on a spot-rate basis with cumulative losses in value of the anticipated transaction measured on a spot-rate basis. When we recognize the hedged revenue or expense transactions, the total
change in the hedges effective value is reclassified to Operating Expense. We record any ineffectiveness, along with the excluded time value of the forward and option contracts, in Other



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##### Table of Contents

Income (Expense), Net. The impact to earnings associated with hedge ineffectiveness from cash flow hedges was negligible for the third quarter of
2006. If it becomes probable that an anticipated transaction, which is hedged, will not occur, we immediately reclassify the gains or losses related to that hedge from OCI toOther Income (Expense).

The following table summarizes the impact of cash flow hedges on OCI (net of tax) during the period:



|                                       |  |               |      |   |             |   |      |         |  |   |         |   |  |   |      |  
|-------------------------------------- |  | ------------- | ---- | - | ----------- | - | ---- | ------- |  | - | ------- | - |  | - | ---- | -
|                                       |  | Third Quarter |      |   | Nine Months |  
|                                       |  | 09/29/06      |      |   | 9/30/05     |   |      | 9/29/06 |  |   | 9/30/05 |  
|Balance at beginning of period         |  | $             | 0.1  |   |             | $ | 0.4  |         |  | $ |        |   |  | $ |     |  
|Net change on cash flow hedges         |  |               | (0.2 | ) |             |   | (0.1 | )       |  |   | (0.3    | ) |  |   | 0.7  |  
|Reclassification to operating expenses |  |               | (0.2 | ) |             |   | (0.3 | )       |  |   |        |   |  |   | (0.7 | )
|                                       |  |               |      |   |             |   |      |         |  |   |         |   |  |   |      |  
|Balance at end of period               |  | $             | (0.3 | ) |             | $ |     |         |  | $ | (0.3    | ) |  | $ |     |  
|                                       |  |               |      |   |             |   |      |         |  |   |         |   |  |   |      |  

10. Income Taxes

We recorded income tax expense of $37.7 million for the third quarter and $96.9 million for the first nine months of 2006, resulting in effective tax rates of 38.9% and 37.0%, respectively. Our effective tax rate differs from the U.S.
federal statutory rate of 35% primarily due to earnings from foreign operations taxed at different rates, the impact from state income taxes and non-deductible expenses from prior acquisitions, as well as a valuation allowance established against
the tax benefit of capital losses recognized during the nine months.

On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3
Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.The Company adopted the alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation
pursuant to SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation. The
method also determines the subsequent impact on the APIC pool and Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R).

11. Operating Segments

Beginning with the first quarter of 2006, we
are reporting operating results for three segments: Broadband, Transport and Services.

The Broadband segment includes Access, Managed Access and Data
products that facilitate the delivery of bundled voice, video and high-speed Internet/data services over fiber-based networks. These products enable service providers to leverage existing infrastructure to integrate Frame Relay, Asynchronous
transfer mode (ATM), and Ethernet and Internet protocol (IP) data networks onto a converged Multi-Protocol Label Switching (MPLS) infrastructure. Access offerings include the Tellabs® 1000 multiservice access platform, the Tellabs® 1100 multiservice access platform and the Tellabs® 1600 optical network terminal 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 Tellabs® 8600 managed edge system and the
Tellabs® 8800 multiservice router series.

The Transport segment includes products that enable service providers to manage bandwidth. 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,
the Tellabs® 6500 transport switch and the
Tellabs® 7100 optical transport system.

The Services segment delivers installation, support services and professional consulting to customers of the Broadband and Transport products segment.

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



12



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##### Table of Contents

Financial information for each operating segment is as follows:

Revenue



|              |  |               |       |             |   |          |  |         |         |  |   |        
|------------- |  | ------------- | ----- | ----------- | - | -------- |  | ------- | ------- |  | - | -------
|              |  | Third Quarter |       | Nine Months
|              |  | 09/29/06      |       | 9/30/05     |   | 09/29/06 |  | 9/30/05
|Broadband     |  | $             | 273.0 |             | $ | 264.1    |  | $       | 831.1   |  | $ | 740.0  
|Transport     |  |               | 203.1 |             |   | 156.1    |  |         | 619.7   |  |   | 498.8  
|Services      |  |               | 46.4  |             |   | 43.7     |  |         | 135.7   |  |   | 123.2  
|              |  |               |       |             |   |          |  |         |         |  |   |        
|Total revenue |  | $             | 522.5 |             | $ | 463.9    |  | $       | 1,586.5 |  | $ | 1,362.0
|              |  |               |       |             |   |          |  |         |         |  |   |        

Segment Profit and Reconciliation to Operating Earnings



|                                                                                               |  |               |       |   |             |   |       |          |  |   |         |   |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | ------------- | ----- | - | ----------- | - | ----- | -------- |  | - | ------- | - |  | - | ------ | -
|                                                                                               |  | Third Quarter |       |   | Nine Months |  
|                                                                                               |  | 09/29/06      |       |   | 9/30/05     |   |       | 09/29/06 |  |   | 9/30/05 |  
|Broadband                                                                                      |  | $             | 41.4  |   |             | $ | 48.8  |          |  | $ | 100.9   |   |  | $ | 94.7   |  
|Transport                                                                                      |  |               | 110.2 |   |             |   | 76.1  |          |  |   | 345.1   |   |  |   | 230.3  |  
|Services                                                                                       |  |               | 17.6  |   |             |   | 10.6  |          |  |   | 48.2    |   |  |   | 33.2   |  
|                                                                                               |  |               |       |   |             |   |       |          |  |   |         |   |  |   |        |  
|Total segment profit                                                                           |  |               | 169.2 |   |             |   | 135.5 |          |  |   | 494.2   |   |  |   | 358.2  |  
|Sales and marketing expenses                                                                   |  |               | (43.5 | ) |             |   | (42.2 | )        |  |   | (133.5  | ) |  |   | (133.8 | )
|General and administrative expenses                                                            |  |               | (27.7 | ) |             |   | (25.2 | )        |  |   | (84.3   | ) |  |   | (69.9  | )
|Equity based compensation and deferred stock compensation not included in segment profit above |  |               | (5.1  | ) |             |   | (2.5  | )        |  |   | (18.2   | ) |  |   | (7.8   | )
|Intangible asset amortization                                                                  |  |               | (6.5  | ) |             |   | (7.9  | )        |  |   | (20.6   | ) |  |   | (28.1  | )
|Restructuring and other charges                                                                |  |               | 0.1   |   |             |   | 0.2   |          |  |   | (1.9    | ) |  |   | (14.2  | )
|                                                                                               |  |               |       |   |             |   |       |          |  |   |         |   |  |   |        |  
|Operating earnings                                                                             |  | $             | 86.5  |   |             | $ | 57.9  |          |  | $ | 235.7   |   |  | $ | 104.4  |  
|                                                                                               |  |               |       |   |             |   |       |          |  |   |         |   |  |   |        |  

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.

Segment Goodwill

Prior to 2006, we reported our results of operations based on us operating in a single segment. Beginning with the first
quarter of 2006, we reported operating results for three segments: Broadband, Transport and Services. For evaluation purposes, we tested each operating segment for possible goodwill impairment by comparing each segments net book value to fair
value in accordance with FAS 142, Goodwill and Other Intangible Assets. As each operating segments fair value was greater than its net book value and no other impairment indicators existed, further impairment tests were not deemed
necessary and no impairment loss was recorded. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment. In estimating the fair value of the operating segments for the purpose of this analysis,
we made estimates and judgments about the future cash flows of our operating segments. Although we base our cash flow forecasts on assumptions that are consistent with plans and estimates we use to manage the underlying operating segments, there is
significant judgment in determining the cash flows attributable to these operating segments.

A breakdown of goodwill for each operating segment follows:



|          |  |         |        
|--------- |  | ------- | -------
|          |  | 9/29/06
|Broadband |  | $       | 595.5  
|Transport |  |         | 395.1  
|Services  |  |         | 122.9  
|          |  |         |        
|Total     |  | $       | 1,113.5
|          |  |         |        



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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, deploys and supports telecommunications networking products around the world. We generate revenue
principally through the sale of telecommunications products, both as stand-alone products and as elements of integrated systems, to many of the worlds largest telecommunications service providers. In addition, we generate revenue by providing
installation and professional services related primarily to our own products and systems.

Prior to 2006, we reported our results of operations based on us
operating in a single segment. Beginning with the first quarter of 2006, we are reporting operating results for three segments: Broadband, Transport and Services.

The Broadband segment includes products that enable the delivery of bundled voice, video and high-speed Internet/data services over fiber-based networks and enable service providers to leverage existing infrastructure to integrate Frame
Relay, ATM, Ethernet and IP data networks onto a converged MPLS infrastructure. Product offerings include the Tellabs® 1000 multiservice access series, the Tellabs® 1100 multiservice access platform and the Tellabs® 1600 optical network terminal platform (access products); the Tellabs® 2300 cable telephony distribution system, the Tellabs® 6300 managed transport system and the Tellabs® 8100 managed access system (managed access products); and the Tellabs® 8600 managed edge system and the Tellabs® 8800 multiservice router series (broadband data
products). Demand for Broadband products, which we sell globally, is driven primarily by consumer demand for voice, data and video services (referred to as the triple play) and for business services for voice and high-speed data.

The Transport segment includes products that enable service providers to manage bandwidth. 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,
the Tellabs® 6500 transport switch and the
Tellabs® 7100 optical transport system. Demand for
these products is driven primarily by end-user demand for wireline and wireless services in North America.

The Services segment delivers installation,
support services and professional consulting to customers of the Broadband and Transport products segment.

RESULTS OF OPERATIONS

For the third quarter of 2006, our revenue grew 12.6% to $522.5 million compared with the third quarter of 2005. Year-to-date revenue for 2006 increased by 16.5% to
$1,586.5 million with all three segments contributing to the increase. Consolidated margin increased to 48.6% in the third quarter compared with 46.9% in the third quarter of 2005, with both products and services margins improving. On a nine-month
basis, consolidated margin was up 2.7 percentage points to 47.3%. Operating expenses increased by $7.4 million over the third quarter of 2005 and $12.1 million over the first nine months of 2005. Net earnings for the quarter were $59.1 million or
$0.13 per share (basic and diluted) compared with $41.9 million or $0.09 per share (basic and diluted) in the same period of 2005. Net earnings for the nine-month period were $165.0 million or $0.37 per basic and $0.36 per diluted share, compared
with $83.7 million or $0.19 per basic and $0.18 per diluted share in the first nine months of 2005.

At the beginning of 2006, we adopted SFAS 123(R) using
the modified prospective method; we did not restate prior periods. Related to the adoption of SFAS 123(R), the third quarter of 2006 includes $7.7 million and the first nine months of 2006 includes $29.8 million of stock option expense. No stock
option expense is included in the 2005 results. See a further discussion of our stock-based compensation awards in Note 4 to our consolidated financial statements.

Revenue (in millions)



|              |  |               |       |             |   |        |  |      |      |      |   |         |  |   |         |  |   |      
|------------- |  | ------------- | ----- | ----------- | - | ------ |  | ---- | ---- | ---- | - | ------- |  | - | ------- |  | - | -----
|              |  | Third Quarter |       | Nine Months
|              |  | 2006          |       | 2005        |   | Change |  | 2006 |      | 2005 |   | Change 
|Products      |  | $             | 476.1 |             | $ | 420.2  |  | $    | 55.9 |      | $ | 1,450.8 |  | $ | 1,238.8 |  | $ | 212.0
|Services      |  |               | 46.4  |             |   | 43.7   |  |      | 2.7  |      |   | 135.7   |  |   | 123.2   |  |   | 12.5 
|              |  |               |       |             |   |        |  |      |      |      |   |         |  |   |         |  |   |      
|Total revenue |  | $             | 522.5 |             | $ | 463.9  |  | $    | 58.6 |      | $ | 1,586.5 |  | $ | 1,362.0 |  | $ | 224.5
|              |  |               |       |             |   |        |  |      |      |      |   |         |  |   |         |  |   |      

Revenue growth continued to be driven by strong demand from wireless customers for our Transport segment.
Additional growth came from higher sales of data products within the Broadband segment. Data products benefited from carriers migrating their traditional frame relay and ATM network to IP/MPLS. Services segment revenue grew in line with the increase
in Transport and Broadband segment revenue.

On a geographic basis, North American revenue was $393.8 million in the quarter, up 10.6% from a year ago,
while international revenue was up 19.4% to $128.7 million from a year ago. The nine-month North American revenue was $1,230.7 million, up 20.4% from a year ago, while international revenue was up 4.7% to $355.8 million from a year ago.



14



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##### Table of Contents

Gross Margin



|             |  |               |   |  |             |   |  |               |   |  |      |   |  |      |   |  |               |  
|------------ |  | ------------- | - |  | ----------- | - |  | ------------- | - |  | ---- | - |  | ---- | - |  | ------------- | -
|             |  | Third Quarter |   |  | Nine Months |  
|             |  | 2006          |   |  | 2005        |   |  | % PointChange |   |  | 2006 |   |  | 2005 |   |  | % PointChange |  
|Products     |  | 49.7          | % |  | 49.3        | % |  | 0.4           | % |  | 48.6 | % |  | 46.3 | % |  | 2.3           | %
|Services     |  | 36.4          | % |  | 24.0        | % |  | 12.4          | % |  | 33.5 | % |  | 26.9 | % |  | 6.6           | %
|Consolidated |  | 48.6          | % |  | 46.9        | % |  | 1.7           | % |  | 47.3 | % |  | 44.6 | % |  | 2.7           | %

Consolidated margin in the third quarter increased by 1.7 percentage points due primarily to higher Services
segment margins. On a nine-month basis, consolidated margin increased by 2.7 percentage points due primarily to a more favorable product segment mix, improved product costs and higher Services segment margins.

Operating Expenses (in millions)



|                                |  |               |       |   |                    |   |       |        |  |   |       |   |  |      |   |  |      |  
|------------------------------- |  | ------------- | ----- | - | ------------------ | - | ----- | ------ |  | - | ----- | - |  | ---- | - |  | ---- | -
|                                |  | Third Quarter |       |   | Percent of Revenue |  
|                                |  | 2006          |       |   | 2005               |   |       | Change |  |   | 2006  |   |  | 2005 |  
|Research and development        |  | $             | 89.6  |   |                    | $ | 84.7  |        |  | $ | 4.9   |   |  | 17.2 | % |  | 18.3 | %
|Sales and marketing             |  |               | 43.5  |   |                    |   | 42.2  |        |  |   | 1.3   |   |  | 8.3  | % |  | 9.1  | %
|General and administrative      |  |               | 27.7  |   |                    |   | 25.2  |        |  |   | 2.5   |   |  | 5.3  | % |  | 5.4  | %
|                                |  |               |       |   |                   
|Subtotal                        |  |               | 160.8 |   |                    |   | 152.1 |        |  |   | 8.7   |   |  | 30.8 | % |  | 32.8 | %
|                                |  |               |       |   |                   
|Intangible asset amortization   |  |               | 6.5   |   |                    |   | 7.9   |        |  |   | (1.4  | ) |  |      |   |  |      |  
|Restructuring and other charges |  |               | (0.1  | ) |                    |   | (0.2  | )      |  |   | 0.1   |   |  |      |   |  |      |  
|                                |  |               |       |   |                    |   |       |        |  |   |       |   |  |      |   |  |      |  
|Total operating expenses        |  | $             | 167.2 |   |                    | $ | 159.8 |        |  | $ | 7.4   |   |  |      |   |  |      |  
|                                |  |               |       |   |                    |   |       |        |  |   |       |   |  |      |   |  |      |  
|                                |  |              
|                                |  | Nine Months   |       |   | Percent of Revenue |  
|                                |  | 2006          |       |   | 2005               |   |       | Change |  |   | 2006  |   |  | 2005 |  
|Research and development        |  | $             | 274.2 |   |                    | $ | 256.4 |        |  | $ | 17.8  |   |  | 17.3 | % |  | 18.8 | %
|Sales and marketing             |  |               | 133.5 |   |                    |   | 133.8 |        |  |   | (0.3  | ) |  | 8.4  | % |  | 9.8  | %
|General and administrative      |  |               | 84.3  |   |                    |   | 69.9  |        |  |   | 14.4  |   |  | 5.3  | % |  | 5.2  | %
|                                |  |               |       |   |                   
|Subtotal                        |  |               | 492.0 |   |                    |   | 460.1 |        |  |   | 31.9  |   |  | 31.0 | % |  | 33.8 | %
|                                |  |               |       |   |                   
|Intangible asset amortization   |  |               | 20.6  |   |                    |   | 28.1  |        |  |   | (7.5  | ) |  |      |   |  |      |  
|Restructuring and other charges |  |               | 1.9   |   |                    |   | 14.2  |        |  |   | (12.3 | ) |  |      |   |  |      |  
|                                |  |               |       |   |                    |   |       |        |  |   |       |   |  |      |   |  |      |  
|Total operating expenses        |  | $             | 514.5 |   |                    | $ | 502.4 |        |  | $ | 12.1  |   |  |      |   |  |      |  
|                                |  |               |       |   |                    |   |       |        |  |   |       |   |  |      |   |  |      |  

Total operating expenses increased in the third quarter by $7.4 million and on a nine-month basis by $12.1
million, due primarily to the inclusion of stock option expense beginning in 2006 and slightly higher spending in general and administrative and research and development. These increases were offset by lower restructuring charges and intangible
asset amortization. Related to the 2006 restructuring activities, we anticipate recording additional charges in the fourth quarter of approximately $9.0 million, primarily for leased facilities. See a further discussion of restructuring and other
charges in Note 3 to our consolidated financial statements.

Other Income (in millions)



|                            |  |               |      |   |             |   |        |  |   |      |   |  |      |      |   |        |   |      |   |  |   |      |  
|--------------------------- |  | ------------- | ---- | - | ----------- | - | ------ |  | - | ---- | - |  | ---- | ---- | - | ------ | - | ---- | - |  | - | ---- | -
|                            |  | Third Quarter |      |   | Nine Months |  
|                            |  | 2006          |      |   | 2005        |   | Change |  |   | 2006 |   |  | 2005 |      |   | Change |  
|Interest income, net        |  | $             | 11.3 |   |             | $ | 6.8    |  | $ | 4.5  |   |  | $    | 33.2 |   |        | $ | 18.9 |   |  | $ | 14.3 |  
|Other income (expense), net |  |               | (1.0 | ) |             |   | 0.8    |  |   | (1.8 | ) |  |      | (7.0 | ) |        |   | (3.6 | ) |  |   | (3.4 | )
|                            |  |               |      |   |             |   |        |  |   |      |   |  |      |      |   |        |   |      |   |  |   |      |  
|Total                       |  | $             | 10.3 |   |             | $ | 7.6    |  | $ | 2.7  |   |  | $    | 26.2 |   |        | $ | 15.3 |   |  | $ | 10.9 |  
|                            |  |               |      |   |             |   |        |  |   |      |   |  |      |      |   |        |   |      |   |  |   |      |  

Interest income, net increased in the third quarter and on a nine-month basis due to larger invested balances and
higher interest rates. Other income (expense), net included charges for other-than-temporary impairments on long-term investments of $1.5 million in the third quarter and $6.1 million in the first nine months of 2006. Comparatively, these charges
were $0.4 million in the third quarter and $4.2 million in the first nine months of 2005.



15



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##### Table of Contents

Income Taxes

We recorded an increase in income tax expense due to higher income earned from both domestic and foreign operations, the impact from non-deductible expenses, and a valuation allowance established against the tax benefit of a capital loss.
In addition, during 2005 our tax expense was favorably impacted by the release of valuation allowances maintained against deferred tax assets resulting from the utilization of domestic net operating loss carryforwards.

In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes(FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective for years beginning after December 15, 2006. We will adopt FIN 48 on its effective date. Currently, we are not able to estimate the impact FIN 48 will have on our financial
statements.

Segments

Revenue (in millions)



|                              |  |               |       |      |             |        |  |       |      |  |      |         |        |   |         |  |      |  
|----------------------------- |  | ------------- | ----- | ---- | ----------- | ------ |  | ----- | ---- |  | ---- | ------- | ------ | - | ------- |  | ---- | -
|                              |  | Third Quarter |       |      | Nine Months |       
|                              |  | 2006          |       | 2005 |             | Change |  |       | 2006 |  | 2005 |         | Change |  
|Broadband                     |  | $             | 273.0 |      | $           | 264.1  |  | 3.4   | %    |  | $    | 831.1   |        | $ | 740.0   |  | 12.3 | %
|Transport                     |  |               | 203.1 |      |             | 156.1  |  | 30.1  | %    |  |      | 619.7   |        |   | 498.8   |  | 24.2 | %
|Services                      |  |               | 46.4  |      |             | 43.7   |  | 6.2   | %    |  |      | 135.7   |        |   | 123.2   |  | 10.1 | %
|                              |  |               |       |      |             |        |  |       |      |  |      |         |        |   |         |  |      |  
|Total revenue                 |  | $             | 522.5 |      | $           | 463.9  |  | 12.6  | %    |  | $    | 1,586.5 |        | $ | 1,362.0 |  | 16.5 | %
|                              |  |               |       |      |             |        |  |       |      |  |      |         |        |   |         |  |      |  
|Segment Profit* (in millions) |  |               |       |      |             |        |  |       |      |  |      |         |        |   |         |  |      |  
|                              |  | Third Quarter |       |      | Nine Months |       
|                              |  | 2006          |       | 2005 |             | Change |  |       | 2006 |  | 2005 |         | Change |  
|Broadband                     |  | $             | 41.4  |      | $           | 48.8   |  | (15.2 | )%   |  | $    | 100.9   |        | $ | 94.7    |  | 6.5  | %
|Transport                     |  |               | 110.2 |      |             | 76.1   |  | 44.8  | %    |  |      | 345.1   |        |   | 230.3   |  | 49.8 | %
|Services                      |  |               | 17.6  |      |             | 10.5   |  | 67.6  | %    |  |      | 48.2    |        |   | 33.2    |  | 45.2 | %
|                              |  |               |       |      |             |        |  |       |      |  |      |         |        |   |         |  |      |  
|Total segment profit          |  | $             | 169.2 |      | $           | 135.4  |  | 25.0  | %    |  | $    | 494.2   |        | $ | 358.2   |  | 38.0 | %
|                              |  |               |       |      |             |        |  |       |      |  |      |         |        |   |         |  |      |  



---

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

Broadband

Revenue

Revenue from the Broadband segment increased $8.9 million to $273.0 million in the third quarter of 2006, and by $91.1 million to $831.1 million on
a nine-month basis. Within this segment, access product revenue decreased in the third quarter by $4.6 million to $161.1 million due to lower fiber-based access revenue. In the third quarter, approximately 56% of total access product revenue was
fiber-based with the balance consisting of copper-based. On a nine-month basis, access product revenue increased by $78.0 million to $515.0 million as continued rollouts of fiber-access solutions provided the growth. Revenue from the managed access
product category declined to $80.0 million in the third quarter and on a nine-month basis to $240.0 million due to reduced shipments of our managed access and cable telephony products. Revenue from data products grew to $31.9 million in the third
quarter and on a nine-month basis to $76.1 million on the strength of worldwide customer growth.

Segment Profit

For the third quarter of 2006, our Broadband segment profit decreased to $41.4 million from $48.8 million in the third quarter of 2005 primarily due to charges for excess
and obsolete inventory. In the first nine months of 2006, Broadband segment profit increased to $100.9 million from $94.7 million a year ago due to improved product costs, which were partially offset by higher research and development expenses.



16



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##### Table of Contents

Transport

Revenue

Third quarter revenue from the Transport segment increased $47.0 million to $203.1 million in 2006 and by $120.9 million to
$619.7 million in the first nine months of 2006. Revenue from Tellabs®5500 wideband
cross-connect products grew significantly, driven by demand from wireless customers as they continued to enhance and build out their networks for 3G capabilities. Approximately 36% of third quarter revenue from Tellabs®5500 wideband cross-connect products came from new systems, system expansions and upgrades, which we
believe indicates that our customers continue to invest in this platform. The remaining 64% consisted of port-card equipment growth on the installed base compared with approximately 80% in the third quarter of 2005. We shipped approximately
2.8 million T-1 equivalents during the third quarter of 2006 compared with 1.7 million T-1 equivalents in the third quarter of 2005.

Segment Profit

Our Transport segment profit increased to $110.2 million for the third quarter of 2006 and to $345.1 million in the
first nine months over the comparable periods in 2005. The increase is due to higher revenue and improved margins from the Tellabs®5500 systems, slightly offset by higher research and development expense.

Services

Revenue

Revenue from the Services segment increased by $2.7
million to $46.4 million in the third quarter of 2006 and by $12.5 million to $135.7 million in the first nine months of 2006. The improvement reflects an increase in revenue from support agreements and professional services.

Segment Profit

Services segment profit increased $7.1 million
to $17.6 million in the third quarter of 2006 and by $15.0 million to $48.2 million in the first nine months of 2006. The increase in segment profit was driven largely by the increase in higher margin support agreements and professional services
revenue.

Financial Condition, Liquidity & Capital Resources

Our principal source of liquidity remained our cash, cash equivalents and marketable securities of $1,231.0 million, which increased by $13.5 million during the quarter and $41.3 million since year-end. The increase
in the third quarter was driven by cash from operating activities of $85.7 million. The year-to-date increase reflects an increase of cash from operating activities of $202.6 million. During the third quarter of 2006, we repurchased 7.6 million
shares of our common stock at a cost of $76.3 million. Year-to-date, we repurchased 18.4 million shares at a cost of $232.1 million.

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 sources of working capital may be from cash-on-hand, cash generated from future operations, short-term or long-term financing, equity offerings or any combination of these sources.

On July 31, 2006, we announced that our Board of Directors authorized a new share repurchase program permitting us to repurchase up to $300.0 million of our
outstanding common stock.

Our current policy is to retain our earnings to provide funds to enhance stockholder value by expanding our business,
repurchasing our common stock and for operating activities. We do not anticipate paying a cash 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 the fourth
quarter of 2006, we expect revenue to be between $525 million and $550 million. We anticipate the fourth quarter gross margin, excluding equity-based compensation expense, will be in a range between 45% and 47% depending on the mix of revenue from
each of our three segments, Broadband, Transport and Services. We expect operating expenses, excluding equity-based compensation expense, amortization of purchased intangibles and restructuring and other charges, to be flat to slightly down as
compared to the third quarter.



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Forward-Looking Statements

This Management's Discussion and Analysis and other sections of this Form 10-Q contain forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect management's expectations, estimates and assumptions, based on the information available at the time the document was prepared. These forward-looking
statements include, but are not limited to, statements regarding future events, plans, goals, objectives and expectations. The words anticipate, believe, estimate, target, expect,
predict, plan, possible, intend, likely, will, should, could, may, would, and similar expressions are intended to identify
forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors that may cause our actual performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by those statements. Important factors that could cause our actual results to differ materially from those in forward-looking statements include, but are not limited to: economic changes
impacting the telecommunications industry; financial condition of 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; 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 Item 1A of our Form 10-K for the fiscal year ended December 30, 2005, filed with the SEC on March 14, 2006. 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 29, 2006, there were no material
changes to our market risks disclosure in our Annual Report on Form 10-K for the year ended December 30, 2005.

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 29, 2006. Based upon 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, and Richard Notebaert (former CEO, President and Director of Tellabs). Thereafter, eight similar complaints were also filed in the United States District Court of the Northern
District of Illinois. All nine of these actions were subsequently consolidated, and on December 3, 2002, a consolidated amended class action complaint was filed against Tellabs, Mr. Birck, Mr. Notebaert, and certain other of our
current or former officers and/or directors. The consolidated amended complaint alleged that during the class period (December 11, 2000-June 19, 2001) the defendants violated the federal securities laws by making materially false and
misleading statements, including, among other things, allegedly providing revenue forecasts that were false and misleading, misrepresenting demand for our products, and reporting overstated revenues for the fourth quarter 2000 in our financial
statements. Further, certain of the individual defendants were alleged to have violated the federal securities laws by trading our securities while allegedly in possession of material, non-public information about us pertaining to these
matters.

On January 17, 2003, Tellabs and the other named defendants filed a motion to dismiss the consolidated amended class action complaint in its
entirety. On May 19, 2003, the Court granted our motion and dismissed all counts of the consolidated amended complaint, while affording plaintiffs an opportunity to replead. On July 11, 2003, plaintiffs filed a second
consolidated amended class action complaint against Tellabs, Messrs. Birck and Notebaert, and many (although not all) of the other previously named individual



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##### Table of Contents

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 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 April 5, 2006, a class action complaint was filed in the United State District Court of the Northern District of Illinois against Tellabs, Michael Birck, Richard
Notebaert (former CEO, President and Director of Tellabs) 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 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.

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 30, 2005. Those risk factors described in that Annual Report could materially adversely affect our business, financial
condition or future results. The risks described in that Annual 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 Priceof Shares |       | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor
Programs |            | Remaining DollarValue of SharesAvailable to
bePurchased Underthe Plans (In Millions) (1)
|12/31/05 through 2/3/06 |  | 781,974                        |  | $                              | 12.65 |                                                                              | 781,974    |                                                                                          | $ | 197.5
|2/4/06 through 3/3/06   |  | 6,713,710                      |  |                                | 14.45 |                                                                              | 6,713,710  |                                                                                          |   | 100.5
|3/4/06 through 3/31/06  |  | 811,600                        |  |                                | 14.22 |                                                                              | 811,600    |                                                                                          |   | 89.0 
|4/1/06 through 5/5/06   |  | 910,840                        |  |                                | 15.99 |                                                                              | 910,840    |                                                                                          |   | N/A  
|5/6/06 through 6/2/06   |  | 1,404,576                      |  |                                | 14.45 |                                                                              | 1,404,576  |                                                                                          |   | N/A  
|6/3/06 through 6/30/06  |  | 170,156                        |  |                                | 14.65 |                                                                              | 170,156    |                                                                                          |   | N/A  
|7/1/06 through 8/4/06   |  | 885,021                        |  |                                | 9.57  |                                                                              | 885,021    |                                                                                          |   | N/A  
|8/5/06 through 9/1/06   |  | 6,429,040                      |  |                                | 10.13 |                                                                              | 6,429,040  |                                                                                          |   | N/A  
|9/2/06 through 9/29/06  |  | 264,391                        |  |                                | 10.44 |                                                                              | 264,391    |                                                                                          |   | N/A  
|                        |  |                                |  |                                |       |                                                                              |            |                                                                                          |   |      
|Total                   |  | 18,371,308                     |  |                                | 12.63 |                                                                              | 18,371,308 |                                                                                          |   |      
|                        |  |                                |  |                                |       |                                                                              |            |                                                                                          |   |      



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On February 2, 2005, Tellabs Board of Directors authorized the purchase of up to $300.0 million of our outstanding
common stock. As of August 2, 2006, we purchased approximately 32.0 million shares of our common stock at a total cost of $300.0 million, including $107.4 million (7.6 million shares) year-to-date and $1.3 million (0.1 million shares) in
the third quarter of 2006.

On January 26, 2006, Tellabs Board of Directors authorized the purchase of up to $100.0 million of our outstanding stock
under Rule 10b5-1 of the Securities Exchange Act of 1934. On April 27, 2006, Tellabs Board of Directors authorized the removal of the $100.0 million cap from the share repurchase program. 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 under this plan. We record these repurchased shares as treasury stock. As of September 29, 2006, we purchased 4.0 million shares
of our common stock under this plan at a total cost of $56.8 million including $7.1 million (0.7 million shares) in the third quarter of 2006.

On
July 31, 2006, Tellabs Board of Directors authorized a new share repurchase program of up to $300.0 million of our outstanding common stock. As of September 29, 2006, we have purchased approximately 6.8 million shares of our
common stock under the new program at a total cost of $67.9 million. We may repurchase shares of our common stock from time to time on the open market or in private transactions and record purchases as treasury stock.

(1) As described above there is no limit on the $100.0 million program. As of September 29, 2006, the new $300.0 million program described above has $232.1 million
available for share repurchases.

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

None

Item 6. Exhibits

(A) Exhibits



|     |  |                                                                            
|---- |  | ---------------------------------------------------------------------------
|10   |  | Form of Executive Performance Stock Units Statement and Award Agreement    
|     | 
|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/ JAMES A. DITEJames A. DiteVice President and Controller(Principal Accounting Officer and duly authorized officer)November 7, 2006(Date)




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