10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 28, 2007

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

For the transition period from                      to                     .

Commission file number: 0-9692

TELLABS, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

Common stock, $0.01 par value

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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).

Large Accelerated Filer  x    Accelerated Filer No.  ¨    Non-Accelerated Filer No.  ¨

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

The approximate aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant computed as of June 29, 2007, was $4,336,062,379. (Solely for the purpose of calculating the preceding amount, all directors and executive officers of the Registrant are deemed to be affiliates.)

As of February 15, 2008, there were 413,776,721 shares of the Registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant’s Annual Report to Stockholders for the fiscal year ended December 28, 2007, are incorporated by reference into Parts I and II, and portions of the Registrant’s Proxy Statement for the annual meeting of stockholders to be held on April 24, 2008, are incorporated by reference into Part III.

TELLABS, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 28, 2007

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Business	3
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	16
Item 2.	Properties	16
Item 3.	Legal Proceedings	17
Item 4.	Submission of Matters to a Vote of Security Holders	18
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
Item 6.	Selected Financial Data	20
Item 7.	Management’s Discussion and Analysis of Results of Operations and Financial Condition	20
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	20
Item 8.	Financial Statements and Supplementary Data	23
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	23
Item 9A.	Controls and Procedures	23
Item 9B.	Other Information	23
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	23
Item 11.	Executive Compensation	23
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	24
Item 13.	Certain Relationships and Related Transactions, and Director Independence	24
Item 14.	Principal Accountant Fees and Services	24
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	24
	Signatures	28
	Schedule II – Valuation and Qualifying Accounts and Reserves	30
	Exhibit Index	31
	Annual Report to Shareholders
	Tellabs, Inc. Deferred Income Plan
	List of Subsidiaries
	Consent of Independent Registered Public Accounting Firm
	Section 302 Certification of CEO
	Section 302 Certification of CFO
	Section 906 Certification of CEO
	Section 906 Certification of CFO

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PART I

ITEM 1. BUSINESS

Note: A glossary of industry and technical terms used in this Form 10-K appears at the end of this Item 1.

Tellabs, Inc. was incorporated in 1975 as an Illinois corporation. In 1992, our shareholders approved the formation of a holding company structure. Under that new structure the shareholders of Tellabs, Inc., an Illinois corporation, became the shareholders of a new holding company, Tellabs, Inc., a Delaware corporation. Tellabs’ goal is to advance communications networks to meet the changing needs of users. We work toward that goal by designing and marketing equipment to communications service providers worldwide. We also provide deployment and professional services.

In November 2004, we acquired Advanced Fibre Communications, Inc. (AFC) of Petaluma, California, a leading supplier in North America of “last-mile access” products. This acquisition gave us a leadership position for delivering residential voice, data and video services over fiber-optic networks. In addition, in December 2004, we acquired Vinci Systems, Inc. (Vinci), a privately held developer of customer-premises equipment used for fiber access. This acquisition accelerated our ability to deliver cost-reduced and feature-enhanced components of the solution we acquired with AFC.

Our products and services enable our customers to deliver wireline and wireless voice, data and video services to business and residential customers. We sell our products domestically and internationally through our field sales force. Our customers are primarily communication services providers, including local exchange carriers (LECs); national post, telephone and telegraph (PTT) administrators, wireless service providers, multiple system operators (MSOs), and competitive service providers (CSPs). Our customer base also includes distributors, original equipment manufacturers (OEMs), system integrators and government agencies.

While we market our products under a variety of solution names, we run our business and report operating results in three segments: Broadband, Transport and Services.

Within the Broadband segment, we market our products in three areas:

• Access, marketed as the Tellabs^® DynamicHome^SM solution, includes products that enable service providers to deliver bundled voice, video and high-speed Internet/data services over copper or fiber networks. Specifically, access products enable service providers to deliver these services over the “last mile” of the communications network, the part of the network that is closest to homes and businesses. As users download more video and music, play more online games and increase their use of other high-bandwidth services, operators must upgrade their access networks to meet this demand. Access offerings include the Tellabs^® 1000 multiservice access series, the Tellabs^® 1100 multiservice access series, the Tellabs^® 1600 optical network terminal series and the Tellabs^® 8865 ServiceAware optical line terminal (OLT).

The Tellabs 1000 series is used in both copper-based and fiber-based access networks. It can be configured as a digital loop carrier (DLC), a digital subscriber line access multiplexer (DSLAM), a fiber-to-the-premise (FTTP) optical line terminal (OLT) for broadband passive optical networks (BPON), or a voice gateway for voice over Internet protocol (VoIP). The Tellabs 1100 series is used in both copper-based and fiber-based access networks. It can be configured as DLC, DSLAM, and FTTP OLT for gigabit passive optical networks (GPON), as well as for fiber-to-the-curb (FTTC) or fiber-to-the-node (FTTN) network architectures. The Tellabs 1600 series of optical network terminals (ONTs) consists of remote devices installed at user locations (i.e., single family homes, multi-dwelling units, and small businesses) in both BPON and GPON FTTP network architectures. The Tellabs 8865 platform is a derivative of the Tellabs 8800 multiservice router optimized as an FTTP OLT for GPON network architectures.

• Managed access, marketed as the Tellabs^® IntegratedMobile ^SM solution, primarily includes aggregation and transport products that deliver wireless and business services outside of the United States. Voice-over-cable products, used to deliver voice and data services over cable television networks, also are included in this segment. Managed access products include the Tellabs^® 2300 cable telephony distribution system, the Tellabs^® 6300 managed transport system, the Tellabs^® 8000 network manager and the Tellabs^® 8100 managed access system.

The Tellabs 2300 system, which can be used anywhere in the world, enables MSOs (cable television providers) and alternate access carriers to deliver integrated video and circuit-switched voice and data services. The Tellabs 6300 system is an SDH optical transport platform that serves wireline and wireless operators outside of North America. The Tellabs 8100 managed access system is used outside of North America in business service and wireless networks. The Tellabs^® 8000 network manager provides full network management across the entire family of Tellabs 6300 and 8100 managed access products, as well as the Tellabs^® 8600 products described below. We recently upgraded it to manage the Tellabs

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8800 series, also described below. It offers end-to-end management for 2G and 3G mobile backhaul applications, carrier-class Internet, virtual private network (VPN) and extranet services for corporate customers, business broadband Internet access and corporate voice services.

• Data, marketed as the Tellabs^® Assured-Ethernet^SM solution, the Tellabs^® MultiservicePLuS^SM solution and the Tellabs^® IntegratedMobile^SM solution, includes next generation packet-switched products that enable wireline and wireless carriers to deliver business services and next-generation wireless services to their customers. Data products include the Tellabs 8600 managed edge system and the Tellabs 8800 multiservice router (MSR) series.

The Tellabs 8600 system is an aggregation platform for next-generation wireless providers. It provides a cost-efficient way to migrate from 2G to 3G and 4G networks by using pseudowire technology to manage TDM, frame relay, ATM, Ethernet and IP traffic in a single device. It is ideal for current customers of the Tellabs 6300 and 8100 systems because it fully integrates with those platforms under the Tellabs 8000 network manager. The Tellabs 8800 MSR series enables service providers to leverage existing infrastructure to seamlessly and cost-effectively integrate all their networks (ATM, Frame Relay, Ethernet and IP) onto a converged MPLS network, while retaining quality of service and unsurpassed network resiliency. This capability enables users to share information regardless of their access technology. Service providers can even perform product upgrades without interrupting user services. The Tellabs 8800 MSR is unique in its ability to take in traffic of any network type and route it over any other network type.

Our Transport segment, marketed as the Tellabs^® DynamicHome^SM solution, the Tellabs Assured-Ethernet solution, and the Tellabs Integrated Mobile solution includes solutions that enable service providers to transport services and manage bandwidth by adding capacity when and where it’s needed. Wireline and wireless providers use these to support wireless services, business services for enterprises, and triple-play voice, video and data services for consumers. Products include the Tellabs^® 3000 voice-quality enhancement products, the Tellabs^® 5000 series of digital cross-connect systems and the Tellabs^® 7100 optical transport system.

The Tellabs 3000 series enables service providers to improve voice quality and ensure calls are echo-free. Wireless operators have directly attributed revenue accretion to this higher quality service.

The Tellabs 5000 series of digital cross-connects manages and routes voice and data traffic and combines, consolidates and segregates signals to maximize efficiency. It also provides a centralized point for network performance monitoring and testing, as well as converting different signal formats. The Tellabs 5500 digital cross-connect, our flagship cross-connect, is used by every major service provider in North America. It enables service providers to reduce equipment and maintenance costs and maximize network profitability. We have evolved this system to integrate narrowband grooming, voice quality enhancement and Ethernet transmission. The Tellabs 5500 NGX switch increases network efficiency by integrating cross-connect functionality with add-drop multiplexing (ADM) and data switching.

The Tellabs 7100 system enables service providers to deliver high-speed wavelength services and alleviate bandwidth bottlenecks. The Tellabs 7100 system integrates optical and electrical transport via wavelength selective switches (WSS), ROADM (reconfigurable optical add-drop multiplexing), Ethernet switching, next-generation SONET/SDH MSPPs (multiservice provisioning platforms) and DWDM (dense wave-division multiplexing) into a single platform. It decreases capital and operating expenses by eliminating network elements and reducing equipment interconnections.

At the heart of the Tellabs 7100 system are four- and eight-degree ROADM capabilities, enabling combined-wavelength trunks to be transported into up to eight directions without adding other equipment. ROADM is a new form of optical add/drop multiplexer that gives service providers the ability to remotely configure any wavelength on any network element. This feature enables operators to instantly provision bandwidth where it is required. ROADM facilitates delivery of multiple services to a household without degradation in service quality.

The Services segment delivers deployment, training, support services and professional consulting to Tellabs’ customers. Through these offerings, Tellabs supports our customers through all phases of running a network: planning, building and operating. Services in the planning phase include network architecture and design, network and applications planning, network management design, migration planning and others. Building services include applications integration, program and project management, installation, testing, network integration, third-party systems integration and others. Once networks are deployed, Tellabs offers a variety of operating services including network optimization, onsite engineering, network monitoring, remote and onsite support, capacity management, training and others.

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COMPETITION

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

Tellabs’ competition comes primarily from telecommunications and data networking infrastructure vendors. These vendors include large and smaller companies that compete directly or indirectly with our offerings or that are developing and deploying alternative technology.

SALES ORGANIZATION

Our global sales group includes direct sales personnel and sales support personnel located throughout the United States, Canada, Latin America, Europe, the Middle East, Africa and Asia Pacific. Our North America sales organization (United States and Canada) is structured by customer type (e.g., ILECs (Independent Local Exchange Carriers), wireless). Our international sales organizations are structured to support activities on a regional basis: Latin America, EMEA (Europe, Middle East and Africa) and Asia Pacific.

We generate revenue through our direct sales organization and selected distributors. We have arrangements with a number of distributors of telecommunications equipment, both in North America and internationally, some of whom maintain inventories of our products to facilitate prompt delivery. These distributors provide information on our products through their catalogs and through trade-show demonstrations. Our field sales force also provides technical support to our distributors. Our direct sales organizations and selected distributors generated the following 2007 revenue:

	Direct Sales		Distributors
North America	98	%	2	%
International	56	%	44	%
Consolidated	87	%	13	%

CUSTOMERS

Revenue from customers within North America was 74% of consolidated revenue in 2007, 76% in 2006 and 75% in 2005. Revenue from international customers was 26% of consolidated revenue in 2007, 24% in 2006 and 25% in 2005.

Revenue from Verizon (including Verizon Wireless) was 37% of consolidated revenue in 2007, 27% in 2006 and 24% in 2005. Revenue from AT&T (including the former BellSouth and Cingular) was 16% of consolidated revenue in 2007, 23% in 2006, and 28% in 2005. Revenue from Sprint Nextel was 11% of consolidated revenue in 2006. No other customer in 2007, 2006 or 2005 accounted for more than 10% of consolidated revenue.

BACKLOG

Total product and service backlog was $328 million at December 28, 2007, and $367 million at December 29, 2006. Backlog is defined as revenue to be recognized on confirmed product and service orders. We expect to ship nearly the entire December 28, 2007, backlog in 2008. Because of the short cycle between order and shipment, we consider backlog to be an indicator, but not the sole predictor, of future revenue.

RESEARCH AND DEVELOPMENT

Tellabs believes the development of new products and enhancement of existing products are vital to our long-term success. As of December 28, 2007, research and development employees totaled 1,479, representing 40% of our total workforce. We conduct research and development at several facilities around the world. In addition to our internal efforts to develop new products, we undertake research and development and product-oriented acquisitions and alliances, from time to time, to provide access to technology that is important to the future of our customers. Research and development expenses were $343.1 million in 2007, $356.9 million in 2006 and $344.0 million in 2005.

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MANUFACTURING

We outsource the manufacturing of our products to contract manufacturers. We currently perform this activity primarily with two suppliers. We are active in the order, configuration and system assembly operations for our products.

We require our contract manufacturers to handle and dispose of any hazardous waste material from our manufacturing activities in compliance with all applicable foreign, Federal, state and local provisions. The cost of complying with environmental regulations has not had a material impact on capital expenditures, earnings or our competitive position.

Our products contain components that generally are available from multiple suppliers, as well as components of proprietary design that are sourced from a single supplier. In some cases, long lead times may be required to develop alternative sources for proprietary components. If component supplies become limited, which has occurred on occasion, or if a proprietary component supplier is unable to meet our requirements, the resulting shortages could result in production delays and/or expedite costs that may affect our business adversely.

EMPLOYEES

At December 28, 2007, we had 3,716 employees. We employed 1,370 individuals in the sales, sales support, customer service and marketing areas; 1,479 in research and product development; and 867 in support activities. We consider our employee relations to be good. We are not a party to collective bargaining agreements.

INTELLECTUAL PROPERTY

We maintain an active program to legally protect our investment in technology through intellectual property rights. The nature and extent of legal protection associated with each such intellectual property right depends on, among other things, the type of intellectual property right and the given jurisdiction in which such right arises. We believe that our intellectual property rights are valuable and important to our business (including each of our segments).

We have various trade and service marks, both registered and unregistered, in the United States and in many foreign countries (collectively, “Marks”). These Marks are important because they differentiate our products and services within our industry. We are not aware of any factor that would inhibit our ability to use any of our major Marks.

We hold numerous U.S. and foreign patents, and we have numerous applications for patents pending in the United States and abroad. We maintain an active program that seeks to legally protect, through patents, various of our developments and innovations. There is no assurance, however, that we will be able to obtain or maintain each patent that we pursue. We also cannot predict whether patents that we obtain will necessarily provide us with any competitive advantage or whether such patents will be challenged by third parties. Beyond patents, we rely on copyright, trade secret and other mechanisms designed to help establish, secure, maintain and protect our intellectual property.

Through various licensing arrangements, we grant certain rights to our intellectual property and receive certain rights to intellectual property of others. We expect to maintain current licensing arrangements and to secure licensing arrangements in the future, as needed and to the extent available on reasonable terms and conditions, to support continued development and marketing of our products and services. Some of these licensing arrangements require or may require royalty payments and other licensing fees. The amount of these payments and fees may depend on various factors, including but not limited to, the structure of royalty payments, offsetting considerations, if any, and the degree of use of the licensed technology.

We believe that the duration of legal protection for our intellectual property is adequate relative to the expected lives of our products and services.

BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION

We are reporting operating results for three segments: Broadband, Transport and Services. Information on our revenue by segment, revenue by country and net long-lived assets by country for the fiscal years ended December 28, 2007, December 29, 2006, and December 30, 2005, is set forth in the footnotes to our consolidated financial statements in our 2007 Annual Report, included herein as Exhibit 13, and incorporated herein by reference.

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HOW TO OBTAIN OUR SEC REPORTS

We file annual, quarterly and other periodic reports, proxy statements and other information with the SEC. These filings are available to the public at the SEC’s Web site at www.sec.gov. No information from this Web page is incorporated herein by reference.

Copies of our most recent annual stockholder report and proxy statement are available directly on the SEC’s Web site free of charge as soon as reasonably practicable after we furnish the material to the SEC. Our Web site includes direct links to the SEC’s Web site for our annual, quarterly and other filings.

Copies of our annual, quarterly and current reports, proxy statements and certain other information filed with the SEC, as well as amendments thereto, are available on our Web site free of charge. Our Web site is located at www.tellabs.com. We will provide this information either electronically or in paper form free of charge upon request.

GLOSSARY OF TECHNICAL TERMS

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

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

4G Wireless — The future generation of wireless networks, which will offer broadband speeds.

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

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

Backhaul — Aggregating and transmitting traffic from remote sites to a main transmission network.

Bandwidth — The carrying capacity of a communications channel.

BPON — Broadband passive optical network, fiber-access systems that deliver high bandwidth to homes and businesses.

Broadband — A high-bandwidth fiber optic, coaxial or hybrid line with more capacity than a voice-grade phone line (64 kilobits per second), which is capable of carrying numerous voice, data and video channels at once.

Converged Transport — An architecture that can integrate many types of transport technologies including ROADM, IP/MPLS, Carrier Ethernet, DWDM and /or TDM/SDH/SONET to move voice, video and data across networks.

Data — Any network traffic other than voice phone calls. Increasingly, phone calls and video are encoded and transported as data.

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

Digital Cross-Connect — A specialized high-speed data channel switch that connects transmission paths based on network needs (rather than call by call). Digital cross-connects manage and reroute network traffic, and combine, consolidate and segregate signals to maximize efficiency.

Downloading — The process of copying data files such as music or movies from a source to a computer.

Ethernet — A data network standard to connect computers, printers, workstations, terminals and servers.

Extranet — A network similar to the Internet, which companies use to do business with customers and suppliers.

FTTC, FTTN, FTTP (Fiber to the Curb, Fiber to the Node, Fiber to the Premises) — Fiber-optic cable extended directly to homes or neighborhoods to deliver broadband communication services, including voice, data and video.

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Fiber Access — Fiber-optic systems that extend to homes or neighborhoods to deliver broadband services, including voice, data and video.

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

Gbps (gigabits per second) — A way to measure data transfer speeds across a network. A gigabit is 1,000 million bits of data.

GPON — Gigabit passive optical network, fiber-access systems that deliver four times more bandwidth than BPON.

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

Internet — The world’s largest decentralized network of computers and network servers.

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

IPTV (Internet Protocol Television) — Technology that enables video and other entertainment services over two-way broadband networks.

Managed Access – An access and transport system that simplifies end-to-end management of mobile transport and business services. (Managed access products are in Tellabs’ Broadband segment.)

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

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

MPLS (MultiProtocol Label Switching) — A packet-switching standard that assigns levels of priority to multiple traffic types within a data stream to assure quality of service (QoS).

MSPP (Multiservice Provisioning Platform) — A system that consolidates the number of separate devices needed to provide transport, switching and routing services.

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

Network — A system of equipment and connections for the transmission of signals that carry voice, video and data.

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

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

Pseudowire — A virtual connection that transports both traditional and new services over a converged packet network.

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

ROADM (Reconfigurable Optical Add/Drop Multiplexer) — A system that enables the remote configuration of any wavelength on any network element, thereby reducing the need for technicians to be dispatched.

SDH (Synchronous Digital Hierarchy) — Transport format for transmitting high-speed digital information over fiber-optic facilities outside of North America, comparable to SONET.

SONET (Synchronous Optical NETwork) — Transport format for sending high-speed digital signals through fiber optics in North America, comparable to SDH.

TDM (Time Division Multiplexing) — Technology that combines multiple streams of traffic by assigning timeslots, sequentially in turn from each input onto a combined higher speed channel.

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Transport — The process of moving voice, data or video across communications networks.

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

Uploading — The process of copying data files such as music or movie from a computer to another source, such as the Internet.

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

VoIP (Voice over Internet Protocol) — The transmission of phone calls over data or Internet links.

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

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

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

Wireline — Networks that use cables rather than radio frequency.

ITEM 1A. RISK FACTORS

Our operating results will fluctuate, which may cause volatility in our stock price.

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

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

• the volume and timing of orders from and shipments to customers;

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

• the ability to attract, retain and motivate qualified personnel;

• the ability to maintain solid and healthy customer and supplier relationships and favorable contract terms;

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

• the potential deferral of customer acceptance of new products compared with our existing products;

• the ability to maintain adequate and effective systems to support business processes and sustain the current and future needs of the business;

• the market acceptance of new and enhanced versions of our products and services;

• variations in the mix of products and services we sell, and the demand and market acceptance of those products and services;

• our utilization of production capacity and employees, and our ability to manufacture and ship products efficiently;

• the availability and cost of key components;

• the ability to obtain reliable and high-quality components for our products;

• introductions or announcements of new products by competitors;

• changes in accounting rules and interpretations;

• our ability to integrate and operate acquired businesses and technologies;

• the potential impairment of investments, goodwill and intangible assets;

• the ability to prevail or mitigate liability in legal disputes and resulting litigation;

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

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• the ability to satisfy and comply with applicable laws, rules and regulations in the various locations where we operate our business and sell our products and services, including international locations.

Our recent operating results may not be a good predictor of our results in future periods. We base our expense levels in part on expectations of future revenue. If revenue levels in a particular period are lower than expected, our operating results will be adversely affected and could result in further restructurings and asset impairments. The failure to meet the expectations of the investment community may cause our stock price to decline, possibly substantially. A significant stock price decline could result in litigation, which could be costly, lengthy and divert management’s attention and resources from business operations.

The market for communications equipment products and services is rapidly changing and very competitive.

The market for communications network equipment products and integration services is rapidly changing. Our success will depend in part on our ability to develop and introduce new products and successfully compete with telecommunications equipment providers, particularly those who are larger than us or are in geographies that have lower cost structures. Such competitors may be able and willing to offer lower product and service prices due to economies of scale, more favorable economic conditions or a desire to capture market share (whether profitable or not). We cannot predict with certainty technological trends or new products in the market, something that our competitors may be able to do more accurately and rapidly. In addition, we cannot predict whether our products and services will meet with market acceptance or profitability. These factors may lead to an inability to successfully compete, which may adversely affect our business, financial condition, operating results or prospects.

Demand for our products may decrease if we do not anticipate and adapt to changing technology and customer requirements.

Communications companies face evolving industry standards, changing market conditions, and frequent introductions of new or enhanced products and services. The introduction of new products and technologies or the adoption of new industry standards can quickly make existing products or products under development obsolete or unmarketable. To grow and remain competitive, we must adapt to these changing technologies and industry standards, enhance our existing solutions and introduce new solutions to address our customers’ changing demands.

In addition, new product developments often require long-term forecasting of market trends, development and implementation of new technologies and processes, and substantial capital commitment. We have invested, and will continue to invest, substantial resources for new product development. We often must make these investments before knowing if the resulting new product will meet with market acceptance or generate revenue. We currently incur costs and expenses in preparation for the deployment of several new products. These costs will precede revenue generation and profits from those products.

We may experience difficulties that could delay or prevent the successful design, development, introduction or marketing of new products. These new products and product enhancements must meet the requirements of current and prospective customers and achieve significant market acceptance.

The success of new products depends on several factors, including proper new product definition, component costs, timely completion and introduction of products, differentiation of new products from those of our competitors, and market acceptance. We cannot assure that we will successfully identify new product opportunities, develop and bring new products to market in a timely manner, or achieve market acceptance of our products. The products and technologies that we pursue may not have the market success we anticipate, and we may not successfully identify and invest in other advanced technologies. If we fail to anticipate or respond on a cost-effective and timely basis to technological developments, changes in industry standards or customer requirements; if we have any significant delays in product development or introduction; or if our products are not accepted in the marketplace to the extent we expect, our business, financial condition, operating results or prospects could be adversely affected.

Our new products will be early in their life cycles and will face challenges for market acceptance.

We made and will continue to make significant investments in new products. These new products are early in their life cycles and are subject to uncertain market demand. They also may face obstacles in manufacturing, deployment and competitive response. Customers may not invest the additional capital required for initial system deployment. Additionally, as customers complete infrastructure deployments, they may require greater levels of service, support and financing than we provided in the past. We cannot assure that we can provide products, services, support and financing to effectively compete for these market opportunities. We may also be delayed in recognizing revenue related to our new products and related services and may be required to recognize costs and expenses for such products before we can recognize the related revenue. Such uncertainty and delay could have a material adverse effect on our business, financial condition, operating results and prospects.

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A limited number of our customers represent a large portion of our revenue.

A large portion of our revenue likely will depend on sales to a limited number of customers in specific geographic areas. The largest customer groups are incumbent local exchange carriers (“ILECs”), which include Verizon, AT&T (including BellSouth) and Qwest Communications; and wireless customers, which include T-Mobile, AT&T (formerly known as Cingular), Sprint and Verizon Wireless. Sales to each of Verizon (including Verizon Wireless) and AT&T (including BellSouth and Cingular) constituted more than 10% of our total revenue for 2007. Further, aggregate sales to Verizon (including Verizon Wireless), and AT&T (including BellSouth and Cingular) constituted approximately 53% of our total revenue for 2007 and approximately 50% of our total revenue for 2006. These ILEC customers primarily operate in the United States, which geographic market represented approximately 74% of our total revenue in 2007 and 76% of our total revenue in 2006. We cannot assure that these customers will continue to purchase products from us. If a significant existing customer merges with another company, we cannot assure that it will continue to purchase our products at prior levels or at all. The loss of one or more large existing customers or a decrease in the level of purchases from these customers could have a material adverse effect on our business, financial condition, operating results and prospects.

Consolidation among our largest customers may lead those combined customers to limit their communications equipment purchases to several large vendors, rather than the current practice of purchasing from a number of different sized vendors. Since we are not among the largest communications equipment vendors, we may lose our ability to sell our products and services to those customers. The loss of our ability to sell to one or more of our large customers could have a material adverse effect on our business, financial condition, operating results and prospects.

Due to our dependence on a large portion of our revenue from a limited number of customers, our bargaining power with respect to prices and contractual terms is often limited. Therefore, we could be, and in some cases have been, required to grant pricing or other concessions to obtain new business or maintain existing business. Such a situation may negatively affect our operating results.

Our revenue depends on the capital spending programs and financial capabilities of our customers and ultimately on the demand for new telecommunications services from users.

Our customers are communications service providers and, in the United States, include, without limitation, ILECs, wireless carriers and competitive service providers. Our ability to generate revenue depends on the capital spending patterns and financial capabilities of these customers, which in turn depend on the stage of completion of expanding network infrastructures; the availability of funding; and the extent to which our customers are affected by regulatory, economic, and business conditions in the geographic areas where they operate. Additionally, our larger customers typically have long implementation cycles; and often require acceptance provisions, which can lead to revenue deferrals. The telecommunications industry recently was affected by financial problems and reduced capital spending by carriers. These conditions adversely affected our operating results in several prior fiscal years and, if these conditions return, could have a material adverse effect on our business, operating results, and financial condition. Further, we cannot assure that network operators or other customers will pursue infrastructure upgrades that require our products and solutions. Infrastructure improvements may be delayed or prevented by a variety of factors including cost, regulatory obstacles, mergers, lack of consumer demand for advanced telecommunications services and alternative approaches to service delivery. Reductions in capital expenditures by companies in the telecommunications industry could seriously harm our revenue, net income and cash flows.

Our business would be adversely affected if we are unable to attract and retain key personnel.

Our success depends largely on our ability to attract and retain highly skilled technical, managerial, sales and marketing personnel. Competition for these personnel is intense. The loss of services of any of our key personnel, the inability to retain and attract qualified personnel in the future, or delays in hiring required personnel, particularly engineering and sales personnel, could make it difficult to meet key objectives, such as timely and effective product introductions.

We may not realize expected benefits from restructuring initiatives.

In the past, we have restructured our business and reduced our workforce in response to industry and market conditions. In light of the rapidly changing market for communications equipment, in January 2008 we announced a new restructuring plan, and we may have to restructure in the future to achieve certain cost savings and to strategically realign our resources. As we further restructure our business or reduce our workforce, we may be required to record additional liabilities. We cannot predict whether we will realize expected synergies and improved operating performance as a result of any current or future restructuring and streamlining of

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operations. We also cannot predict whether any restructuring and streamlining of operations will adversely affect our ability to retain key employees, which, in turn, would adversely affect our operating results. Further, in the event the market fluctuates up or down, we may not have the appropriate level of resources and personnel to appropriately react to the change.

We operate in a highly competitive industry.

Our products and services continue to face competitive pressures. Our success in competing with other communications equipment providers will depend primarily on the following:

• the price, quality and reliability of our products;

• our engineering, manufacturing and marketing skills;

• our delivery and service capabilities;

• our control of operating expenses and management of assets;

• overall financial strength and stability; and

• our ability to integrate acquired businesses effectively.

We also may face more intense competition in certain markets. Pricing pressures could increase from current and future competitors and customers. Many current competitors have, and future competitors also may have, more engineering, manufacturing, marketing, and financial and personnel resources available to them, may have better access to such resources and may be better able to attract and retain highly qualified personnel. Consolidation among communications equipment providers as well as entrants into the communications equipment market also may affect competition. As a result, other providers may respond more quickly to new or emerging technologies and changes in customer requirements and be able to offer a wider range of products and services, separately or bundled together. In addition, technological change, the increasing addition of Internet, data, video, voice and other services to networks, the possibility of regulatory changes and industry consolidation will likely continue to cause rapid evolution in the competitive environment. The full scope and nature of these changes are difficult to predict. Increased competition, particularly from Asia-based competitors, could lead to price cuts, reduced gross margins and loss of market share, which may adversely affect our business, operating results and financial condition.

Conditions in international markets will affect our operations.

Sales outside of North America generated 26% of our revenue in 2007 and 24% in 2006. Due to our international sales and our international operations and research and development organizations, we are subject to the risks of conducting business internationally. These risks include:

• local economic and market conditions;

• political and economic instability;

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

• reliance on employees and third parties in various geographies to complete product developments;

• unexpected changes in legislative or regulatory requirements;

• fluctuations in currency exchange rates;

• tariffs and other barriers and restrictions, including established relationships between government-controlled carriers and local equipment vendors;

• longer payment cycles;

• difficulties in enforcing intellectual property and contract rights;

• greater difficulty in accounts receivable collection;

• potentially adverse taxes, including any U.S. taxes imposed on our actual or deemed repatriation of earnings of foreign subsidiaries;

• potentially lower margins and less certainty of support for customer relationships where foreign sales are made through local distributors; and

• the burdens of complying with a variety of foreign laws and telecommunications standards.

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

We are exposed to fluctuations in the market values of our investments and in interest rates; impairment of our investments could have a material effect on our financial statements.

We maintain an investment portfolio of various holdings, types and maturities. These securities are generally classified as available-for-sale and, consequently, are recorded on our Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a separate component of Accumulated other comprehensive income, net of tax. If the fair value declines, we may recognize the decline in earnings below the cost basis when the decline is judged to be other-than-temporary. For information regarding the sensitivity of and risks associated with the market value of investments and interest rates, refer to the section titled “Quantitative and Qualitative Disclosures About Market Risk” included in this report and in our 2007 Annual Report, included herein as Exhibit 13.

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

Because we conduct a portion of our business outside the United States, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve, and they could have a material adverse impact on our financial results and cash flows. Additionally, we have exposures to emerging market currencies, which can have extreme currency volatility. A weakened U.S. dollar will increase the cost of local operating expenses and procurement of raw materials to the extent that we must purchase components in foreign currencies. An increase in the value of the dollar could increase the real cost to our customers outside the United States where we sell in U.S. dollars.

We may encounter difficulties obtaining necessary raw materials and supplies.

Our ability to make and service our products and meet customer demands depends on our ability to obtain timely deliveries of important raw materials and supplies within certain quality standards. The availability of these raw materials and supplies is subject to market forces beyond our control. From time to time there may not be sufficient quantities of raw materials and supplies in the marketplace to meet the customer demand for our products. In addition, the costs to obtain these raw materials and supplies are subject to price fluctuations. Many companies use the same raw materials and supplies to produce their products that we use to produce our products. Companies with more resources may have a competitive advantage in obtaining raw materials and supplies due to greater buying power. Reduced supply or higher prices for raw materials and supplies may adversely affect our business, operating results and financial condition. In addition, we currently purchase certain key components from sole or limited-source vendors, and most of our component purchases are on a purchase-order basis without guaranteed supply arrangements. If supply is disrupted, we may be unable to find an alternative source in a timely manner, at favorable prices or of acceptable quality. These circumstances may limit our ability to meet scheduled deliveries to customers and may increase our expenses.

We depend on contract manufacturers and third-party service providers.

We have purchase agreements with contract manufacturers that require them to buy components used to manufacture our products and authorize them to buy components in accordance with agreed-upon lead times. As customers increasingly demand shorter delivery timeframes, the difficulty of accurately forecasting component needs creates additional risk. Failure to estimate requirements accurately can lead to monetary penalties, excess or obsolete inventory, or manufacturing disruptions. Further, since we do not, in every instance, have a contractual relationship with suppliers to our contract manufacturers, we are subject to and dependent on the terms of the agreements between the contract manufacturer and the supplier. As a result, we have limited ability to take legal action against suppliers if a component fails or is outside of the quality standards we set. In addition, the contract manufacturers may not allocate sufficient resources to the timely completion of our orders in accordance with our quality standards and result in significant interruptions in the supply of products to our customers.

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We rely on a small number of contract manufacturers to perform the majority of our product manufacturing. The qualification of these manufacturers is an expensive and time-consuming process, and these manufacturers build products for other companies, including our competitors. We constantly review their manufacturing capability to ensure they meet our production requirements in terms of cost, capacity and quality. Periodically, we may decide to transfer the manufacturing of a product from one contract manufacturer to another to better meet our production needs. It is possible that we may not effectively manage this transition or the new contract manufacturer may not perform as well as expected. As a result, we may not be able to fill orders in a timely manner, which could harm our business. These limitations and the failure to deliver products on time may adversely affect our business, operating results and financial condition.

We rely on the use of third-party customer service providers to deliver and install products. We depend on such third-party agents to perform key on-site services for our customers. We cannot control the availability of such resources or the quality of the services provided by such third parties. Scarcity of resources, price fluctuations, and quality or delivery issues may adversely affect our business, operating results and financial condition.

We may be unable to sell certain inventory, which could result in lower gross profit margins and net income.

Some customer requirements include specific configurations of our products, for which we procure the related component parts. In many cases, we forecast and purchase components in advance. If customers do not place orders, if their requirements change, or if they cancel orders, we may be unable to cost-effectively rework these components and/or return them to inventory as available-for-sale. Write-downs and accruals for unrealizable inventory will negatively impact our gross profit margins and net income.

Intellectual property rights may not be adequate to protect our business.

Our future success depends in part on our intellectual property, including our proprietary technology and innovations. We have attempted to protect our intellectual property through various mechanisms such as patents, copyrights, trademarks, contractual obligations and trade secrets. We cannot be assured, however, that the patents we obtain and other intellectual property rights that we hold will necessarily provide us with any competitive advantage. Third parties may attempt to use our intellectual property without authorization. It is difficult to police the unauthorized use of our intellectual property, particularly in certain foreign countries, the laws of which may not protect intellectual property rights to the same extent as the laws of the United States. Litigation may be necessary to enforce our intellectual property rights, which could be costly and disruptive; there is no guarantee that we will obtain a successful result, no matter how much time, money and energy we spend on litigation. In addition, competitors and others may develop competitive technology independently without violating our proprietary rights. Any inability to secure, protect or enforce proprietary rights could result in loss of any competitive advantage, loss of customer orders and decreased revenue.

We are and may be subject to additional intellectual property infringement claims that are costly and time consuming to defend. These claims could limit our ability to use some technologies.

As competition in the communications equipment industry increases and the functionality of the products in this industry converges, companies in the industry increasingly become the target of infringement claims and other intellectual property disputes. Third parties have and may in the future assert infringement claims against us or our customers or partners in connection with our products, services or other aspects of our business. From time to time we receive notices or claims based on third-party patents or other proprietary rights, including notices or claims that may originate from competitors. Any such third parties may choose to litigate their claims, or we may pursue litigation to determine the scope and validity of any such proprietary rights. We may be unsuccessful in any such litigation. We may be unable to secure, on commercially reasonable terms, any licenses that we seek. Third-party claims, whether with or without merit, potentially can result in:

• costly litigation;

• diverting management’s time, attention and resources;

• delaying or halting product shipments or services delivery;

• requiring us to pay damages;

• requiring us to enter into royalty-bearing licensing arrangements or to obtain substitute technology of lower quality or higher cost; or

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

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Product quality or performance problems could impact our business.

The development and production of new products with high technology content often involves problems with components and manufacturing methods. If significant problems in reliability, quality or network monitoring develop, including those due to defects in product, a number of negative effects on our business could result, including:

• costs to fix product defects;

• high service and warranty expenses;

• payment of liquidated damages for performance failures;

• high inventory obsolescence expense;

• high levels of product returns;

• delays or interruptions in product turn-up;

• delays in collecting accounts receivable;

• reduced orders from existing customers; and

• declining interest from potential customers.

We may be unable to identify or complete strategic acquisitions, investments and dispositions.

Our long-term growth strategy includes building value for the company through a variety of methods. These methods include acquisition of, investment in, or joint ventures in, complementary businesses, products, services or technologies and potential divestitures of certain portions of our business. We cannot assure that we will be able to identify suitable third parties for these transactions. Even if we identify suitable third parties to participate in these transactions, we cannot assure that we will be able to make them on commercially acceptable terms, if at all. If we acquire a company, it may be difficult to assimilate its businesses, products, services, technologies and personnel into our operations. These difficulties could disrupt our ongoing business, distract our management and workforce, increase our expenses and adversely affect our operating results. In addition, we may incur debt or be required to issue equity securities to pay for future acquisitions or investments. The issuance of any equity securities could be dilutive to our stockholders. We also may need to make further investments to support the acquired company and may have difficulty identifying and acquiring appropriate resources. If we divest or otherwise exit certain portions of our business, we may be required to record additional expenses, for items such as workforce reduction costs, closure of excess facilities and excess inventory write-offs. Furthermore, estimates with respect to the useful life and ultimate recoverability of our carrying basis of assets, including goodwill and purchased intangible assets, could change as a result of such disposition.

Our reported financial results could suffer if there is an impairment of goodwill or other intangible assets.

We are required to annually test our goodwill to determine if impairment has occurred. We evaluate the carrying value of our goodwill and intangible assets for impairment whenever indicators of impairment exist. We test our three operating segments for possible goodwill impairment by comparing each segment’s net book value with fair value. If each operating segment’s fair value is greater than its book value and no other impairment indicators exist, further impairment tests are not deemed necessary and no impairment loss is recorded. If intangible assets are deemed to be impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets would be recognized. Events or circumstances could arise in the future that may create a need to record an impairment adjustment that could have a material adverse affect on our financial statements.

We are subject to numerous and changing industry regulations and standards.

Our products must comply with a significant number of communications industry technological regulations and standards, which vary between U.S. and international markets. Our products also must interoperate with third-party products. Testing to ensure compliance with technological standards and interoperability requires significant time and money. If we fail to ensure compliance with evolving standards and regulations in a timely manner or fail to maintain interoperability with equipment from other companies, we could experience customer contract penalties, delayed or lost customer orders, decreased revenue and reduced net income that may adversely affect our business, financial condition and operating results. To remain competitive, and in some cases remain compliant with customer requirements, we also must comply with industry certifications such as ISO (International Organization for Standardization) and TL 9000, a quality management system developed for the telecommunications industry.

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We operate in an environment subject to changing government regulations.

The communications equipment industry is subject to government regulation in the United States and other countries. Our business depends on the continued growth of the telecommunications industry worldwide. Federal and state agencies regulate most of our domestic customers, and foreign customers also are subject to regulation. In particular, there may be future changes in U.S. telecommunications regulations that could slow the expansion of service providers’ network infrastructures and adversely affect our business, operating results and financial condition. Future changes in tariffs by regulatory agencies or application of tariff requirements to currently untariffed services could adversely affect the sales of our products for certain classes of customers. Moreover, uncertainty regarding future legislation and government policies combined with emerging competition also may affect the demand for our products. Competition could intensify as a result of future regulatory changes or new regulations in the markets where we operate and sell our products and services, which could adversely affect our business, operating results and financial condition.

Our failure or the failure of our contract manufacturers to comply with applicable environmental laws and regulations worldwide could adversely impact our business and results of operations.

The manufacture, assembly and testing of our products may require the use of hazardous materials that are subject to a broad array of environmental, health and safety laws and regulations. Our failure or the failure of our contract manufacturers to comply with any of these applicable laws or regulations could result in:

• regulatory penalties, fines and legal liabilities,

• suspension of production, or

• curtailment of our operations or sales.

In addition, our failure or the failure of our contract manufacturers to properly manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials could subject us to increased costs or future liabilities. Existing and future environmental laws and regulations may restrict our use of certain materials to manufacture, assemble and test products. Any of these consequences could adversely impact our business and results of operations by increasing our expenses and/or requiring us to alter our manufacturing processes.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our corporate headquarters is located in Naperville, Illinois, approximately 35 miles west of Chicago. During 2007, we operated 52 facilities globally, totaling 1.8 million square feet to support:

• Corporate and administration: 250,000 square feet.

• Research and development: 818,000 square feet, of which 67% is used by the Broadband segment and 33% is used by the Transport segment.

• Operations: 334,000 square feet, of which 57% is used by the Transport segment and 43% by the Broadband segment.

• Sales and services: 358,000 square feet.

We own 1.0 million square feet of the total, which includes our headquarters facility and four facilities in Espoo, Finland. We lease facilities in 30 countries that total 0.8 million square feet, including 16 facilities in North America; 17 facilities in Europe, Middle East and Africa; 12 facilities in the Asia Pacific region and 2 facilities in Latin America.

Our leases included 555,000 square feet in North America; 126,000 square feet in Europe, Middle East and Africa; 61,000 square feet in Asia Pacific; and 9,000 square feet in Latin America.

We own substantially all of our equipment. We believe our facilities are adequate and suitable additional space and equipment will be available for expansion.

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ITEM 3. LEGAL PROCEEDINGS

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

On January 17, 2003, Tellabs and the other named defendants filed a motion to dismiss the consolidated amended class action complaint in its entirety. On May 19, 2003, the Court granted our motion and dismissed all counts of the consolidated amended complaint, while affording plaintiffs an opportunity to replead. On July 11, 2003, plaintiffs filed a second consolidated amended class action complaint against Tellabs, Messrs. Birck and Notebaert, and many (although not all) of the other previously named individual defendants, realleging claims similar to those contained in the previously dismissed consolidated amended class action complaint. We filed a second motion to dismiss on August 22, 2003, seeking the dismissal with prejudice of all claims alleged in the second consolidated amended class action complaint. On February 19, 2004, the Court issued an order granting that motion and dismissed the action with prejudice. On March 18, 2004, the plaintiffs filed a Notice of Appeal to the United States Federal Court of Appeal for the Seventh Circuit, appealing the dismissal. The appeal was fully briefed and oral argument was heard on January 21, 2005. On January 25, 2006, the Seventh Circuit issued an opinion affirming in part and reversing in part the judgment of the district court, and 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, and remanded the case to the district court. On September 22, 2006, defendants filed a motion in the district court to dismiss some (but not all) of the remaining claims. On October 3, 2006, the defendants filed with the United States Supreme Court a petition for a writ of certiorari seeking to appeal the Seventh Circuit’s decision. On January 5, 2007, the defendants’ petition was granted. The United States Supreme Court heard oral arguments on March 28, 2007. On June 21, 2007, the United States Supreme Court vacated the Seventh Circuit’s judgment and remanded the case for further proceedings. On November 1, 2007, the Seventh Circuit heard oral arguments for the remanded case. On January 17, 2008, the Seventh Circuit issued an opinion adhering to its earlier opinion reversing in part the judgment of the district court, and remanded the case to the district court for further proceedings. We believe that we have valid defenses to the lawsuit.

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

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

On June 28, 2006, the Court consolidated all three actions and on August 14, 2006, plaintiffs filed a consolidated class action complaint. On September 15, 2006, defendants filed a Motion to Dismiss, or in the Alternative, for Summary Judgment seeking the dismissal with prejudice of all claims in the consolidated amended class action complaint. On February 13, 2007, the court denied defendants’ motion and on April 17, 2007, denied Tellabs’ motion for leave to certify an issue for interlocutory appeal to the United States Federal Court of Appeal for the Seventh Circuit. Plaintiffs moved to certify a class, discovery was conducted to determine the propriety of class certification, and Tellabs opposed class certification. On September 20, 2007, the court granted plaintiff’s motion to certify a class. Merits discovery is now proceeding, and a trial is currently scheduled for October 20, 2008. We believe that we have valid defenses to the lawsuit.

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QPSX Developments 5 Pty Ltd. v. Ciena Corporation et al On October 1, 2007, Tellabs was served with a complaint filed in the United States District Court for the Eastern District of Texas against Tellabs and several other companies in a case captioned QPSX Developments 5 Pty Ltd. v. Ciena Corporation et al., Civil Action No. 2:07-cv-118. The complaint alleges infringement of U.S. Patent No. 5,689,499, and seeks unspecified damages including enhanced damages, as well as interest, costs, attorney fees and other remedies including injunctive relief. On November 21, 2007, Tellabs filed its answer, defenses and counterclaims in response to the complaint. We believe that we have valid defenses to the lawsuit.

Fujitsu Network Communications Inc. v. Tellabs, Inc. On January 28, 2008, Fujitsu Network Communications, Inc. and Fujitsu Limited filed a complaint in the United States District Court for the Eastern District of Texas against Tellabs in a case captioned Fujitsu Network Communications, Inc. and Fujitsu Limited v. Tellabs, Inc. and Tellabs Operations, Inc., Civil Action No. 6:08-cv-00022-LED. The complaint alleges infringement of U.S. Patent Nos. 5,526,163, 5,521,737, 5,386,418 and 6,487,686, and seeks unspecified damages including enhanced damages, as well as attorney fees and other remedies including injunctive relief. We believe that we have valid defenses to the lawsuit.

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 adverse effect on our results of operations, financial position or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

FORWARD-LOOKING STATEMENTS

Except for historical information, the matters discussed or incorporated by reference into this report may include forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect management’s expectations, estimates and assumptions, based on the information available at the time the document was prepared. These forward-looking statements include, but are not limited to, statements regarding future events, plans, goals, objectives and expectations. The words “anticipate,” “believe,” “foreseeable,” “estimate,” “target,” “expect,” “predict,” “plan,” “project,” “intend,” “likely,” “possible,” “will,” “would,” “should,” “could,” “may,” “continue,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors that may cause our actual performance or achievements to be materially different from any future results, performance or achievements expressed or implied by those statements. Important factors that could cause our actual results to differ materially from those in forward-looking statements include, but are not limited to: economic changes impacting the telecommunications industry; financial condition of telecommunication service providers and equipment vendors, including any impact of bankruptcies; the impact of customer and vendor consolidation; new product acceptance; product demand and industry capacity; competitive products and pricing; competitive pressures from new entrants to the telecommunications industry; initiatives to improve profitability that may have financial consequences including further restructuring charges, exiting businesses and product areas; impairment charges and other cost cutting initiatives and related charges and costs; manufacturing efficiencies; research and new product development; protection of and access to intellectual property, patents and technology; ability to attract and retain highly qualified personnel; availability of components and critical manufacturing equipment and capacity; foreign economic conditions, including currency rate fluctuations; the regulatory and trade environment; the impact of new or revised accounting rules or interpretations, including revenue recognition requirements; availability and terms of future acquisitions; divestitures and investments; uncertainties relating to synergies, charges, and expenses associated with business combinations and other transactions; and other risks and future factors that may be detailed from time to time in the Company’s filings with the SEC. For a further description of such risks and future factors, see Item 1A of this Form 10-K. Our actual future results could differ materially from those predicted in such forward-looking statements. In light of the foregoing risks, uncertainties and other factors, investors should not place undue reliance on the forward-looking statements in determining whether to buy, sell or hold any of our securities. 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. The foregoing discussion should be read in conjunction with the financial statements and related notes and management’s discussion and analysis included in our 2007 Annual Report, included herein as Exhibit 13, and incorporated in this report by reference.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Tellabs’ common stock is listed on the NASDAQ National Market under the symbol “TLAB”. As of February 15, 2008, there were approximately 7,356 stockholders of record and 413,776,721 outstanding shares.

The section entitled “Common Stock Market Data” in our 2007 Annual Report, included herein as Exhibit 13, is incorporated herein by reference. We have never paid cash dividends and do not anticipate paying a cash dividend in the foreseeable future.

On February 2, 2005, our Board of Directors authorized the purchase of up to $300 million of our outstanding common stock. As of August 2, 2006, we purchased 32.0 million shares of our common stock at a total cost of $300 million, completing this program. This includes purchases of $107.4 million (7.6 million shares) during fiscal 2006.

On January 26, 2006, our Board of Directors authorized the purchase of up to $100 million of our outstanding stock under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. On April 27, 2006, our Board of Directors authorized the removal of the $100 million cap from this 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 in the manner provided under this program. As of December 28, 2007, we purchased 7.1 million shares of our common stock under this program at a total cost of $90.8 million. This includes purchases of $28.7 million (2.6 million shares) during fiscal 2007. On January 24, 2008, our Board of Directors authorized a one-year extension of this program.

On July 31, 2006, our Board of Directors authorized a repurchase program of up to $300 million of our outstanding common stock. As of December 28, 2007, we purchased 32.4 million shares of our common stock at a total cost of $270.1 million, leaving $29.9 million available to be purchased under this program. This includes purchases of $167.1 million (22.5 million shares) during fiscal 2007. We intend to continue to repurchase shares under this program from time to time during open trading windows and when we do not possess material non-public information.

On November 8, 2007, our Board of Directors authorized a repurchase program of up to $600 million of our outstanding common stock. No purchases of our common stock have been made under this program. We intend to repurchase shares under this program (upon completion of the July 31, 2006, authorized $300 million program) from time to time during open trading windows and when we do not possess material non-public information.

In addition, during 2007 we purchased 0.2 million shares for $2.2 million to cover withholding taxes on shares issued under employee stock plans. In 2006, we purchased 0.2 million shares for $3.5 million to cover withholding taxes on shares issued under employee stock plans.

We record repurchased shares from these programs as Treasury stock.

Repurchases of Common Stock in 2007:

Period of Purchases	Total Number of Shares Purchased	Average Purchase Price of Shares		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Remaining Dollar Value of Shares Available to be Purchased Under the Programs (In millions) (1)
12/30/06 through 2/2/07	522,931	$	10.12	522,931	$	193.1
2/3/07 through 3/2/07	1,793,207		10.70	1,793,207		176.1
3/3/07 through 3/30/07	73,509		10.12	73,509		176.1
3/31/07 through 5/4/07	362,569		10.69	362,569		176.1
5/5/07 through 6/1/07	328,216		11.03	328,216		176.1
6/2/07 through 6/29/07	230,467		10.80	230,467		176.1
6/30/07 through 8/3/07	934,498		11.82	934,498		176.1
8/4/07 through 8/31/07	117,842		10.62	117,842		176.1
9/1/07 through 9/28/07	127,180		10.49	127,180		176.1
9/29/07 through 11/2/07	61,490		9.05	61,490		176.1
11/3/07 through 11/30/07	20,483,643		7.14	20,483,643		629.9
12/1/07 through 12/28/07	20,851		7.08	20,851		629.9
Total	25,056,403	$	7.82	25,056,403

(1) The amounts in this column represent the remaining amounts under the two $300 million and one $600 million programs. The Rule10b5-1 repurchase program does not have a limit; therefore, it is not included in the remaining value of shares.

19

ITEM 6. SELECTED FINANCIAL DATA

The five years of selected financial data, for our 2007, 2006, 2005, 2004 and 2003 fiscal years is included in the 11-Year Summary of Selected Financial Data in our 2007 Annual Report, included herein as Exhibit 13, and such five years of selected data is incorporated herein by reference.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The Management’s Discussion and Analysis of Results of Operations and Financial Condition in our 2007 Annual Report, included herein as Exhibit 13, and is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Investments in Marketable Securities

During the normal course of business, we invest a portion of our cash and cash equivalents in marketable securities. For a discussion of our investments in marketable securities for the fiscal years ended December 28, 2007, and December 29, 2006, see the notes to our consolidated financial statements in our 2007 Annual Report, included herein as Exhibit 13, and incorporated herein by reference.

Financial Contracts and Market Risk

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

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

Non-designated Hedges

We use derivative contracts to manage overall foreign currency exposures that are remeasured through income. We record these contracts on the balance sheet at fair value. Changes in the fair value of these contracts are included in earnings as part of Other expense, net. We had a net gain of $2.2 million in 2007, a net gain of $7.5 million in 2006 and a net loss of $23.3 million in 2005. Receivables resulting from the contracts are included in Miscellaneous receivables and other current assets, while payables from the contracts are included as part of Other accrued liabilities. We do not engage in hedging specific individual transactions.

20

Cash Flow Hedges

We use derivative contracts designated as cash flow hedges to mitigate currency risk related to an imbalance of nonfunctional currency denominated costs and related revenue. We conducted monthly effectiveness tests of our derivative contracts on a spot-to-spot basis, which excludes the time value related to forward points. In 2007, we recorded a loss of $0.4 million related to time value in Other expense, net. Effective gains and losses from our derivative contracts are recorded in Accumulated other comprehensive income until the underlying transactions are realized, at which point they are reclassified to either Operating expense, Other expense, net or Other cost of revenue, depending on the nature of the underlying transaction. Ineffectiveness of our derivative contracts is recorded to Other expense, net. We recorded nominal ineffectiveness in 2007. 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 Accumulated other comprehensive income to Other expense, net. At year-end 2007, we had a balance of $0.4 million remaining in Accumulated other comprehensive income, which is expected to be reclassified to income within the next twelve months.

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

(In millions)	Weighted Average Contract Rate	Notional Value of Forward Contracts Maturing in 2008
Forward contracts at December 28, 2007:
Forward contracts to sell foreign currencies for Euro:
United States dollar	1.4383	$	97.8
British pound	1.3784		40.8
Norwegian kroner	8.0460		1.0
Swedish kroner	9.4476		5.9
Swiss franc	1.6600		0.8
		$	146.3
Forward contracts to buy foreign currencies for Euro:
British pound	1.3801	$	45.6
Norwegian kroner	8.0460		1.0
Swedish kroner	9.4476		8.6
United States dollar	1.4382		2.4
		$	57.6
Forward contracts to sell foreign currencies for British pound:
Euro	1.3784	$	15.8
Forward contracts to sell foreign currencies for U.S. dollar:
Mexican peso	0.0915	$	9.0
Euro	1.4382		2.1
Canadian dollar	1.0073		0.6
Australian dollar	0.8663		2.1
		$	13.8
Forward contracts to buy foreign currencies for U.S. dollar:
Canadian dollar	1.0073		1.1
Singapore dollar	0.6885		1.0
		$	2.1
Forward contracts to buy foreign currencies for Australia dollar:
United States dollar	0.8663	$	11.6
Forward contracts to buy foreign currencies for Singapore dollar:
United States dollar	0.6885	$	1.3
Total contracts outstanding at December 28, 2007:		$	248.5

21

(In millions)	Weighted Average Contract Rate	Notional Value of Forward Contracts Maturing in 2007
Forward contracts at December 29, 2006:
Forward contracts to sell foreign currencies for Euro:
United States dollar	1.3219	$	70.0
British pound	1.4868		15.6
Norwegian kroner	8.1913		1.6
Swedish kroner	8.9872		2.7
		$	89.9
Forward contracts to buy foreign currencies for Euro:
British pound	1.4902	$	21.7
Swedish kroner	9.0098		4.6
United States dollar	1.3152		1.9
		$	28.2
Forward contracts to sell foreign currencies for British pound:
Euro	1.4937	$	15.0
Forward contracts to buy foreign currencies for British pound:
United States dollar	1.9565	$	0.9
Forward contracts to sell foreign currencies for U.S. dollar:
Mexican peso	10.9240	$	7.6
Euro	1.3152		0.8
Australian dollar	0.7833		0.5
		$	8.9
Forward contracts to buy foreign currencies for U.S. dollar:
India rupee	0.0225	$	0.5
Singapore dollar	0.6505		2.5
		$	3.0
Forward contracts to sell foreign currencies for India rupee:
United States dollar	0.0218	$	1.3
Forward contracts to buy foreign currencies for India rupee:
United States dollar	0.0215	$	3.1
Forward contracts to buy foreign currencies for Thai baht:
United States dollar	37.5770	$	2.1
Forward contracts to sell foreign currencies for Australia dollar:
United States dollar	0.7833	$	1.5
Forward contracts to sell foreign currencies for Danish kroner:
United States dollar	5.6710	$	1.4
Total contracts outstanding at December 29, 2006:		$	155.3

22

Pursuant to our policy, we entered into the above contracts immediately prior to the respective year-ends. Accordingly, the fair value of such contracts was nominal as of December 28, 2007 and December 29, 2006.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements and Notes, Report of Independent Registered Public Accounting Firm and Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting in our 2007 Annual Report, included herein as Exhibit 13, are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) carried out an evaluation under their supervision and with the participation of our management, of the effectiveness of our disclosure controls and procedures and internal control over financial reporting.

Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures are effective and there were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Management’s report on internal control over financial reporting and the attestation report of Ernst and Young LLP, our independent registered public accounting firm, on our internal control over financial reporting is set forth in our 2007 Annual Report, included herein as Exhibit 13, and is incorporated herein by reference.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required is incorporated herein by reference to the sections entitled “Voting Information - Election of Directors,” “Committees of the Board-Audit and Ethics Committee,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for our 2008 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended December 28, 2007, and the sections entitled “Officers” and “Code of Ethics” in our 2007 Annual Report, included herein as Exhibit 13, and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required is incorporated herein by reference to the sections entitled “Executive Compensation,” “Director Compensation,” and “Corporate Governance,” in our Proxy Statement for our 2008 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days, after the fiscal year ended December 28, 2007.

23

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required is incorporated herein by reference to the sections entitled “Security Ownership of Management” and “Security Ownership of Certain Beneficial Owners” in our Proxy Statement for our 2008 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended December 28, 2007. Securities authorized for issuance under equity compensation plans is included in the notes to our 2007 Annual Report, included herein as Exhibit 13, and is incorporated herein by reference.

Equity Compensation Plan Table

The following table summarizes information as of December 28, 2007, relating to equity compensation plans of the Company pursuant to which Common Stock is authorized for issuance:

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	30,581,723	$	18.38	29,445,041
Equity compensation plans not approved by security holders (1)	6,406,931	$	11.86	—
Total	36,988,654	$	17.25	29,445,041

(1) All of these options were issued pursuant to option plans that were assumed in merger transactions. The Company has not made, and will not make, any future grants or awards of equity securities under these plans.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required is incorporated herein by reference to the section entitled “Transactions with Related Persons”, “Policies and Procedures for Review and Approval of Related-Person Transactions” and “Corporate Governance” in our Proxy Statement for our 2008 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended December 28, 2007.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required is incorporated herein by reference to the section entitled “Independent Auditor’s Fees and Services” in our Proxy Statement for our 2008 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended December 28, 2007.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1. Financial Statements:

The following Consolidated Financial Statements of Tellabs, Inc. and Subsidiaries, included in the registrant’s 2007 Annual Report, included herein as Exhibit 13, were previously incorporated by reference in Item 8:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets: December 28, 2007 and December 29, 2006

Consolidated Statements of Income: Years ended December 28, 2007, December 29, 2006 and December 30, 2005

Consolidated Statements of Stockholders’ Equity: Years ended December 28, 2007, December 29, 2006 and December 30, 2005

Consolidated Statements of Cash Flow: Years ended December 28, 2007, December 29, 2006 and December 30, 2005

Notes to Consolidated Financial Statements

24

2. Financial Statement Schedule:

The following Consolidated Financial Statement Schedule of Tellabs, Inc. and Subsidiaries and related Report of Independent Registered Public Accounting Firm are included herein pursuant to Item 15(d):

Schedule II. Valuation and Qualifying Accounts and Reserves

Other schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.

(b) Exhibits:

Exhibit Number	Description
3.1	Restated Certificate of Incorporation and Amendments 14/
3.2	Third Amended and Restated By-Laws dated February 13, 2008 (incorporated by reference to Exhibit 3.2 of Tellabs, Inc. Form 8-K filed with the SEC on February 15, 2008)21/
10.1	Tellabs Operations, Inc. Deferred Compensation Plan, as amended and its related trust, as amended 3/
10.2	Tellabs, Inc. Deferred Income Plan
10.3	1986 Non-Qualified Stock Option Plan, as amended and restated 1/
10.4	Amendment to Tellabs, Inc. 1986 Non-Qualified Stock Option Plan (As Amended and Restated June 26, 1992) 7/
10.5	1987 Stock Option Plan for Non-Employee Corporate Directors, as amended and restated 1/
10.6	Amendment to Tellabs, Inc. 1987 Stock Option Plan for Non-Employee Corporate Directors (As Amended and Restated June 26, 1992) 7/
10.7	1989 Stock Option Plan, as amended and restated 1/
10.8	Amendment to Tellabs, Inc. 1989 Stock Option Plan (As Amended and Restated June 26, 1992) 7/
10.9	Employee Quality Stock Award Program 2/
10.10	1991 Stock Option Plan, as amended and restated 1/
10.11	Amendment to Tellabs, Inc. 1991 Stock Option Plan (As Amended and Restated June 26, 1992) 7/
10.12	Amendment to the Coherent Communications Systems Corporation Amended and Restated 1993 Equity Compensation Plan 7/
10.13	Amendment to the Coherent Communications Systems Corporation 1993 Equity Compensation Plan 8/
10.14	1994 Stock Option Plan 3/
10.15	Amendment to the Tellabs, Inc. 1994 Stock Option Plan 7/
10.16	Tellabs, Inc. 1998 Stock Option Plan 4/
10.17	Amendment to the Tellabs, Inc. 1998 Stock Option Plan 7/
10.18	1999 Tellabs, Inc., Stock Bonus Plan 6/
10.19	SALIX Technologies, Inc. 1998 Omnibus Stock Plan and Option Agreement Dated as of December 1, 1997 5/
10.20	Amendment to the SALIX Technologies, Inc. Omnibus Stock Plan 7/
10.21	Tellabs, Inc. 2001 Stock Option Plan 8/
10.22	Form of Executive Agreement for Corporate Officers 11/
10.23	Ocular Networks, Inc. Amended and Restated 2000 Stock Incentive Plan 9/
10.24	Tellabs Advantage Plan, as amended and restated 13/
10.25	First Amendment to the Tellabs Advantage Plan 13/
10.26	Second Amendment to the Tellabs Advantage Plan 13/
10.27	2004 Amendment to the Tellabs Advantage Plan 15/
10.28	2006 Amendment to the Tellabs Advantage Plan 19/
10.29	Vivace Networks, Inc. 1999 Equity Incentive Plan, as amended 18/
10.30	Tellabs, Inc. 2004 Incentive Compensation Plan 12/
10.31	Forms of Stock Award Statement, Stock Award Agreement and RSU Award Statement pertaining to Tellabs, Inc. 2004 Incentive Compensation Plan 15/
10.32	Advanced Fibre Communication, Inc. 1996 Stock Incentive Plan 15/
10.33	Form of Stock Option Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan 15/
10.34	Form of Automatic Stock Option Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan 15/
10.35	Form of Notice of Grant of Stock Option pertaining to the Advanced Fibre Communication, Inc. 1996 Plan 15/

25

10.36	Form of Notice of Grant of Non-Employee Director Automatic Stock Option pertaining to the Advanced Fibre Communication, Inc. 1996 Plan 15/
10.37	Form of Stock Issuance Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan 15/
10.38	2005 Tellabs, Inc. Employee Stock Purchase Plan 16/
10.39	Tellabs, Inc. Executive Continuity and Protection Program 16/
10.40	Form of Executive Performance Stock Units Statement and Award Agreement 17/
10.41	401(k) Plan as Amended and Restated Effective January 1, 2007 20/
10.42	Addendum Incorporating Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) to Tellabs 401(k) Plan 20/
13	Annual Report to Stockholders
21	Subsidiaries of Tellabs, Inc.
23	Consent of Independent Registered Public Accounting Firm
31.1	CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibits 10.1 through 10.42 contain, among other documents, management contracts or compensatory plans or arrangements required to be filed as an Exhibit to this Form 10-K pursuant to Item 15(b) hereof.

(c) Schedules: See Item 15(a)2 above.

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

2/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended April 1, 1988 (File No. 0-9692).

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

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

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

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

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

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

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

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

11/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended September 26, 2003 (File No. 0-9692).

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

13/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended January 2, 2004 (File No. 0-9692).

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

26

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

16/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended March 31, 2005 (File No. 0-9692).

17/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended September 29, 2006 (File No. 0-9692).

18/ Incorporated by reference from Tellabs, Inc. Form S-8 filed on July 29, 2003 (File no. 333-107457).

19/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 29, 2006 (File No. 0-9692).

20/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended September 28, 2007 (File No. 0-9692).

21/ Incorporated by reference from Tellabs, Inc. Form 8-K Current Report dated February 13, 2008 (File No. 0-9692).

27

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
February 26, 2008	/s/ Krish A. Prabhu
	Krish A. Prabhu
	President, Chief Executive Officer and Director (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Krish A. Prabhu	February 26, 2008
Krish A. Prabhu
President, Chief Executive Officer and Director
(Principal Executive Officer)

/s/ Timothy J. Wiggins	February 26, 2008
Timothy J. Wiggins
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)

/s/ Thomas P. Minichiello
Thomas P. Minichiello	February 26, 2008
Vice President of Finance and Chief Accounting Officer
(Principal Accounting Officer)

/s/ Michael J. Birck
Michael J. Birck	February 26, 2008
Chairman and Director

28

/s/ Linda Beck
Linda Beck	February 26, 2008
Director
/s/ Bo Hedfors
Bo Hedfors	February 26 , 2008
Director
/s/ Frank Ianna
Frank Ianna	February 26, 2008
Director
/s/ Frederick A. Krehbiel
Frederick A. Krehbiel	February 26, 2008
Director
/s/ Michael E. Lavin
Michael E. Lavin	February 26, 2008
Director
/s/ Stephanie Pace Marshall
Stephanie Pace Marshall	February 26, 2008
Director
/s/ William F. Souders
William F. Souders	February 26, 2008
Director
/s/ Jan H. Suwinski
Jan H. Suwinski	February 26, 2008
Director

29

TELLABS, INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

Three Years Ended December 28, 2007, December 29, 2006 and December 30, 2005

Accounts Receivable Allowances

(In millions)	Balance at Beginning of Year		Net Additions (Reductions) Charged to Costs and Expenses			Deductions (A)			Acquisitions (B)			Reclass (C)			Currency Translation Adjustments			Balance at End of Year
2007	$	3.8	$	(0.9	)	$	—		$	—		$	—		$	0.1		$	3.0
2006	$	4.2	$	—		$	(0.2	)	$	—		$	—		$	(0.2	)	$	3.8
2005	$	14.8	$	(1.4	)	$	(1.3	)	$	(3.8	)	$	(4.2	)	$	0.1		$	4.2

NOTE:

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

(B) – Purchase price adjustments related to the acquisition of AFC.

(C) – Reclass of returns to current liabilities.

30

Exhibit Index

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

31

EX-10.2

EXHIBIT 10.2

TELLABS, INC.

2008 DEFERRED INCOME PLAN

Effective as of January 1, 2008

Tellabs, Inc.

2008 Deferred Income Plan

TABLE OF CONTENTS

		Page
Purpose		1
ARTICLE 1	Definitions	1
ARTICLE 2	Selection, Enrollment, Eligibility	8
2.1	Selection by Committee	8
2.2	Enrollment Requirements	8
2.3	Eligibility; Commencement of Participation	8
2.4	Termination of Participation and/or Deferrals	8
ARTICLE 3	Deferral Commitments/Credit to Accounts/Vesting/Measurement Funds/Taxes	9
3.1	Minimum Deferrals	9
3.2	Maximum Deferral	9
3.3	Election to Defer; Effect of Election Form	10
3.4	Withholding of Annual Deferral Amounts	10
3.5	Annual Company Contribution Amount	10
3.6	Annual Restricted Stock Amount	10
3.7	Annual Restoration Contribution Amount	11
3.8	Investment of Trust Assets	11
3.9	Sources of Stock	11
3.10	Vesting	11
3.11	Crediting/Debiting of Account Balances	12
3.12	FICA and Other Taxes	14
3.13	Distributions	14
ARTICLE 4	In-Service Benefits; Unforeseeable Financial Emergencies; Withdrawal Election	14
4.1	In-Service Benefit	14
4.2	Payment of In-Service Benefit	14
4.3	Other Benefits Take Precedence Over In-Service	15
4.4	Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies	15
ARTICLE 5	Retirement Benefit	15
5.1	Retirement Benefit	15
5.2	Payment of Retirement Benefit	15

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5.3	Settlement in Stock	15
5.4	Death Prior to Completion of Retirement Benefit	15
ARTICLE 6	Pre-Retirement Survivor Benefit	16
6.1	Pre-Retirement Survivor Benefit	16
ARTICLE 7	Termination Benefit	16
7.1	Termination Benefit	16
7.2	Payment of Termination Benefit	16
ARTICLE 8	Disability Waiver and Benefit	16
8.1	Disability Benefit; Continued Eligibility	16
ARTICLE 9	Changing Payment Elections	16
9.1	Permissible Changes	16
9.2	409A Transition Elections	16
ARTICLE 10	Beneficiary Designation	17
10.1	Beneficiary	17
10.2	Acknowledgement	17
10.3	No Beneficiary Designation	17
10.4	Doubt as to Beneficiary	17
10.5	Discharge of Obligations	17
ARTICLE 11	Leave of Absence	18
11.1	Paid Leave of Absence	18
11.2	Unpaid Leave of Absence	18
ARTICLE 12	Termination, Amendment or Modification	18
12.1	Termination	18
12.2	Amendment	19
12.3	Effect of Change in Control	19
12.4	Plan Agreement	19
12.5	Effect of Payment	19
ARTICLE 13	Administration	20
13.1	Committee Duties	20
13.2	Agents	20

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13.3	Binding Effect of Decisions	20
13.4	Indemnity of Committee	20
13.5	Employer Information	20
ARTICLE 14	Other Benefits and Agreements	20
14.1	Coordination with Other Benefits	20
ARTICLE 15	Claims Procedures	21
15.1	Presentation of Claim	21
15.2	Notification of Decision	21
15.3	Review of a Denied Claim	21
15.4	Decision of Review	21
15.5	Legal Action	22
ARTICLE 16	Trust	22
16.1	Establishment of the Trust	22
16.2	Interrelationship of the Plan and the Trust	22
16.3	Distributions From the Trust	22
ARTICLE 17	Miscellaneous	22
17.1	Status of Plan	22
17.2	Unsecured General Creditor	22
17.3	Employer’s Liability	23
17.4	Nonassignability	23
17.5	Not a Contract of Employment	23
17.6	Furnishing Information	23
17.7	Terms	23
17.8	Captions	23
17.9	Governing Law	23
17.10	Notice	23
17.11	Successors	24
17.12	Spouse’s Interest	24
17.13	Validity	24
17.14	Incompetent	24
17.15	Court Order	24
17.16	Distribution in the Event of Taxation	24
17.17	Insurance	25
17.18	Legal Fees To Enforce Rights After Change in Control	25

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TELLABS DEFERRED INCOME PLAN

Effective as of January 1, 2008

Purpose

The purpose of this Plan is to provide specified benefits to a select group of management and highly compensated Employees and Directors who contribute materially to the continued growth, development and future business success of Tellabs, Inc., a Delaware corporation, its subsidiary, Tellabs Operations, Inc., and its other subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for other purposes of Title I of ERISA, and is intended to comply with the requirements of Code Section 409A and to enable Participants to take advantage of certain transition rules relating thereto. This Plan shall supersede in its entirety the Tellabs, Inc. Deferred Income Plan, effective as of September 2, 2001, as amended. Effective January 1, 2008, any and all balances accrued by a Participant under such predecessor plan shall be subject to the terms and conditions of this Plan and shall be referred to as the “Initial Account Balances.”

ARTICLE 1

Definitions

For purposes of this Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings:

1.1 “Account(s)” shall mean the Account or Accounts maintained on the books of the Company used solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan and shall not constitute a separate fund of assets. The Accounts available for each Participant shall be identified as the Retirement Account and the In-Service Account.

1.2 “Account Balance” shall mean the total amount of money (excluding stock) a Participant has in an Account or Accounts under the Plan. For a Participant with both an In-Service Account and a Retirement Account his Account Balance is the sum of the amounts credited to his Retirement Account and In-Service Account under this Plan. Participant’s election of a Valuation Fund shall apply to a Participant’s entire Account Balance unless Participant specifically designates certain Valuation Funds for the Retirement Account and other Valuation Funds for the In-Service Account.

1.3 “Annual Bonus” shall mean any compensation, in addition to Base Annual Salary, relating to services performed during any calendar year, whether or not paid in such calendar year or included on the Federal Income Tax Form W-2 for such calendar year, payable to a Participant as an Employee under any Employer’s annual bonus and cash incentive plans, excluding stock options and restricted stock.

1.4 “Annual Company Contribution Amount” shall mean, for any one Plan Year, the amount determined in accordance with Section 3.5.

1.5 “Annual Deferral Amount” shall mean that portion of a Participant’s Base Annual Salary, Annual Bonus and Directors Fees

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that a Participant elects to have, and is deferred, in accordance with Article 3, for any one Plan Year. In the event of a Participant’s Retirement, Disability (if deferrals cease in accordance with Section 8.1), death or a Termination of Employment prior to the end of a Plan Year, such year’s Annual Deferral Amount shall be the actual amount withheld prior to such event.

1.6 “Annual Installment Method” shall be an annual installment payment over the number of years selected by the Participant in accordance with this Plan, calculated as follows: The Account Balance of the Participant shall be calculated as of the close of business on the last business day of the Plan Year immediately preceding any annual payment. The amount of the annual installment shall be calculated by multiplying this balance by a fraction, the numerator of which is one, and the denominator of which is the remaining number of annual payments due the Participant. By way of example, if the Participant elects a 10-year Annual Installment Method, the first payment shall be  ¹/10 of the Account Balance, calculated as described in this definition. The following year, the payment shall be ¹/9 of the Account Balance, calculated as described in this definition. Each annual installment shall be paid on or as soon as practical after the last business day of the applicable year. The Annual Restricted Stock Amount shall be distributable in shares of actual Stock in the same manner previously described. However, the Committee may, in its sole discretion, adjust the annual installments in order to distribute whole shares of actual Stock.

1.7 “Annual Restoration Contribution Amount” shall mean, for any one Plan Year, the amount determined in accordance with Section 3.7.

1.8 “Annual Restricted Stock Amount” shall mean, with respect to a Participant for any one Plan Year, the amount of Restricted Stock Units deferred in accordance with Section 3.6 of this Plan, calculated using the closing price of Stock at the end of the business day closest to the date such Restricted Stock Units would otherwise vest, but for the election to defer.

1.9 “Base Annual Salary” shall mean the annual cash compensation relating to services performed during any calendar year, whether or not paid in such calendar year or included on the Federal Income Tax Form W-2 for such calendar year, excluding bonuses, non-standard commissions, overtime, fringe benefits, stock options, restricted stock, relocation expenses, unused and unpaid excess vacation days, incentive payments, non-monetary awards, directors fees and other fees, automobile and other allowances paid to a Participant for employment services rendered (whether or not such allowances are included in the Employee’s gross income). Base Annual Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or non-qualified plans of any Employer, including this Plan, and shall be calculated to include amounts not otherwise included in the Participant’s gross income under Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by any Employer; provided, however, that all such amounts will be included in compensation only to the extent that, had there been no such plan, the amount would have been payable in cash to the Employee.

1.10 “Beneficiary” shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 9, that are entitled to receive benefits under this Plan upon the death of a Participant.

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1.11 “Beneficiary Designation Form” shall mean the form that may be established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries.

1.12 “Board” shall mean the Board of Directors of the Company.

1.13 “Change in Control” shall mean the first to occur of any of the following events:

(a) Any “person” (as defined in Section 13(d) and 14(d) of the Securities Exchange Act as amended from time to time, or any successor act thereto, hereinafter referred to as the “Exchange Act”), excluding for this purpose, the Company or any Subsidiary of the Company, or any employee benefit plan of the Company or any Subsidiary of the Company, or any person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan which acquires beneficial ownership of voting securities of the Company, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company’s then outstanding securities; provided, however, that no Change in Control will be deemed to have occurred as a result of a change in ownership percentage resulting solely from an acquisition of securities by the Company; and provided further that no Change in Control will be deemed to have occurred if a person inadvertently acquires an ownership interest of twenty percent (20%) or more but then promptly reduces that ownership interest below twenty percent (20%); or

(b) During any two (2) consecutive years (not including any period beginning prior to the Effective Date), individuals who at the beginning of such two (2) year period constitute the Board of Directors of the Company and any new director (except for a director designated by a person who has entered into an agreement with the Company to effect a transaction described elsewhere in this definition of Change in Control) whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (such individuals and any such new director, the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; or

(c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners of outstanding voting securities of the Company immediately prior to such Business Combination beneficially own, directly or indirectly, more than fifty percent (50%) of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the company resulting from such Business Combination (including, without limitation, a company which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the

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same proportions as their ownership, immediately prior to such Business Combination of the outstanding voting securities of the Company; (ii) no person (excluding any company resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such company resulting from such Business Combination) beneficially owns, directly or indirectly, twenty percent (20%) or more of, respectively, the then combined voting power of the then outstanding voting securities of such company except to the extent that such ownership existed prior to the Business Combination; and (iii) at least a majority of the members of the board of directors of the company resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or,

(d) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company; or,

(e) A tender offer (for which a filing has been made with the Securities and Exchange Commission (“SEC”)) which purports to comply with the requirements of Section 14(d) of the Exchange Act and the corresponding SEC rules) is made for the outstanding voting securities of the Company, then the first to occur of: (i) any time during the offer when the person making the offer owns or has accepted for payment securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company’s then outstanding securities, or (ii) three business days before the offer is to terminate unless the offer is withdrawn first if the person making the offer could own, by the terms of the offer plus any securities owned by such person, securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities when the offer terminates.

Notwithstanding the foregoing, for purposes of any provision of this Plan for which a Change in Control is an event which triggers a payment or a change in the time or form of payments under the Plan, including but not limited to Article 12 hereof, then solely for such purpose, an event shall not constitute a Change in Control unless such event is also a “change in control event” as such term is defined in Treasury Regulation 1.409A-3(i)(5).

1.14 “Claimant” shall have the meaning set forth in Section 15.1.

1.15 “Code” shall mean the Internal Revenue Code of 1986, as it may be amended from time to time.

1.16 “Code Section 409A” shall mean Section 409A of the Code and applicable rules, regulations, and guidance issued thereunder.

1.17 “Committee” shall mean the committee described in Article 12.

1.18 “Company” shall mean Tellabs, Inc., a Delaware corporation, and any successor to all or substantially all of the Company’s assets or business.

1.19 “Deduction Limitation” shall mean the following described limitation on a benefit that may otherwise be distributable pursuant to the provisions of this Plan. Except as otherwise provided, this limitation shall be applied to all distributions that are “subject to the Deduction Limitation” under this Plan. If an Employer determines in good faith prior to a Change in

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Control that there is a reasonable likelihood that any compensation paid to a Participant for a taxable year of the Employer would not be deductible by the Employer solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Change in Control is deductible, the Employer may defer all or any portion of a distribution under this Plan. Any amounts deferred pursuant to this limitation shall continue to be credited/debited with additional amounts in accordance with Section 3.11 below, even if such amount is being paid out in installments. The amounts so deferred and amounts credited thereon shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant’s death) at the earliest possible date, as determined by the Employer in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Employer during which the distribution is made will not be limited by Section 162(m), or if earlier, the effective date of a Change in Control. Notwithstanding anything to the contrary in this Plan, the Deduction Limitation shall not apply to any distributions made after a Change in Control.

1.20 “Director” shall mean any member of the Board of Directors of the Employer who is not also an Employee.

1.21 “Director Fees” shall mean the annual fees paid by any Employer, including retainer fees and meeting fees, as compensation for serving on the Board of Directors.

1.22 “Disability” shall mean when a Participant is (i) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months; or (ii) by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Employer(s).

1.23 “Disability Benefit” shall mean the benefit set forth in Article 8.

1.24 “Election Form” shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan, identifying the element of compensation to deferred under the terms of this Plan and the appropriate Account to be credited with respect to such deferral.

1.25 “Employee” shall mean a person who is an employee of any Employer.

1.26 “Employer(s)” shall mean the Company, Tellabs Operations, Inc. and/or any other subsidiaries (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan as a sponsor.

1.27 “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time.

1.28 “Excess/Qualified Benefit Limitations” shall mean the limits set forth in Code Section 401(a)(17), 401(k) (3) and 402(g), as amended from time to time, which limit the amount of contributions the Company may make to the Qualified Program on behalf of a given Participant.

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1.29 “Hourly Salary Rate” shall be determined by dividing the bi-weekly salary of the Participant on the last day of the Plan Year by eighty (80).

1.30 “Initial Account Balance” shall mean, with respect to those Participants who participated in the Predecessor Deferred Income Plan, the amount initially credited as of the effective date of this Plan to a Participant’s Retirement Account and In-Service Account as reasonably determined by the Committee, in its sole discretion. The sum of the amounts credited to a Participant’s Retirement Account and the In-Service Account as the Initial Account Balances shall be equal to the Account Balance as of that same date in the Predecessor Deferred Income Plan. The Initial Account Balances shall be subject to the terms and conditions of this Plan and any Participant with an Initial Account Balance shall have no right to demand distribution of such amounts other than as provided for herein.

1.31 “In-Service Account” shall mean, with respect to each Participant, the credit on the records of the Employer equal to the Initial Account balance assigned to the In-Service Account, plus amounts deferred from Base Annual Salary, and Annual Bonus, or Director Fees, if applicable, except that no deferral amount shall be credited to an In-Service Account during a Plan Year in which a distribution is to be made, plus amounts credited in accordance with all the applicable crediting provisions of this Plan, less any distributions made to the Participant pursuant to this Plan.

1.32 “In-Service Benefit” shall mean the benefit set forth in Section 4.1.

1.33 “Key Employee” shall have the meaning set forth in Code Section 409A.

1.34 “Participant” shall mean any Employee or Director (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs a Plan Agreement, an Election Form and a Beneficiary Designation Form, (iv) whose signed Plan Agreement, Election Form and Beneficiary Designation Form are accepted by the Committee, (v) who commences participation in the Plan, and (vi) whose Plan Agreement has not terminated. A spouse or former spouse of a Participant shall not be treated as a Participant in the Plan or have an account balance under the Plan, even if he or she has an interest in the Participant’s benefits under the Plan as a result of applicable law or property settlements resulting from legal separation or divorce.

1.35 “Plan” shall mean the Tellabs Deferred Income Plan, which shall be evidenced by this instrument and by each Plan Agreement, as they may be amended from time to time.

1.36 “Plan Agreement” shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. Each Plan Agreement executed by a Participant and the Participant’s Employer shall provide for the entire benefit to which such Participant is entitled under the Plan; should there be more than one Plan Agreement, the Plan Agreement bearing the latest date of acceptance by the Employer shall supersede all previous Plan Agreements in their entirety and shall govern such entitlement. The terms of any Plan Agreement may be different for any Participant, and any Plan Agreement may provide additional benefits not set forth in the Plan or limit the benefits otherwise provided under the Plan; provided, however, that any such additional benefits or benefit limitations must be agreed to by both the Employer and the Participant.

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2008 Deferred Income Plan

1.37 “Plan Year” shall mean a period beginning on January 1 of each calendar year and continuing through December 31 of such calendar year.

1.38 “Pre-Retirement Survivor Benefit” shall mean the benefit set forth in Article 6.

1.39 “Predecessor Deferred Income Plan” shall mean the Tellabs, Inc. Deferred Income Plan, effective as of September 2, 2001, as amended.

1.40 “Qualified Program” shall be the Tellabs Advantage Program, adopted by Tellabs Operations, Inc., as may be further amended and/or any successor program thereto.

1.41 “Restricted Stock Units” shall mean unvested restricted stock units as awarded to the Participant under any Company stock incentive or bonus plan identified therein or by the Committee as being eligible for deferral under the provisions of this Plan.

1.42 “Retirement”, “Retire(s)” or “Retired” shall mean, with respect to an Employee, severance from employment from all Employers, on or after the attainment of age fifty-five (55) or such earlier date as approved by the Committee, for any reason other than death or Disability; and shall mean with respect to a Director who is not an Employee, severance of his or her directorships with all Employers on or after such date as determined in the sole discretion of the Committee.

1.43 “Retirement Account” shall mean, with respect to each Participant, a credit on the records of the Employer equal to the Initial Account balance assigned to the Retirement Account, plus amounts deferred or credited from Base Annual Salary, Annual Bonus, Annual Company Contributions Amounts, Annual Restoration Contribution Amounts, Annual Restricted Stock Amount, or Director Fees, if applicable, plus amounts credited in accordance with all the applicable crediting provisions of this Plan, less any distributions made to the Participant pursuant to this Plan.

1.44 “Retirement Benefit” shall mean the benefit set forth in Article 5.

1.45 “Stock” shall mean the common stock, $.01 par value per share of Tellabs, Inc., or any other equity securities of the Company designated by the Committee.

1.46 “Termination Benefit” shall mean the benefit set forth in Article 7.

1.47 “Termination of Employment” shall mean the severing of employment with all Employers, or service as a Director of all Employers, voluntarily or involuntarily, for any reason other than Retirement, Disability, or death. If a Participant is both an Employee and a Director, a Termination of Employment shall be determined in the sole discretion of the Committee by reference to the Participant’s employment status with respect to those accounts attributable to compensation relating to such employment and separately as a Director for those accounts attributable to compensation relating to service as a Director. References herein to “Termination of Employment” are intended to mean a termination of employment or service as a Director which constitutes a “separation from service” under Code Section 409A and Treasury Regulation 1.409A-1(h).

1.48 “Trust” shall mean the Master Trust Agreement associated with the plan document as entered into between the Company and the trustee named therein and as amended from time to time.

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1.49 “Unforeseeable Financial Emergency” shall be determined in accordance with Treasury Regulation 1.409A-3(i)(3).

1.50 “Years of Service” shall mean the total number of years in which a Participant has been employed by one or more Employers. For purposes of this definition, “Service” shall have the meaning provided for such term for purposes of vesting under the Qualified Program, whether or not the Participant is a participant in such plan.

ARTICLE 2

Selection, Enrollment, Eligibility

2.1 Selection by Committee. Participation in the Plan shall be limited to a select group of management and highly compensated Employees, as determined by the Committee in its sole discretion. From that group, the Committee shall select, in its sole discretion, Employees eligible to participate in the Plan. Directors shall also be Participants in the Plan.

2.2 Enrollment Requirements. As a condition to participation, each selected Employee or Director shall complete, execute and return to the Committee a Plan Agreement, an Election Form and a Beneficiary Designation Form, all within thirty (30) days after he or she is selected to participate in the Plan. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary.

2.3 Eligibility; Commencement of Participation. Provided an Employee or Director selected to participate in the Plan has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within the specified time period, that Employee or Director shall commence participation in the Plan on the first day of the month following the month in which the Employee or Director completes all enrollment requirements. If an Employee or a Director fails to meet all such requirements within the period required, in accordance with Section 2.2, that Employee or Director shall not be eligible to participate in the Plan until the first day of the Plan Year following the delivery to and acceptance by the Committee of the required documents.

2.4 Termination of Participation and/or Deferrals. If the Committee determines in good faith that an Employee no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee shall have the right, in its sole discretion, to (i) terminate any deferral election the Participant has made for the remainder of the Plan Year in which the Participant’s membership status changes, (ii) prevent the Participant from making future deferral elections and/or (iii) immediately distribute the Participant’s then Account Balances as a Termination Benefit and terminate the Participant’s participation in the Plan.

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ARTICLE 3

Deferral Commitments/Credit to Accounts/Vesting/Valuation Funds/Taxes

3.1 Minimum Deferrals.

(a) Base Annual Salary, Annual Bonus and Director Fees. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Annual Salary, Annual Bonus and/or Director Fees in the following minimum amount:

Deferral	Minimum Percentage
Base Annual Salary and/or Annual Bonus	1	%
Director Fees	1	%

If an election is made for less than such minimums, the amount deferred shall be zero.

(b) Annual Restricted Stock Amount. For each grant of Restricted Stock Units, a Participant eligible to defer Restricted Stock Units may elect to defer, as his or her Annual Restricted Stock Amount, Restricted Stock Units in the following minimum amount:

Deferral	Minimum Percentage
Restricted Stock Units	10	%

If an election is made for less than stated minimum amount, the amount deferred shall be zero.

(c) Short Plan Year. Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year of the Plan itself, the minimum Annual Deferral Percentage shall apply to any Base Annual Salary to be paid during the remainder of the Plan Year.

3.2 Maximum Deferral.

(a) Base Annual Salary, Annual Bonus and Directors Fees. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Annual Salary, Annual Bonus and/or Directors Fees up to the following maximum percentages for each deferral elected:

Deferral	Maximum Amount
Base Annual Salary	75	%
Annual Bonus	100	%
Directors Fees	100	%

(b) Annual Restricted Stock Amount. For each Plan Year, a Participant who is eligible to defer Restricted Stock Units may elect to defer, as his or her Annual Restricted Stock Amount, Restricted Stock Units in the following maximum percentage:

Deferral	Maximum Percentage
Restricted Stock Units	100	%

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(c) Short Plan Year. Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year the maximum Annual Deferral Amount with respect to Base Annual Salary, and/or Director Fees shall be limited to the amount to be paid during the remainder of the Plan Year. Annual Bonus deferrals may be done only during open enrollment periods for the Plan.

3.3 Election to Defer; Effect of Election Form.

(a) Plan Years. Subject to Section 9, for each Plan Year, an irrevocable deferral election for that Plan Year, and such other elections as the Committee deems necessary or desirable under the Plan, may be made by timely delivering to the Committee, in accordance with its rules and procedures, before the end of the Plan Year preceding the Plan Year for which the election is made, a new Election Form.

(b) Restricted Stock Units. For those Participants eligible to defer Restricted Stock Units, for an election to defer Restricted Stock Units to be valid: (i) a separate irrevocable Election Form must be completed and signed by the Participant, with respect to such Restricted Stock Units during the open enrollment period for the following Plan Year; and (ii) such Election Form must be timely delivered to the Committee and accepted by the Committee at least six (6) months prior to the date such Restricted Stock vests Units vest under the terms of the award thereof.

3.4 Withholding of Annual Deferral Amounts. For each Plan Year, the Base Annual Salary portion of the Annual Deferral Amount shall be withheld from each regularly scheduled Base Annual Salary payroll in equal amounts, as adjusted from time to time for increases and decreases in Base Annual Salary. The Annual Bonus and/or Directors Fees portion of the Annual Deferral Amount shall be withheld at the time the Annual Bonus or Directors Fees are or otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself.

3.5 Annual Company Contribution Amount. For each Plan Year, an Employer, in its sole discretion, may, but is not required to, credit any amount it desires to any Retirement Account under this Plan, which amount shall be for that Participant the Annual Company Contribution Amount for that Plan Year. The amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive an Annual Company Contribution Amount for that Plan Year. The Annual Company Contribution Amount, if any, shall be credited as of the last day of the Plan Year. If a Participant is not employed by an Employer as of the last day of a Plan Year other than by reason of his or her Retirement or death while employed, the Annual Company Contribution Amount for that Plan Year shall be zero.

3.6 Annual Restricted Stock Unit Amount. Subject to any terms and conditions imposed by the Committee, eligible Participants may elect to defer, under the Plan, Restricted Stock Units, which amount shall be for that Participant the Annual Restricted Stock Amount for that Plan Year. The portion of any Restricted Stock Units deferred shall, at the time the Restricted Stock Units would otherwise vest under the terms of the award thereof, but for the election to defer, be reflected on the books of the Company as an unfunded, unsecured promise to deliver to the Participant a specific number of actual shares of Stock in the future.

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3.7 Annual Restoration Contribution Amount. For each Plan Year during which the Company maintains the Qualified Program, an Employer shall credit a Participant’s Retirement Account an amount equal to the difference between (i) the amount the Employer contributed on behalf of such Employee Participant under the Qualified Program during such Plan Year and (ii) the amount that would have been contributed by the Employer under the Qualified Program during such Plan Year without regard to the Excess/Qualified Benefit Limitations, which amount shall be for that Participant the Annual Restoration Contribution Amount for that Plan Year. The amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive an Annual Restoration Contribution Amount for that Plan Year. The Annual Restoration Contribution Amount, if any, shall be credited as soon as practical, but in no event later than the last day of the second month immediately following the close of the Plan Year. If a Participant is not employed by an Employer, or is no longer providing services as a Director, as of the last day of a Plan Year other than by reason of his or her Retirement or death while employed, the Annual Restoration Contribution Amount for that Plan Year shall be zero.

3.8 Investment of Trust Assets. The Trustee of the Trust shall be authorized, upon written instructions received from the Committee or investment manager appointed by the Committee, to invest and reinvest the assets of the Trust in accordance with the applicable Trust Agreement, including the disposition of Stock and reinvestment of the proceeds in one or more investment vehicles designated by the Committee.

3.9 Sources of Stock. If Stock is credited under the Plan in the Trust pursuant to Section 3.6 in connection with a deferral of Restricted Stock Units, the shares so credited shall be deemed to have originated, and shall be counted against the number of shares reserved, under such other plan, program or arrangement.

3.10 Vesting.

(a) A Participant shall at all times be 100% vested in his or her Annual Deferral Amount, and Annual Restricted Stock Amount, and amounts credited thereon pursuant to Section 3.11.

(b) The Committee, in its sole discretion, will determine over what period of time and in what percentage increments a Participant shall vest in his or her Annual Company Contribution Amount and amounts credited thereon pursuant to Section 3.11. The Committee may credit some Participants with larger or smaller vesting percentages than other Participants, and the vesting percentage credited to any Participant for a Plan Year may be zero, even though one or more other Participants have a greater vesting percentage credited to them for that Plan Year.

(c) A Participant shall at all times be 100% vested in his or her Annual Restoration Contribution Amount, and amounts credited thereon pursuant to Section 3.11.

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(d) Notwithstanding anything to the contrary contained in this Section 3.10, in the event of a Change in Control and/or the Participant’s attainment of age sixty-five (65), a Participant’s Annual Company Contribution Amount, and amounts credited thereon pursuant to Section 3.11, shall immediately become 100% vested (if it is not already vested in accordance with the above vesting schedules).

3.11 Crediting/Debiting of Account Balances. In accordance with, and subject to, the rules and procedures that are established from time to time by the Committee, in its sole discretion, amounts shall be credited or debited to a Participant’s Account Balance in accordance with the following rules:

(a) Election of Valuation Funds. Subject to the restrictions found in Sections 3.11(d) and 3.11(e) below, a Participant, in connection with his or her initial deferral election in accordance with Section 3.3(a) above, shall elect, on the Election Form, one or more Valuation Fund(s) (as described in this Section 3.11(c) below) to be used to determine the amounts to be credited or debited to his or her Account Balance for the first day on which the Participant commences participation in the Plan and continuing thereafter for each subsequent day in which the Participant participates in the Plan, unless changed in accordance with the next sentence. Commencing with the first business day that follows the Participant’s commencement of participation in the Plan and continuing thereafter for each subsequent day in which the Participant participates in the Plan, no later than the close of business on such day, the Participant may (but is not required to) elect, by submitting an Election Form to the Committee that is accepted by the Committee, to add or delete one or more Valuation Fund(s) to be used to determine the amounts to be credited or debited to his or her Account Balance, or to change the portion of his or her Account Balance allocated to each previously or newly elected Valuation Fund. If an election is made in accordance with the previous sentence, it shall apply no later than the close of business on the next business day and continue thereafter for each subsequent day in which the Participant participates in the Plan, unless changed in accordance with the previous sentence.

(b) Proportionate Allocation. In making any election described in Section 3.11(a) above, the Participant shall specify on the Election Form, in increments of one percentage point (1%), the percentage of his or her Account Balance to be allocated to a Valuation Fund (as if the Participant was making an investment in that Valuation Fund with that portion of his or her Account Balance).

(c) Valuation Funds. The Committee shall designate one or more valuation funds based on certain mutual or other collective investment funds which, along with the fund described in Sections 3.11(d) and Section 3.11(e) below, shall constitute the Valuation Funds. Subject to Sections 3.11(d) and 3.11(e) below, the Participant may elect one or more of the Valuation Funds for purposes of crediting additional amounts to his or her Account Balance. As necessary, the Committee may, in its sole discretion, discontinue, substitute or add a Valuation Fund. Each such action will take effect as of date determined by the Committee.

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(d) Conversion of Restricted Fixed Rate Valuation Fund. For each Participant who has been credited with an Initial Account Balance in either his or her Retirement Account or In-Service Account, such portion, if any, of such Initial Account Balance with respect to which the Restricted Fixed Rate Valuation Fund under the predecessor Deferred Income Plan was the Valuation Fund as of December 31, 2007, shall be converted from such Valuation Fund to one or more other Valuation Funds as the participant may elect; provided, however, that in the event a Participant shall fail to elect such other Valuation Fund(s), then the amounts allocated to the Restricted Fixed Rate Fund shall be allocated to other Valuation Funds (other than the Tellabs, Inc. Stock Unit Fund) as the Committee shall have determined and communicated to the Participants prior to January 1, 2008.

(e) Tellabs, Inc. Stock Unit Fund. A Participant’s Annual Restricted Stock Amount will be automatically reflected in the Tellabs, Inc. Stock Unit Fund as the Valuation Fund. Participants may not select any other Valuation Fund to be used with respect to their Annual Restricted Stock Amount, and no other portion of the Participant’s Accounts can be either initially allocated or re-allocated to the Tellabs, Inc. Stock Unit Fund.

(f) Crediting or Debiting Method. The performance of each elected Valuation Fund (either positive or negative) will be determined by the Committee, in its reasonable discretion, based on the performance of the Valuation Funds themselves. A Participant’s Account Balance(s) shall be credited or debited on a daily basis based on the performance of each Valuation Fund selected by the Participant, as though (i) a Participant’s Account Balance(s) were invested in the Valuation Fund(s) selected by the Participant, at the closing price on such date; (ii) the portion of the Annual Deferral Amount, Company Contribution Amount, Qualifying Gain, Restricted Stock, Units, and/or Annual Restoration Contribution Amounts, that was actually deferred or contributed during any business day was invested in the Valuation Fund(s) selected by the Participant or as otherwise provided by this Section 3.11, in the percentages applicable to such business day, no later than the close of business on the first business day after the day on which such amounts are actually deferred or contributed, at the closing price on such date; and (iii) any distribution made to a Participant that decreases such Participant’s Account Balance ceased being invested in the Valuation Fund(s), in the percentages applicable to such business day, no earlier than one business day prior to the distribution, at the closing price on such date.

(g) No Actual Investment. Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Valuation Funds are to be used for measurement purposes only, and a Participant’s election of any such Valuation Fund, the allocation to his or her Account Balance(s) thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant’s Account Balance shall not be considered or construed in any manner as an actual investment of his or her Account Balance in any such Valuation Fund. In the event that the Company or the Trustee (as that term is defined in the Trust), in its own discretion, decides to invest funds in any or all of the Valuation Funds, no Participant shall have any rights in or to such investments themselves. Without limiting the foregoing, a Participant’s Account Balance(s) shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company or the Trust; the Participant shall at all times remain an unsecured creditor of the Company.

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3.12 FICA and Other Taxes.

(a) Annual Deferral Amounts. For each Plan Year in which an Annual Deferral Amount is being withheld from an Employee Participant, the Participant’s Employer(s) shall withhold from that portion of the Participant’s Base Annual Salary and Annual Bonus that is not being deferred, in a manner determined by the Employer(s), the Participant’s share of FICA and other employment taxes on such Annual Deferral Amount. If necessary, the Committee may reduce the Annual Deferral Amount in order to comply with this Section 3.12.

(b) Other Amounts. When an Employee Participant becomes vested in a portion of his or her Annual Company Contribution Amounts, and/or Annual Restoration Contribution Amounts the Participant’s Employer(s) shall withhold from the Participant’s Base Annual Salary and/or Annual Bonus that is not deferred, in a manner determined by the Employer(s), the Participant’s share of FICA and other employment taxes. If necessary, the Committee may reduce the vested portion of the Participant’s aforementioned amounts in order to comply with this Section 3.12.

(c) Annual Restricted Stock Amounts. For each Plan Year in which an Annual Restricted Stock Amount is being first withheld from an Employee Participant, the Participant’s Employer(s) shall withhold from that portion of the Participant’s Base Annual Salary, Bonus, and Restricted Stock Units that are not being deferred, in a manner determined by the Employer(s), the Participant’s share of FICA and other employment taxes on such Annual Restricted Stock Amount. If necessary, the Committee may reduce the Annual Restricted Stock Amount in order to comply with this Section 3.12.

3.13 Distributions. The Participant’s Employer(s), or the trustee of the Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the trustee of the Trust, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust.

ARTICLE 4

In-Service Benefits; Unforeseeable Financial Emergencies;

Withdrawal Election

4.1 In-Service Benefit. Subject to the Deduction Limitation, a Participant shall receive, as an In-Service Benefit, his or her In-Service Account Balance, at the date specified by the Participant in an Election Form. Notwithstanding the foregoing, the Participant may subsequently amend one time the intended date of payment provided that such change complies with Article 9.

4.2 Payment of In-Service Benefit. A Participant, in connection with his or her deferral into the In-Service Account, shall elect

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on an Election Form to receive the In-Service Benefit in a lump sum or pursuant to the Annual Installment Method of up to 5 years. The Participant may change his or her election to an allowable alternative payout period by submitting a new Election Form to the Committee, provided that any such changes comply with Article 9. If a Participant does not make any election with respect to the payment of the In-Service Benefit, then such benefit shall be payable in a lump sum. The lump sum payment shall be made, or installment payments shall commence, no later than sixty (60) days after the first day of the month of the Plan Year selected by the Participant or otherwise provided by this Plan. Any payment made shall be subject to the Deduction Limitation.

4.3 Other Benefits Take Precedence Over In-Service. Should an event occur that triggers a benefit under Article 5, 6, 7 or 8, the In-Service Account shall not be paid in accordance with Section 4.1 but shall be paid in accordance with the other applicable Article.

4.4 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies. If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to (i) suspend any deferrals required to be made by a Participant to his or her Accounts and/or (ii) receive a partial or full payout from the Plan. The payout shall not exceed the lesser of the Participant’s Account Balance(s), calculated as if such Participant were receiving a Termination Benefit, or the amount reasonably needed to satisfy the Unforeseeable Financial Emergency. If, subject to the sole discretion of the Committee, the petition for a suspension and/or payout is approved, suspension shall take effect upon the date of approval and any payout shall be made within sixty (60) days of the date of approval. The payment of any amount under this Section 4.4 shall not be subject to the Deduction Limitation.

ARTICLE 5

Retirement Benefit

5.1 Retirement Benefit. Subject to the Deduction Limitation, a Participant who Retires shall receive, as a Retirement Benefit, his or her Account Balance.

5.2 Payment of Retirement Benefit. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form to receive the Retirement Benefit in a lump sum or pursuant to the Annual Installment Method of up to 10 years, or as may otherwise be permitted by the Committee. The Participant may change his or her election to an allowable alternative payout period by submitting a new Election Form to the Committee, provided that any such changes comply with Article 9. If a Participant does not make any election with respect to the payment of the Retirement Benefit, then such benefit shall be payable in a lump sum. The lump sum payment shall be made, or installment payments shall commence, no later than sixty (60) days after the last day of the Plan Year in which the Participant Retires. Any payment made shall be subject to the Deduction Limitation.

5.3 Settlement in Stock. The portion of the Retirement Account attributable to the Annual Restricted Stock Amount shall only be satisfied by the distribution of actual shares of stock.

5.4 Death Prior to Completion of Retirement Benefit. If a Participant dies after Retirement but before the Retirement Benefit is paid in full, the Participant’s unpaid Retirement Benefit payments shall continue and shall be paid to the Participant’s

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Beneficiary over the remaining number of years and in the same amounts as that benefit would have been paid to the Participant had the Participant survived.

ARTICLE 6

Pre-Retirement Survivor Benefit

6.1 Pre-Retirement Survivor Benefit. Subject to the Deduction Limitation, the Participant’s Beneficiary shall receive a lump sum, Pre-Retirement Survivor Benefit equal to the Participant’s Account Balance(s) if the Participant dies before he or she Retires, experiences a Termination of Employment or suffers a Disability.

ARTICLE 7

Termination Benefit

7.1 Termination Benefit. Subject to the Deduction Limitation, the Participant shall receive a Termination Benefit, which shall be equal to the Participant’s Account Balance(s) if a Participant experiences a Termination of Employment prior to his or her Retirement, death or Disability.

7.2 Payment of Termination Benefit. The Participant shall receive his or her Termination Benefit in a lump sum payment no later than thirty (30) days after the date on which the Committee determines that the Participant is owed such benefits. Any payment made shall be subject to the Deduction Limitation. If Participant is a Key Employee payment of his or her Termination Benefit will be paid no earlier than six months from Termination of Employment.

ARTICLE 8

Disability Waiver and Benefit

8.1 Disability Benefit. A Participant who becomes Disabled prior to the occurrence of an event described in Articles 4, 5, 6 or 7 shall receive his or her Account Balance in the form of a lump sum within sixty (60) days of the determination that the Participant is Disabled. Any payment made shall be subject to the Deduction Limitation.

ARTICLE 9

Changing Payment Elections

9.1 Permissible Changes. Subject to Section 9.2, a Participant may make a one-time change to his or her payment elections under Sections 4.1 (In-Service Benefit), 4.2 (Payment of In-Service Benefit) and 5.2 (Payment of Retirement Benefit) by submitting a new Election Form to the Committee provided that (a) any such Election Form will not be effective for twelve (12) months after the date the Election Form is submitted to and accepted by the Committee and (b) the date benefit payments commence to the Participant must be at least five (5) years after the date benefits would have otherwise commenced under the payment election in effect prior to such change.

9.2 409A Transition Elections. Notwithstanding anything in the Plan to the contrary, effective through December 31, 2008, each Participant (or Beneficiary) shall be permitted to make a new payment elections provided that with respect to such

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Participant’s (or Beneficiary’s) Accounts under the Plan, notwithstanding the timing requirements of Section 9.1 above. Any election pursuant to this Section 9.2 shall be made at such time and on such Election Form as the Committee shall determine. With respect to elections made prior to December 31, 2007, any such election shall only apply to benefits amounts that would not otherwise be payable in 2007 and may not cause an amount to be paid in 2007 that would not otherwise be payable in 2007. The Committee may permit an election prior to December 31, 2007 to receive a lump sum payment of the balance of a Participant’s entire Account as of January 1, 2008 during January 2008. The Committee may extend to Participants (or Beneficiaries) the opportunity to make a similar election during 2008, provided any such elections made after December 31, 2007 but before January 1, 2009, any such elections may only apply to benefits that would not otherwise be payable in 2008 and may not cause a benefit to be paid in 2008 that would not otherwise be payable in 2008, and shall be subject to such other limitations and provisions as the Committee shall determine.

ARTICLE 10

Beneficiary Designation

10.1 Beneficiary. Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee (or its designee) prior to his or her death.

10.2 Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received and acknowledged in writing by the Committee or its designated agent.

10.3 No Beneficiary Designation. If a Participant fails to designate a Beneficiary as provided in Sections 10.1 and 10.2 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant’s benefits, then the Participant’s designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant’s estate.

10.4 Doubt as to Beneficiary. If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant’s Employer to withhold such payments until this matter is resolved to the Committee’s satisfaction.

10.5 Discharge of Obligations. The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant’s Plan Agreement shall terminate upon such full payment of benefits.

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ARTICLE 11

Leave of Absence

11.1 Paid Leave of Absence. If a Participant is authorized by the Participant’s Employer for any reason to take a paid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.3, unless the Committee allows an exception pursuant to Section 8.1.

11.2 Unpaid Leave of Absence. If a Participant is authorized by the Participant’s Employer for any reason to take an unpaid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Participant shall be excused from making deferrals until the earlier of the date the leave of absence expires or the Participant returns to a paid employment status. Upon such expiration or return, deferrals shall resume for the remaining portion of the Plan Year in which the expiration or return occurs, based on the deferral election, if any, made for that Plan Year. If no election was made for that Plan Year, no deferral shall be withheld.

ARTICLE 12

Termination, Amendment or Modification

12.1 Termination. Although each Employer anticipates that it will continue the Plan for an indefinite period of time, there is no guarantee that any Employer will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, each Employer reserves the right to discontinue its sponsorship of the Plan and/or to terminate the Plan at any time with respect to any or all of its participating Employees and Directors, by action of its board of directors. Upon the termination of the Plan with respect to any Employer, the Plan Agreements of the affected Participants who are employed by that Employer, or in the service of that Employer as Directors, shall terminate and their Account Balances, determined as if they had experienced a Termination of Employment on the date of Plan termination or, if Plan termination occurs after the date upon which a Participant was eligible to Retire, then with respect to that Participant as if he or she had Retired on the date of Plan termination, shall be paid to the Participants as follows: Prior to a Change in Control, if the Plan is terminated with respect to all of its Participants, an Employer shall have the right, in its sole discretion, and notwithstanding any elections made by the Participant, to pay such benefits in a lump sum or pursuant to the Annual Installment Method of up to 10 years, but not longer than as the Participant may have elected previously, with amounts credited and debited during the installment period as provided herein. If the Plan is terminated with respect to less than all of its Participants, an Employer shall be required to pay such benefits in a lump sum. After a Change in Control, the Employer shall be required to pay such benefits in a lump sum. The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination; provided however, that the Employer shall have the right to accelerate installment payments without a premium or prepayment penalty by paying the balance of the Account(s) in a lump sum or pursuant to the Annual Installment Method using fewer years (provided that the present value of all payments that will have been received by a Participant at any given point of time under the different payment schedule shall equal or exceed the

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present value of all payments that would have been received at that point in time under the original payment schedule). After a Change in Control, the effect of termination of the Plan shall be governed by Section 11.3 below.

12.2 Amendment. Subject to Section 12.3 below relating to amendments made after a Change in Control, any Employer may, at any time, amend or modify the Plan in whole or in part with respect to that Employer by the action of its board of directors; provided, however, that: (i) no amendment or modification shall be effective to decrease or restrict the value of a Participant’s Account Balance in existence at the time the amendment or modification is made, calculated as if the Participant had experienced a Termination of Employment as of the effective date of the amendment or modification or, if the amendment or modification occurs after the date upon which the Participant was eligible to Retire, the Participant had Retired as of the effective date of the amendment or modification, and (ii) no amendment or modification of this Section 12.1 or Section 11.3 of the Plan shall be effective. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification; provided, however, that the Employer shall have the right to accelerate installment payments by paying the balance of the Account(s) in a lump sum or pursuant to the Annual Installment Method using fewer years (provided that the present value of all payments that will have been received by a Participant at any given point of time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule).

12.3 Effect of Change in Control. Despite the provisions of Sections 12.1 and 12.2 above, following a Change in Control, the provisions of this Plan or any Participant’s Plan Agreement may not be amended or terminated in any manner with respect to a Participant or Beneficiary if such amendment or termination would have an adverse effect in any way upon the computation or amount of or entitlement to benefits of such Participant or Beneficiary under the Plan as in effect immediately prior to the Change in Control, including, but not limited to, any adverse change in or to the crediting or debiting of amounts to the Account Balances or the time or manner of payment of the Account Balances to any Participant or Beneficiary, unless the Participant or Beneficiary has given written consent to such amendment or termination. An “adverse effect” for purposes of this Section 12.3 shall include, but not be limited to, any acceleration of the payment of the Account Balances payable to the Participant or Beneficiary or a change in the composition of the risk and return characteristics represented by the available Valuation Funds or the Participant’s or Beneficiary’s ability to allocate his or her Account Balances among such Valuation Funds.

12.4 Plan Agreement. Despite the provisions of Sections 12.1 and 12.2 above, if a Participant’s Plan Agreement contains benefits or limitations that are not in this Plan document, the Employer may only amend or terminate such provisions with the consent of the Participant.

12.5 Effect of Payment. The full payment of the applicable benefit under Articles 4, 5, 6, 7 or 8 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan and the Participant’s Plan Agreement shall terminate.

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ARTICLE 13

Administration

13.1 Committee Duties. Except as otherwise provided in this Article 13, this Plan shall be administered by a Committee, which shall consist of the Committee appointed by the Board. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. Any individual serving on the Committee who is a Participant shall not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant or the Company.

13.2 Agents. In the administration of this Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to any Employer.

13.3 Binding Effect of Decisions. The decision or action of the Committee, and any Employee to whom the duties of the Committee may be delegated, with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan.

13.4 Indemnity of Committee. All Employers shall indemnify and hold harmless the members of the Committee, and any Employee to whom the duties of the Committee may be delegated against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee, any of its members, any such Employee.

13.5 Employer Information. To enable the Committee to perform its functions, the Company and each Employer shall supply full and timely information to the Committee as the case may be, on all matters relating to the compensation of its Participants, the date and circumstances of the Retirement, Disability, death or Termination of Employment of its Participants, and such other pertinent information as the Committee may reasonably require.

ARTICLE 14

Other Benefits and Agreements

14.1 Coordination with Other Benefits. The benefits provided for a Participant and Participant’s Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant’s Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided.

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ARTICLE 15

Claims Procedures

15.1 Presentation of Claim. Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a “Claimant”) may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within sixty (60) days after such notice was received by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred, or such claim is waived. The claim must state with particularity the determination desired by the Claimant.

15.2 Notification of Decision. The Committee shall consider a Claimant’s claim within a reasonable time, and shall notify the Claimant in writing:

(a) that the Claimant’s requested determination has been made, and that the claim has been allowed in full; or

(b) that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant’s requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant:

(i) the specific reason(s) for the denial of the claim, or any part of it;

(ii) specific reference(s) to pertinent provisions of the Plan upon which such denial was based;

(iii) a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and

(iv) an explanation of the claim review procedure set forth in Section 15.3 below.

15.3 Review of a Denied Claim. Within sixty (60) days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant’s duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. Thereafter, but not later than thirty (30) days after the review procedure began, the Claimant (or the Claimant’s duly authorized representative):

(a) may review pertinent documents;

(b) may submit written comments or other documents; and/or

(c) may request a hearing, which the Committee, in its sole discretion, may grant.

15.4 Decision on Review. The Committee shall render its decision on review promptly, and not later than sixty (60) days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee’s decision must be rendered within 120 days after such date. Such decision must be written in a manner calculated to be understood by the Claimant, and it must contain:

(a) specific reasons for the decision;

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(b) specific reference(s) to the pertinent Plan provisions upon which the decision was based; and

(c) such other matters as the Committee deems relevant.

15.5 Legal Action. A Claimant’s compliance with the foregoing provisions of this Article 15 is a mandatory prerequisite to a Claimant’s right to commence any legal action with respect to any claim for benefits under this Plan.

ARTICLE 16

Trust

16.1 Establishment of the Trust. The Company shall establish the Trust, and each Employer shall at least annually transfer over to the Trust such assets as the Employer determines, in its sole discretion, are necessary to provide, on a present value basis, for its respective future liabilities created with respect to the Annual Company Contribution Amounts, Annual Deferral Amounts, Annual Restoration Contribution Amounts, and Annual Restricted Stock Amounts for such Employer’s Participants for all periods prior to the transfer, as well as any debits and credits to the Participants’ Account Balances for all periods prior to the transfer, taking into consideration the value of the assets in the trust at the time of the transfer.

16.2 Interrelationship of the Plan and the Trust. The provisions of the Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan.

16.3 Distributions From the Trust. Each Employer’s obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer’s obligations under this Plan.

ARTICLE 17

Miscellaneous

17.1 Status of Plan. The Plan is intended to be a plan that is not qualified within the meaning of Code Section 401(a) and that “is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employee” within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted to the extent possible in a manner consistent with that intent.

17.2 Unsecured General Creditor. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. For purposes of the payment of benefits under this Plan, any and all of an Employer’s assets shall be, and remain, the general, un-pledged unrestricted assets of the Employer. An Employer’s obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future.

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Tellabs, Inc.

2008 Deferred Income Plan

17.3 Employer’s Liability. An Employer’s liability for the payment of benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement.

17.4 Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise.

17.5 Not a Contract of Employment. The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an “at will” employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer, either as an Employee or a Director, or to interfere with the right of any Employer to discipline or discharge the Participant at any time.

17.6 Furnishing Information. A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary.

17.7 Terms. Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply.

17.8 Captions. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions.

17.9 Governing Law. Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the internal laws of the State of Delaware without regard to its conflicts of laws principles.

17.10 Notice. Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

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Tellabs, Inc.

2008 Deferred Income Plan

Deferred Income Plan Committee

Attention: Legal Department

1415 W. Diehl Road

Naperville, Illinois 60563

Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant.

17.11 Successors. The provisions of this Plan shall bind and inure to the benefit of the Participant’s Employer and its successors and assigns and the Participant and the Participant’s designated Beneficiaries.

17.12 Spouse’s Interest. The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse’s will, nor shall such interest pass under the laws of intestate succession.

17.13 Validity. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein.

17.14 Incompetent. If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person’s property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant’s Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount.

17.15 Court Order. The Committee is authorized to make any payments directed by court order in any action in which the Plan or the Committee has been named as a party. In addition, if a court determines that a spouse or former spouse of a Participant has an interest in the Participant’s benefits under the Plan in connection with a property settlement or otherwise, the Committee, in its sole discretion, shall have the right, notwithstanding any election made by a Participant, to immediately distribute the spouse’s or former spouse’s interest in the Participant’s benefits under the Plan to that spouse or former spouse.

17.16 Distribution in the Event of Taxation.

(a) In General. If, for any reason, all or any portion of a Participant’s benefits under this Plan becomes taxable to the Participant prior to receipt, a Participant may petition the Committee before a Change in Control, or the trustee of the Trust after a Change in Control, for a distribution of that portion of his or her benefit that has become taxable.

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Tellabs, Inc.

2008 Deferred Income Plan

Upon the grant of such a petition, which grant shall not be unreasonably withheld (and, after a Change in Control, shall be granted), a Participant’s Employer shall distribute to the Participant immediately available funds in an amount equal to the taxable portion of his or her benefit (which amount shall not exceed a Participant’s unpaid Account Balance under the Plan). If the petition is granted, the tax liability distribution shall be made within ninety (90) days of the date when the Participant’s petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Plan.

(b) Trust. If the Trust terminates in accordance with the terms of the Trust Agreement and benefits are distributed from the Trust to a Participant in accordance with the terms thereof, the Participant’s benefits under this Plan shall be reduced to the extent of such distributions.

17.17 Insurance. The Employers, on their own behalf or on behalf of the trustee of the Trust, and, in their sole discretion, may apply for and procure insurance on the life of the Participant, in such amounts and in such forms as the Trust may choose. The Employers or the trustee of the Trust, as the case may be, shall be the sole owner and beneficiary of any such insurance. The Participant shall have no interest whatsoever in any such policy or policies, and at the request of the Employers shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Employers have applied for insurance.

17.18 Legal Fees To Enforce Rights After Change in Control. The Company and each Employer is aware that upon the occurrence of a Change in Control, the Board or the board of directors of a Participant’s Employer (which might then be composed of new members) or a shareholder of the Company or the Participant’s Employer, or of any successor corporation might then cause or attempt to cause the Company, the Participant’s Employer or such successor to refuse to comply with its obligations under the Plan and might cause or attempt to cause the Company or the Participant’s Employer to institute, or may institute, litigation seeking to deny Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Change in Control, it should appear to any Participant that the Company, the Participant’s Employer or any successor corporation has failed to comply with any of its obligations under the Plan or any agreement thereunder or, if the Company, such Employer or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny, diminish or to recover from any Participant the benefits intended to be provided, then the Company and the Participant’s Employer irrevocably authorize such Participant to retain counsel of his or her choice at the expense of the Company and the Participant’s Employer (who shall be jointly and severally liable) to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company, the Participant’s Employer or any director, officer, shareholder or other person affiliated with the Company, the Participant’s Employer or any successor thereto in any jurisdiction. Any such expenses shall be paid within sixty (60) days of the date evidence that such expenses were incurred is provided to the Company or Employer and in all events no later than the December 31 of the calendar year following the calendar year in which such expenses were incurred.

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Tellabs, Inc.

2008 Deferred Income Plan

IN WITNESS WHEREOF, the Company has signed this Plan document effective January 1, 2008.

“Company”
Tellabs, Inc., a Delaware corporation
By:	/s/ Kyle K. Matthews
Title:	VP–Human Resources

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EX-13

Exhibit 13

Dramatic change is under way in the telecommunications industry. Users want more mobile, video and high-speed Internet services. Telecom service providers must transform networks to meet user needs. Amid consolidation by service providers and competitors, Tellabs sees hypercompetition and increased pricing pressure.

We understand the challenges facing Tellabs. Our new products are winning new customers. We are on course to improve financial performance as we work to increase gross profit margins, reduce operating expenses, cut overhead costs, expand revenue opportunities and return excess capital to stockholders.

Telecom service providers choose Tellabs (NASDAQ: TLAB) to advance the networks that deliver telephone, mobile, Internet and video services around the world.

CONTENTS

Financial Highlights	2
Chairman’s Letter to Stockholders	3
Management Answers Investors’ Questions	9
Tellabs Solutions and Applications	18
Management’s Discussion and Analysis	21
Reports of Management and Independent Registered Public Accounting Firm	30
Consolidated Financial Statements	32
Notes to Consolidated Financial Statements	36
11-Year Summary of Selected Financial Data	58
Directors	60
Officers	62
Glossary	63
Investor Information	64

Tellabs Financial Highlights

2007

Tellabs fiscal years ended December 28, 2007, and December 29, 2006.

In millions, except per-share and employee data	2007			2006			Change
Revenue	$	1,913		$	2,041		-6	%
Gross profit	$	674		$	934		-28	%
Operating earnings	$	27		$	247		-89	%
Earnings before income taxes	$	70		$	285		-75	%
Net earnings	$	65		$	194		-66	%
Net earnings per share	$	0.15		$	0.43		-65	%
Total cash, cash equivalents and marketable securities	$	1,219		$	1,300		-6	%
Total assets	$	3,747		$	3,922		-4	%
Total liabilities	$	833		$	984		-15	%
Stockholders’ equity	$	2,913		$	2,938		-1	%
Net cash provided by operating activities	$	131		$	318		-58	%
Working capital	$	1,439		$	1,470		-2	%
Research and development expense	$	343		$	357		-4	%
Return on average stockholders’ equity		2.2	%		6.7	%	-67	%
Weighted average shares outstanding		441			454		-3	%
Number of shares outstanding at year-end		419			439		-5	%
Number of employees		3,716			3,713		—

2

Chairman’s Letter to Stockholders

Michael J. Birck

Chairman of the Board

As our industry goes through a sea change, Tellabs is moving forward.

Dear Stockholders, Customers, Employees and Friends,

For Tellabs and other telecom equipment vendors, 2007 brought choppy waters.

Some of our customers, the telecom service providers, delayed network expansions and upgrades in the wake of recent mergers. The spending slowdown was most pronounced among North American wireless carriers. Tellabs’ 2007 revenue of $1.9 billion fell 6% from a year ago.

Customers are choosing Tellabs’ new products

While overall revenue was disappointing, Tellabs’ new products performed better than expected:

• Almost half, or 48%, of our 2007 revenue came from products we added since 2003.

• Revenue from fiber-access systems rose to a record level.

• Data revenue grew 50% on rising sales of the Tellabs^® 8800 system. And the recently launched Tellabs^® 8600 system won 35 out of 36 competitions for customers in 2007.

• Services revenue increased 22%, as customers chose Tellabs for existing and new consulting services.

We are encouraged by the acceptance of our new products and services, some of which are selling in substantial quantities. While we see real opportunities to extend these offerings into more customer networks, we need to continue to make our new products more profitable. We are hard at work doing just that.

Some of our competitors, the telecom equipment vendors, responded to customer consolidation and aggressive purchasing tactics with mergers of their own. Still, dozens of vendors compete for virtually every opportunity, creating hypercompetition in the marketplace. To win, some vendors resort to price cutting, often to levels that leave little or no room for profit.

As a result of such competition, many equipment vendors, Tellabs among them, saw profit margins shrink last year. Tellabs’ 2007 gross profit margins fell 10.5 percentage points.

As the mobile carriers move to new pseudo wire technology, the Tellabs 8600 system has become a leading contender, winning 35 out of 36 competitions in 2007.

(Source: Infonetics Research)

TELLABS ANNUAL REPORT 2007

3

While we were among the handful of competitors to produce a profit in 2007, our net earnings declined 65% to 15 cents per share. We have our work cut out for us in 2008.

User demand continues to grow

The good news for our industry is that strong demand for telecom services will continue to shape our future. Growth will spring from recent innovations:

• More than one out of three people in the world, or 2.5 billion people, used a mobile phone in 2007. New users are signing up for mobile phones at the rate of 1,000 per minute. Mobile voice, Internet, video and commercial services will propel industry growth.

• More than half of U.S. households now use high-speed Internet. And those users demand even faster Internet speeds, driven largely by the need to download and upload videos and photos. Service providers are responding to that demand by embarking on multi-year network upgrades.

• YouTube^TM, a video sharing Web site, consumed more bandwidth in 2007 than the entire Internet used in the year 2000. As more people watch video via the Internet, this growth will continue.

User demand is driving service providers to transform their traditional voice networks into Internet and video networks. Both services can use up to 25 times more bandwidth than voice.

At the same time, competition is forcing service providers to reduce network costs. So our customers are embarking on major infrastructure upgrades that will take years and years to fully complete.

Tellabs enables customers to quickly upgrade and expand their networks to meet changing user needs. Network operators need:

• fiber access to increase bandwidth to homes

• more capacity to carry new mobile services on wireless networks

• multiservice routers to interconnect existing and new services with high reliability

• converged transport solutions to meet bandwidth needs deep inside the network

• specialized services to optimize networks, speed revenue and lower expenses.

Tellabs products and services address exactly these needs.

We are making headway on profitability

We clearly understand the challenges before us. Tellabs’ leadership and people are working to meet our customers’ needs as we improve our financial performance. We must increase gross profit margins, reduce operating expenses and expand revenue opportunities. We also must aggressively pursue new products and perhaps new product categories through internal development and, possibly, acquisition.

We are working to improve gross profit margins across the board, especially on products early in their life cycles, when margins tend to be slim or even negative. In the second half of 2007, we began to eke out margin improvements on the Tellabs^® 7100 optical transport system (OTS) and Tellabs^® 1600 optical network terminals (ONTs). Still, we have much more to do here.

In 2007, we cut Tellabs’ operating expenses by $16 million or 2%. To keep Tellabs shipshape, we plan to lower annual operating expenses and overhead costs for products and services by $100 million, with these savings fully realized in 2009. Unfortunately, that means we will need to lay off about 225 people this year.

We serve the world’s largest telecom service providers

In 2007, Tellabs provided equipment to 30 of the world’s 35 largest service providers. Yet we need to cast a wider net to diversify our revenue opportunities.

TELLABS ANNUAL REPORT 2007

5

Three-fourths of Tellabs’ revenue comes from North American customers, including the top U.S. wireless providers and the wireline side of Verizon and AT&T. To expand sources of U.S. revenue, we are stepping up sales activities with independent operating companies (IOCs) and national local exchange carriers (NLECs). These customers are deploying new networks to deliver Internet Protocol television (IPTV) and business services.

Although most of Tellabs’ revenue comes from North America today, capital spending is increasingly stronger in other markets. Our data products have opened the door to new relationships with Tier One service providers, such as NTT of Japan, Telstra of Australia and Telecom Italia.

We are expanding and pursuing further opportunities around the globe. To augment our opportunities, Tellabs is launching an international version of the Tellabs 7100 OTS and the new Tellabs^® 7100 Nano OTS.

We extended our share repurchase program

In November, the Board of Directors authorized an additional $600 million share repurchase program to return excess capital to stockholders. In 2007, we repurchased 25.1 million shares, or almost 6% of Tellabs shares outstanding. Since 2005, we have bought back 14% of shares outstanding. This program signals our confidence in Tellabs’ future as a stand-alone company, while assuring adequate resources to fund our future. At year-end, Tellabs held more than $1.2 billion in cash and equivalents.

Introducing Rob Pullen, Tellabs new CEO

In November, Tellabs chief executive officer Krish A. Prabhu announced his plan to step down after four years at the helm. We appreciate his contributions and leadership.

Setting Tellabs’ course for the future is our new chief executive officer, Robert W. Pullen, who has served Tellabs in a variety of leadership roles over the past 23 years, including services, sales, and research and development. Rob has a deep understanding of our industry’s issues and is well-qualified to navigate our company through the current industry environment. He brings strong continuity to his new position as Tellabs’ CEO, and he has demonstrated the leadership skills that made him the Board’s obvious choice.

Most recently, Rob served Tellabs as vice president of global services, a segment that produced 22% revenue growth in 2007, in part as a result of innovative professional services we recently introduced. Rob served Tellabs as vice president of sales in North America, more than doubling revenue in our largest market between 2002 and 2005. Before that, he was vice president of optical networking, a role in which he successfully integrated two acquisitions while leading a key R&D team.

Stockholders who attend our annual meeting in April will have an opportunity to meet Rob and talk with him face to face. I intend to stay active in the business as Chairman of the Board.

I am grateful to our stockholders for their support as we move forward in a challenging and sometimes frustrating industry environment. I appreciate and sincerely thank Tellabs people for their work each day to make our customers and company successful.

Times like these test our resilience. Tellabs’ track record shows that we can come through them strengthened by the challenges. As we go forward, I am confident that we have the right plan, the right products and the right people to steer Tellabs back to profitable growth.

Sincerely,

Michael J. Birck

Chairman of the Board

February 26, 2008

TELLABS ANNUAL REPORT 2007

7

Management Answers Your Questions

Timothy J. Wiggins

Executive Vice President and

Chief Financial Officer

Q. What’s happening in the telecom equipment industry?

A. Michael J. Birck, chairman of the board: The industry is feeling the aftershock of consolidation, which has reduced the number of service-provider customers and increased the purchasing power of the largest among them. For example, four of our largest customers in 2005 are now one customer with considerable leverage over vendors.

After customers consolidated, some delayed network expansion and upgrades, which was especially evident among North American mobile providers. Moreover, we have seen increasingly aggressive procurement contracting by both wireless and wireline service providers in North America, resulting in paper-thin profit margins for many vendors. Since three-quarters of Tellabs’ revenue comes from North America, we were particularly hard hit during 2007.

Responding to service-provider consolidation, some of Tellabs’ competitors have joined forces. Our markets have thus become hypercompetitive, with a few very large and dozens of smaller vendors fighting over less business. The inevitable result is increasing pricing pressure that drains profits out of our sector. Tellabs was one of a handful of companies whose network equipment business stayed in the black last year. That meager profit notwithstanding, we are far from satisfied with our 2007 results.

Q. What happened to Tellabs’ results in 2007?

A. Timothy J. Wiggins, executive vice president and chief financial officer: Revenue of $1.9 billion dropped by 6%, primarily due to lower spending by North American wireless carriers on Tellabs products. But buried in those results were encouraging trends for our future, including strong uptake of our data, access and services offerings.

• We achieved our highest sales of fiber-access equipment ever, and we rank #1 in fiber-access market share in North America.

• Data revenue grew 50% on the strength of our successful Tellabs 8600 and Tellabs 8800 systems.

• Tellabs^® Global Services grew 22%, propelled by existing and new services.

• Nearly half of our 2007 revenue came from products and services we added to our portfolio since 2003, proof that our new offerings are winning customers over.

The transport market is shifting to new technologies built into the Tellabs 7100 OTS. Revenue from the Tellabs 7100 system quadrupled in 2007.

(Source: Infonetics Research)

TELLABS ANNUAL REPORT 2007

9

Management Answers Your Questions, continued

Daniel P. Kelly

Executive Vice President –

Global Products

However, as our product mix shifted toward new products faster than expected, Tellabs’ gross profit margins declined 10.5 percentage points. Products that are early in their life cycles often carry lower margins than more established products. We sold fewer Tellabs^® 5500 digital cross-connects, an established product; we sold more Tellabs 7100 OTSs, a new product; and we sold more Tellabs 1600 ONTs at negative margins. As a result, earnings fell 65% to 15 cents per share. As we begin 2008, we are aggressively focused on improving Tellabs’ performance.

Q. What does Tellabs need to do to get its performance back on track?

A. Timothy J. Wiggins, executive vice president and chief financial officer: We are implementing a plan to increase gross profit margins and reduce our annual operating expenses and overhead costs. Under this plan, together with the restructuring announced in September 2007, Tellabs expects our 2009 costs to be $100 million lower than our 2007 costs. We are working to:

• Reduce our operating expenses by $75 million a year.

• Cut overhead costs of products and services by $25 million a year.

• Increase gross profit margins on new products by reducing costs and winning more customers.

• Increase revenue from customers in Europe, Africa, Asia, Australia and Latin America, and from IOCs and NLECs in North America.

• Return excess capital to stockholders through our stock repurchase programs, including $600 million authorized in November by our Board of Directors.

Q. How are Tellabs’ new products doing?

A. Daniel P. Kelly, executive vice president, global products: Our products are performing well in the marketplace and in customers’ networks. Today, nearly half of our revenue comes from products we added since 2003, proof positive that we’ve chosen the right products and targeted the right markets. We are focused on network applications that are growing faster than service providers’ overall capital spending, such as consumer broadband services, business services and mobile transport. In 2007, Tellabs invested 18% of sales in research and development.

Our engineers have proven time and again that we can move faster than large competitors to solve customers’ problems quickly. For example, we developed the current version of the Tellabs 7100 system on a compressed schedule that enabled us to earn Verizon’s business. As a result, revenue from the Tellabs 7100 system quadrupled last year, beating our plans.

TELLABS ANNUAL REPORT 2007

11

Management Answers Your Questions, continued

Carl A. DeWilde

Executive Vice President –

Global Sales, Services and Strategy

To further expand the addressable markets for the Tellabs 7100 system, in 2008 we are:

• Adding international interfaces to meet customer needs outside of North America.

• Launching a smaller version, the Tellabs 7100 Nano system, to address customer needs in smaller networks around the world.

• Integrating Ethernet switching capabilities into the Tellabs 7100 system to converge optical and data functionality into a single platform.

We continue to improve our flagship transport product for North American providers, the Tellabs 5500 system. During 2008, our new high-density shelf will increase optical density sixfold, which reduces our customers’ operating expenses.

And we’re making strong headway with new data products around the world. Data revenue grew 50% in 2007. Dozens of customers have chosen the Tellabs 8600 system to migrate wireless backhaul networks to Ethernet, reducing operating expenses as much as 90% compared with existing leased lines. Thanks to its highly integrated and cost-effective architecture, the Tellabs 8600 system is delivering solid gross profit margins, early in its life.

The Tellabs 8800 multiservice router (MSR) series addresses our customers’ need to continue delivering more profitable existing services, such as ATM and Frame Relay, along with new Ethernet and IP/MPLS services. More than 100 customers have chosen Tellabs’ data products for networks around the world.

Q. How is Tellabs doing with customers?

A. Carl A. DeWilde, executive vice president, global sales, services and strategy: I’m encouraged. Tellabs products are competitive and our customer relationships are expanding.

We are focusing on specific network applications such as mobile transport. When mobile carriers needed a new way to haul traffic in wireless networks, our Tellabs 8600 system fit that need. During 2007, the Tellabs 8600 system won 35 of the 36 competitions that we participated in, which contributed to our 50% growth in data revenue.

Such strong new products enable Tellabs to make headway with new customers. For example, our Tellabs 8800 series has brought us new customers such as Telstra in Australia and Telecom Italia.

TELLABS ANNUAL REPORT 2007

13

Management Answers Your Questions, continued

John M. Brots	Jean K. Holley
Executive Vice President –	Executive Vice President and
Global Operations	Chief Information Officer

In fact, during 2007 Tellabs earned business from 30 of the top 35 service providers in the world. Our successful partnership with Verizon to build the FiOS fiber-access network has propelled Tellabs to a #1 market share in North American fiber access.

In 2008, we are sharpening our focus on making profitable sales. Our job is clear:

• Increase business with existing customers.

• Add channel partners to reach additional customers.

• Win more business from telecom service providers outside North America and customers such as IOCs and NLECs in the United States.

• Pass up potential deals that deny us the opportunity to realize a fair profit.

Q. How is Tellabs’ supply chain contributing to profitability and customer satisfaction?

A. John M. Brots, executive vice president, global operations: Tellabs’ supply chain initiatives have reduced costs by more than $100 million over the past three years, as we completed our conversion to outsourced manufacturing.

Our current supply chain initiatives focus on reducing costs by continuing to:

• Realize new efficiencies in sourcing components in low-cost geographic regions.

• Engineer products for better manufacturability.

• Reduce the costs of converting parts into finished products.

• Assure the quality of products before they ship.

• Optimize our highly efficient distribution network.

We are always working to improve customer satisfaction by meeting customer requirements more consistently. Since 2005, our key customer satisfaction measure has increased at double-digit rates. That said, with today’s price pressure, our primary focus remains the job of making Tellabs’ supply chain more efficient and more effective for customers.

Q. What is Tellabs doing to make business processes more efficient?

A. Jean K. Holley, executive vice president and chief information officer: To improve our visibility of revenue and gross profit margins, last year we deployed a tool that enables us to forecast revenue and gross profit margins in a more granular way. Now we can manage the business more effectively.

We are consolidating the primary engineering tools in our R&D and supply chain organizations. These tools lower our supply chain costs, simplify collaboration by employees around the world, and enable us to leverage consistent, global engineering practices as we move to low-cost geographies.

TELLABS ANNUAL REPORT 2007

15

Management Answers Your Questions, continued

James M. Sheehan

Executive Vice President and

Chief Administrative Officer

Q. What is Tellabs doing to address its corporate social responsibility?

A. James M. Sheehan, executive vice president and chief administrative officer: In keeping with our tradition, Tellabs continues to invest in the communities where we do business through programs to match employee gifts of time and money. Over the past decade, the Tellabs Foundation has given more than $10 million to nonprofit organizations focused primarily on education, health and the environment.

Last year, Tellabs established a cross-functional team to open a dialogue with investors and customers about Tellabs’ broader commitment to corporate social responsibility.

In 2008, we are taking steps to adopt a Supplier Code of Conduct and report regularly on Tellabs’ corporate social responsibility performance. In keeping with the company’s values, we want to ensure that, throughout our supply chain, workers are treated with respect, working conditions remain safe, and our vendors use environmentally responsible manufacturing processes.

Q. Where is Tellabs going long-term? Can you survive as an independent entity?

A. Michael J. Birck, chairman of the board: We run Tellabs for the long term, so Tellabs’ Board of Directors and senior executives studied these issues and their ramifications throughout the year.

Our careful review of the industry and our business prospects convinces us that Tellabs has what it takes to survive independently. We have the right customers, products, people and financial resources to go it alone.

To do that, however, we will need to augment our current products and services to better position us for growth and profitability, and we are continually examining such opportunities.

The share repurchase program now in progress is evidence that we believe in our future as an independent organization. It enables Tellabs to return capital to stockholders and signals our confidence in our future as a stand-alone company, one with considerably better share price performance than was recently exhibited.

Yet, we are mindful that challenges abound and circumstances can change, just as they did during 2007. It would be unwise to rule out possible future business combinations. If we see clear opportunity to create value for customers and stockholders through either an acquisition or a merger, we will act accordingly.

This industry is much more difficult and complex than it was a few years ago, yet we still believe it holds ample future promise, enough to justify the hard work that will surely be needed.

TELLABS ANNUAL REPORT 2007

17

Tellabs Solutions and Applications for Network Transformation

	User needs	Drive network transformations
Tellabs® IntegratedMobileSM solution	Video on Demand (VoD) Interactive gaming Mobile Internet Music downloads Mobile commerce	•        Provide future-ready solutions for mobile service today and tomorrow. •        Minimize total cost of ownership through network convergence. •        Enable mobile operators to converge on a packet-based network. •        Enable mobile commerce.
Tellabs® DynamicHomeSM solution	Video on Demand (VoD) Interactive gaming Music and video downloads Faster uploads	•        Guarantee quality and delivery of high-quality video, voice and data services. •        Migrate quickly to new Video on Demand (VoD), Internet Protocol Television (IPTV) and High- Definition Television (HDTV) services.
Tellabs® Converged TransportSM solution	Faster downloads More bandwidth and capacity	•        Combine the most advanced optical networking and services layer technologies on one seamless platform. •        Advance network flexibility and service delivery. •        Reduce costs. •        Provision bandwidth anywhere on the network remotely and instantly.
Tellabs® MultiservicePLuSSM solution and Tellabs® AssuredEthernetSM solution	Service compatibility IP Virtual Private Networks (VPN) Reliable Ethernet Faster connections Delivery guarantees	•        Guarantee quality for existing Frame Relay and ATM customers over IP/MPLS networks. •        Enable new Ethernet or IP customers to communicate with existing ATM or Frame Relay customers with a unique service-interworking function. •        Offer QoS guarantees in an IP/MPLS environment to protect existing Service Level Agreements (SLAs).
Tellabs® Global Services	Fast service turn-up New 3G services High availability	•        Increase revenues. •        Lower costs. •        Reduce network complexity. •        Speed time to market. •        Improve network resilience and reliability. •        Reduce risk.

Primary Competitors: Alcatel-Lucent, Cisco, Ericsson, Fujitsu, Juniper, Nortel

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By service providers /partners*	Using Tellabs solutions	And Tellabs products
América Móvil, Ericsson, Swisscom Mobile, Telecom Italia, TeliaSonera, T-Mobile Hungary, Vodafone Hungary, Vodacom South Africa, Wind	Tellabs® IntegratedMobileSM solution enables wireless operators to migrate from 2G networks to 3G and beyond without the expense of multiple technology overlays.	Tellabs® 3000 voice-quality enhancement systems Tellabs® 5500 digital cross-connect system Tellabs® 6300 managed transport system Tellabs® 8100 managed access system Tellabs® 8600 managed edge system Tellabs® 8605 access switch Tellabs® 8800 multiservice router series
Blue Valley Tele-communications, Charles Pointe/TelAtlantic, Connexion Technologies, NTELOS, Verizon	Tellabs® DynamicHomeSM solution enables superior service delivery with unsurpassed flexibility and delivery guarantees.	Tellabs® 1000 multiservice access series Tellabs® 1100 multiservice access series Tellabs® 1134 multiservice access platform Tellabs® 1150 multiservice access platform Tellabs® 1600 optical network terminal series Tellabs® 7100 optical transport system Tellabs® 8800 multiservice router series Tellabs® 8865 ServiceAware optical line terminal
Verizon	Tellabs® Converged TransportSM enables service providers to keep up with surging traffic growth by adding incremental wavelength capacity where and when it’s needed.	Tellabs® 7100 optical transport system Tellabs® 7100 Nano optical transport system Tellabs® 6300 managed transport system
BSNL, Diveo, CableNet, MRS, MetroNet, NTT Communications, Telekom Malaysia, TeliaSonera, Telstra	Tellabs® MultiservicePLuSSM and AssuredEthernetSM solutions deliver today’s and tomorrow’s business services with guaranteed reliability.	Tellabs® 1000 multiservice access series Tellabs® 5500 digital cross-connect system Tellabs® 6300 managed transport system Tellabs® 7100 optical transport system Tellabs® 8100 managed access system Tellabs® 8600 managed edge system Tellabs® 8800 multiservice router series
Bharti, BSNL, Connexion Technologies, NTT Communications, Telstra	Tellabs® Global Services optimize today’s networks and seamlessly migrate to advanced networks.	Deployment, professional and support services; customer training

* representative customers

TELLABS ANNUAL REPORT 2007

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Tellabs Common Stock Market Data

In dollars

	2007				2006
	High		Low		High		Low
First Quarter	$	11.11	$	9.72	$	16.04	$	10.43
Second Quarter	$	11.44	$	9.56	$	17.28	$	12.69
Third Quarter	$	13.67	$	9.31	$	13.52	$	8.84
Fourth Quarter	$	9.68	$	6.55	$	11.74	$	9.61

Five-Year Cumulative Total Return Comparison

In dollars

Tellabs stock performance over five years through Dec. 28, 2007, is compared with a peer group (the Dow Jones Telecommunications Equipment Index), the NASDAQ Market Index and the S&P 500 Index, assuming that $100 was invested in each on Dec. 29, 2002.

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Management’s Discussion and Analysis

Introduction and Overview of Business

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

We generate revenue principally through the sale of telecommunications products, both as stand-alone products and as elements of integrated systems, to communications service providers worldwide. We also generate revenue by providing services related primarily to our own products and systems.

In 2006, we began reporting results under three reporting segments: Broadband, Transport and Services. For comparative purposes, we have included corresponding data for 2005.

Our Broadband segment includes the access, managed access and data product portfolios that facilitate the delivery of bundled triple-play services and next-generation wireline and wireless services. We earn revenue from our Broadband segment globally. Revenue from our access products is earned primarily in North America for the support of copper-based and fiber-based networks. Access product revenue is driven by consumer demand for the triple play of bundled voice, video and high-speed Internet/data services in addition to competition among traditional telecommunications companies and cable service operators to be the sole provider of triple-play services. Revenue for our managed access products is earned primarily outside North America. Managed access product revenue is driven by business services for voice and high-speed data as well as network access services for wireless communications. Revenue from our data products is earned globally. Data product revenue is driven by consumer demand for wireless and wireline carriers to deliver business services and next-generation wireless services.

Our Transport segment includes digital cross-connect systems, converged transport systems and voice quality enhancement products. These products enable service providers to manage bandwidth, improve voice quality and transport traffic by adding capacity when and where it is needed. Revenue from our Transport segment is primarily earned in North America. Transport product revenue is driven by the needs of service providers to support wireless services, business services for enterprises and triple-play voice, video and data services for consumers. We are marketing our new Transport segment products in international markets in 2008.

Our Services segment delivers deployment, support, professional consulting, training and systems integration services to Tellabs customers. These services support various phases of the network including planning, installation and on-going support. Revenue from our Services segment is earned globally. Deployment service revenue makes up almost half of our Services revenue, which arises primarily from sales of our transport products in North America, and tends to lag product sales by approximately one fiscal quarter. In addition, revenue comes from support agreements, professional consulting and training.

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

We are transforming the company from a business based primarily on the circuit-switched Time Division Multiplexing (TDM) technology used in our digital cross-connect and managed access products to a business based on packet-switching and Internet Protocol (IP) technology used in our converged transport, access and multiservice data products. These products are taking root as service providers transform their networks to next-generation capabilities. Some of these products carry gross profit margins lower than our historical average. The mix of our products can affect overall profitability in any given quarter.

In light of these factors, management continues to prepare and implement initiatives to improve our overall performance. On January 21, 2008, we committed to a plan to bring our operating expenses as well as our cost to produce products and deliver services in line with our current revenue and market conditions. To further improve financial performance, we plan on expanding our revenue opportunities to keep us highly competitive in a changing marketplace.

TELLABS ANNUAL REPORT 2007

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Results of Operations

Our 2007 net earnings decreased to $65.0 million from $194.1 million in 2006 and $175.8 million in 2005.

In 2007, revenue declined $127.8 million compared with 2006. The decrease for the year was primarily due to reduced product revenue from our Transport segment, including lower revenue from our Tellabs^® 5500 digital cross-connect. The decrease was partially offset with higher revenue from our Tellabs^® 7100 OTS and increased services revenue from deployment, support and professional services. Our Broadband segment also saw lower revenue from our access and managed access products.

In 2007, our margin decreased 10.5% to 35.2% from 45.7% in 2006. The decrease was primarily due to a product mix shift with fewer Tellabs^® 5500 digital cross-connects and more Tellabs^® 7100 OTS and Tellabs^® 1600 ONTs.

Operating expenses for 2007 decreased by $39.7 million to $647.1 million primarily due to reduced incentive compensation expense. Operating expenses increased to $686.8 million in 2006 from $666.2 million in 2005.

Segment Revenue In millions	2007		2006		2005		2007 vs. 2006	2006 vs. 2005
Broadband	$	1,018.6	$	1,080.4	$	1,042.1	(6)%	4%
Transport		672.7		778.2		674.2	(14)%	15%
Services		222.1		182.6		167.1	22%	9%
Total revenue	$	1,913.4	$	2,041.2	$	1,883.4	(6)%	8%

Geographic Revenue

In millions	2007		%		2006		%		2005		%
North America	$	1,413.5	74	%	$	1,548.4	76	%	$	1,419.4	75	%
International		499.9	26	%		492.8	24	%		464.0	25	%
Total revenue	$	1,913.4	100	%	$	2,041.2	100	%	$	1,883.4	100	%

Segment Revenue

Revenue from our Broadband segment in 2007 was $1,018.6 million, down $61.8 million from 2006. For the year, our access and managed access revenue decreased, while our data product revenue increased. Comparatively, revenue increased $38.3 million in 2006 from 2005.

Access product revenue decreased to $566.8 million in 2007 from $652.9 million in 2006 due to lower unit prices on our single-family ONTs, lower revenue from fiber-to-the-curb platforms, and lower revenue from independent operating companies for copper-based platforms. The decrease in revenue was partially offset by higher revenue from increased ONT unit volume. In 2006, revenue improved to $652.9 million from $617.0 million in 2005 on stronger ONT unit volume partially offset by lower revenue from copper-access platforms and other fiber-access equipment. In 2007, approximately 69% of access revenue came from fiber-based platforms, with the balance coming from copper-based platforms. This result compares with approximately 57% in 2006 and 50% in 2005.

Managed access revenue declined to $291.3 million in 2007 from $320.4 million in 2006. We had less revenue due to lower demand in our Europe, Middle East and Africa (EMEA) region for our Tellabs^® 6300 SDH transport product. In addition, our revenue was lower from our Tellabs^® 2300 cable telephony product, which is late in its life cycle. We had higher revenue from our Tellabs^® 8100 managed access system, driven by large network expansions. Comparatively, revenue decreased to $320.4 million in 2006 from $364.8 million in 2005 as we saw fewer shipments of our Tellabs^® 8100 managed access systems for network expansions.

Revenue from our data products has increased each year since we introduced them in the second half of 2003. In 2007, revenue from these products increased 49.9% to $160.5 million from $107.1 million in 2006. In 2006, revenue nearly doubled to $107.1 million from $60.3 million in 2005. Our revenue growth was driven by demand for wireless backhaul applications and next-generation data products. Growth from these products is the result of a larger customer base across our global markets. Our customers include North American and international Tier 1 wireline and wireless service providers as well as cable TV operators.

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Revenue from our Transport segment decreased to $672.7 million in 2007 from $778.2 million in 2006. We had less revenue from our Tellabs^® 5500 digital cross-connects, primarily from North American wireless service providers, as 3G network build-outs slowed from previous-year levels. We had more revenue from the roll-out of our Tellabs^® 7100 OTS with reconfigurable optical add/drop multiplexer (ROADM), which was deployed into the network of a large North American wireline service provider. Comparatively, revenue increased to $778.2 million in 2006 from $674.2 million in 2005 as a result of increased spending by North American wireless carriers to meet growing capacity requirements and to build out their networks to provide 3G services. Shipments to our North American wireless customers accounted for approximately 40% of all Transport revenue in 2007, compared with 62% in 2006 and 54% in 2005. We shipped approximately 6.4 million T-1 equivalents on the Tellabs 5500 system during 2007, compared with 10.1 million in 2006 and 7.3 million in 2005.

Services revenue increased $39.5 million from 2006 to 2007. We had more revenue from deployment services as a result of the rollout of our Tellabs^® 7100 OTS product as well as increased revenue from professional and support services. Comparably, 2006 revenue increased $15.5 million from 2005 primarily due to increasing professional and support services that extended beyond the deployment services that have traditionally led this segment. 2006 was the first year in which professional and support services together accounted for over 50% of total services revenue.

Gross Profit and Margin

In millions	2007			2006			2005
Gross profit	$	674.3		$	933.6		$	855.0
Gross margin		35.2	%		45.7	%		45.4	%
Product gross profit	$	605.4		$	871.6		$	807.5
Product margin		35.8	%		46.9	%		47.0	%
Services gross profit	$	68.9		$	62.0		$	47.5
Services margin		31.0	%		34.0	%		28.4	%

Gross Margin

Overall gross margin decreased primarily in North America due to higher revenue from lower-margin newer products and lower revenue from established products that carry higher margins. This factor is the primary driver of our overall gross margin decline from 45.4% in 2005 and 45.7% in 2006 to 35.2% in 2007.

Product Gross Margin

Product gross margin declined from 2006 to 2007, primarily in North America, due to a product mix shift with fewer Tellabs^® 5500 digital cross-connects and more Tellabs^® 7100 OTS and ONT products. Product gross margin was relatively flat from 2005 to 2006 since the benefit from lower manufacturing costs was offset by an unfavorable product mix.

Services Gross Margin

Services gross margin decreased in 2007 due to a higher proportion of revenue from lower-margin deployment services. Services gross margin improved in 2006 due to a change in mix toward support and professional services, which have higher margins.

Gross Margin Trend

Our gross margin will continue to be subject to variability due to product mix. Our gross margin is different for each product and services category and for each product within a category because the actual margin depends on the specific system configurations sold as well as customer and geographic pricing differences. Over the past few years, this variability has tended to affect our gross margin, which is likely to continue.

In 2008, our management announced a plan to improve gross margins and reduce operating expenses. This plan includes workforce reductions and facility closures and consolidations. Through this plan and other cost savings initiatives, we expect to reduce our expenses through the course of 2008 so that when we enter 2009 our cost structure for products and services will be $25 million less than it was in 2007.

TELLABS ANNUAL REPORT 2007

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Operating Expenses

	Expense						Percent of Revenue
In millions	2007		2006		2005		2007		2006		2005
Research and development	$	343.1	$	356.9	$	344.0	17.9	%	17.5	%	18.3	%
Sales and marketing		176.6		179.8		175.5	9.2	%	8.8	%	9.3	%
General and administrative		99.1		113.5		95.6	5.2	%	5.6	%	5.1	%
Subtotal		618.8		650.2		615.1	32.3	%	31.9	%	32.7	%
Intangible asset amortization		22.5		28.6		36.0
Restructuring and other charges		5.8		8.0		12.9
Purchased in-process R&D		—		—		2.2
Total operating expenses	$	647.1	$	686.8	$	666.2

Operating expenses in 2007 decreased by $39.7 million to $647.1 million compared with 2006. The reduction in our operating expenses during 2007 is primarily due to reduced incentive compensation expense. The increase in research and development, sales and marketing, and general and administrative expenses from 2005 to 2006 is due primarily to the inclusion of $32.5 million of stock-option expenses in 2006.

In 2008, our management announced a plan to improve gross margins and reduce operating expenses. This plan includes workforce reductions and facility closures and consolidations. Through this plan and other cost savings initiatives, we expect to reduce our expenses through the course of 2008 so that when we enter 2009 our operating cost structure will be $75 million less than it was in 2007.

Intangible Asset Amortization

Intangible asset amortization decreased from 2006 to 2007 with certain intangibles reaching full amortization. The decrease in amortization from 2005 to 2006 was due to certain intangibles reaching full amortization, including a $1.4 million impairment charge for developed technology in 2006.

Restructuring and Other Charges

Restructuring and other charges were $5.8 million in 2007, $8.0 million in 2006 and $12.9 million in 2005. In 2007, activities included consolidating research and development into fewer locations and shifting them to a lower-cost environment. In 2006, we consolidated two order configuration and distribution centers into a single location and had a related workforce reduction. The charges in 2005 were related to reorganizing our research and development groups in Denmark and Finland and headcount reductions in other locations.

Purchased In-Process Research and Development

When we acquired AFC and Vinci in 2004, we estimated the fair value of in-process research and development expense (IPR&D). The charge to IPR&D in 2005 finalized the purchase price allocation for these two acquisitions.

Segment Profit*

In millions	2007		2006		2005
Broadband	$	39.1	$	120.4	$	156.2
Transport		237.5		414.5		317.5
Services		72.2		65.7		47.5
Total segment profit	$	348.8	$	600.6	$	521.2

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

Our Broadband segment profit for 2007 was $39.1 million, down $81.3 million from a profit of $120.4 million in 2006. The decrease in 2007 was primarily due to higher revenue from single-family ONTs and lower revenue from access products sold into existing copper-based networks, partially offset by an increase in revenue from our data products. Our Broadband segment profit decreased $35.8 million from 2005 to 2006. While we had strong revenues from our access products, a mix shift toward single-family ONTs, which was partially offset by improved revenue from our data products, decreased the overall profit in this segment.

        Our Transport segment profit for 2007 was $237.5 million, down from $414.5 million in 2006. The decrease was due to lower segment revenue primarily from our Tellabs^® 5500 digital cross-connect and a shift in our product mix, which includes higher amounts of Tellabs^® 7100 OTS revenue. Our Transport segment profit increased $97.0 million from 2005 to 2006 due to higher revenue primarily from our Tellabs^® 5500 digital cross-connect, improved gross margins, and lower research and development expenses as a percentage of revenue.

Our Services segment profit was $72.2 million in 2007, up $6.5 million from $65.7 million in 2006. The increase was due to higher revenue, including an increase in higher-margin support services. Our Services segment profit increased $18.2 million from 2005 to 2006 due to increased revenue from higher-margin professional and support services and lower customer service costs as a percentage of revenue.

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Other Income

In millions	2007			2006			2005
Interest income, net	$	50.9		$	45.7		$	28.3
Other expense, net		(7.9	)		(7.8	)		(4.0	)
Total	$	43.0		$	37.9		$	24.3

The Interest income, net increase in 2007 was driven by higher invested balances. Other expense, net included charges to write-down the carrying value of certain cost-basis equity investments in start-up technology companies and other long-term equity investments. These charges were $0.5 million in 2007, $7.0 million in 2006 and $4.8 million in 2005. In addition, in 2007 we had a charge of $5.2 million for an other-than-temporary impairment from investments in marketable securities.

Income Taxes

In millions	2007			2006			2005
Income tax expense	$	(5.2	)	$	(90.6	)	$	(37.3	)
Effective tax rate		7.4	%		31.8	%		17.5	%

The reduction in our tax expense in 2007 is primarily attributable to a decrease in income earned from domestic operations.

The increase in our tax expense in 2006 was due primarily to higher income earned from domestic operations and the absence of a benefit from valuation allowance reversals that occurred in 2005.

Financial Condition, Liquidity and Capital Resources

Our principal source of liquidity is our cash, cash equivalents and marketable securities, which totaled $1,218.5 million at the end of 2007.

In 2007, we generated $131.4 million of cash from operating activities compared with $317.8 million in 2006. The decrease for the year was primarily due to lower earnings. We purchased $198.0 million (25.3 million shares) of our common stock. We purchased 22.5 million shares of common stock for $167.1 million under the $300 million repurchase program approved by our Board of Directors on July 31, 2006. We also purchased 2.6 million shares for $28.7 million under the Company’s Rule 10b5-1 stock 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 in the manner provided under this program. On January 24, 2008, our Board of Directors authorized a one-year extension of the Rule 10b5-1 stock repurchase program. During 2007, we purchased 0.2 million shares for $2.2 million to cover withholding taxes on shares issued under employee stock plans. On November 8, 2007, our Board of Directors authorized $600 million for a common stock repurchase program. No purchases of our common stock were made under this program as of December 28, 2007. From all stock repurchase programs, we have purchased $660.9 million since 2005. We provide no assurance that we will continue our repurchase activity and we may change or reduce our repurchase activity in the future. We cannot estimate the timing of any such change or the impact on our cash, cash equivalents and marketable securities.

We believe that the current level of working capital, particularly cash and marketable securities, is sufficient to meet our normal operating requirements for the foreseeable future. Further, we believe that sufficient resources exist to support our future growth and strategic needs. Future available sources of working capital include cash-on-hand, cash generated from future operations, short-term or long-term financing, equity offerings or any combination of these sources. Our current policy is to use our liquidity, financial strength and stability to expand our business, potentially through acquisitions, to repurchase our common stock and to fund our business operations. We do not anticipate paying a cash dividend in the foreseeable future.

Subsequent Events

In November 2007, Krish A. Prabhu, Tellabs chief executive officer, president and director, announced his plan to resign from Tellabs, effective February 29, 2008. On February 26, 2008, Tellabs announced that Robert W. Pullen was named Tellabs chief executive officer, president and director, effective March 1, 2008.

On January 21, 2008, our management committed to a plan to improve gross profit margins and reduce operating expenses. We expect to record charges during 2008 in the range of $12 million to $14 million, of which approximately $6 million to $7 million will be for workforce reductions of approximately 225 employees and $6 million to $7 million will be for facility- and asset-related charges. Estimated cash payments under the plan are in the range of $11 million to $12 million. We anticipate a first quarter 2008 charge of approximately $8 million.

Through this plan, the restructuring plan announced in September 2007 for a workforce reduction of approximately 125 employees, and other cost saving initiatives, we expect to achieve $100 million in savings by 2009. Reductions will include $75 million from annual operating expenses and $25 million from overhead costs of products and services.

TELLABS ANNUAL REPORT 2007

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Contractual Obligations

The following table sets forth an overview of our contractual obligations as of December 28, 2007, that will affect our liquidity and cash flows in future periods:

	Payments Due by Period
In millions	Total		Less than 1 Year		1–3 Years		3–5 Years		More than 5 Years
Operating lease obligations	$	69.1	$	16.0	$	23.5	$	16.0	$	13.6
Operating lease obligations related to restructuring activities, net		21.2		7.5		11.5		2.2		—
Purchase commitments to contract manufacturers and suppliers		241.9		241.9		—		—		—
Income taxes		28.2		28.2		—		—		—
Stock loan1		291.0		291.0		—		—		—
Stock loan borrowing fees2		10.5		2.1		3.9		3.6		0.9
Total obligations	$	661.9	$	586.7	$	38.9	$	21.8	$	14.5

¹ Our agreement with the lender of the stock has no defined date when we must repay the loan; however, the loan is callable at the discretion of the lender. Our investment in Cisco stock is maintained at a value equal to or greater than the market value of the loaned securities.

² For purposes of contractual obligations disclosure, we used Cisco’s average share price of $30.17 for the quarter ended December 28, 2007, to determine the hypothetical value of the borrowing fees assuming the loans are settled in 2012.

We use several contract manufacturers and suppliers to provide manufacturing services for our products. During the normal course of business, to reduce manufacturing lead times and ensure adequate component supply, we enter into agreements with certain contract manufacturers and suppliers that enable them to procure inventory based on criteria defined by us. Under these agreements, the maximum liability for purchase commitments as of December 28, 2007, was $241.9 million, of which $16.9 million was recorded on the balance sheet.

The stock loan borrowing fees that are recorded in the financial statements each period are affected by Cisco’s average share price at the end of each quarter.

As of December 28, 2007, we had unrecognized tax positions of $28.2 million included in short-term income tax liabilities and $54.6 million included in long-term income tax liabilities. At this time, we are unable to make a reasonable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes.

Off-Balance Sheet Arrangements

None.

Critical Accounting Estimates

The methods, estimates and judgments that we use in applying our accounting policies can have a significant impact on the results we report in the consolidated financial statements. Some of these estimates require difficult and subjective judgments, often as a result of the need to estimate matters that are inherently uncertain. For the reasons discussed below, we consider our critical accounting estimates to be revenue recognition, the allowance for excess and obsolete inventory and excess purchase commitments (collectively E&O), goodwill valuation, the valuation of amortizable intangible assets, the estimate of the warranty liability, reserve requirements for lease obligations on vacated facilities, income taxes and equity-based compensation.

We have discussed the development and selection of these critical accounting policies and estimates with the Audit and Ethics Committee of Tellabs’ Board of Directors.

Revenue Recognition

Determining the proper revenue recognition in our financial statements requires us to make significant judgments about the application of the accounting rules to our customer arrangements.

When a customer arrangement involves multiple deliverables, we evaluate all deliverables to determine whether they represent separate units of accounting. This approach involves a determination about:

• whether the delivered item has value to the customer on a stand-alone basis;

• whether there is objective and reliable evidence of the fair value of the undelivered item; and

• whether delivery or performance of the undelivered item is considered probable and is substantially in our control where an arrangement contains a general right of return relative to the delivered item.

The determination of whether software is more than incidental can impact whether revenue is recognized under software revenue recognition guidance or under general revenue recognition guidance. This assessment could impact the amount and timing of revenue recognition.

Many of our contracts contain customer acceptance provisions. In some cases—for example, sales involving new products—we defer revenue until we receive formal customer acceptance. In cases where we can demonstrate that the product or service has met all

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acceptance criteria prior to formal customer acceptance, or where we have sufficient historical evidence of customer acceptance, we consider acceptance to be perfunctory, and therefore formal customer acceptance is not required. Our judgment about whether acceptance is perfunctory can impact the timing of revenue for contracts containing acceptance provisions.

Excess & Obsolete Inventory and Excess Purchase Commitments

We determine our inventory cost using the first-in, first-out method, and we value our inventory at the lower of cost or market, with market determined by reference to current replacement cost or net realizable selling price. We determine the amount of inventory that is excess and obsolete (E&O) and purchase commitments in excess of requirements using estimates of future demand for individual components of raw materials and finished goods.

To determine E&O, we compare our listings of existing piece parts and finished goods to future product demand and usage requirements. We record a full valuation allowance for inventory quantities on hand in excess of two years’ expected usage. For inventory quantities that fall between one and two years’ demand, we use management judgment to determine the appropriate E&O amount. We do not record an allowance if the quantity is less than one year’s forecasted demand.

We believe our accounting estimate related to E&O is a critical accounting estimate because it requires us to make assumptions about sales volumes and product mix that are highly uncertain, and changes in estimates can have a material effect on our financial statements.

Goodwill

We report 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 with fair value in accordance with SFAS 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. However, events or circumstances could arise in the future that may create a need to record an impairment adjustment that could be material to our financial statements.

The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions. We use the discounted cash flow method to estimate the fair value of each operating segment. 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.

We believe that the accounting estimate related to the valuation of goodwill is a critical accounting estimate because it requires us to make assumptions that are highly uncertain about the future cash flows of our segments.

Intangible Assets

Our intangible assets consist primarily of purchased technology, which arose primarily from acquisitions of businesses in 2004 and 2003.

We evaluate the carrying value of our intangible assets for impairment whenever indicators of impairment exist. Accounting standards require that if the sum of the future cash flows expected to result from a long-term asset is less than the reported value of the asset, an impairment charge must be recognized in the financial statements. The amount of impairment is calculated by subtracting the fair value of the asset from the reported carrying value of the asset.

We believe that the accounting estimate related to valuation of intangible assets is a critical accounting estimate because it requires us to make assumptions about future sales prices and sales volumes for our products that involve new technologies and uncertainties around customer acceptance of new products or timely introduction into their networks. The recognition of an impairment could be material to our financial statements.

Warranty Costs

We provide warranties for all of our products, which have terms and conditions that vary depending on the product sold. We provide a basic limited warranty, including parts and labor, for all products other than access products for periods that range from 90 days to five years. The basic limited warranty for access products covers parts and labor for periods that generally range from two years to six years. We record warranty expense in cost of revenue on the consolidated statement of operations. We estimate our warranty liability by applying historical warranty return rates and costs per claim to the number of units shipped that are still within their warranty period. In addition, when we judge that a particular warranty claim will involve costs that are out of the ordinary, we separately estimate the costs for that claim and record the amount as an additional warranty expense for the period in which we determine we have a liability.

We believe that the accounting estimate related to warranty costs is a critical accounting estimate because it requires us to make assumptions about matters that are highly uncertain, including: future rates of product failure; repair costs, including availability of materials; shipping and handling; and de-installation and re-installation costs at our customers’ sites, among others. Consequently, the changes in our warranty reserves could be material to our financial statements.

TELLABS ANNUAL REPORT 2007

27

Restructuring Reserves – Leases

Our restructuring reserves consist of amounts we owe on leases for facilities we vacated, reduced by an estimate of sublease rental income. We determined the amount of the reserve for each facility by estimating the amount of time it will be vacant before it is sublet and the terms of the sublease agreement compared with our obligation, then reducing it by an estimate of potential sublease income. We examine real estate market conditions in each location where we have a vacated facility.

We believe our accounting estimate of restructuring lease obligations is a critical accounting estimate because it requires us to make assumptions about real estate rental markets and conditions that are highly uncertain, and changes in our estimates could have a material impact on our financial statements.

Income Taxes

We conduct business and file income tax returns in numerous tax jurisdictions around the world. This requires us to interpret tax laws that are often vague and uncertain, and to make judgments about the application of those laws when we prepare our tax returns. When we calculate income tax expense and the related tax liabilities and assets for our consolidated financial statements, we use estimates of the amount of income, deductions and credits that we believe are allowable under local tax laws and that should be allowed by tax authorities if our tax returns are audited. However, tax authorities may disagree on the amounts of income, deductions and credits that are allowed to be included in those tax returns. This could result in paying additional taxes or receiving a refund of previously paid taxes.

Because we are a large multi-national corporation, the United States Internal Revenue Service (IRS) generally audits each of our federal income tax returns. During 2006, the IRS completed its examination of our federal income tax returns for the years 2001 through 2003 and notified us of its intention to assess additional taxes and interest for those years. We are appealing this decision. The IRS is currently auditing our tax returns for the years 2004 and 2005 and the 2002 through 2004 pre-acquisition years of a subsidiary. We expect these examinations will be completed in 2008. Although we have recorded tax reserves for potential IRS adjustments to our tax liabilities for prior years, we cannot provide assurance whether or not these adjustments will have a material impact on our financial statements.

Equity-Based Compensation

We account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment. Under the fair value recognition provisions of this statement, we measure share-based compensation cost at the grant date based on the value of the award, which is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires several assumptions, and a change in these assumptions could materially impact our stock-based compensation expense and our results of operations. These assumptions include our stock’s expected volatility, the risk-free interest rate, expected option term and expected dividend yield, in addition to the amount of share-based awards that are expected to be forfeited.

Strategy and Outlook

Tellabs operates in an industry characterized by change and uncertainty.

Our wireline carrier customers face significant competitive threats to their most profitable residential services from other providers in North America and globally from the substitution of mobile services. In an effort to stem line loss and declining voice revenues, carriers have begun ambitious and expensive programs to transform their wireline networks with fiber-optic technology to deliver a bundle of voice, data and video services that is competitive with or superior to that offered by competitors.

Over the past few years, wireless carriers, also under competitive pressures, have aggressively invested in network infrastructure to deliver new, data-oriented services.

Many of these carriers have consolidated in recent years to achieve the advantages of scale needed to sustain such major network build-outs. The remaining large carriers have gained increased pricing power over equipment suppliers such as Tellabs. This consolidation has had an adverse effect on the overall capex growth in carriers.

Some equipment suppliers have consolidated in recent years to achieve the scale advantages needed to better address their consolidated customer base. Heightened competition by these suppliers has resulted in lower profits for Tellabs and some of its direct competitors. At the same time, capable suppliers still outnumber North American carrier customers by a wide margin.

Moreover in international markets the presence of Asian equipment suppliers challenges our ability to grow. Asian equipment suppliers have significantly lower cost structures than companies such as Tellabs, particularly for research and development.

Expectations for capital spending levels by our customers in 2008 vary, and generally speaking, we expect very modest global overall growth in capex this year. We cannot predict how macro-economic issues will affect capital spending by our customers in 2008.

Over the past few years, Tellabs has shifted its product offerings to address the strategic needs of both wireline and wireless carriers. Building on a base of successful established products, we have deployed in North America the new fiber-access and

28

ROADM technologies needed for the delivery of combined voice, data and video services to residential customers. Our new data products address the changing nature of wireless services and enterprise computing on a global basis.

Some of these newer products are less profitable than our established products, given the early-stage nature of their deployment and the conditions surrounding our industry. As we look forward, our strategy is to maximize revenue and profitability from our established products and profitably grow the new product areas.

In response to these changing industry dynamics and our changing product mix, we announced a plan early in 2008 to improve profitability by reducing operating expenses and improving gross margin.

Under this plan, together with the restructuring we announced in September 2007, we expect to reduce our expenses and costs through the course of 2008 so that when we enter 2009 our cost structure will be $100 million lower than what it was in 2007. About three-quarters of the cuts will come in operating expenses, with the balance in supply-chain and services overhead costs. We plan to achieve these results by further headcount reductions through both layoffs and expected normal attrition, lower spending for prototypes and equipment, and reductions in third-party services.

As part of this plan, we expect to incur total charges of about $12 million to $14 million during 2008, with about $8 million of the charges falling in the first quarter.

In addition, we are working to diversify our customer base. We have won significant new customers with our data products and will work to continue that trend. We are focused on increasing sales of our access products with IOC and NLEC customers in the United States. We have introduced new versions of our ROADM platform that are intended specifically for IOC, NLEC and international customers.

Since 2005, we have determined that it is appropriate for us to actively return excess capital to stockholders through stock buybacks. In 2008, the company will continue to evaluate how to use excess cash to increase stockholder value.

Forward-Looking Statements

Except for historical information, the matters discussed or incorporated by reference into this Management’s Discussion and Analysis may include forward-looking statements made pursuant to the safe harbor provisions contained in the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended. These statements reflect management’s expectations, estimates and assumptions, based on current and available information. 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,” “foreseeable,” “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 most recently filed Form 10-K. Our actual future results could differ materially from those predicted in such forward-looking statements. In light of the foregoing risks, uncertainties and other factors, investors should not place undue reliance on the forward-looking statements in determining whether to buy, sell or hold any of our securities. 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. The foregoing discussion should be read in conjunction with the financial statements in this 2007 Annual Report.

TELLABS ANNUAL REPORT 2007

29

Management’s Report on Internal Control over Financial Reporting

The management of Tellabs, Inc., and subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) of the Securities Exchange Act of 1934, as amended. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 28, 2007, as required by Rule 13a-15(c) of the Securities Exchange Act of 1934, as amended. In making this assessment, we used the criteria set forth in the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 28, 2007.

Michael J. Birck

Chairman of the Board

Krish Prabhu

President and Chief Executive Officer

Timothy J. Wiggins

Executive Vice President and Chief Financial Officer

February 22, 2008

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Tellabs, Inc. We have audited the accompanying consolidated balance sheets of Tellabs, Inc. and subsidiaries (the “Company”) as of December 28, 2007, and December 29, 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 28, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 28, 2007, and December 29, 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 28, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 10 to the consolidated financial statements, in 2007 the Company changed its method of accounting for uncertain tax positions in connection with the required adoption of FASB Interpretation No. 48. As discussed in Note 1 to the consolidated financial statements, in 2006 the Company changed its method of accounting for share-based payments in connection with the required adoption of Statement of Financial Accounting Standards No. 123(R).

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 28, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2008, expressed an unqualified opinion thereon.

Ernst & Young LLP

Chicago, Illinois

February 22, 2008

30

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

The Board of Directors and Shareholders of Tellabs, Inc. We have audited Tellabs, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 28, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 28, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 28, 2007, and December 29, 2006, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 28, 2007, and our report dated February 22, 2008, expressed an unqualified opinion thereon.

Ernst & Young LLP

Chicago, Illinois

February 22, 2008

TELLABS ANNUAL REPORT 2007

31

Consolidated Statements of Income

In millions, except per-share data	Year Ended 12/28/07			Year Ended 12/29/06			Year Ended 12/30/05
Revenue
Products	$	1,691.3		$	1,858.6		$	1,716.3
Services		222.1			182.6			167.1
		1,913.4			2,041.2			1,883.4
Cost of Revenue
Products		1,085.9			987.0			908.8
Services		153.2			120.6			119.6
		1,239.1			1,107.6			1,028.4
Gross Profit		674.3			933.6			855.0
Operating Expenses
Research and development		343.1			356.9			344.0
Sales and marketing		176.6			179.8			175.5
General and administrative		99.1			113.5			95.6
Intangible asset amortization		22.5			28.6			36.0
Restructuring and other charges		5.8			8.0			12.9
Purchased in-process research and development		—			—			2.2
		647.1			686.8			666.2
Operating Earnings		27.2			246.8			188.8
Other Income
Interest income, net		50.9			45.7			28.3
Other expense, net		(7.9	)		(7.8	)		(4.0	)
		43.0			37.9			24.3
Earnings Before Income Tax		70.2			284.7			213.1
Income tax expense		(5.2	)		(90.6	)		(37.3	)
Net Earnings	$	65.0		$	194.1		$	175.8
Net Earnings Per Share
Basic	$	0.15		$	0.44		$	0.39
Diluted	$	0.15		$	0.43		$	0.39
Weighted Average Shares Outstanding
Basic		436.6			445.9			449.9
Diluted		441.1			454.1			454.5

The accompanying notes are an integral part of these statements.

32

Consolidated Balance Sheets

In millions, except share data	12/28/07			12/29/06
ASSETS
Current Assets
Cash and cash equivalents	$	213.0		$	153.6
Investments in marketable securities		1,005.5			1,146.5
		1,218.5			1,300.1
Other marketable securities		291.0			288.6
Accounts receivable, net of returns of $3.0 and $ 3.8		363.8			411.0
Inventories
Raw materials		35.3			34.5
Work in process		11.7			19.7
Finished goods (includes costs of $6.8 and $28.6 related to deferred revenue)		124.2			112.8
		171.2			167.0
Income taxes		10.6			10.7
Miscellaneous receivables and other current assets		56.6			55.2
Total Current Assets		2,111.7			2,232.6
Property, Plant and Equipment
Land		21.2			20.8
Buildings and improvements		209.6			205.5
Equipment		439.3			411.2
		670.1			637.5
Accumulated depreciation		(367.7	)		(329.6	)
		302.4			307.9
Goodwill		1,110.5			1,107.4
Intangible Assets, Net of Amortization		67.0			89.6
Other Assets		155.0			184.9
Total Assets	$	3,746.6		$	3,922.4
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	91.3		$	119.5
Accrued compensation		49.1			70.7
Restructuring and other charges		10.8			7.8
Income taxes		83.8			97.9
Stock loan		291.0			288.6
Deferred revenue		30.0			55.4
Other accrued liabilities		117.0			122.3
Total Current Liabilities		673.0			762.2
Long-Term Restructuring Liabilities		14.4			22.3
Income Taxes		78.9			128.2
Other Long-Term Liabilities		67.0			71.4
Stockholders’ Equity
Preferred stock: authorized 5,000,000 shares of $.01 par value; no shares issued and outstanding		—			—
Common stock: authorized 1,000,000,000 shares of $.01 par value; 493,900,528 and 489,034,812 shares issued		4.9			4.9
Additional paid-in capital		1,459.5			1,395.3
Treasury stock, at cost: 75,177,591 and 49,919,908 shares		(796.7	)		(598.7	)
Retained earnings		2,113.3			2,042.0
Accumulated other comprehensive income		132.3			94.8
Total Stockholders’ Equity		2,913.3			2,938.3
Total Liabilities and Stockholders’ Equity	$	3,746.6		$	3,922.4

The accompanying notes are an integral part of these statements.

TELLABS ANNUAL REPORT 2007

33

Consolidated Statements of Stockholders’ Equity

In millions	Year Ended 12/28/07				Year Ended 12/29/06				Year Ended 12/30/05
	Shares	Amount			Shares	Amount			Shares	Amount
Common Stock
Balance at beginning of year	489.0	$	4.9		477.0	$	4.8		466.9	$	4.7
Stock issued for employee stock programs	4.9		—		12.0		0.1		10.1		0.1
Balance at end of year	493.9		4.9		489.0		4.9		477.0		4.8
Additional Paid-In Capital
Balance at beginning of year			1,395.3				1,238.7				1,145.9
Reclassification from deferred compensation			—				(10.9	)			—
Stock option activity			50.4				148.2				83.2
Restricted stock award activity			10.2				7.5				7.3
Stock purchase plan activity			3.9				6.9				2.3
Performance stock units			(0.3	)			0.8				—
Deferred compensation related to acquisitions			—				4.1				—
Balance at end of year			1,459.5				1,395.3				1,238.7
Deferred Compensation
Balance at beginning of year			—				(10.9	)			(21.8	)
Reclassification to additional paid-in-capital			—				10.9				—
Amortization of deferred compensation			—				—				10.9
Amortization of restricted stock awards			—				—				5.4
Restricted stock award activity			—				—				(5.4	)
Balance at end of year			—				—				(10.9	)
Treasury Stock
Balance at beginning of year	49.9		(598.7	)	27.7		(322.8	)	3.3		(129.6	)
Purchases	25.3		(198.0	)	22.2		(275.9	)	24.4		(193.2	)
Balance at end of year	75.2		(796.7	)	49.9		(598.7	)	27.7		(322.8	)
Retained Earnings
Balance at beginning of year			2,042.0				1,847.9				1,672.1
Provisions of FIN 48, adjustment to beginning retained earnings			6.3				—				—
Net earnings			65.0				194.1				175.8
Balance at end of year			2,113.3				2,042.0				1,847.9
Accumulated Other Comprehensive Income
Balance at beginning of year			94.8				57.0				125.9
Reclassification adjustment for gain (loss) included in net earnings			(2.5	)			(0.5	)			2.5
Unrealized gain (loss) on available-for-sale securities, net of tax (expense) benefit of $(1.6) in 2007, $1.3 in 2006 and $2.1 in 2005			2.8				5.9				(3.1	)
Net unrealized holding gain (loss) on available-for-sale securities			0.3				5.4				(0.6	)
Foreign currency translation adjustments			34.9				33.6				(68.3	)
SFAS 158, net of tax (expense) benefit of $(1.4) in 2007 and $0.7 in 2006			2.3				(1.2	)			—
Balance at end of year			132.3				94.8				57.0
Total Stockholders’ Equity		$	2,913.3			$	2,938.3			$	2,814.7

The accompanying notes are an integral part of these statements.

34

Consolidated Statements of Cash Flow

In millions	Year Ended 12/28/07			Year Ended 12/29/06			Year Ended 12/30/05
Operating Activities
Net earnings	$	65.0		$	194.1		$	175.8
Adjustments to reconcile net earnings to     net cash provided by operating activities:
Depreciation and amortization		90.7			103.5			126.1
Stock-based compensation		32.1			52.2			16.3
Deferred income taxes		(2.7	)		39.4			(15.6	)
Excess tax benefits from stock-based compensation		(2.1	)		(15.3	)		14.0
Restructuring and other charges		5.8			8.0			12.9
Other than temporary impairment charges on investments		5.7			7.0			4.8
Purchased in-process research and development		—			—			2.2
Net changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable		68.4			(81.9	)		(15.0	)
Inventories		3.7			(52.7	)		7.0
Miscellaneous receivables and other current assets		2.5			9.1			3.2
Other assets		14.9			(0.2	)		(16.0	)
Accounts payable		(40.0	)		21.4			(15.5	)
Restructuring and other charges		(10.7	)		(9.8	)		(24.2	)
Deferred revenue		(25.4	)		46.1			(0.3	)
Other accrued liabilities		(32.2	)		(10.6	)		(27.3	)
Income taxes		(29.3	)		(8.7	)		9.4
Other long-term liabilities		(15.0	)		16.2			0.6
Net Cash Provided by Operating Activities		131.4			317.8			258.4
Investing Activities
Capital expenditures		(57.7	)		(67.2	)		(61.8	)
Disposals of property, plant and equipment		2.1			3.1			15.6
Payments for purchases of investments		(1,240.4	)		(1,654.4	)		(661.9	)
Proceeds from sales and maturities of investments		1,380.9			822.1			1,180.4
Net Cash Provided by (Used for) Investing Activities		84.9			(896.4	)		472.3
Financing Activities
Proceeds from issuance of common stock under stock plans		31.4			99.6			71.6
Repurchase of common stock		(198.0	)		(275.9	)		(193.2	)
Excess tax benefits from stock-based compensation		2.1			15.3			—
Net Cash Used for Financing Activities		(164.5	)		(161.0	)		(121.6	)
Effect of Exchange Rate Changes on Cash		7.6			12.4			(21.2	)
Net Increase (Decrease) in Cash and Cash Equivalents		59.4			(727.2	)		587.9
Cash and Cash Equivalents at Beginning of Year		153.6			880.8			292.9
Cash and Cash Equivalents at End of Year	$	213.0		$	153.6		$	880.8
Other Information
Interest paid	$	3.0		$	2.2		$	2.3
Income taxes paid	$	35.0		$	46.5		$	11.8

The accompanying notes are an integral part of these statements.

TELLABS ANNUAL REPORT 2007

35

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Nature of Business

We design and market equipment to telecommunications service providers worldwide. Our products and services provide solutions to deliver wireline and wireless voice, data and video services for business and residential customers. We also provide installation and professional services that support our products.

Principles of Consolidation

Our consolidated financial statements include the accounts of Tellabs and our subsidiaries. We eliminated all intercompany accounts and transactions.

Use of Estimates

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires us to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash Equivalents

We consider all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents.

Fair Value of Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, marketable securities, cost-basis investments and derivatives. The carrying value of the cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair value because of their short-term nature. We determine the fair value of marketable securities based on quoted market prices and the fair value of our derivatives is based on quoted market prices or current rates offered for instruments with similar characteristics. See discussion in Notes 5 and 6 regarding investments and derivatives, respectively.

Accounts Receivable Allowances

We base our reserve for allowances on our assessment of the collectibility of customer accounts. We regularly review the allowance by considering factors such as customer financial strength, the age of accounts receivable balances, current economic conditions that may affect a customer’s ability to pay and historical experience. As specific balances are determined to be ultimately uncollectible, they are removed from our accounts receivable aging.

Inventories and Suppliers

We determine our inventory cost using the first-in, first-out method. We value our inventory at the lower of cost or market, with market determined at the lower of current replacement cost or net realizable selling price. We determine the amount of inventory that is excess and obsolete and purchase commitments in excess of requirements using estimates of future demand for individual components of raw materials and finished goods.

We obtain products from third-party suppliers, due to the outsourcing of our manufacturing. Although a limited number of suppliers are used to manufacture our products, we believe other suppliers could provide similar products on comparable terms. An inability of a supplier to provide product would cause a near-term reduction of revenue, which would affect operating results adversely.

Property, Plant and Equipment

We record property, plant and equipment at cost. We compute depreciation using both the declining-balance and straight-line methods. Buildings are depreciated over 25 to 40 years; building improvements over 7 years; leasehold improvements over the lesser of the life of the lease or the useful life of the asset, currently 3 to 15 years; and equipment over 3 to 10 years. We evaluate property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.

Stock Options

At the beginning of 2006, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) 123(R), Share-Based Payments, 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 did not restate 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.

Prior to the adoption of SFAS 123(R), we accounted for equity-based compensation plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. If compensation cost for our stock-based compensation plans had been determined using the fair value at the grant dates for awards under those plans consistent with the method required by SFAS 123, Accounting for Stock-Based Compensation, our net earnings and net earnings per share would have changed to the pro forma amounts indicated below:

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In millions, except per-share data	2005
Net earnings as reported	$	175.8
Add: stock-based employee compensation expense included in reported net earnings, net of related tax effects		10.3
Less: Total stock-based employee compensation expense determined under fair- value based method for all grants, net of related tax effects 1		(18.9	)
Pro forma net earnings	$	167.2
Net earnings per common share
As reported	$	0.39
Pro forma basic and diluted	$	0.37

¹ The pro forma effect recorded in 2005 includes a tax benefit of $62.7 million, of which $35.6 million represents the release of a valuation allowance maintained against the deferred tax benefit on stock-based employee compensation expense recorded in 2004 and 2003.

Income Taxes

We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis at enacted tax rates when such amounts are expected to be realized or settled. We provide valuation allowances if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Goodwill

We report operating results for three segments: Broadband, Transport and Services. Our segments represent our reporting units, which are used for evaluation purposes. We test each operating segment for possible goodwill impairment annually and when impairment indicators exist, by comparing each segment’s net book value to fair value in accordance with SFAS 142, Goodwill and Other Intangible Assets. The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions. We use the discounted cash flow method to estimate the fair value of each operating segment. This methodology requires us to use estimates and judgments about the future cash flows of our operating segments. The assumptions used in our cash flow forecasts are consistent with plans and estimates we use to manage the underlying operating segments.

However, events or circumstances could arise in the future that may create a need to record an impairment.

Intangible Assets

Our intangible assets are made up primarily of purchased technology and customer relationships from acquisitions. All assets are amortized over their estimated useful lives and reviewed for impairment, in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, when indicators of impairment exist, such as loss of customer relationships, customer nonacceptance of our products and underlying technology, and reduced product margins indicating declining operating performance or cash flows.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price or fee is fixed or determinable, and collectibility is reasonably assured in accordance with the guidance in the Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition.

Contracts and customer purchase orders are generally used to determine the existence of an arrangement. Shipping terms and related documents are used to verify delivery or performance.

The Company assesses whether the sales price is fixed or determinable based on payment terms and whether the sales price is subject to refund or adjustment. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer.

Collectibility is assessed based on the creditworthiness of the customer as determined by credit checks and the customer’s payment history to the Company. If collectibility is not considered probable, revenue is not recognized until the fee is collected.

The majority of our revenue comes from product sales. We generally recognize revenue either upon shipment or upon delivery to the customer, depending on the contractual delivery terms.

Some of our customer agreements contain acceptance clauses that grant the customer the right to return or exchange products that do not conform to specifications. If we do not have sufficient historical evidence of customer acceptance, we recognize revenue when the conditions of acceptance have been met or the acceptance provisions lapse. When we have sufficient historical evidence that our products meet the specifications, we recognize revenue upon shipment or delivery.

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Some customer agreements grant the right to return or exchange product based on subjective criteria. We accrue for returns under the guidance of SFAS No. 48, Revenue Recognition When Right of Return Exists, based on historical evidence of rates of return. We recognize revenue, net of potential returns, upon shipment or upon delivery of the product to the customer.

Some of our customer arrangements are in the form of distribution agreements, with contractual rights of return, promotional rebates, and other incentives and credits. We recognize revenue net of estimated returns and rebates, which are calculated based on contractual provisions and historical evidence of returns activity.

We also recognize revenue from deployment services, support agreements, training and other professional services. Deployment services revenue results from installation of our products at customer sites. Installation services, which generally occur over a short time period, are not services essential to the functionality of our products, as customers may purchase installation services from us, install our products themselves, or hire third parties to perform the installation. We recognize revenue for deployment services upon completion. We recognize revenue from support agreements ratably over the service period. We recognize training and other professional services revenue upon completion.

Some of our customer arrangements include multiple deliverables, such as product sales that include services to be performed after delivery of the product. In such cases, we apply the guidance in Emerging Issues Task Force (EITF) 00-21, Revenue Arrangements with Multiple Deliverables. Generally, we account for a deliverable (or a group of deliverables) separately if (1) the delivered item(s) has stand-alone value to the customer, (2) there is objective and reliable evidence of the fair value of the undelivered item(s) included in the arrangement, and (3) if we have given the customer a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) or service(s) is probable and substantially in our control.

We generally determine if objective and reliable evidence of fair value for the items included in a multiple-element arrangement exists based on whether we have vendor specific objective evidence (VSOE) of the price that we sell an item for on a stand-alone basis. If we do not have VSOE for the item, we will use the price charged by a vendor selling a comparable product or service on a stand-alone basis to similarly situated customers, if available.

When there is objective and reliable evidence of fair value for all units of accounting in an arrangement, we allocate the arrangement consideration to the separate units of accounting based on their relative fair values. In cases where we have objective and reliable evidence of fair value for the undelivered items in an arrangement, but no such evidence for the delivered items, we allocate the arrangement consideration using the residual method. If the elements cannot be considered separate units of accounting, or if we cannot determine the fair value of any of the undelivered elements, we defer revenue until the entire arrangement is delivered or fair value can be determined for all undelivered units of accounting.

Once we have determined the amount, if any, of arrangement consideration allocable to the undelivered item(s), we apply the applicable revenue recognition policy, as described elsewhere herein, to determine when such amount may be recognized as revenue.

When an arrangement includes software that is more than incidental, we account for the transaction under the provisions of Statement of Position (SOP) 97-2, Software Revenue Recognition. If the arrangement includes non-software elements for which software is essential to the functionality of the element, those elements are also accounted for under SOP 97-2, as prescribed in EITF 03-05, Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software.

Many of our customer arrangements include the right to invoice the customer for costs of shipping product to the customer’s location. In these cases, we record the amount included on the customer’s invoice for shipping costs as revenue, in accordance with EITF 00-10, Accounting for Shipping and Handling Fees and Costs. The cost of shipping products to customers is recorded as cost of revenue.

EITF 06-03, How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement, which was issued in 2006, allows revenue to be presented either gross or net of these sales-related taxes. We record revenue net of any sales-related taxes that are billed to our customers. We believe this approach results in financial statements that are more easily understood by investors.

Earnings Per Share

We base earnings per share on the weighted average number of common shares (basic) and the weighted average common shares adjusted for assumed exercises of dilutive stock options, restricted stock and shares under the employee stock purchase plan (diluted). We base earnings per share in periods of a net loss solely on basic weighted average number of common shares under generally accepted accounting principles.

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Foreign Currency Translation

We generally measure the financial statements of our foreign subsidiaries using the local currency as the functional currency. In such cases, we translate assets and liabilities at exchange rates in effect at the balance sheet date, and we translate revenue and expenses at weighted average exchange rates during the year. We record the gain or loss from translating a subsidiary’s stockholders’ equity into U.S. dollars as foreign currency translation adjustments in Accumulated Other Comprehensive Income.

Foreign Currency Transactions

We recognize foreign currency transaction gains and losses resulting from changes in exchange rates in Other expense, net. We recorded net losses of $1.1 million in 2007, $2.5 million in 2006 and $4.0 million in 2005.

2. New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157, Fair Value Measurements, which defines fair value, creates a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for financial assets and liabilities and recurring non-financial assets and liabilities issued for fiscal years beginning after November 15, 2007, and the interim periods within those fiscal years. The FASB has provided a one-year deferral for the implementation of SFAS 157 (fiscal years beginning after November 15, 2008) for all non-financial and non-recurring assets and liabilities, which include our long-lived assets, goodwill and intangible assets. We will adopt the provisions of SFAS 157 for all financial and recurring non-financial assets and liabilities on the effective date. We will adopt the provisions of SFAS 157 for non-financial and non-recurring assets and liabilities as of the deferred effective date. Based on the provisions of SFAS 157, the difference between the carrying value and fair value will be recognized at the adoption date as a cumulative-effect adjustment to the opening balance of retained earnings. SFAS 157 will not have a material effect on our financial statements.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of SFAS 115. SFAS 159 permits all entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value at specified election dates. SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. The objective of SFAS 159 is to improve financial reporting by providing companies with the opportunity to mitigate the volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The associated unrealized gains and losses on the items for which the fair value option has been elected shall be reported in earnings. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We will adopt SFAS 159 on the effective date. Based on the provisions of SFAS 159, the difference between the carrying value and fair value will be recognized at the adoption date as a cumulative-effect adjustment to the opening balance of retained earnings. SFAS 159 will not have an effect on our financial statements.

In December 2007, the FASB issued SFAS 141(R), Business Combinations. SFAS 141(R) establishes principles and requirements for an acquirer, which improves the relevance, representational faithfulness and comparability of information provided by a reporting entity in its financial reports about business combinations and its effects. SFAS 141(R) is effective prospectively to business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Currently, we are not able to estimate the impact SFAS 141(R) will have on our financial statements.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements (an amendment of ARB No. 51). SFAS 160 establishes accounting and reporting standards designed to improve the relevance, comparability and transparency of the financial information provided in a reporting entity’s consolidated financial statements. SFAS 160 requires:

• ownership interests in subsidiaries held by parties, other than the parent, to be clearly identified, labeled and presented in the consolidated balance sheet within equity, but separate from the parent’s equity,

• net income attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of income,

• changes in the parent’s ownership interest to be accounted for as equity transactions, if a subsidiary is deconsolidated and any retained noncontrolling equity investment to be measured at fair value,

• and that entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and noncontrolling owners.

SFAS 160 is effective for fiscal years and interim periods beginning on or after December 15, 2008.

Currently, we are not able to estimate the impact SFAS 160 will have on our financial statements.

TELLABS ANNUAL REPORT 2007

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3. Restructuring and Other Charges

During the third quarter of 2007, our management initiated a plan to better align our resources with strategic business objectives. The primary activity is a reduction of headcount in both the Broadband and Transport segments of our business. By the end of 2007, we reduced headcount by 126 and recorded $5.5 million, primarily in cash severance expense related to those reductions. We have substantially completed the objectives of this plan.

In the second quarter of 2006, we had restructuring activities to reduce costs and better align our resources with our internal needs and our customers’ requirements. The activities included 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 reduced headcount by 126 employees during 2006 and closed or consolidated two leased facilities as a result of those reductions. These activities have been completed. The total expense of the 2006 restructuring plans was $9.2 million, which included $2.3 million in severance costs, $6.7 million in facility charges and $0.2 million in asset disposals, all of which were recorded in 2006.

In the fourth quarter of 2004 and throughout 2005, we initiated and executed plans to improve profitability by reorganizing our operations in Denmark and Finland, and by reducing headcount on a smaller scale in other locations. Implementation of these plans, which is complete, resulted in workforce reductions, facility closures and asset disposals. Total charges of these plans were $17.4 million, including $1.6 million in 2004 and $15.8 million in 2005. The breakdown of these charges is $14.0 million for severance, $2.9 million in facility and related costs, and $0.5 million in noncancelable software licenses.

An additional charge to restructuring expense in 2007 of $0.3 million includes a reduction of $0.1 million in severance and an increase of $0.4 million in facility related charges. Reductions to restructuring expense in 2006 totaled $1.2 million, including $0.5 million in severance and $0.7 million in facility related charges. The changes in 2007 and 2006 are both due to changes in estimates to previous restructuring plans. A net reduction during 2005 to prior restructuring plans of $2.9 million in facility charges was recorded primarily as a result of favorable subleasing.

As of December 28, 2007, we had $25.2 million accrued for restructuring plans. The 2007 restructuring plan balance of $4.0 million primarily consists of cash severance that we expect to pay through the third quarter of 2008. The $21.2 million balance for previous restructuring plans relates to net lease obligations that expire by 2012.

The following table summarizes our restructuring and other charges recorded in operating expenses for the plans mentioned above, as well as adjustments to reserves recorded for prior restructurings:

In millions	2007		2006		2005
Severance and other termination benefits	$	5.4	$	1.8	$	12.4
Facility and other exit costs		0.4		6.2		—
Other obligations		—		—		0.5
Total restructuring and other charges	$	5.8	$	8.0	$	12.9

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The following table summarizes our restructuring and other charges activity by segment during 2007 and 2006 and the status of the reserves at year end:

In millions	12/29/06		Restructuring Expense			Cash Payments			Other Activities1			12/28/07
2007 Restructuring Plan
Broadband	$	—	$	4.8		$	(1.4	)	$	0.2		$	3.6
Transport		—		0.7			(0.3	)		—			0.4
Subtotal 2007 Restructuring		—		5.5			(1.7	)		0.2			4.0
2006 Restructuring Plans
Broadband		7.1		1.0			(2.7	)		—			5.4
Transport		0.2		—			—			—			0.2
Subtotal 2006 Restructuring		7.3		1.0			(2.7	)		—			5.6
Previous Restructuring Plans
Broadband		0.2		—			(0.1	)		—			0.1
Transport		22.6		(0.7	)		(6.4	)		—			15.5
Subtotal Previous Restructuring		22.8		(0.7	)		(6.5	)		—			15.6
Total All Restructuring Plans	$	30.1	$	5.8		$	(10.9	)	$	0.2		$	25.2
In millions	12/30/05		Restructuring Expense			Cash Payments			Other Activities1			12/29/06
2006 Restructuring Plans
Broadband	$	—	$	8.6		$	(2.3	)	$	0.8		$	7.1
Transport		—		0.6			(0.3	)		(0.1	)		0.2
Subtotal 2006 Restructuring		—		9.2			(2.6	)		0.7			7.3
2005/2004 Restructuring Plans
Broadband		0.9		(0.1	)		(0.7	)		—			0.1
Transport		0.4		(0.4	)		—			—			—
Subtotal 2005/2004 Restructuring		1.3		(0.5	)		(0.7	)		—			0.1
Previous Restructuring Plans
Broadband		0.3		—			(0.2	)		—			0.1
Transport		29.6		(0.7	)		(6.3	)		—			22.6
Subtotal Previous Restructuring		29.9		(0.7	)		(6.5	)		—			22.7
Total All Restructuring Plans	$	31.2	$	8.0		$	(9.8	)	$	0.7		$	30.1

¹ Other activities include the effects of currency translation, write-downs of property, plant and equipment to be disposed, and other changes in the reserve balance that do not flow through restructuring expense.

4. Goodwill and Intangible Assets

Goodwill

Prior to 2006, we reported goodwill as a single consolidated segment. In 2006 we began reporting operations in multiple segments: Broadband, Transport and Services. Due to the change in operating segments, we allocated goodwill to each operating segment beginning in 2006, based on each segment’s proportional fair value.

In 2007, we made adjustments of $0.6 million related to the adoption of FIN 48, Accounting for Uncertainty in Income Taxes, which resulted in a reduction of our tax benefit associated with prior acquisitions. We made adjustments of $1.9 million during 2006 to reduce goodwill from the acquisition of AFC, which relates primarily to exit cost liabilities associated with the acquisition. We also made an adjustment of $5.6 million during 2006 to reduce goodwill to reflect a tax benefit for net operating losses from a prior acquisition. During 2005, we made adjustments to the AFC purchase price of $13.8 million for costs to exit facilities and adjustments of $9.7 million related to other assets and liabilities assumed in the acquisitions of AFC and Vinci.

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We tested each operating segment for possible goodwill impairment by comparing each segment’s net book value with fair value in accordance with SFAS 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. However, events or circumstances could arise in the future that may create a need to record an impairment adjustment that could be material to our financial statements. The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions. We use the discounted cash flow method to estimate the fair value of each operating segment. This methodology requires us to use 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.

The following table reconciles goodwill from December 31, 2005, as follows:

	2007								2006
In millions	Broadband		Transport		Services		Total		Broadband			Transport			Services			Total
Beginning balance	$	592.3	$	392.9	$	122.2	$	1,107.4	$	594.7		$	394.5		$	122.7		$	1,111.9
Additions/(reductions)		0.3		0.2		0.1		0.6		(4.0	)		(2.7	)		(0.8	)		(7.5	)
Currency translation adjustments		1.3		0.9		0.3		2.5		1.6			1.1			0.3			3.0
Ending balance	$	593.9	$	394.0	$	122.6	$	1,110.5	$	592.3		$	392.9		$	122.2		$	1,107.4

Intangible Assets

We amortize our intangible assets with finite lives on a straight-line basis over their estimated useful lives, which range from approximately 1 year to 13 years.

In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, intangible assets are reviewed for impairment when events or circumstances indicate that its carrying amount may not be recoverable. No impairment was recorded in 2007.

During the fourth quarter of 2006, we recorded a charge of $1.4 million for impaired developed technology related to the Tellabs^® 1600 small business ONT, based on reduced demand. The impairment adjustment is included in Intangible asset amortization. Total impairment for this asset relates to the Broadband segment.

The gross carrying amount and accumulated amortization of intangible assets subject to amortization are as follows:

In millions	12/28/07									12/29/06
	Gross Assets			Accumulated Amortization			Net			Gross Assets			Accumulated Amortization			Net
Developed technology	$	149.2		$	(102.4	)	$	46.8		$	149.2		$	(81.8	)	$	67.4
Customer relationships/backlog		34.2			(10.6	)		23.6			34.2			(8.2	)		26.0
Trade name/trademarks		2.0			(2.0	)		—			2.0			(2.0	)		—
Leasehold estates		(4.6	)		1.2			(3.4	)		(4.6	)		0.8			(3.8	)
Total	$	180.8		$	(113.8	)	$	67.0		$	180.8		$	(91.2	)	$	89.6

The estimated amortization expense for each of the next five years follows:

In millions
2008	$	22.2
2009	$	18.5
2010	$	7.8
2011	$	4.2
2012	$	3.6

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5. Investments

We account for investments in marketable securities at market prices, with the unrealized gain or loss, less deferred income taxes, shown as a separate component of stockholders’ equity. We base realized gains and losses on specific identification of the security sold. At December 28, 2007, and December 29, 2006, available-for-sale marketable securities consisted of the following:

In millions	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair Value
2007
U.S. government debt obligations	$	80.7	$	0.6	$	(0.1	)	$	81.2
U.S. government-sponsored enterprise (agency) debt obligations		256.9		2.7		—			259.6
Municipal tax-exempt debt obligations		283.4		1.7		—			285.1
Corporate debt and asset-backed obligations		184.7		1.0		(1.5	)		184.2
Foreign government debt obligations		73.4		0.1		(0.2	)		73.3
Foreign bank and corporate debt obligations		103.9		0.7		(0.4	)		104.2
Preferred and common stocks		18.6		—		(0.7	)		17.9
	$	1,001.6	$	6.8	$	(2.9	)	$	1,005.5
2006
U.S. government debt obligations	$	59.0	$	—	$	(0.2	)	$	58.8
U.S. government-sponsored enterprise (agency) debt obligations		356.9		0.6		(1.8	)		355.7
Municipal tax-exempt debt obligations		339.5		0.1		(0.2	)		339.4
Corporate debt and asset-backed obligations		240.2		0.5		(0.6	)		240.1
Foreign government debt obligations		89.3		—		(0.6	)		88.7
Foreign bank debt obligations		16.9		0.2		—			17.1
Preferred and common stocks		47.3		0.5		(1.1	)		46.7
	$	1,149.1	$	1.9	$	(4.5	)	$	1,146.5

Of our available-for sale debt obligations at December 28, 2007, $169.6 million have contractual maturities of less than 12 months, $769.2 million have contractual maturities of greater than one year up to five years, and $44.2 million have contractual maturities greater than five years.

Gross unrealized gains related to our fixed-income securities were caused by interest rate fluctuations. Gross unrealized losses related to fixed-income securities were primarily due to changes in market conditions that caused spreads to widen for fixed-income securities. We review investments held with unrealized losses to determine if the loss is other-than-temporary. We evaluated near-term prospects of the security in relation to the severity and duration and our intent and ability to hold the security for a period of time sufficient to allow for an anticipated recovery. Based on our review, we determined that it was not reasonable to assume that some of our preferred stocks would recover to fair value in the near-term due to the severity and duration of the impairment. We recognized a $5.2 million other-than-temporary impairment as of December 28, 2007. For all other investments we determined that our ability and

TELLABS ANNUAL REPORT 2007

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intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value was reasonable and do not consider these investments to be other-than-temporarily impaired at December 28, 2007. No other-than-temporary impairments were recorded for the years ended December 29, 2006, and December 30, 2005.

Investments in marketable securities with unrealized losses at December 28, 2007, and December 29, 2006, were as follows:

	Unrealized Loss Less than 12 months					Unrealized Loss Greater than 12 months					Total
In millions	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
2007
U.S. government debt obligations	$	28.8	$	(0.1	)	$	—	$	—		$	28.8	$	(0.1	)
Corporate debt and asset-backed obligations		53.5		(1.2	)		11.1		(0.3	)		64.6		(1.5	)
Foreign government debt obligations		31.2		(0.1	)		15.1		(0.1	)		46.3		(0.2	)
Foreign bank and corporate debt obligations		50.9		(0.3	)		10.7		(0.1	)		61.6		(0.4	)
Preferred and common stocks		3.8		(0.7	)		—		—			3.8		(0.7	)
Total	$	168.2	$	(2.4	)	$	36.9	$	(0.5	)	$	205.1	$	(2.9	)
2006
U.S. government debt obligations	$	8.0	$	—		$	39.9	$	(0.2	)	$	47.9	$	(0.2	)
U.S. government-sponsored enterprise (agency) debt obligations		51.9		(0.3	)		139.7		(1.5	)		191.6		(1.8	)
Municipal tax-exempt debt obligations		61.8		(0.1	)		91.2		(0.1	)		153.0		(0.2	)
Corporate debt and asset-backed obligations		15.9		(0.1	)		122.0		(0.5	)		137.9		(0.6	)
Foreign government debt obligations		2.3		(0.1	)		72.6		(0.5	)		74.9		(0.6	)
Preferred and common stocks		—		—			33.7		(1.1	)		33.7		(1.1	)
Total	$	139.9	$	(0.6	)	$	499.1	$	(3.9	)	$	639.0	$	(4.5	)

The following table presents gross realized gains and losses related to the fixed income investments:

In millions	12/28/07			Year Ended 12/29/06			12/30/05
Gross realized gains	$	3.2		$	0.6		$	0.7
Gross realized losses1		(8.7	)		(1.1	)		(6.9	)
Total	$	(5.5	)	$	(0.5	)	$	(6.2	)

¹ Includes $5.2 million other-than-temporary impairment for the year ended December 28, 2007.

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As a result of the AFC acquisition, we acquired 10.6 million shares of Cisco common stock, shown as Other marketable securities in Current Assets. AFC owned this stock as a result of its investment in privately held Cerent Corporation, which was acquired by Cisco in 1999. In 2000, AFC entered into two three-year hedge contracts, pledging all of the Cisco stock to secure the obligations under the contracts. When the hedge contracts matured in 2003, AFC entered into stock loan agreements with a lender, borrowing 10.6 million shares of Cisco stock to settle the hedge contracts on the Cisco stock. The aggregate amount of the fair values of those stock loans are reflected as a current liability on our balance sheets as of December 28, 2007, and December 29, 2006. The values of both the asset and liability move in tandem with each other since each is based on the number of shares we hold at the current stock price. At December 28, 2007, Other marketable securities and Stock loan was $291.0 million at a market price of $27.56 per share and $288.6 million at a market price of $27.33 per share at December 29, 2006. The fees for 2007 associated with the stock loan agreement were $2.1 million.

In addition to the above investments, we maintain investments in start-up technology companies and partnerships that invest in start-up technology companies. We recorded these investments in Other Assets. These investments totaled $12.5 million ($11.0 million recorded at cost and $1.5 million recorded at fair value) at December 28, 2007, and $17.8 million ($10.3 million recorded at cost and $7.5 million recorded at fair value) at December 29, 2006.

We review each investment in our portfolio quarterly, including historical and projected financial performance, expected cash needs and recent funding events. We recognize other-than-temporary impairments if the market value of the investment is below its cost basis for an extended period of time or if the issuer has experienced significant financial declines or difficulties in raising capital to continue operations. Other-than-temporary impairments were $0.5 million for the year ended December 28, 2007, and are included in Other expense, net in the Consolidated Statements of Income.

Other-than-temporary impairments were $7.0 million for the year ended December 29, 2006. During 2006, we recorded a net gain of $5.5 million to Other Comprehensive Income on available-for-sale securities as the investment was converted from preferred to public common shares. The investment had an aggregate value of $7.5 million. Other-than-temporary impairments were $4.8 million for the year ended December 30, 2005, which included a loss of $0.5 million from currency translation adjustments related to the sale of a foreign investment. In 2005, we recorded $4.0 million in income from a long-term investment because the underlying company was purchased by a publicly traded entity.

6. Derivative Financial Instruments

Financial Instruments and Market Risk

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

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

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Non-designated Hedges

We use derivative contracts to manage overall foreign currency exposures that are remeasured through income. We record these contracts on the balance sheet at fair value. Changes in the fair value of these contracts are included in earnings as part of Other expense, net. We had a net gain of $2.2 million in 2007, a net gain of $7.5 million in 2006 and a net loss of $23.3 million in 2005. Receivables resulting from the contracts are included in Miscellaneous receivables and other current assets, while payables from the contracts are included as part of Other accrued liabilities. We do not engage in hedging specific individual transactions.

Cash Flow Hedges

We use derivative contracts designated as cash flow hedges to mitigate currency risk related to an imbalance of nonfunctional currency denominated costs and related revenue. We conducted monthly effectiveness tests of our derivative contracts on a spot-to-spot basis, which excludes the time value related to forward points. In 2007, we recorded a loss of $0.4 million related to time value in Other expense, net. Effective gains and losses from our derivative contracts are recorded in Accumulated other comprehensive income until the underlying transactions are realized, at which point they are reclassified to either Operating expense, Other expense, net or Other cost of revenue, depending on the nature of the underlying transaction. Ineffectiveness of our derivative contracts is recorded to Other expense, net. We recorded nominal ineffectiveness in 2007. 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 Accumulated other comprehensive income to Other expense, net. At year-end 2007, we had a balance of $0.4 million remaining in Accumulated other comprehensive income, which is expected to be reclassified to income within the next twelve months.

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

In millions	Notional Value of Forward Contracts1
Forward contracts at December 28, 2007:
Related forward contracts to sell foreign currencies for Euro	$	146.3
Related forward contracts to buy foreign currencies for Euro		57.6
Related forward contracts to sell foreign currencies for British pound		15.8
Related forward contracts to sell foreign currencies for U.S. dollar		13.8
Related forward contracts to buy foreign currencies for U.S. dollar		2.1
Related forward contracts to buy foreign currencies for Australian dollar		11.6
Related forward contracts to sell foreign currencies for Singapore dollar		1.3
Total	$	248.5
Forward contracts at December 29, 2006:
Related forward contracts to sell foreign currencies for Euro	$	89.9
Related forward contracts to buy foreign currencies for Euro		28.2
Related forward contracts to sell foreign currencies for Danish kroner		1.4
Related forward contracts to sell foreign currencies for British pound		15.0
Related forward contracts to buy foreign currencies for British pound		0.9
Related forward contracts to sell foreign currencies for U.S. dollar		8.9
Related forward contracts to buy foreign currencies for U.S. dollar		3.0
Related forward contracts to sell foreign currencies for India rupee		1.3
Related forward contracts to buy foreign currencies for India rupee		3.1
Related forward contracts to sell foreign currencies for Australian dollar		1.5
Related forward contracts to buy foreign currencies for Thai baht		2.1
Total	$	155.3

¹ Pursuant to our policy, we entered into the above contracts immediately prior to the respective year-ends. Accordingly, the fair value of such contracts was nominal as of December 28, 2007, and December 29, 2006.

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7. Product Warranties

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

In millions	12/28/07			12/29/06			12/30/05
Balance at beginning of year	$	45.0		$	49.2		$	41.2
Accruals for product warranties issued		22.0			19.1			37.0
Settlements		(17.9	)		(23.3	)		(29.0	)
Balance at end of year	$	49.1		$	45.0		$	49.2
Balance sheet classification at end of year
Other accrued liabilities	$	25.1		$	23.3		$	27.9
Other long-term liabilities		24.0			21.7			21.3
Total product warranty liabilities	$	49.1		$	45.0		$	49.2

8. Employee Stock Plans

The Tellabs, Inc. 2004 Incentive Compensation Plan provides for the grant of short-term and long-term incentives, including stock options, stock appreciation rights (SARs), restricted stock and performance stock units. We approved 39,139,977 shares for grant under the plan, of which 20,599,051 remain available for grant at December 28, 2007. Under the 2004 plan and predecessor plans, we granted awards at market value on the date of grant.

Effective April 25, 2007, we suspended the 2005 Tellabs, Inc. Employee Stock Purchase Plan. The final purchase for employees enrolled through the date of suspension occurred on April 30, 2007.

At the beginning of our first quarter of 2006, we adopted the provisions of SFAS 123(R), which require 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 did not restate prior periods. In addition, we eliminated the balance of deferred compensation in Stockholders’ Equity against Additional paid-in-capital as of December 31, 2005, as required by this statement.

Stock Options and Stock-Settled Stock Appreciation Rights

Stock options and stock-settled SARs granted in 2007 and 2006 generally vest over three years from the grant date. Effective May 14, 2007, all outstanding stock-settled SARs were converted into an equivalent number of stock options to simplify the administration of these instruments. This conversion did not change the expensing characteristics, as these options have the same exercise price and vesting schedule as the originally granted stock-settled SARs. We recognize compensation expense on a straight-line basis over the service period based on the fair value of the stock options on the grant date. Compensation expense for stock options and stock-settled SARs was $21.9 million in 2007 and $38.3 million in 2006. Options granted but unexercised expire 10 years from the grant date.

We estimate 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:

	2007		2006		2005
Expected volatility	41.2	%	46.3	%	51.9	%
Risk free-interest rate	4.5	%	4.8	%	3.9	%
Expected term (in years)	4.6		4.5		4.0
Expected dividend yield	0.0	%	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 2007 and 2006 and on historical volatility for options granted in 2005. If we had determined the expected volatility for 2005 using a combination of historical and implied volatility, the expected volatility would have been 49.2%. We based the risk-free interest rate on the U.S. Treasury yield curve in effect at the date of grant. We estimated the expected term of the options and stock-settled SARs using their vesting period, post-vesting employment termination behavior and historical exercise patterns.

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The following is a summary of the activity in our stock options and stock-settled SARs during 2007, and status at the end of the year ended December 28, 2007:

	Shares		Weighted Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding—beginning of year	41,699,013		$	16.91
Granted	1,934,819		$	10.32
Exercised	(3,779,087	)	$	7.56
Forfeited/expired	(2,866,091	)	$	20.44
Outstanding—end of year	36,988,654		$	17.25	5.0	$	5.1
Exercisable—end of year	32,627,133		$	18.13	4.5		5.1
Shares expected to vest	36,353,411		$	17.36	4.9		5.1
Weighted average fair value of options granted during 2007			$	4.21

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our closing stock price as of December 28, 2007, that the option holders would have received had all holders exercised their options as of that date. The aggregate intrinsic value of exercised stock options was $13.2 million in 2007, $50.3 million in 2006 and $22.9 million in 2005.

As of December 28, 2007, we had $16.9 million of unrecognized compensation cost related to stock options that we expect to recognize over a weighted average period of 1.6 years. The weighted average fair value of stock options granted was $5.70 in 2006 and $3.85 in 2005.

Cash-Settled Stock Appreciation Rights

Our 2004 Incentive Compensation Plan also provides for the granting of cash-settled SARs in conjunction with, or independent of, the stock options under the plans. These SARs allow the holder to receive in cash the difference between the cash-settled SARs’ grant price (market value of our stock on the grant date) and the market value of our stock on the date the holder exercises the SAR. These cash payments were negligible in 2007, $0.1 million in 2006 and $0.1 million in 2005. The cash-settled SARs are generally assigned 10-year terms. Cash-settled SARs generally vest over three years from the grant date. At December 28, 2007, there were 231,123 cash-settled SARs outstanding with exercise prices that ranged from $6.01 to $70.06. The weighted average price of the 151,243 cash-settled SARs granted in 2007 was $10.24. The weighted average price of the 71,300 cash-settled SARs granted in 2006 was $11.62. The weighted average price of the 16,720 cash-settled SARs granted in 2005 was $8.38.

Restricted Stock

We granted 2,903,869 restricted shares in 2007, 1,114,227 restricted shares in 2006 and 944,984 restricted shares in 2005. Of the shares granted in 2007, 1,448,723 vest over a three-year period, 1,415,146 shares vest over a two-year period and 40,000 shares vest over a one-year period. Of the shares granted in 2006, 1,047,621 shares vest over a two-year period and 66,606 shares vest over a one-year period. Of the shares granted in 2005, 214,500 shares vest over a two-year period and 730,484 shares vest over a one-year period. We recognize compensation expense on a straight-line basis over the vesting periods based on the market price of our stock on the grant date. Compensation expense was $10.2 million in 2007, $7.9 million in 2006 and $5.4 million in 2005. The weighted average issuance price of restricted stock granted in 2007 was $9.84 per share. The weighted average issuance price of restricted stock granted in 2006 was $12.98 per share. The weighted average issuance price of restricted stock granted in 2005 was $8.44 per share. Our non-vested stock award activity for 2007 follows:

	Shares		Weighted-Average Grant Date Fair Value
Non-vested—beginning of year	1,339,308		$	12.22
Granted	2,903,869		$	9.84
Vested	(806,752	)	$	11.80
Forfeited	(215,414	)	$	10.65
Non-vested—end of year	3,221,011		$	10.28

As of December 28, 2007, we had $23.8 million of unrecognized compensation cost related to restricted stock that we expect to recognize over a weighted average period of 1.0 year.

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Performance Stock Units

We granted 375,000 performance stock units (PSUs) in 2007 and 270,000 PSUs in 2006 to executive officers. We did not grant PSUs previously. The PSUs granted in 2007 entitle the recipients to receive shares of our common stock commencing in March 2008, contingent on the achievement of company operating income and revenue-based targets for the 2007 fiscal year. Following achievement of these financial measures and subject to continued employment, one-third of such shares will be issued in annual installments in March 2008, March 2009 and March 2010. At minimum target performance, we will issue one-half share for each PSU granted and at maximum target performance, two shares will be granted for each PSU granted. The weighted average issuance price of the PSUs granted in 2007 was $12.53 per share.

The PSUs granted in 2006 entitle the recipients to receive shares of our common stock in March 2008, contingent on the achievement of cumulative company operating income and revenue-based targets for the 2006 and 2007 fiscal years. At minimum target performance, we will issue one-half share for each PSU granted and at maximum target performance, three shares will be granted for each PSU granted. The weighted average issuance price of the PSUs granted in 2006 was $11.37 per share.

At December 28, 2007, there were 555,000 PSUs outstanding, which reflects a reduction of 90,000 shares forfeited in 2007. Due to a decline in operating performance relative to targets, compensation expense for PSUs was a credit of $0.3 million in 2007. Compensation expense was $0.8 million in 2006.

Employee Stock Purchase Plan

Under the 2005 Tellabs, Inc. Employee Stock Purchase Plan, employees were able to elect to withhold a portion of their compensation to purchase our common stock at 85% of the fair market value on the date of purchase. In 2007, 384,893 shares of common stock were purchased under the plan, with 8,845,990 remaining available for purchase under the plan at December 28, 2007. Compensation expense for the plan was $0.4 million in 2007 and $1.0 million in 2006. The weighted average purchase price of shares purchased under the plan in 2007 was $9.03. Effective April 25, 2007, we suspended the 2005 plan. The final purchase for employees enrolled through the date of suspension occurred on April 30, 2007.

Stock-Based Compensation Expense

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

In millions	2007			2006
Cost of revenue—products	$	2.5		$	2.8
Cost of revenue—services		3.5			4.4
Research and development		12.3			19.3
Sales and marketing		6.4			9.6
General and administrative		7.4			16.1
Stock-based compensation expense before income taxes		32.1			52.2
Income tax benefit		(11.0	)		(16.5	)
Total stock-based compensation expense after income taxes	$	21.1		$	35.7

9. Employee Benefit and Retirement Plans

401(k) Plans

Our U.S.-based employees may participate in the Tellabs 401(k) Plan. Upon meeting eligibility requirements, we will match (dollar-for-dollar) up to the first 4% of the employee’s percentage contribution. Both employee and employer contributions are vested immediately. The plan provides for a discretionary Company contribution, which is subject to Board of Directors approval and is funded entirely by us. The amount of the contribution is based on a percent of pay for a specific period as declared by the Board. All 401(k) eligible employees actively employed on the last business day of the declared period are immediately eligible to receive this fully vested contribution. The investment of these funds follows the participants’ elections on file for the program. The Board of Directors declared a 2% contribution in 2007, 2006 and 2005. We maintain similar plans for the benefit of eligible employees at our Finland and Denmark subsidiaries.

Our contributions to these programs were $26.5 million in 2007, $25.3 million in 2006 and $24.3 million in 2005.

Deferred Income Plan

We provide a Deferred Income Plan that permits certain officers and management employees to defer portions of their compensation. All deferrals prior to September 2, 2001, were guaranteed a fixed return. In September 2001, we adopted a new deferred income plan (2001 Plan), which offered multiple investment tracking funds with returns based on market performance. All deferrals into the 2001 Plan were invested in the new fund options. Participants with a balance from the prior plan had that balance rolled into a fixed return fund which was not open

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to new deferrals or transfers from other investment funds. Money could be moved out of the fixed return fund into the other investment options. Effective January 1, 2008, the 2001 Plan was transitioned into a new Internal Revenue Code Section 409(a) compliant plan, the Tellabs Deferred Income Plan 2008 (2008 Plan). The 2008 Plan provided participants the one-time opportunity to elect a distribution of their account balances from the 2001 Plan and also eliminated the fixed return fund. All remaining balances in the fixed return fund were transferred into the 2008 Plan options selected by the participants. As of December 28, 2007, the $22.0 million long-term portion of the deferred income obligation is included in Other Long-Term Liabilities and the $16.3 million current portion is included in Other accrued liabilities (includes $14.2 million for payments of elected one-time distributions in January 2008). Adjustments to reflect changes in the fair value of the amount owed to the employee are made to the applicable liability account with a corresponding charge (or credit) to compensation expense.

Retiree Medical Plan

We maintain a defined-benefit Retiree Medical Plan. Under the plan, we provide qualified retirees with a subsidy to offset their medical costs and allow the retirees to participate in the Company-sponsored healthcare plan. We made no contributions in 2007 or 2006. We currently do not anticipate making a contribution to the plan in 2008, as it is adequately funded.

On December 29, 2006, we adopted SFAS 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS 158 requires that we recognize the overfunded or underfunded status of our defined benefit postretirement plan as an asset or liability in the balance sheet with changes in the funded status recognized through comprehensive income in the year in which they occur. The impact of adoption was a charge to accumulated other comprehensive income of $1.2 million at December 29, 2006.

The following table summarizes benefit obligations, plan assets and funded status of the Retiree Medical Plan:

In millions	2007			2006
Change in benefit obligation
Accumulated postretirement benefit obligation at beginning of year	$	13.1		$	11.2
Service cost		1.1			1.0
Interest cost		0.6			0.7
Actuarial (gain) loss		(3.6	)		0.5
Benefits paid		(0.3	)		(0.3	)
Accumulated postretirement benefit obligation at end of year	$	10.9		$	13.1
Change in plan assets
Assets at fair value at beginning of year	$	9.0		$	8.9
Return on plan assets		0.3			0.3
Benefits paid		(0.2	)		(0.2	)
Assets at fair value at end of year	$	9.1		$	9.0

The plan’s assets were invested in a guaranteed income fund indexed to the five-year Treasury at December 28, 2007, and December 29, 2006. The actuarial gain in 2007 was caused primarily by the change in the discount rate assumption and by demographic changes.

The following table summarizes components of net periodic benefit cost of the Retiree Medical Plan:

In millions	2007			2006			2005
Components of net periodic benefit cost
Service cost	$	1.1		$	1.0		$	1.1
Interest cost		0.6			0.7			0.6
Expected return on assets		(0.4	)		(0.5	)		(0.4	)
Amortization of unrecognized prior service cost		0.1			0.1			0.1
Net periodic postretirement benefit cost	$	1.4		$	1.3		$	1.4
Curtailment		—			—			(1.0	)
Total cost for the year	$	1.4		$	1.3		$	0.4

The curtailment of $1.0 million in 2005 is due primarily to the termination of employees related to our acquisition of AFC. We amortize the prior service cost using a straight-line method over the average remaining years of service to full eligibility for benefits of the active Retiree Medical Plan participants. We expect to amortize $0.1 million of unrecognized prior service cost and $0.1 million of net actuarial gain in 2008.

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The following table summarizes the weighted-average assumptions used to determine benefit costs and benefit obligations:

	2007		2006		2005
Discount rate used to determine benefit costs	5.75	%	6.00	%	6.00	%
Discount rate used to determine benefit obligation	6.75	%	5.75	%	6.00	%
Expected long-term rate of return on assets	5.00	%	5.00	%	5.00	%

There is no trend rate assumption required for this plan because all liabilities are related to a fixed-dollar subsidy and are not related to medical claims. Therefore, any change in future medical inflation trends or assumptions will not affect the liabilities of this plan.

The discount rate used to determine the benefit obligation increased in 2007 due to the increase in the hypothetical zero coupon corporate bond yield curve that replicates the cash flows of the plan.

We study historical markets and preserve long-term historical relationships between equities and fixed-income securities consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. We evaluate current market factors such as inflation and interest rates before determining long-term capital market assumptions. The long-term portfolio return is established via a building-block approach with proper consideration of diversification and rebalancing. We review peer data and historical returns to check for reasonableness and appropriateness.

The following table presents estimated future benefit payments for the Retiree Medical Plan as of December 31, 2007:

In millions
2008	$	0.3
2009	$	0.4
2010	$	0.4
2011	$	0.5
2012	$	0.5
2013–2017	$	3.9

There is $0.7 million of unrecognized prior service cost, net of tax, and $1.8 million of unrecognized net gain, net of tax, in Accumulated other comprehensive income at December 28, 2007.

10. Income Taxes

Components of earnings before income taxes are as follows:

In millions	2007		2006		2005
Domestic source	$	0.2	$	212.4	$	140.1
Foreign source		70.0		72.3		73.0
Earnings before income tax	$	70.2	$	284.7	$	213.1

The provision for income tax (expense) benefit consists of the following:

In millions	12/28/07			12/29/06			12/30/05
Current
Federal	$	2.2		$	(28.7	)	$	(15.3	)
State		0.1			(7.9	)		(0.8	)
Foreign		(22.6	)		(16.4	)		(22.0	)
Subtotal		(20.3	)		(53.0	)		(38.1	)
Deferred
Federal and state		11.8			(36.4	)		(1.0	)
Foreign		3.3			(1.2	)		1.8
Subtotal		15.1			(37.6	)		0.8
Total income tax expense	$	(5.2	)	$	(90.6	)	$	(37.3	)

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Deferred tax assets (liabilities) for 2007 and 2006 consist of the following:

In millions	12/28/07			12/29/06
Deferred tax assets
Net operating loss and tax credit carryforwards	$	94.9		$	81.2
Accrued liabilities		31.3			35.0
Inventory reserves		34.9			21.4
Deferred employee benefit expenses		23.1			24.5
Restructuring accruals		8.8			11.4
Deferred compensation plan		13.0			11.7
Amortizable intangibles		9.9			13.2
Deferred revenue and advance payments		2.3			12.2
Other		8.7			14.8
Gross deferred tax assets	$	226.9		$	225.4
Deferred tax liabilities
Unrealized gain on marketable securities	$	(198.9	)	$	(198.2	)
Fixed assets and depreciation		(0.1	)		(0.5	)
Other		(2.7	)		(2.6	)
Gross deferred tax liabilities	$	(201.7	)	$	(201.3	)
Valuation allowance	$	(43.0	)	$	(42.3	)
Net deferred tax asset	$	(17.8	)	$	(18.2	)

The net deferred income tax liability decreased from $18.2 million at December 29, 2006, to $17.8 million at December 28, 2007. The $0.4 million change is attributable primarily to an increase in inventory reserves and federal and state credits offset by a reduction in deferred revenue and advanced payments. Our net deferred tax liability includes a $197.4 million liability representing taxes that will be due on certain hedge contract gains upon termination of our Stock loan.

Reconciliation of the reported effective income tax rates to the domestic federal income tax rate:

In percentages	2007		2006		2005
Statutory Federal income tax rate	35.0	%	35.0	%	35.0	%
Foreign earnings taxed at different rates1	(21.9	)	(5.6	)	(5.4	)
Research and development credit	(15.7	)	(3.3	)	(4.0	)
Valuation allowance on net domestic deferred tax assets	4.9		3.1		(18.4	)
Tax exempt interest	(6.3	)	(0.9	)	—
Nondeductible stock compensation expense	0.9		0.8		0.4
Interest related to prior year tax matters	7.6		0.2		1.9
Tax on repatriated foreign earnings under the AJCA of 2004, net of credits	—		—		7.2
Write-off of in-process research and development	—		—		0.4
State income tax, net of federal benefits	4.9		1.6		0.3
Other, net	(2.0	)	0.9		0.1
Effective income tax rate	7.4	%	31.8	%	17.5	%

¹ In 2007, foreign earnings taxed at different rates reflects a benefit of $12.4 million, including interest, related to the reversal of reserves no longer required due to a lapse in the statute of limitations.

Deferred Tax Valuation Allowance

We regularly assess our ability to realize deferred tax assets and we record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. During 2007 we added a valuation allowance of $3.2 million related to capital loss carryforwards and decreased the valuation allowance by $2.5 million related to foreign and state net operating loss and credit carryforwards.

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Summary of Carryforwards

We had the following tax net operating loss (tax effected) and credit carryforwards as of December 28, 2007:

			Years of Expiration
In millions	12/28/07		Beginning	Ending
U.S. net operating loss and credit carryforwards	$	59.4	2021	2027
State net operating loss and credit carryforwards		23.9	2008	2027
State credit carryforwards		12.9	no expiration
Foreign net operating loss carryforwards		7.6	no expiration
U.S. capital loss carryforwards		3.6	2010	2012
Foreign net operating loss carryforwards		0.3	2011	2018
Total	$	107.7

Accounting for Uncertainty in Income Taxes (FIN 48) We adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on December 30, 2006. As a result, we recognized a decrease of approximately $5.7 million in the liability for unrecognized tax benefits, which we accounted for as a cumulative effect increase of $6.3 million to retained earnings and an increase of $0.6 million to goodwill balances as of December 30, 2006. The total amount of unrecognized tax benefits as of December 28, 2007, was $63.8 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

In millions	2007
Balance at December 30, 2006	$	70.2
Additions based on tax positions related to the current year		2.9
Additions for tax positions of prior years		1.6
Reductions for tax positions of prior years as a result of a lapse in the statute of limitations		(8.1	)
Reductions for tax positions of prior years relating to settlements with taxing authorities		(2.8	)
Balance at December 28, 2007	$	63.8

The ending balance at December 28, 2007, includes an accrual, net of federal benefit, of $44.6 million of unrecognized tax benefits that, if recognized would affect the effective tax rate, and $13.1 million of unrecognized tax benefits that, if recognized, would decrease goodwill associated with prior acquisitions. We continue to recognize interest and penalties related to income tax matters as part of our income tax expense. Our tax provision included $5.3 million of interest and penalties for 2007 and $4.5 million for the year 2006. The balance of interest and penalties accrued was $12.6 million as of December 28, 2007, and $11.7 million as of December 30, 2006.

It is reasonably possible that unrecognized benefits related to federal income taxes will decrease by approximately $47.0 million to $48.0 million as a result of the settlement of audits or the expiration of statute of limitations within the next 12 months.

It is reasonably possible that unrecognized benefits related to foreign income taxes will decrease by approximately $1.0 million to $2.0 million as a result of the settlement of audits or the expiration of statute of limitations within the next 12 months.

Investment in Foreign Operations

We do not provide deferred U.S. income taxes and foreign withholding taxes on the undistributed cumulative earnings of foreign subsidiaries because we consider such earnings to be permanently reinvested in those operations. The undistributed cumulative earnings of foreign subsidiaries that are considered permanently reinvested outside the United States were $396.3 million at December 28, 2007. Upon repatriation of these earnings, we would be subject to U.S. income tax, net of available foreign tax credits. At December 28, 2007, the estimated amount of this unrecognized deferred tax liability on permanently reinvested foreign earnings, based on current exchange rates and assuming we are able to use foreign tax credits, was $58.2 million.

The American Jobs Creation Act of 2004 (AJCA) created a one-time incentive for U.S. corporations to repatriate foreign earnings by providing an 85% dividends received deduction with respect to qualifying dividends. In 2005, we recorded an income tax expense of $15.4 million associated with our decision to repatriate $600 million under the AJCA.

Audits

We file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. We are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities in our major jurisdictions for years before 2001. Our major jurisdictions currently include the United States, California, Illinois, Finland, Denmark and Mexico. The Internal Revenue Service (IRS) has completed its audit of our U.S. income tax returns for years 2001 through 2003 and has proposed various adjustments that could result in additional tax of $48.2 million primarily related to the disallowance of a loss claimed with respect to

TELLABS ANNUAL REPORT 2007

53

an investment in a subsidiary. We do not agree with the proposed adjustments and are appealing this decision. We estimate that these issues will be resolved in the next 12 months. In addition, the IRS is examining our federal income tax returns for the 2004 and 2005 periods as well as the 2002 through 2004 pre-acquisition years of a subsidiary. We expect these examinations will be completed in 2008.

11. Comprehensive Income

Comprehensive income for the periods presented consists of net earnings, unrealized gains and losses on available-for-sale securities, foreign currency translation adjustments and unrecognized prior service costs and net gain (loss) due to SFAS 158.

In millions	12/28/07		12/29/06			12/30/05
Net earnings	$	65.0	$	194.1		$	175.8
Other comprehensive income
Unrealized gain (loss) on available-for-sale securities		0.3		5.4			(0.6	)
Foreign currency translation adjustments		34.9		33.6			(68.3	)
Unrecognized prior service cost		—		(0.7	)		—
Unrecognized net gain (loss)		2.3		(0.5	)		—
Total comprehensive income	$	102.5	$	231.9		$	106.9

12. Segment Information

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

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

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

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

We define segment profit as gross profit less research and development expenses. Segment profit excludes sales and marketing expenses, general and administrative expenses, the amortization of purchased deferred stock compensation and intangibles, restructuring and other charges, and the impact of equity-based compensation (which includes restricted stock and performance stock units granted after June 30, 2006, and stock options). The prior year comparison for 2005 excludes the impact from purchased in-process research and development.

Consolidated revenue by segment follows:

In millions	2007		2006		2005
Broadband	$	1,018.6	$	1,080.4	$	1,042.1
Transport		672.7		778.2		674.2
Services		222.1		182.6		167.1
Total	$	1,913.4	$	2,041.2	$	1,883.4

54

Segment profit and reconciliation to operating earnings by segment follows:

In millions	2007			2006			2005
Broadband	$	39.1		$	120.4		$	156.2
Transport		237.5			414.5			317.5
Services		72.2			65.7			47.5
Total segment profit	$	348.8		$	600.6		$	521.2
Sales and marketing expenses		(176.6	)		(179.8	)		(175.5	)
General and administrative expenses		(99.1	)		(113.5	)		(95.6	)
Equity-based compensation and deferred stock compensation not included in segment profit		(17.6	)		(23.9	)		(10.2	)
Intangible asset amortization		(22.5	)		(28.6	)		(36.0	)
Restructuring and other charges		(5.8	)		(8.0	)		(12.9	)
Purchased in-process research and development		—			—			(2.2	)
Operating earnings	$	27.2		$	246.8		$	188.8

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.

During 2007, revenue from two customers accounted for 37% and 16% of consolidated revenue. In 2006, revenue from three customers accounted for 27%, 12% and 11% of consolidated revenue. In 2005, revenue from two customers accounted for 24% and 16% of consolidated revenue. We attribute revenue to customers based on the effective date of any relevant merger. Revenue from these major customers is earned in each of our three operating segments.

Consolidated revenue by country, based on customer location, follows:

In millions	2007		2006		2005
United States	$	1,398.6	$	1,524.7	$	1,400.1
International		514.8		516.5		483.3
Total	$	1,913.4	$	2,041.2	$	1,883.4

Long-lived assets by country follow:

In millions	12/28/07		12/29/06
United States	$	1,440.8	$	1,482.1
International		80.0		74.4
Total	$	1,520.8	$	1,556.5

13. Operating Lease Commitments

We have a number of operating lease agreements primarily involving office space, buildings and office equipment. These leases are non-cancelable and expire on various dates through 2028. As of December 28, 2007, future minimum lease commitments under non-cancelable leases are as follows:

In millions
2008	$	16.0
2009		14.1
2010		9.4
2011		8.2
2012		7.8
2013 and thereafter		13.6
Total minimum lease payments	$	69.1

Total future minimum lease payments have not been reduced by $1.4 million of future sublease payments to be received under non-cancelable subleases. Total rental expense was $18.4 million for 2007, $20.2 million for 2006 and $21.5 million for 2005.

14. Stock Repurchase Programs

On February 2, 2005, our Board of Directors authorized the purchase of up to $300 million of our outstanding common stock. As of August 2, 2006, we purchased 32.0 million shares of our common stock at a total cost of $300 million, completing this program. This includes purchases of $107.4 million (7.6 million shares) during fiscal 2006.

On January 26, 2006, our Board of Directors authorized the purchase of up to $100 million of our outstanding stock under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. On April 27, 2006, our Board of Directors authorized the removal of the $100 million cap from this 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 in the manner provided under this program. As of December 28, 2007, we purchased 7.1 million shares of our common stock under this program at a total cost of $90.8 million. This includes purchases of $28.7 million (2.6 million shares) during fiscal 2007. On January 24, 2008, our Board of Directors authorized a one-year extension of this program.

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55

On July 31, 2006, our Board of Directors authorized a repurchase program of up to $300 million of our outstanding common stock. As of December 28, 2007, we purchased 32.4 million shares of our common stock at a total cost of $270.1 million, leaving $29.9 million available to be purchased under this program. This includes purchases of $167.1 million (22.5 million shares) during fiscal 2007. We intend to continue to repurchase shares under this program from time to time during open trading windows and when we do not possess material non-public information.

On November 8, 2007, our Board of Directors authorized a repurchase program of up to $600 million of our outstanding common stock. No purchases of our common stock have been made under this program as of December 28, 2007. We intend to repurchase shares under this program (upon completion of the July 31, 2006, authorized $300 million program) from time to time during open trading windows and when we do not possess material non-public information.

In addition, during 2007 we purchased 0.2 million shares for $2.2 million to cover withholding taxes on shares issued under employee stock plans. In 2006, we purchased 0.2 million shares for $3.5 million to cover withholding taxes on shares issued under employee stock plans.

We record repurchased shares as Treasury stock.

15. Earnings Per Share

The following table sets forth the computation of net earnings per share:

In millions, except per-share data	2007		2006		2005
Numerator:
Net earnings	$	65.0	$	194.1	$	175.8
Denominator:
Denominator for basic net earnings per share – weighted average shares outstanding		436.6		445.9		449.9
Effect of dilutive securities:
Employee stock options and awards		4.5		8.2		4.6
Denominator for diluted net earnings per share – adjusted weighted average shares outstanding and assumed conversions		441.1		454.1		454.5
Net earnings per share, basic	$	0.15	$	0.44	$	0.39
Net earnings per share, diluted	$	0.15	$	0.43	$	0.39

The number of anti-dilutive securities excluded from the weighted average shares outstanding computation was 21.7 million in 2007, 17.0 million in 2006 and 38.2 million in 2005.

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16. Quarterly Financial Data (Unaudited)

Selected quarterly financial data for 2007 and 2006 follows:

In millions, except per-share data	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
2007
Revenue	$	451.9	$	534.5	$	457.9	$	469.1
Gross profit	$	185.9	$	187.6	$	144.3	$	156.5
Net earnings	$	25.5	$	29.6	$	3.6	$	6.3
Earnings per share –
Basic	$	0.06	$	0.07	$	0.01	$	0.01
Diluted	$	0.06	$	0.07	$	0.01	$	0.01
2006
Revenue	$	514.7	$	549.3	$	522.5	$	454.7
Gross profit	$	242.3	$	254.2	$	253.7	$	183.4
Net earnings	$	52.4	$	53.5	$	59.1	$	29.1
Earnings per share –
Basic	$	0.12	$	0.12	$	0.13	$	0.07
Diluted	$	0.11	$	0.12	$	0.13	$	0.07

The per-share computation for the year is a separate, annual calculation. Accordingly, the sum of the quarterly per-share amounts do not necessarily equal the annual per-share amount.

TELLABS ANNUAL REPORT 2007

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11-Year Summary of Selected Financial Data (Unaudited)

In millions, except per-share, employee and stockholder data	2007			2006			2005			20044
Statement of Income Data
Revenue	$	1,913.4		$	2,041.2		$	1,883.4		$	1,231.8
Gross profit	$	674.3		$	933.6		$	855.0		$	657.0
Operating earnings (loss)	$	27.2		$	246.8		$	188.8		$	(31.7	)
Earnings (loss) before income taxes and cumulative effect of change in accounting principle	$	70.2		$	284.7		$	213.1		$	(10.2	)
Earnings (loss) before cumulative effect of change in accounting principle	$	65.0		$	194.1		$	175.8		$	(29.8	)
Net earnings (loss)	$	65.0		$	194.1		$	175.8		$	(29.8	)
Net earnings (loss) per share before cumulative effect of change in accounting principle – diluted 1	$	0.15		$	0.43		$	0.39		$	(0.07	)
Net earnings (loss) per share – diluted 1	$	0.15		$	0.43		$	0.39		$	(0.07	)
Weighted average shares outstanding – diluted 1		441.1			454.1			454.5			420.2
Balance Sheet Data
Total assets	$	3,746.6		$	3,922.4		$	3,514.9		$	3,545.1
Total liabilities	$	833.3		$	984.1		$	700.2		$	747.9
Stockholders’ equity	$	2,913.3		$	2,938.3		$	2,814.7		$	2,797.2
Other Information
Net cash provided by operating activities	$	131.4		$	317.8		$	258.4		$	214.7
Working capital	$	1,438.7		$	1,470.4		$	1,347.8		$	1,298.9
Long-term debt	$	—		$	—		$	—		$	—
Research and development expenditures 2	$	343.1		$	356.9		$	344.0		$	250.3
Return on average equity		2.2	%		6.7	%		6.3	%		–1.2	%
Stock price at year-end	$	6.70		$	10.26		$	10.90		$	8.59
Number of employees		3,716			3,713			3,609			4,125
Number of registered stockholders 3		7,356			7,678			8,262			8,035

1 Restated to reflect two-for-one stock split in 1999.

2 Research and development expenditures do not include purchased in-process research and development costs of $2.2 million in 2005 and $102.1 million in 2004.

3 For 2007 represents the number of stockholders at February 15, 2008. For 2006 represents the number of stockholders at February 16, 2007. For years 2005 – 1997 represents the number of stockholders at the record date for the next annual meeting of stockholders.

4 Includes the acquisition of AFC in November 2004.

5 We adopted SAB 101, Revenue Recognition in Financial Statements, in 2000, which is shown as a change in accounting principle.

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2003			2002			2001			20005			1999			1998			1997
$	980.4		$	1,317.0		$	2,199.7		$	3,387.4		$	2,322.4		$	1,706.1		$	1,280.9
$	354.0		$	486.5		$	763.2		$	1,835.4		$	1,382.3		$	1,000.0		$	761.3
$	(264.5	)	$	(329.7	)	$	(279.4	)	$	995.0		$	731.8		$	484.4		$	379.8
$	(244.7	)	$	(327.8	)	$	(244.8	)	$	1,109.4		$	802.1		$	577.7		$	417.2
$	(241.6	)	$	(313.1	)	$	(182.0	)	$	760.0		$	549.7		$	391.5		$	275.5
$	(241.6	)	$	(313.1	)	$	(182.0	)	$	730.8		$	549.7		$	391.5		$	275.5
$	(0.58	)	$	(0.76	)	$	(0.44	)	$	1.82		$	1.32		$	0.96		$	0.69
$	(0.58	)	$	(0.76	)	$	(0.44	)	$	1.75		$	1.32		$	0.96		$	0.69
	413.1			411.4			409.6			418.4			417.0			408.9			401.1
$	2,607.5		$	2,705.7		$	2,865.8		$	3,073.1		$	2,354.6		$	1,651.9		$	1,250.1
$	388.2		$	415.4		$	400.2		$	445.5		$	307.1		$	247.4		$	257.9
$	2,219.3		$	2,290.3		$	2,465.6		$	2,627.6		$	2,047.5		$	1,404.5		$	992.2
$	149.9		$	177.8		$	419.3		$	426.1		$	452.2		$	239.3		$	219.1
$	1,291.1		$	1,359.2		$	1,625.1		$	1,910.0		$	1,511.4		$	1,054.9		$	685.0
$	—		$	—		$	3.4		$	2.9		$	9.4		$	3.3		$	3.1
$	286.1		$	340.6		$	422.7		$	412.4		$	311.0		$	224.1		$	171.9
	–10.7	%		–13.2	%		-7.1	%		31.3	%		31.8	%		32.7	%		34.0	%
$	8.36		$	7.43		$	15.79		$	56.50		$	64.19		$	34.28		$	27.38
	3,515			4,828			7,334			8,643			7,068			5,073			4,394
	6,659			6,397			5,845			5,367			5,504			4,371			3,725

TELLABS ANNUAL REPORT 2007

59

Board of Directors

	Linda Beck, 44, president of New Edge Networks, an EarthLink subsidiary, since 2007. Executive vice president and general manager of business solutions at EarthLink 2005–2007; executive vice president of operations 2000-2005; vice president of engineering at MindSpring 1999–2000. Various management positions at Netcom 1996–1999; Sybase 1994–1996; Amdahl 1992–1994; GTE 1987–1992. M.B.A., St. Mary’s College; B.S., Iowa State University. Tellabs director since 2006.
	Michael J. Birck, 70, chairman and co-founder of Tellabs. Chairman since 2000, chief executive officer 2002- 2004, chief executive officer and president 1975–2000. Director, Molex Incorporated, Illinois Tool Works. M.S.E.E., New York University; B.S.E.E., Purdue University. Tellabs director since 1975.
	Bo Hedfors, 64, founder and president of Hedfone Consulting, Inc. (telecom and Internet consulting) since 2002. President, global wireless infrastructure business at Motorola 1998–2002. President and CEO of Ericsson, Inc. 1994–1998; chief technology officer of LM Ericsson 1990–1993. Director, Openwave Systems, Inc. since 2002. M.S.E.E., Chalmers University of Technology. Tellabs director since 2003.
	Frank Ianna, 58, chief executive officer and director of Attila Technologies LLC since 2007. President of AT&T Network Services 1998-2003; various executive and senior management positions at AT&T 1990-1998; various management and staff positions at AT&T 1972–1998. M.S.E.E., Massachusetts Institute of Technology; B.E.E.E., Stevens Institute of Technology. Tellabs director since 2004.
	Fred A. Krehbiel, 66, co-chairman of Molex Incorporated since 1999. Co-chairman and chief executive officer 2004–2005; chairman of the board 1993–1999; vice chairman and chief executive officer 1988–1993. Director, DeVry, Inc. B.A., Lake Forest College. Tellabs director since 1985.
	Michael E. Lavin, 62, Midwest area managing partner KPMG LLP 1993–2002. Partner 1977–2002. Director, Integrys Energy Group, Inc. and SPSS Inc. B.B.A., University of Wisconsin. Tellabs director since 2003.
	Stephanie Pace Marshall, Ph.D., 62, founding president and president emerita of Illinois Mathematics and Science Academy since 1986. Ph.D., Loyola University; M.A., University of Chicago; B.A., Queens College. Tellabs director since 1996.
	Robert W. Pullen, 45, president and chief executive officer since 2008. Vice president and general manager of global services 2005–2008; senior vice president of North American sales 2002–2005; various management, engineering and sales positions 1985–2002. Chairman, executive board of Telecommunications Industry Association. M.B.A., Northwestern University; B.S.E.E., University of Illinois. Tellabs director since 2008.
	William F. Souders, 79, chairman and chief executive officer of Emery Air Freight Corporation 1988–1989. Executive vice president and director at Xerox Corporation 1974–1986. B.A., Lake Forest College. Tellabs director since 1990.
	Jan H. Suwinski, 66, professor of Business and Operations, Cornell University, Johnson Graduate School of Management since 1997. Chairman, Siecor Corporation, 1992–1996. Executive vice president of OptoElectronics Group, Corning Incorporated 1990–1996. Director, Thor Industries, Inc. and ACI Worldwide, Inc., M.B.A. and B.M.E., Cornell University. Tellabs director since 1997.

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Board of Directors Structure and Process

Tellabs is managed by and under the direction of its Board of Directors.

Each director who is not an officer of the Company is paid an annual retainer of $40,000 plus a fee of $1,500 and expenses for each board of director meeting attended in person and $1,000 for each substantive telephonic board of directors meeting. Each director receives equity compensation as described in the Tellabs 2008 proxy statement.

Committee members receive a fee of $1,000 for each committee meeting attended in person and $500 for each substantive telephonic committee meeting. In addition, the chairperson of the audit and ethics committee receives an annual retainer of $12,000, the chair of the compensation committee receives an annual retainer of $8,000, and the chair of the nominating and governance committee receives an annual retainer of $6,000.

The board has an audit and ethics committee, a nominating and governance committee and a compensation committee.

Members of the audit and ethics committee are Michael Lavin — Chairman, Bo Hedfors, William Souders and Jan Suwinski. Linda Beck will replace Bo Hedfors on this committee following the annual meeting.

Nominating and governance committee members are Stephanie Pace Marshall — Chairman, Linda Beck, Bo Hedfors, Fred Krehbiel and Michael Lavin.

Compensation committee members are William Souders — Chairman, Frank Ianna, Stephanie Pace Marshall and Jan Suwinski.

Corporate Governance and Bylaws

Tellabs is committed to remaining responsive to stockholders, strengthening our corporate governance and adopting the best practices of major public companies. The Tellabs Board of Directors has amended the company’s bylaws on the election of directors. Under the amended bylaws, an uncontested nominee for director must receive favorable votes from a majority of votes cast at a meeting where a quorum is present. These changes are reflected in Tellabs’ revised bylaws at www.tellabs.com/investors/by-laws_ 021308.pdf.

In accordance with our corporate governance guidelines, an uncontested nominee who does not receive a majority vote must tender a resignation. Tellabs’ Nominating and Governance Committee will evaluate such resignations and make a recommendation to the Tellabs Board of Directors. The board will reach a decision in the best interests of Tellabs and its stockholders, and publicly disclose its decision and rationale within 90 days after the certification of the related stockholder vote. These changes are reflected in Tellabs’ revised corporate governance guidelines at www.tellabs.com/investors/corporategov_0208.pdf.

TELLABS ANNUAL REPORT 2007

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Officers

	Michael J. Birck, 70, chairman and co-founder. Chairman since 2000, chief executive officer 2002–2004, chief executive officer and president 1975–2000. Director, Molex Incorporated, Illinois Tool Works. M.S.E.E., New York University; B.S.E.E., Purdue University. Tellabs director since 1975.
	John M. Brots, 47, executive vice president, global operations since 2005. Vice president of supply chain management 2004; vice president of North American operations 2000–2003; various operations and management positions 1988–2003. M.B.A., St. Edwards University; B.S., Cameron University.
	Carl A. DeWilde, 60, executive vice president, global sales, services and strategy since 2007. Executive vice president, broadband products since 2005; executive vice president, access products since 2004. Chief operating officer and chief technology officer at Xtera Communications 2000–2004. Senior vice president of development at Fujitsu Network Communications 1992–2000; various senior management positions at Alcatel 1990–1992. B.S.E.E., Hogeschool Zeeland.
	Jean K. Holley, 48, executive vice president and chief information officer since 2005. Senior vice president and chief information officer 2004. Chief information officer at USG Corp. from 1998–2003. Various positions at Waste Management from 1989–1998. Director, VASCO Data Security International, Inc. M.S., Illinois Institute of Technology; B.S., University of Missouri–Rolla.
	Daniel P. Kelly, 46, executive vice president, global products since 2007. Executive vice president, transport products 2004–2007. Various engineering and management positions 1985–2004. M.B.A., University of Chicago; M.S.E.E. and B.S.E.E., University of Notre Dame.
	Robert W. Pullen, 45, president and chief executive officer since 2008. Vice president and general manager of global services 2005–2008; senior vice president of North American sales 2002–2005; various management, engineering and sales positions 1985–2002. Chairman, executive board of Telecommunications Industry Association. M.B.A., Northwestern University; B.S.E.E., University of Illinois. Tellabs director since 2008.
	James M. Sheehan, 45, executive vice president and chief administrative officer since 2005. General counsel and secretary since 2002; vice president and deputy general counsel 2000–2002; director and assistant general counsel 1995–2000. J.D., University of Illinois College of Law; B.S., University of Illinois.
	Timothy J. Wiggins, 51, executive vice president and chief financial officer since 2003. Executive vice president and chief financial officer at Chicago Bridge & Iron Company, N.V. 1996–2001; various senior financial and operating management positions at Fruehauf Trailer Corporation and Autodie Corporation 1988–1996. Certified Public Accountant; B.S., Michigan State University.

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Glossary

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

4G Wireless — The future generation of wireless networks, which will offer broadband speeds.

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

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

Backhaul — Aggregating and transmitting traffic from remote sites to a main transmission network.

Bandwidth — The carrying capacity of a communications channel.

BPON — Broadband passive optical network, fiber-access systems that deliver high bandwidth to homes and businesses.

Broadband — A high-bandwidth fiber optic, coaxial or hybrid line with more capacity than a voice-grade phone line (64 kilobits per second), which is capable of carrying numerous voice, data and video channels at once.

Converged Transport — An architecture that can integrate many types of transport technologies including ROADM, IP/MPLS, Carrier Ethernet, DWDM and /or TDM/SDH/ SONET to move voice, video and data across networks.

Data — Any network traffic other than voice phone calls. Increasingly, phone calls and video are encoded and transported as data.

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

Digital Cross-Connect — A specialized high-speed data channel switch that connects transmission paths based on network needs (rather than call by call). Digital cross-connects manage and reroute network traffic, and combine, consolidate and segregate signals to maximize efficiency.

Downloading — The process of copying data files such as music or movies from a source to a computer.

Ethernet — A data network standard to connect computers, printers, workstations, terminals and servers.

Fiber Access — Fiber-optic systems that extend to homes or neighborhoods to deliver broadband services, including voice, data and video.

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

Gbps (gigabits per second) — A way to measure data transfer speeds across a network. A gigabit is 1,000 million bits of data.

GPON — Gigabit passive optical network, fiber-access systems that deliver four times more bandwidth than BPON.

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

Internet —The world’s largest decentralized network of computers and network servers.

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

IPTV (Internet Protocol Television) — Technology that enables video and other entertainment services over two-way broadband networks.

Managed Access — An access and transport system that simplifies end-to-end management of mobile transport and business services. (Managed access products are in Tellabs’ Broadband segment.)

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

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

MPLS (MultiProtocol Label Switching) — A packet-switching standard that assigns levels of priority to multiple traffic types within a data stream to assure quality of service (QoS).

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

Network — A system of equipment and connections for the transmission of signals that carry voice, video and data.

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

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

Pseudowire — A virtual connection that transports both traditional and new services over a converged packet network.

ROADM (Reconfigurable Optical Add/Drop Multiplexer) — A system that enables the remote configuration of any wavelength on any network element, thereby reducing the need for technicians to be dispatched.

TDM (Time Division Multiplexing) — Technology that combines multiple streams of traffic by assigning timeslots, sequentially in turn from each input onto a combined higher speed channel.

Transport — The process of moving voice, data or video across communications networks.

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

Uploading — The process of copying data files such as music or movie from a computer to another source, such as the Internet.

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

VoIP (Voice over Internet Protocol) — The transmission of phone calls over data or Internet links.

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

WDM (wavelength division multiplexing) — A way to increase the capacity of optical fiber by carrying multiple wavelengths or colors of light, rather than only one color.

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

Wireline — Networks that use cables rather than radio frequency.

TELLABS ANNUAL REPORT 2007

63

Information for Our Investors

Ownership Structure and Investor Rights

Stockholder class and voting rights: All Tellabs stockholders are entitled to one vote for each share held. Only stockholders of record as of February 25, 2008, the record date for the annual meeting determined by the board of directors, are entitled to receive notice of, to attend and to vote at the annual meeting.

Votes cast in person or by proxy at the annual meeting of stockholders will be tabulated by the inspectors of election appointed for the meeting who determine whether a quorum, a majority of the shares entitled to be voted, is present.

Stockholders Owning More than 5% of the Company’s Shares:

(as of December 31, 2007)

Columbia Wanger Asset Management LP

Michael J. Birck

Lord Abbett and Co. LLP

Stockholder Logistics

If you have a question for the board of directors, would like to make a stockholder proposal or nominate a director for the board, contact James M. Sheehan, Tellabs executive vice president and chief administrative officer at +1.630.798.8800.

For inclusion in the Company’s proxy statement for the Tellabs 2009 Annual Meeting of Stockholders, proposals of stockholders must be received by James M. Sheehan, Secretary of the Company, no later than November 17, 2008.

To nominate one or more directors for consideration at the 2009 annual meeting, a stockholder must provide notice of the intent to make such nomination(s) by personal delivery or by mail to the Secretary of the Company, no later than November 17, 2008. The Company’s bylaws set specific requirements that such written notice must satisfy. Copies of those requirements will be sent to any stockholder upon written request.

Certificate of Incorporation and Bylaws

Tellabs’ certificate of incorporation and bylaws are available online at www.tellabs.com/investors.

Code of Ethics

Tellabs’ code of ethics and global business policy are available online at www.tellabs.com/about/ethics.shtml.

Important Dates for Stockholders

(Dates subject to change)

First Quarter 2008

Record Date for Annual Meeting: Monday, February 25 Earnings Call: Tuesday, April 22 (7:30 a.m. Central time) Annual Meeting: Thursday, April 24

Second Quarter 2008

Earnings Call: Tuesday, July 22 (7:30 a.m. Central time)

Third Quarter 2008

Earnings Call: Tuesday, October 21 (7:30 a.m. Central time)

We’re Here to Help You

You can get investor information online at www.tellabs.com/investors or contact Tom Scottino, senior manager, investor relations, at +1.630.798.3602 or tom.scottino@tellabs.com.

Transfer Agent

Computershare Investor Services serves as the stock transfer agent for Tellabs. If you need to transfer stock, change ownership, report lost or stolen certificates, or change your address, please contact Computershare Investor Services at +1.312.360.5389.

64

Requests for Information

Additional information is available without charge. For additional copies of annual reports, 10-Ks, 10-Qs or other financial information, please visit www.tellabs.com/investors or contact:

Secretary

Tellabs, Inc.

One Tellabs Center

1415 West Diehl Road

Naperville, IL 60563

U.S.A.

Or visit: www.sec.gov

Stock Trading Information

Tellabs stock is traded in the United States, listed on the NASDAQ Stock Market under the symbol TLAB. It appears in newspaper stock tables as Tellabs. Tellabs is a component of the NASDAQ-100 Index, NASDAQ Global Select Market, the Standard & Poor’s 500 Index and the Domini 400 Social Index^SM.

Trademarks

All trademarked or registered trademark product and service names used herein are the property of Tellabs or one of its affiliates in the United States and/or in other countries. All other product or company names used herein may be the property of their respective companies.

Annual Meeting

The 2008 Annual Meeting of Stockholders will be held at 2 p.m. Central time on Thursday, April 24, 2008, at:

Northern Illinois University

1120 East Diehl Road

Naperville, IL 60563

U.S.A.

Doors will open at 1 p.m.

Internet users can hear a simultaneous live webcast of the annual meeting at www.tellabs.com.

Electronic Voting

As an added convenience, stockholders can vote their proxy by mail, by phone at +1.800.690.6903, or via the Internet at www.proxyvote.com.

Independent Auditors

Ernst & Young LLP,

Chicago, IL U.S.A.

The Tellabs Foundation

The Tellabs Foundation supports nonprofit organizations in the priority areas of education, environment and health. For an annual report on corporate and foundation community activities, contact Meredith Hilt, executive director of Tellabs Foundation, at meredith.hilt@tellabs.com.

Worldwide Locations

Please visit www.tellabs.com and see the “Tellabs Locations” section for the most up-to-date, complete information on Tellabs’ global presence. The “Contact Us” page also provides easy access to the right people.

For Information:

In Asia Pacific

Phone: +65.6215.6411

Fax: +65.6215.6422

In Europe, Middle East and Africa

Phone: +44.870.238.4700

Fax: +44.870.238.4851

In Latin America and Caribbean

Phone: +1.954.839.2800

Fax: +1.954.839.2828

In North America

Phone: +1.630.798.8800

Fax: +1.630.798.2000

How to Reach Us

One Tellabs Center

1415 West Diehl Road

Naperville, IL 60563 U.S.A

Phone: +1.630.798.8800

Fax: +1.630.798.2000

www.tellabs.com

	Report printed entirely on recycled paper.
	©2008 Tellabs. All rights reserved.
	Printed in U.S.A.

TELLABS ANNUAL REPORT 2007

EX-21

EXHIBIT 21

Tellabs, Inc. and Subsidiaries

Subsidiaries of the Registrant

as of December 28, 2007

Name	State or Other Jurisdiction of Incorporation
Tellabs Operations, Inc.	Delaware
Tellabs Japan, Inc.	Delaware
Tellabs International, Inc.	Illinois
Tellabs Communications Canada Ltd.	Canada
Tellabs do Brazil, Ltda.	Brazil
Tellabs H.K. Limited	Hong Kong
Tellabs Pty Limited	Australia
Tellabs International de Mexico S.A. de C.V.	Mexico
Tellabs Asia Pacific Pte Ltd	Singapore
Tellabs (Thailand) Co., Ltd.	Thailand
Tellabs Korea Limited	Korea
Tellabs India Private Limited	India
Tellabs Communications International Limited	China
Tellabs Communication Technologies (Shanghai) Limited	China
Tellabs K.K.	Japan
Tellabs de Venezuela, S.A.	Venezuela
Tellabs Communications (Malaysia) Sdn. Bhd.	Malaysia
Tellabs (Malaysia) Sdn. Bhd. (49% joint venture)	Malaysia
Tellabs Philippines, Inc.	Philippines
Tellabs Holdings, B.V.	The Netherlands
Tellabs Enterprises B.V.	The Netherlands
Tellabs Oy	Finland
Kiinteisto Oy Mestarinkaarre	Finland
Kiinteisto Oy Sinimaentie 6	Finland
Tellabs Denmark A/S	Denmark
Tellabs Communications (India) Private Limited	India
Kring – Tellabs India Private Limited	India
Tellabs Holdings, Ltd.	Ireland
Tellabs (Ireland) Ltd.	Ireland
Tellabs Ltd.	Ireland
Tellabs Research Ltd.	Ireland
Tellabs Communications Ireland Limited	Ireland
Tellabs Communications Technologies	Ireland
Tellabs EMEA Holdings, Ltd.	Ireland
Tellabs AB	Sweden
Tellabs South Africa (S.A.) (Proprietary) Limited	South Africa
Tellabs SAS	France
Tellabs Italia S.r.l.	Italy
Tellabs Netherlands B.V.	The Netherlands
Tellabs Poland Sp. z o.o.	Poland
Tellabs Southern Europe s.a. Sociedad Unipersonal (Spain)	Spain
Tellabs Deutschland GmbH	Germany
Tellabs Austria Vertriebs GmbH	Austria
Tellabs Norway AS	Norway
Tellabs U.K. Ltd.	United Kingdom
Tellabs Communications UK Limited	United Kingdom
E. Coherent Communications Systems Limited	United Kingdom
Tellabs North America, Inc.	Delaware
Tellabs Petaluma, Inc.	Delaware
Tellabs Vienna, Inc.	Delaware
Advanced Fibre Technology Communications (Hong Kong) Limited	Hong Kong
Hangzhou AFTEK Communication Company, Ltd.	China
Advanced Fibre Communications (HK) Limited	Hong Kong
AFC Foreign Sales Corporation	U.S. Virgin Islands

Tellabs Bedford, Inc.	Delaware
AccessLan India	India
Advanced Fibre Communications (India) Private Limited	India
Tellabs International GmbH	Switzerland
Advanced Fibre Communications Mexico S. de R.L. de C.V.	Mexico
Advanced Fibre Communications International Limited	Cayman Islands
Advanced Fibre Communications U.K. Limited	United Kingdom
AFC Harris Multimedia Communications Private Limited	Mauritius
AFC Harris Multimedia Communications Limited	India
Tellabs Mexico, Inc.	Delaware
Tellabs de Mexico, S.A. de C.V.	Mexico
Tellabs TG, Inc.	Delaware
Tellabs Transport Group, Inc.	Quebec
Tellabs Nevada Holdings Corporation	Nevada
Tellabs Treasury Holdings Corporation	Nevada
Tellabs Equity Holdings Corporation	Nevada
Tellabs Securities Holdings Corporation	Nevada
Tellabs Reston, Inc.	Delaware
Tellabs San Jose, Inc.	Delaware
Future Networks, Inc.	Georgia

EX-23

EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in this Annual Report (Form 10-K) of Tellabs, Inc. of our reports dated February 22, 2008, with respect to the consolidated financial statements of Tellabs, Inc. and the effectiveness of internal control over financial reporting of Tellabs, Inc., included in the 2007 Annual Report to Shareholders of Tellabs, Inc.

Our audits also included the financial statement schedules of Tellabs, Inc. listed in Item 15 (a). This schedule is the responsibility of Tellabs, Inc.’s management. Our responsibility is to express an opinion based on our audits. In our opinion, as to which the date is February 22, 2008, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-45788, 33-48972, 33-55487, 333-49557, 333-83509, 333-87637, 333-95135, 333-56546, 333-81360, 333-107457, 333-122712 and 333-128076, and Form S-4 No. 333-116794) and related prospectuses of our reports dated February 22, 2008, with respect to the consolidated financial statements of Tellabs, Inc. and the effectiveness of internal control over financial reporting of Tellabs, Inc. incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule of Tellabs, Inc. included in this Annual Report (Form 10-K) of Tellabs, Inc. for the year ended December 28, 2007.

/s/ Ernst & Young, LLP

Chicago, Illinois

February 22, 2008

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Krish A. Prabhu, certify that:

1. I have reviewed this annual report on Form 10-K of Tellabs, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: February 26, 2008

/s/ Krish A. Prabhu

Krish A. Prabhu

Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Timothy J. Wiggins, certify that:

1. I have reviewed this annual report on Form 10-K of Tellabs, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: February 26, 2008

/s/ Timothy J. Wiggins

Timothy J. Wiggins

Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Tellabs, Inc. (the “Company”) on Form 10-K for the year ended December 28, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Krish A. Prabhu, the Chief Executive Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Krish A. Prabhu

Krish A. Prabhu

Chief Executive Officer

Date: February 26, 2008

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Tellabs, Inc. (the “Company”) on Form 10-K for the year ended December 28, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Timothy J. Wiggins, the Chief Financial Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Timothy J. Wiggins

Timothy J. Wiggins

Chief Financial Officer

Date: February 26, 2008

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.