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 January 1, 2010

¨ 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:

Common stock, $0.01 par value

(Title of Class)

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

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    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.    x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x	Accelerated filer  ¨
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)	Smaller reporting company  ¨

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 July 3, 2009, was $2,000,948,796. (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 12, 2010, there were 384,361,574 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 January 1, 2010, 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 29, 2010, are incorporated by reference into Part III.

TELLABS, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED JANUARY 1, 2010

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	12
Item 1B.	Unresolved Staff Comments	20
Item 2.	Properties	20
Item 3.	Legal Proceedings	20
Item 4.	Reserved	22
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23
Item 6.	Selected Financial Data	24
Item 7.	Management’s Discussion and Analysis of Results of Operations and Financial Condition	24
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 8.	Financial Statements and Supplementary Data	26
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	26
Item 9A.	Controls and Procedures	26
Item 9B.	Other Information	26
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	26
Item 11.	Executive Compensation	26
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	26
Item 13.	Certain Relationships and Related Transactions, and Director Independence	27
Item 14.	Principal Accountant Fees and Services	27
PART IV
Item 15.	Exhibits and Financial Statement Schedules	27
	Signatures	31
	Schedule II – Valuation and Qualifying Accounts and Reserves	33
	Exhibit Index	34
	Annual Report to Stockholders
	Subsidiaries of the Registrant
	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 enrich people’s lives by innovating the way the world connects. We work toward that goal by designing and marketing equipment and services to communications-services providers worldwide.

On December 1, 2009, we acquired WiChorus, Inc. (WiChorus), a supplier of industry-leading infrastructure products for the mobile Internet. This acquisition will enable us to quickly enter a large and fast growing market with a purpose-built 4G, LTE, and WiMax mobile-network solution that can be used in today’s 3G networks and complements our IP mobile backhaul portfolio.

In November 2004, we acquired Advanced Fibre Communications, Inc. (AFC) of Petaluma, California, a leading supplier in North America of “last-mile access” products. We deliver 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. Beginning in 2008, we reduced our investment in this residential access business and focused on more profitable opportunities in mobile, optical and business markets.

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 and distributors/partners. Our customers are primarily communication services providers, including local exchange carriers (LECs); global wireline and 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: data, access and managed access.

Data products include next generation packet-switched products that enable wireline and wireless carriers to deliver business services and next-generation mobile voice and Internet services to their customers. Data products include the Tellabs^® 8600 managed edge system, the Tellabs^® 8800 multiservice router (MSR) series and the Tellabs^® SmartCore™ 9100 platform.

• 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 the Tellabs^® 8100 managed access 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. This capability enables users to share information regardless of their access technology. 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.

• The Tellabs SmartCore™ 9100 platform is a mobile core gateway designed for the new generation of 4G mobile networks. This platform addresses High-Speed Packet Access (HSPA) and Evolved HSPA (HSPA+), WiMAX and Long Term Evolution (LTE) mobile packet core needs. In addition, the platform can be used in today’s 3G networks to provide a smooth migration path to 4G. Content inspection capabilities and ample resources for state information enable Quality of Service (QoS) support, policy enforcement and billing for large numbers of subscribers. The platform enables the wireless carrier to create new revenue-generating services by delivering personalized content to mobile users.

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Access 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. Access offerings include the Tellabs^® 1000 multiservice access series, the Tellabs^® 1100 multiservice access series and the Tellabs^® 1600 optical network terminal series (ONTs).

• The Tellabs 1000 series 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 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. In addition, this platform can be used to deliver enterprise GPON services such as fiber-to-the-desktop (FTTD).

• The Tellabs 1600 series of 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 and FTTD network architectures.

Managed access includes aggregation and transport products that deliver wireless and business services primarily 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 6300 managed transport system, the Tellabs 8000 network manager and the Tellabs 8100 managed access system.

• The Tellabs 6300 system is a packet optical transport and access platform that serves wireline and wireless operators primarily 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 a wide range of Tellabs products. The Tellabs 8000 manager fully supports the Tellabs^® 3700 multimedia controller, Tellabs^® 5500 digital cross-connect, Tellabs^® 5320 L/S digital cross-connect, Tellabs 6300 managed transport system, Tellabs^® 7100 optical transport system, Tellabs^® 7300 metro Ethernet switching series, Tellabs 8100 managed access system, Tellabs 8600 managed edge system, and Tellabs 8800 multiservice router series. The network manager 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.

The Transport segment 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, the Tellabs^® 7100 optical transport system and the Tellabs^® 7300 metro Ethernet switching series.

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

• The Tellabs 5000 series of digital cross-connects manages and routes voice, data and video 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 is used by every major service provider in North America. It enables service providers to reduce equipment and maintenance costs and maximize network profitability.

• The Tellabs 7100 optical transport 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

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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. The Tellabs 7300 metro Ethernet switching series extends a Tellabs 7100 or Tellabs 8000 network solution to the customer’s premises for any size application. The Tellabs 7300 series offers a portfolio of Ethernet switching products that address service management, provisioning, monitoring and troubleshooting.

The Services segment delivers deployment, training, support and network design/consulting services 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.

COMPETITION

We sell our products and services in global markets where competition is intense. Our customers base their purchasing decisions on multiple factors including: product features, performance, price, total cost of ownership, quality, reliability, capacity, and customer service. Breadth of product line, customer-oriented planning and delivery, emerging technology, vendor financial stability and relationships, incumbency and responsiveness to their needs are also factored into these decisions.

Tellabs’ competition comes primarily from telecommunications and data networking infrastructure vendors. These vendors include large and small companies that compete directly or indirectly with our offerings.

SALES ORGANIZATION

Our sales organization includes direct sales personnel and sales support personnel around the world. In North America (United States and Canada), the sales organization is structured by customer type, e.g., Local Exchange Carriers (LECs), Wireless Operators, Multiple Services Operators (MSOs), Competitive Service Providers (CSPs), etc. Outside North America, the sales organization is structured on a regional basis: Latin America (Mexico, Central and South America, and the Caribbean), EMEA (Europe, Middle East and Africa) and Asia Pacific (Australia, the Far East, and the Indian Sub-continent).

Our direct sales force accounts for the majority of sales. In North America, our products and services are also sold through value-added resellers and distributors. Outside North America, we have business relationships with independent sales representatives and distributors, as well as other public and private network providers that distribute products. Some of our distributors provide information on our products through their catalogs and through trade-show demonstrations. Our field sales force also provides technical support to distributors. Direct sales organizations and selected distributors generated the following 2009 revenue:

	Direct Sales	Distributors
North America	97%	3%
Outside North America	54%	46%
Consolidated	82%	18%

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CUSTOMERS

Traditional telecommunications service providers are our historical customer base and continue to represent the largest contributors to our revenue. Tellabs has relationships with major wireless and wireline carriers and broadband service providers around the world. We serve 43 of the world’s top 50 providers. We deliver the technology that enables our customers to offer new products and services and reduce their operating expenses. We see opportunities in growing markets, including: mobile, optical and business, as well as professional services.

Revenue from customers within North America was 66% of consolidated revenue in 2009, compared with 68% in 2008 and 74% in 2007. Revenue from customers outside North America was 34% of consolidated revenue in 2009, compared with 32% in 2008 and 26% in 2007.

Carrier consolidation has reduced the number of customers for our products and services. The remaining carriers are large and can exert considerably more pricing pressure than in years past. These carriers may focus their future purchases with a few large suppliers, which could also adversely affect our revenue. In addition, we face more global competition, especially in the newly emerging growth areas we target.

We had two customers in 2009 who contributed more than ten percent of our revenue. Revenue from Verizon (including Verizon Wireless) was 30% of consolidated revenue in 2009, compared with 33% in 2008 and 37% in 2007. Revenue from AT&T (including the former BellSouth and Cingular) was 21% of consolidated revenue in 2009 and 16% in 2008 and 2007. No other customer in 2009, 2008, or 2007 accounted for more than 10% of consolidated revenue.

We have executed product and service supply agreements (“Supply Agreements”) with several of our large customers that detail the commercial terms and conditions for sales. These Supply Agreements with our largest customers are requirements based and usually do not obligate the customer to a specific volume of business. The vast majority of our sales, whether to customers with Supply Agreements or otherwise, result from periodic purchase orders. A summary of the status of the Supply Agreements with Verizon and AT&T follows:

Verizon. We supply Verizon and its affiliated companies products and services under several agreements, including agreements with companies acquired by Verizon. We provide the following products from our Transport segment: Tellabs 3000 Voice-Quality Enhancement Systems, Tellabs 5500 Digital Cross Connect products and Tellabs 7100 Optical Transport Systems. In the Broadband segment we provide Verizon with the Tellabs 1600 Optical Network Terminal Series, Tellabs 1000 Multiservice Access Platform and the Tellabs 8800 Multiservice Router products. Verizon also procures engineering, furnishing and installation (EF&I) and support services from our Services segment. These products and services are provided under various supply agreements. These supply agreements are with multiple Verizon entities and may include separate products and services or a combination of products and services. The supply agreements also may relate to products in one segment or across multiple segments of our business. These agreements have different expiration dates. The earliest expiration date is June 30, 2010, and the latest expiration date is December 15, 2013. All of these agreements can be extended by written agreement of the parties.

AT&T. We supply AT&T and its affiliated companies products and services under several agreements, including agreements with companies acquired by AT&T. We provide the following products from our Transport segment: Tellabs 5500 Digital Cross Connect products and the Tellabs 7100 Optical Transport Systems. In the Broadband segment we provide AT&T with the Tellabs 1000 Multiservice Access Platform, Tellabs 1100 Multiservice Access Platform, the Tellabs 8600 Managed Edge System and the Tellabs 8800 Multiservice Router products. AT&T procures support services and professional services from our Services segment. These products and services are provided under various agreements. These supply agreements are with multiple AT&T entities and may include separate products and services or a combination of products and services. The supply agreements also may relate to products in one segment or across multiple segments of our business. These agreements have different expiration dates. The earliest expiration date is May 1, 2010, and the latest expiration date is March 18, 2014. All of these agreements can be extended by written agreement of the parties.

We evaluated the materiality of each of these contracts with AT&T and Verizon and have determined that currently none of these contracts with our principal customers is required to be filed as material contracts pursuant to Items 101(c)(1)(vii) and 601(b)(10) of Regulation S-K.

Major service providers require product approval prior to adopting a vendor’s products for use in their networks. We are involved in a constant process of submitting new and succeeding generations of products for approval and our products are widely deployed in these service provider networks. However, we cannot be certain that we will obtain these approvals in the future, or that sales of these products will continue to occur.

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BACKLOG

Total product and service backlog was $383 million at January 1, 2010, and $322 million at January 2, 2009. Backlog is defined as revenue to be recognized on confirmed product and service orders. We expect to ship nearly the entire January 1, 2010, backlog in 2010. 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 is vital to our long-term success. As of January 1, 2010, research and development employees totaled 1,278, representing 39% 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. These alliances provide us access to technology and innovations that we believe will be important to our customers. Research and development expenses were $268.7 million in 2009, compared with $305.2 million in 2008 and $343.1 million in 2007.

MANUFACTURING

We outsource the manufacturing of our products to contract manufacturers. Tellabs’ strategy is to use two primary contract manufacturers, although we do have written agreements with other contract manufacturers. We are active in the order, configuration and system assembly operations for our products.

The current concentration of our contract manufacturers is not dependent upon a limited number of suppliers capable of producing our products, but rather the result of a strategic initiative. Consolidating contract manufacturers is a common business model followed in our industry in order to improve production efficiency and innovation resulting from close working relationships with a few key suppliers. Our largest contract manufacturers in 2009 were Jabil and Flextronics; however, we also used Sanmina-SCI Corporation, AsteelFlash and BreconRidge to supplement the two main contract manufacturers. The facilities owned and operated by these contract manufacturers for the production of our products are located in Mexico, Canada, Malaysia, China and the United States. Tellabs can switch production between contract manufacturers without significant impact on production.

Our agreements with contract manufacturers are evergreen or self-renewing and include at least a six-month termination clause in order to minimize the business impact to either party. Tellabs provides a 12-month non-binding rolling forecast. The contract manufacturers procure parts according to production strategy and piece part lead times. Production strategies range from build to forecast, build to order, and replenish to stated inventory levels. The build strategies expose Tellabs to the risk that our customers will not order those products for which we have forecast sales, or will purchase less than we have forecast. As a result, we may incur carrying charges or obsolete material charges for components purchased by our contract manufacturers. We work closely with our contract manufacturers to manage material, quality, cost and delivery times, and we continually evaluate their services to ensure performance on a reliable and cost-effective basis. Each contract manufacturer provides Tellabs with a minimum six-month product warranty.

We require our contract manufacturers to handle and dispose of any hazardous waste material from our manufacturing activities in compliance with all applicable laws and regulations. We perform periodic audits and inspections of our contract manufacturers to verify compliance. The additional cost of complying with environmental regulations has not had a material impact on capital expenditures, earnings or our competitive position.

As is common in our industry, our products contain components that generally are available from multiple suppliers, as well as components of primarily Tellabs’ 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 and we cannot quickly source that component from another supplier, the resulting shortages could result in production delays and/or expedite costs that may affect our business adversely. To limit this risk with respect to our single source suppliers, we frequently negotiate for

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the right to use their technology or to allow a third party to manufacture their products, or require that they maintain a sufficient inventory of components, in the event the supplier were to go out of business or is otherwise unable to meet our requirements.

We typically enter into written agreements with our principal contract manufacturers and suppliers. Under the terms of our typical manufacturing supply agreements with our principal contract manufacturers and suppliers, we are generally not obligated to use their services or purchase their products unless and until we place a firm purchase order. These agreements generally apply to multiple products and across product segments.

EMPLOYEES

At January 1, 2010, we had 3,295 employees. We employed 1,278 individuals in research and product development; 1,254 in the sales, sales support, customer service and marketing areas; and 763 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, respectively. Our patents expire at various dates between April 2010 and March 2028, with approximately half of our patents expiring after 2019. We are not substantially dependent on any single patent. We maintain an active program that seeks to legally protect, through patents, various 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 are not substantially dependent on any single license.

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 revenue by segment, revenue by country and net long-lived assets by country for the fiscal years ended January 1, 2010, January 2, 2009, and December 28, 2007, is set forth in the footnotes to our consolidated financial statements in our 2009 Annual Report, included herein as Exhibit 13, and incorporated herein by reference.

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.

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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 Mobile — Digital wireless networks that carry voice and low-speed data.

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

4G Mobile — The future generation of wireless networks, designed to offer broadband speeds and integrate different types of mobile technology.

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

ANSI (American National Standards Institute) — A private non-profit organization that oversees the development of standards for products, services, processes and personnel in the United States.

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

Bandwidth — The carrying capacity of a communications channel.

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

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

Carrier Ethernet — A scalable, manageable carrier-class network that delivers standardized Ethernet services with Quality of Service and high levels of reliability.

Cloud Computing — A process that involves delivering hosted or virtualized services over the Internet.

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

Deployment Services — Services such as installation, training and support.

Digital — Systems that transport information in the binary 1s and 0s format, like a 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.

DLC (Digital Loop Carrier) — A system that uses digital transmission to extend the range of a signal farther than would be possible using only copper wires.

DSLAM (Digital Subscriber Line Access Multiplexer) — A device that serves as an interface between a number of subscribers’ premises and the carrier network.

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DWDM (Dense 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.

Dynamic Optical Networking — A self-tuning optical network with dynamic provisioning and restoration of wavelengths.

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-area networks (WANs).

Gateway — A network device that acts as an entrance to another network and performs functions including signaling control, QoS and security.

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

GPON — Gigabit passive optical network, the next generation of fiber-access systems, which delivers four times more bandwidth than BPON.

HSPA+ (Evolved High-Speed Packet Access) — A 3G wireless broadband standard.

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.

LAN (Local-Area Network) — A computer or data network that covers a small physical area, like a home, office, or small group of buildings.

LTE (Long Term Evolution) —The next generation of mobile communications services with improved performance and faster speeds.

Managed Access — An access and transport system that simplifies end-to-end management of mobile transport and business services.

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

Mobile Backhaul — A process of aggregating and transmitting mobile traffic from remote sites to a main transmission network.

Mobile Packet Core — The signaling and gateway core infrastructure in a mobile network for 3G and 4G networks.

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 (MSR) — 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.

Network Management — A set of procedures, software, equipment and operations techniques designed to keep a network operating at maximum efficiency.

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Offloading — A process of transferring data or bypassing non-required network elements to reduce costs.

OLT (Optical Line Terminal) — A device that terminates a fiber-access network in a service provider’s central office.

Optical Network — A communication system using fiber optics as the means for carrying information between equipment.

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 — A technology that transmits communications traffic in the form of laser light over fiber-optic cable.

Professional Services — Services such as network optimization, business case analysis and network performance enhancements.

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, reducing the need to dispatch technicians.

Router — A device that sends internet protocol (IP) traffic, or packets, to specific destinations.

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

Smartphone — A mobile device that integrates the functionality of a mobile phone, personal digital assistant or other information appliance, often with personal computer functionality.

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.

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.

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.

WiMax — A technology that provides wireless transmission of data for both point-to-point and mobile applications.

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

Wireline — Networks that use cables rather than radio frequency.

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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 U.S. and global economy generally as well as in the telecommunications market;

• 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

• 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.

Current economic conditions and uncertain economic outlook could adversely affect our results of operations and financial condition.

The global economy is currently undergoing a period of unprecedented volatility, which has affected the demand for equipment, services and supplies. A further decline or prolonged period of economic decline could have a material adverse effect on our results of operations and financial condition and exacerbate the other risk factors related to our business. Possible effects of current and future adverse economic conditions on our business include: decrease in purchases or usage of our products, services and supplies by consumers and business customers if increased unemployment leads to lower utilization of telecommunications and internet services. Our customers or channel partners may stop or decrease purchasing due to their efforts to reduce inventory and conserve cash and/or their inability to obtain financing. We may also experience disruptions in our business due to our inability to obtain equipment, parts and supplies from our suppliers – and our suppliers from their suppliers – if marginal supply businesses fail; collection delinquencies due to insolvency of our customers or shortage of cash to support their businesses; and decrease in our ability to hedge currency

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exposures due to higher hedging costs because of extreme volatility of exchange rates. In addition, a prolonged economic downturn could impact the viability of our current vision and strategy. If our strategy is not re-evaluated in a timely fashion our future growth and operating results could be adversely impacted. To the extent we are not able to continue to generate ample cash from operations, it may also adversely impact our ability to invest in the growth of our business, repurchase shares or pay dividends.

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. In addition, certain of our investments are subject to general credit, liquidity, interest rate and market risks. Fluctuating interest rates can add significant variability to interest income. Market risks associated with our investment portfolio may have an adverse effect on our liquidity, financial condition and results of operations. 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 2009 Annual Report, included herein as Exhibit 13.

The market for communications equipment products and services is rapidly changing, very competitive and can fluctuate unpredictably from quarter to quarter.

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.

Our revenue and results of operations can fluctuate unpredictably from quarter to quarter. Our budgeted expense levels depend in part on our expectations of long-term future revenue and gross margin and substantial reductions in expense are difficult and can take time to implement. Uncertainty or lack of visibility into customer spending, and changes in economic or market conditions, can make it difficult to prepare reliable estimates of future revenue and corresponding expense levels. Consequently, our level of operating expense or inventory may be high relative to our revenue, which could harm our ability to achieve or maintain profitability. Additional factors that contribute to fluctuations in our revenue and operating results include:

• economic and market conditions affecting us and our customers;

• changes in capital spending by large communications service providers;

• the timing and size of orders, including our ability to recognize revenue under customer contracts; and

• variations in the mix between higher and lower margin products and services and the level of pricing pressure we encounter.

Many factors affecting results of operations are beyond our control, particularly in the case of large service provider orders and multi-vendor or multi-technology network infrastructure builds where the achievement of certain thresholds for acceptance is subject to the readiness and performance of the customer or other providers, and changes in customer requirements or installation plans. As a consequence, our results for a particular quarter may be difficult to predict, and our prior results are not necessarily indicative of results likely in future periods. Capital spending in the telecommunications industry is cyclical and can be curtailed or deferred on short notice even within a quarter so we may not have visibility to the changed behavior until a quarter is almost concluded. The factors above may cause our operating results to fall below the expectations of securities analysts or investors, which may cause our stock price to decline.

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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. If our development strategy does not align with our portfolio vision and customer expectations, it could negatively impact our investment in research and development.

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. Also, failure to designate appropriate resources to develop new products could negatively impact our time to market. 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. If we do not achieve a balance between declining sales of mature products and increased sales and margins on new products there could be an adverse impact on our operating results. 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 ensure 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.

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

A large portion of our revenue will likely depend on sales to a limited number of customers in specific geographic areas. Traditional telecommunications service providers are our historical customer base and continue to represent the largest contributor to our revenue. 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 and the resulting pricing may not be sustainable. Such a situation may negatively affect our operating results.

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

Our primary customers are communications 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, develop and retain highly skilled technical, managerial, sales and marketing personnel. Competition for these personnel is intense and we may fail to retain or attract key personnel if we do not provide them with the proper vision, leadership and growth opportunities. 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 our strategic goals and remain competitive as a technology company.

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, 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 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. If we cannot effectively reduce our cost structure while continuing to invest in growth opportunities, we may fail to meet strategic and market expectations, which could have an adverse effect on our operating results and share price.

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 ability to offer solutions and compete with providers providing end-to-end solutions;

• 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

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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, bundled together or as end-to-end solutions. 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 34% of our revenue in 2009 and 32% in 2008. 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.

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 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.

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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. Further, if supply to our contract manufacturers 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 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

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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.

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 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 may include acquisition of, investment in, or joint ventures in, adjacent or 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. If we are unable to identify suitable third parties for strategic transactions we may not be able to capitalize on market opportunities with existing and new customers, which could inhibit our ability to gain market share. 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,

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increase our expenses and adversely affect our operating results and ability to compete and gain market share. 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. For evaluation purposes, each segment with a goodwill balance is reviewed for possible goodwill impairment. Goodwill impairment is reviewed annually and when impairment indicators exist, by comparing the segment’s net book value to fair value. If the 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.

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.

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If we are not able to build, sustain and utilize proper information technology infrastructure effectively, our business could suffer.

We depend on information technology as an enabler to improve the effectiveness of our operations and to interface with our customers, as well as to maintain financial accuracy and efficiency. If we do not allocate and effectively manage the resources necessary to build, sustain and utilize the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, inaccurate or incomplete data, business disruptions, or the loss of or damage to intellectual property through security breach.

As our operations grow in both complexity and scope, we will continuously need to improve and upgrade our systems and infrastructure while maintaining the reliability and integrity of our systems and infrastructure. The expansion of our systems and infrastructure may require us to commit substantial financial, operational and technical resources before the volume of our business increases, with no assurance that the volume of business will increase. Any other upgrades to our systems and information technology, or new technology, now and in the future, will require that our management and resources be diverted from our core business to assist implementation of such upgrades or new technology. There can be no assurance that the time and resources our management will need to devote to these upgrades, service outages or delays due to the installation of any new or upgraded technology (and customer issues therewith), or the impact on the reliability of our data from any new or upgraded technology will not have a material adverse effect on our business, financial condition or results of operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our corporate headquarters is located in Naperville, Illinois, approximately 35 miles west of Chicago. During 2009, we operated 49 facilities globally, totaling 1.3 million square feet to support:

• Research and development: 628,000 square feet, of which 58% was used by the Broadband segment and 42% was used by the Transport segment.

• Sales and services: 291,000 square feet.

• Operations: 211,000 square feet.

• Corporate and administration: 173,000 square feet.

We own approximately 0.9 million square feet of the total, which includes our headquarters facility and four facilities in Espoo, Finland. We lease facilities in 33 countries that total approximately 0.4 million square feet, including 8 facilities in North America; 19 facilities in Europe, Middle East and Africa; 14 facilities in the Asia Pacific region; and 3 facilities in Latin America.

Our leases included 195,000 square feet in North America; 75,000 square feet in Europe, Middle East and Africa; 51,000 square feet in Asia Pacific; and 12,199 square feet in Latin America.

We own substantially all of our equipment used in our business, other than that related to outsourced activities. We believe our facilities are in good condition and are suitable and adequate for our current needs.

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.

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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. On February 24, 2009, the district court granted plaintiffs’ motion for class certification. The case is now proceeding in the district court and discovery is ongoing. 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. On March 21, 2008, Tellabs filed its answer, defenses and counterclaims in response to the complaint. A trial date had been set for May 10, 2010, in the Eastern District of Texas, however on July 7, 2009, the court granted Tellabs’ motion to transfer and issued an order transferring the action to the United States District Court for the Northern District of Illinois. On September 15, 2009, the Court in the Northern District of Illinois consolidated this action, for discovery purposes only, with the action instituted by Tellabs against Fujitsu in the Northern District of Illinois. A trial date has not yet been set for the transferred action. We believe that we have valid defenses to the lawsuit.

Tellabs Operations, Inc. v. Fujitsu Limited and Fujitsu Network Communications Inc. On June 11, 2008, Tellabs Operations, Inc. filed a complaint in the United States District Court for the Northern District of Illinois against Fujitsu Limited and Fujitsu Network Communications, Inc. in a case captioned Tellabs Operations, Inc. v. Fujitsu Limited and Fujitsu Network Communications, Inc. Civil Action No. 1:08-cv-3379. The complaint alleges infringement of Tellabs Operations, Inc.’s U.S. Patent No. 7,369,772, and seeks unspecified damages including enhanced damages, as well as attorney fees and other remedies including injunctive relief. On September 5, 2008, each of Fujitsu Limited and Fujitsu Network Communications, Inc. served its answer, defenses and counterclaims in response to the complaint. Fujitsu Limited also brought counterclaims against Tellabs, Inc. and Tellabs Operations, Inc. alleging infringement of U.S. Patent Nos. 5,533,006 and 7,227,681, seeking unspecified damages including enhanced damages, as well as attorney fees and other remedies including injunctive relief. On September 22, 2008, Tellabs Operations, Inc. filed its answer to the counterclaims of Fujitsu Network Communications, Inc., and also filed its counterclaims and reply to counterclaims of Fujitsu Limited. On that same date, Tellabs, Inc. filed its answer and counterclaims against Fujitsu Limited. A trial date has not yet been set in the case. We believe that we have valid defenses to Fujitsu’s counterclaims.

Telcordia Technologies Inc. v. Tellabs, Inc. On May 4, 2009, Telcordia Technologies, Inc. filed a complaint against Tellabs in the United States District Court for the District of New Jersey in a case captioned Telcordia Technologies Inc. v. Tellabs, Inc., Civil

21

Action No. 2:09-cv-02089. The complaint alleges infringement of U.S. Patent Nos. 4,893,306, 4,835,763 and Re. 36,633, and seeks unspecified damages including enhanced damages, as well as attorney fees and other remedies including injunctive relief. On July 27, 2009, Telcordia filed a first amended complaint adding Tellabs Operations, Inc. and Tellabs North America, Inc. as additional defendants. On September 1, 2009, Tellabs filed answers, defenses and counterclaims in response to the first amended complaint. On December 15, 2009, the Court granted Tellabs’ motion to transfer, which resulted in a transfer of the action to the United States District Court for the District of Delaware. A trial date has not yet been set for the transferred action. 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. RESERVED

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 current and available information at the time the document was prepared. These forward-looking statements include, but are not limited to, statements regarding future events, plans, goals, objectives and expectations. The words “anticipate,” “believe,” “estimate,” “target,” “expect,” “predict,” “plan,” “possible,” “project,” “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: overall negative economic conditions generally and disruptions in credit and capital markets, including specific impacts of these conditions on the telecommunications industry; financial condition of telecommunications service providers, equipment vendors and contract manufacturers, including the impact of any bankruptcies; the impact of customer and vendor consolidation; integration of a new business; successful expansion into adjacent markets with new and existing products and platforms; 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 and the ability to realize anticipated savings under such cost-reduction initiatives; 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 are advised not to rely on these forward-looking statements when making investment decisions. 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 risk factors, financial statements and related notes and management’s discussion and analysis included in our 2009 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 Global Select Market under the symbol “TLAB”. As of February 12, 2010, there were approximately 6,961 stockholders of record and 384,361,574 outstanding shares. There are also stockholders holding stock in street name. The section entitled “Common Stock Market Data” in our 2009 Annual Report, included herein as Exhibit 13, is incorporated herein by reference.

As detailed below, our Board of Directors has authorized a number of repurchase programs during recent years. We record repurchased shares as Treasury stock.

We repurchase outstanding common stock under Rule 10b5-1. 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 January 1, 2010, we purchased 7.5 million shares of our common stock under this program since February 2006, at a total cost of $93.4 million, including $1.8 million (0.2 million shares) in 2009 and $0.9 million (0.2 million shares) in 2008. On January 27, 2010, 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 outstanding common stock. As of February 1, 2008, we purchased 37.0 million shares of our common stock under this program at a total cost of $300 million, completing this program. This total includes purchases of $29.9 million (4.6 million shares) in 2008.

On November 8, 2007, our Board of Directors authorized a repurchase program of up to $600 million of outstanding common stock. As of January 1, 2010, we purchased 32.4 million shares of our common stock under this program at a total cost of $204.0 million, leaving $396.0 million available to be purchased under this program. This total includes purchases of $81.1 million (12.7 million shares) in 2009 and $122.9 million (19.7 million shares) in 2008. We provide no assurance that we will continue our repurchase activity and we may change our repurchase activity in the future.

In addition, during 2009 we purchased 0.5 million shares for $2.6 million to cover withholding taxes on shares issued under employee stock plans. In 2008, we purchased 0.4 million shares for $2.0 million to cover withholding taxes on shares issued under employee stock plans.

Repurchases of Common Stock:

Period of Purchases	Total Number of Shares Purchased	Average Purchase Price Per Share	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
1/3/09 through 2/6/09	425	$4.14	425	$477.1
2/7/09 through 3/6/09	—	—	—	$477.1
3/7/09 through 4/3/09	3,597	$4.19	3,597	$477.1
4/4/09 through 5/8/09	2,655	$4.76	2,655	$477.1
5/9/09 through 6/5/09	—	—	—	$477.1
6/6/09 through 7/3/09	1,111	$5.76	1,111	$477.1
7/4/09 through 8/7/09	405	$5.73	405	$477.1
8/8/09 through 9/4/09	9,285,477	$6.51	9,285,477	$416.9
9/5/09 through 10/2/09	166,381	$6.89	166,381	$416.9
10/3/09 through 11/6/09	3,454,330	$6.14	3,454,330	$396.0
11/7/09 through 12/4/09	2,982	$6.00	2,982	$396.0
12/5/09 through 1/1/10	1,214	$5.55	1,214	$396.0
Total	12,918,577	$6.42	12,918,577

¹ The amounts in this column represent the remaining amounts under the current $600 million program described above. The Rule 10b5-1 repurchase program described above does not have a repurchase amount limit; therefore, it is not included in the remaining value of shares.

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ITEM 6. SELECTED FINANCIAL DATA

The five years of selected financial data, for our 2009, 2008, 2007, 2006 and 2005 fiscal years is included in the 5-Year Summary of Selected Financial Data in our 2009 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 2009 Annual Report, included herein as Exhibit 13, 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 January 1, 2010, and January 2, 2009, see the notes to our consolidated financial statements in our 2009 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 subjecting us to risks associated with fluctuating foreign exchange rates. To mitigate these risks, we use derivative foreign exchange contracts to address nonfunctional exposures that are expected to be settled in one year or less. The derivative foreign exchange contracts consist of foreign currency forward and option contracts.

Derivative financial contracts involve elements of market and credit risk. 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. We monitor the counterparties’ credit ratings and other market data to minimize credit risk. In addition, we also limit the aggregate contract amount entered into with any one financial institution to mitigate credit risk.

Cash Flow Hedges

We use foreign currency forward and option contracts, designated as cash flow hedges, to mitigate currency risk related to an imbalance of nonfunctional currency denominated costs and related revenue. We conduct monthly effectiveness tests of these hedging relationships on a spot-to-spot basis, excluding forward points. Effective gains and losses from derivative contracts are recorded in Accumulated other comprehensive income until the underlying transactions occur, at which time they are reclassified to Total cost of revenue. Ineffectiveness is recorded to Other income (expense), net. If it becomes probable that an anticipated transaction that is hedged will not occur, we immediately reclassify the gains or losses related to that hedge from Accumulated other comprehensive income to Other income (expense), net. At January 1, 2010, we had a net unrealized loss of $1.4 million in Accumulated other comprehensive income, which is expected to be reclassified to income within the next 12 months. At January 1, 2010, we held derivatives designated as cash flow hedges in one currency, with a gross notional equivalent of $29.3 million. Maturities on the outstanding hedges range from one to five months.

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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:

	January 1, 2010
In millions	Notional Amount	Fair Value
Forward Contracts
Purchased	$29.3	$(1.6	)
Sold	—	—
Total	$29.3	$(1.6	)

Balance Sheet Hedges (Non-designated Hedges)

Short-term monetary assets and liabilities denominated in currencies other than the functional currency of the Tellabs entity entering into the transaction are remeasured through income as foreign currency rates fluctuate. Changes in the value of derivative contracts intended to offset these fluctuations are also recorded in income. The gain or loss from changes in the fair value of the derivative contracts are generally offset by gains or losses of the underlying transactions being hedged. These derivative contracts are not designated as hedges. At January 1, 2010, we held non-designated foreign currency forward contracts in nine currencies, with a gross notional equivalent of $173.3 million. Forward contracts with approximately 30 day maturities were used to hedge the exposures.

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:

	January 1, 2010
In millions	Notional Amount	Fair Value
Forward Contracts
Purchased	$  35.2	$—
Sold	138.1	0.1
Total	$173.3	$0.1

Net Investment Hedges

We entered into three-month foreign currency forward contracts, designated as net investment hedges, to hedge a portion of our net investment in one of our foreign subsidiaries to preserve the U.S. dollar value of our Euro cash. Effective changes in the fair value of these contracts due to exchange rate fluctuations are recorded within Accumulated other comprehensive income. Those amounts will be reflected in income only when we dispose of the investment in the foreign subsidiary. We conduct monthly effectiveness tests of net investment hedges on a spot-to-spot basis, excluding forward points, and any measurement of ineffectiveness is recorded in income. As of January 1, 2010, we had a net unrealized gain of $10.2 million in Accumulated other comprehensive income, which includes a net gain of $9.3 million related to settled contracts and a net gain of $0.9 million related to unsettled contracts. We held net investment hedges with a notional value of 100 million Euros at the end of 2009. All net investment hedges were contracted with three month maturities.

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:

	January 1, 2010
In millions	Notional Amount	Fair Value
Forward Contracts
Purchased	$   —	$—
Sold	143.0	0.9
Total	$143.0	$0.9

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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 2009 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 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 internal control over financial reporting that have materially affected or are reasonably likely to materially affect 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 internal control over financial reporting is set forth in our 2009 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 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended January 1, 2010, and the sections entitled “Officers” and “Corporate Responsibility” in our 2009 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 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days, after the fiscal year ended January 1, 2010.

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 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended January 1, 2010. Securities authorized for issuance under equity compensation plans is included in the notes to our 2009 Annual Report, included herein as Exhibit 13, and is incorporated herein by reference.

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Equity Compensation Plan Table

The following table summarizes information as of January 1, 2010, 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	27,119,777	$15.45	38,673,876	1
Equity compensation plans not approved by security holders2	3,570,790	$  9.96	—
Total	30,690,567	$14.81	38,673,876

¹ Includes 29,827,886 securities available under the Amended and Restated 2004 Incentive Compensation Plan and 8,845,990 securities available under the 2005 Employee Stock Purchase Plan, which has been suspended by the Company.

² 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 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended January 1, 2010.

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 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended January 1, 2010.

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 2009 Annual Report, included herein as Exhibit 13, were previously incorporated by reference in Item 8:

Report of Independent Registered Public Accounting Firm

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

Consolidated Balance Sheets: January 1, 2010 and January 2, 2009

Consolidated Statements of Operations: Years ended January 1, 2010, January 2, 2009 and December 28, 2007

Consolidated Statements of Stockholders’ Equity: Years ended January 1, 2010, January 2, 2009 and December 28, 2007

Consolidated Statements of Cash Flows: Years ended January 1, 2010, January 2, 2009 and December 28, 2007

Notes to Consolidated Financial Statements

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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
2.1	Agreement and Plan of Merger among Tellabs, Inc., Tellabs Willow Corp. and WiChorus, Inc. dated as of October 20, 2009 22/
3.1	Restated Certificate of Incorporation and Amendments 9/
3.2	Fourth Amended and Restated By-Laws dated January 29, 2009 19/
10.1	Tellabs, Inc. Deferred Income Plan 16/
10.2	1986 Non-Qualified Stock Option Plan, as amended and restated 1/
10.3	Amendment to Tellabs, Inc. 1986 Non-Qualified Stock Option Plan (As Amended and Restated June 26, 1992) 4/
10.4	1991 Stock Option Plan, as amended and restated 1/
10.5	Amendment to Tellabs, Inc. 1991 Stock Option Plan (As Amended and Restated June 26, 1992) 4/
10.6	1994 Stock Option Plan 2/
10.7	Amendment to the Tellabs, Inc. 1994 Stock Option Plan 4/
10.8	Tellabs, Inc. 1998 Stock Option Plan 3/
10.9	Amendment to the Tellabs, Inc. 1998 Stock Option Plan 4/
10.10	Tellabs, Inc. 2001 Stock Option Plan 5/
10.11	Ocular Networks, Inc. Amended and Restated 2000 Stock Incentive Plan 6/
10.12	Tellabs Advantage Plan, as amended and restated 8/
10.13	First Amendment to the Tellabs Advantage Plan 8/
10.14	Second Amendment to the Tellabs Advantage Plan 8/
10.15	2004 Amendment to the Tellabs Advantage Plan 10/
10.16	2006 Amendment to the Tellabs Advantage Plan 14/
10.17	Vivace Networks, Inc. 1999 Equity Incentive Plan, as amended 13/
10.18	Tellabs, Inc. 2004 Incentive Compensation Plan 7/
10.19	Forms of Stock Award Statement, Stock Award Agreement and RSU Award Statement pertaining to Tellabs, Inc. 2004 Incentive Compensation Plan 10/
10.20	Advanced Fibre Communication, Inc. 1996 Stock Incentive Plan 10/
10.21	Form of Stock Option Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan 10/
10.22	Form of Automatic Stock Option Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan 10/
10.23	Form of Notice of Grant of Stock Option pertaining to the Advanced Fibre Communication, Inc. 1996 Plan 10/
10.24	Form of Notice of Grant of Non-Employee Director Automatic Stock Option pertaining to the Advanced Fibre Communication, Inc. 1996 Plan 10/
10.25	Form of Stock Issuance Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan 10/
10.26	2005 Tellabs, Inc. Employee Stock Purchase Plan 11/
10.27	Tellabs, Inc. Executive Continuity and Protection Program 11/
10.28	Form of Executive Performance Stock Units Statement and Award Agreement 12/
10.29	401(k) Plan as Amended and Restated Effective January 1, 2007 15/
10.30	Addendum Incorporating Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) to Tellabs 401(k) Plan 15/
10.31	2008 Form of Executive Performance Stock Units Award Statement 18/
10.32	Tellabs, Inc. Amended and Restated 2004 Incentive Compensation Plan 17/
10.33	2009 Form of Executive Performance Stock Units Statement and Award Agreement 20/
10.34	Amendment to Tellabs 401(k) Plan 21/
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

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Exhibits 10.1 through 10.34 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-K Annual Report for the year ended December 31, 1993 (File No. 0-9692).

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

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

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

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

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

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

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

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

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

0-9692).

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

0-9692).

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

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

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

0-9692).

16/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 28, 2007 (File No. 0-9692).

17/ Incorporated by reference from Tellabs, Inc. Definitive Proxy Statement filed March 19, 2008 (File No. 0-9692).

18/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended March 28, 2008 (File No.

0-9692).

19/ Incorporated by reference from Tellabs, Inc. Form 8-K Current Report dated February 3, 2009 (File No. 0-9692).

29

20/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended April 3, 2009 (File No. 0-9692).

21/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended October 2, 2009 (File No.

0-9692).

22/ Incorporated by reference from Tellabs, Inc. Form 8-K Current Report filed October 22, 2009 (File No. 0-9692).

30

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.
March 1, 2010	/s/ Robert W. Pullen
	Robert W. Pullen
	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/ Robert W. Pullen	March 1, 2010
Robert W. Pullen
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Timothy J. Wiggins	March 1, 2010
Timothy J. Wiggins
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Thomas P. Minichiello	March 1, 2010
Thomas P. Minichiello
Vice President of Finance and Chief Accounting Officer
(Principal Accounting Officer)
/s/ Michael J. Birck	March 1, 2010
Michael J. Birck
Chairman and Director

31

/s/ Bo Hedfors	March 1, 2010
Bo Hedfors
Director
/s/ Frank Ianna	March 1, 2010
Frank Ianna
Director
/s/ Linda Wells Kahangi	March 1, 2010
Linda Wells Kahangi
Director
/s/ Frederick A. Krehbiel	March 1, 2010
Frederick A. Krehbiel
Director
/s/ Michael E. Lavin	March 1, 2010
Michael E. Lavin
Director
/s/ Stephanie Pace Marshall	March 1, 2010
Stephanie Pace Marshall
Director
/s/ William F. Souders	March 1, 2010
William F. Souders
Director
/s/ Jan H. Suwinski	March 1, 2010
Jan H. Suwinski
Director

32

TELLABS, INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

Three Years Ended January 1, 2010, January 2, 2009 and December 28, 2007

Accounts Receivable Allowances

In millions	Balance at Beginning of Year	Net Additions (Reductions) Charged to Costs and Expenses	Deductions (A)	Currency Translation Adjustments	Balance at End of Year
2009	$1.4	$  —	$—	$  —	$1.4
2008	$3.0	$(1.3)	$—	$(0.3)	$1.4
2007	$3.8	$(0.9)	$—	$  0.1	$3.0

NOTE:

(A) – Net uncollectible accounts charged off.

33

Exhibit Index

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

34

EX-13

Exhibit 13

Fast-forward

In the future, mobile devices

will become smarter. Together

with smart networks, they’ll

deliver the smart, personalized

mobile Internet.

Tellabs (NASDAQ: TLAB) is part of the S&P 500, NASDAQ Global Select Market,

Ocean Tomo 300 Patent Index, and corporate responsibility indexes such as the

Maplecroft Climate Innovation Index, FTSE KLD and FTSE4Good.

Tellabs innovations fast-forward the future to empower the mobile Internet.

Now that smartphones are as brainy as PCs, Tellabs is helping to make networks smarter too. Smartphones plus smart networks will advance the mobile Internet revolution, enable carriers to transform their business models and deliver a personalized user experience to you.

Today 43 of the top 50 global telecom service providers choose Tellabs solutions. We fast-forward the future.

CONTENTS

Tellabs Financial Highlights	2
CEO’s Letter to Stockholders	3
Investor Q&A	6
Innovation Puts Our Customers Ahead	8
Tellabs® Mobile Solutions	10
Tellabs® Optical Solutions	12
Tellabs® Business Solutions	14
Corporate Responsibility	16
Common Stock Data	20
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
5-Year Summary of Selected Financial Data	59
Board of Directors	60
Officers	62
Glossary	63
Investor Information	64

	TELLABS FINANCIAL HIGHLIGHTS
	Tellabs fiscal years ended January 1, 2010, and January 2, 2009.
	In millions, except per-share and employee data	2009			2008			Change
	Revenue	$	1,526		$	1,729		(12)%
	Gross profit	$	666		$	660		1%
	Operating earnings (loss)	$	94		$	(970	)	N/M
	Earnings (loss) before income tax	$	113		$	(953	)	N/M
	Net earnings (loss)	$	114		$	(930	)	N/M
	Net earnings (loss) per share	$	0.29		$	(2.32	)	N/M
	Total cash, cash equivalents and marketable securities	$	1,105		$	1,152		(4)%
	Total assets	$	2,623		$	2,511		4%
	Total liabilities	$	708		$	665		6%
	Stockholders’ equity	$	1,915		$	1,847		4%
	Net cash provided by operating activities	$	234		$	131		79%
	Working capital	$	1,289		$	1,376		(6)%
	Research and development expense	$	269		$	305		(12)%
	Return on average stockholders’ equity		6.0	%		(39.1	)%	N/M
	Weighted average shares outstanding		394			400		(2)%
	Number of shares outstanding at year-end		384			396		(3)%
	Number of employees		3,295			3,228		2%

2

LETTER TO STOCKHOLDERS

Fast-forwarding Tellabs to profitable growth

Robert W. Pullen, Chief Executive Officer and President

	Dear Stockholders, Customers, Employees and Friends,
	We performed well in a challenging economy during 2009. We’re helping our customers succeed, increasing our profits and positioning ourselves to grow with the mobile Internet.
	Still, we’re going through the most challenging global economy since the Great Depression. Our customers, the telecom service providers, have reduced capital spending and deferred projects.
	Our customers continue to consolidate and garner greater purchasing power. Competition among service providers is driving demand. But competition among network equipment vendors is intensifying, which pressures selling prices.
	We are seeing positive trends as the world’s economies begin to thaw. People are communicating more and consuming more bandwidth than ever. Customers are spending to meet the growing needs of the mobile Internet, a major trend that will shape the next decade in telecom. They’re also spending to meet growing demand for videoconferencing, telecommuting and Internet video. Our customers’ need to invest continues to drive demand for innovative Tellabs solutions.
	Tellabs is committed to profitable revenue growth, which we pursue vigorously. Last year we reduced expenses, increased profit margins and moved into the black. Our revenue fell 12% to $1.53 billion, as a result of lower customer spending and our decision to focus research and development (R&D) in more profitable growth areas. Some of the highlights of 2009 were:
	•   We grew data product revenue 59% to $342 million, a record high.
	•   We earned $114 million or 29 cents per share, versus a loss of $930 million or $2.32 per share a year ago.
	•   We increased operating earnings to $93.5 million, the best since 2006.
	•   We improved gross profit margins to 43.6%, the highest since 2006.
	•   We boosted operating margins to 6%, the best since 2006.
	•   We generated cash from operations of $234 million, the most since 2006.
	•   We reduced operating expense to $572 million, the lowest since 1998.
	•   We acquired Silicon Valley start-up WiChorus, and its breakthrough mobile packet core platform, to      empower the mobile Internet.
	•   We delivered a total return to shareholders of 38%.
	We kept Tellabs’ balance sheet rock-solid. After paying $165 million in net cash for the WiChorus acquisition and repurchasing $83 million in Tellabs shares, we ended the year with more than $1.1 billion in cash and cash equivalents. And we carry zero debt.
	In January, we announced Tellabs’ first quarterly cash dividend of 2 cents per share. We believe that dividends are a good way to return capital to shareholders. And we’re confident that Tellabs will continue to generate ample cash from operations to enable us to invest in the growth of our business, repurchase shares and pay dividends.

	TELLABS ANNUAL REPORT 2009
3

We’re fast-forwarding Tellabs’ strategy. In late 2008, we introduced a strategy that began to show positive results during 2009.

Focus our investments in growth products and services. In 2009 we applied more than 80% of our R&D spending to develop innovative mobile, optical and Internet Protocol/Ethernet products. Our focus on innovation is paying off. These growth products and services generated 36% of our 2008 revenue and 46% of our 2009 revenue. In 2010, we expect growth products and services to generate more than half of revenue.

Innovate in growth markets. We continue to emphasize markets that are growing faster than customers’ overall capital spending — mobile, optical and business.

In the mobile market, we see tremendous opportunities ahead, driven by the mobile Internet. The WiChorus acquisition significantly increases Tellabs’ addressable mobile market. Through the acquisition, we’ve added the innovative Tellabs^® SmartCore™ 9100 platform, a leader in the 4G WiMax mobile packet core market, used by customers such as Clearwire. Going forward, we’re positioning this platform for the larger 3G evolved high-speed packet access (HSPA+) and 4G long-term evolution (LTE) markets. Most important, the acquisition increases the value we can offer customers.

In the optical market, we see growing bandwidth demand, and we are innovating to lower the cost per bit and reduce network energy consumption. Tellabs^® Optical Solutions provide enormous bandwidth while cutting capital expenditures up to 65%, power consumption up to 65% and operating expenses up to 85%.

In the business market, we helped service providers win dozens of business customers with Tellabs^® Business Solutions. Many of these businesses are Fortune 500 companies, including financial institutions that need highly available networks for their mission-critical traffic. U.S. federal government agencies are using the innovative Tellabs^® Optical LAN (local area network) as a higher-bandwidth alternative to active Ethernet LANs, cutting capital expense up to 70%, reducing power consumption up to 80% and shrinking space needs up to 90%.

One constant at Tellabs is that when we focus, we win. In 2009 we focused on what we could control: implementing Tellabs’ strategies, expanding into new markets with the WiChorus acquisition, controlling costs and expenses, and delivering innovative, differentiated solutions to customers.

We’re fortunate to be well-positioned in an industry as essential as communications. Tellabs is committed to helping customers succeed by delivering these life-enriching services. While billions of people enjoy communications services today, billions more still need them. People want to connect, to do business, to be educated and to be entertained.

Fast-forwarding the mobile Internet. Four decades ago, the Internet started up. Fast-forward to today: half a billion people use high-speed Internet services.

Three decades ago, cellular phones appeared. Fast-forward to today: almost 5 billion mobile devices connect us, and the mobile Internet is rapidly growing.

Most of the world’s people will first experience the Internet through a mobile device. Looking ahead, the mobile Internet will profoundly transform communications around the world. Fast-forward to tomorrow: the mobile Internet will be considered as essential as a telephone.

4

Smartphones put the power of a PC in your hand, as 3G and 4G mobile networks deliver high-speed Internet services. But to fully unlock the potential of the mobile Internet, we need smarter, higher-bandwidth networks. That’s why Tellabs is innovating to empower the mobile Internet.

Fast-forward to tomorrow: the mobile Internet will anticipate your personal needs. With your permission, it’s smart enough to know your whereabouts, your needs and your preferences.

• When you want to schedule time with family or friends, you can instantly put an invitation on their calendars.

• When you need to track health indicators such as blood pressure or blood sugar, it stays in touch with your doctor.

• When you’re in traffic, it suggests an alternate route to save you time.

• When your flight touches down, it suggests how to reach your destination quickly — providing routes and schedules of shuttles, trains and buses.

• When you want entertainment, it shows what’s playing, with reviews from people like you.

Such applications are emerging today. Over the next decade, we will begin to see the full potential of the mobile Internet. The key focus of Tellabs’ innovators is to enable smart networks and smart mobile devices to work together intelligently.

To fast-forward the mobile Internet, we acquired WiChorus and its team of innovators. This acquisition expands Tellabs^® Mobile Solutions, already in more than 120 networks around the world. WiChorus logically extends Tellabs from mobile backhaul into the adjacent mobile packet core.

Today, the Tellabs^® SmartCore™ 9100 platform is the only mobile packet core platform that’s purpose-built for 4G WiMax and LTE. This breakthrough technology makes mobile networks smarter — that is, content-aware, context-aware and application-aware. Such intelligence enables mobile carriers to make money and reduce expenses. Together, smart mobile devices and smart networks will bring you a smart, personalized mobile Internet that anticipates and addresses your personal needs.

Since our platform is compatible with 3G networks, mobile carriers can reap many of these benefits today. For example, carriers can offload Internet traffic at the network edge, reducing capital expenses in core networks as much as 50%. For users, that means faster downloads.

We at Tellabs are driven by our passion to meet customers’ communications needs. That’s why we innovate to help our customers succeed. Today, we serve 43 of the world’s top 50 telecom service providers, including nine of the top 10. We still see plenty of room to grow.

We’re excited about our central role in empowering the mobile Internet. As much as our industry has accomplished over the past few decades, it’s only a hint of what’s to come. As our industry’s exciting future unfolds, I believe that Tellabs has the right strategy, the right customer focus and the right people to succeed.

Sincerely,

Robert W. Pullen

Chief Executive Officer and President

March 1, 2010

	TELLABS ANNUAL REPORT 2009
5

Q & A

Answers to investor questions

	CEO and president Robert W. Pullen answers investors’ frequently asked questions.
	Q. When will Tellabs attain year-over-year revenue growth?
	A. We expect first-quarter 2010 revenue to grow compared with first-quarter 2009. It’s too soon to say how the year ahead will unfold.
	We’re committed to profitable revenue growth. We see an inflection point ahead, when user demands and network needs will require customers to increase capital spending. When that time comes, Tellabs is well-positioned to grow faster than the overall telecom equipment sector.
	In this context, we focus on what we can control:
	•   We’ve cut operating expenses to $572 million, the lowest since 1998.
	•   We’ve improved gross profit margins from 38.2% in 2008 to 43.6% in 2009.
	•   We’ve strategically focused Tellabs in markets that are growing faster than the overall telecom      equipment market — mobile, optical, business and professional services.
	Q. Why did you acquire WiChorus?
	A. The WiChorus acquisition logically extends Tellabs’ mobile business from backhaul into an adjacent market, packet core. It’s a great fit in terms of customers, products, technology, cultures and market potential:
	•   Customers: Tellabs and WiChorus address the same mobile customers. Our global sales and service      reach provides WiChorus access to more than 120 Tellabs mobile backhaul customers. WiChorus brings      Tellabs new WiMax customers.
	•   Products: WiChorus has the industry’s best-of-breed 4G and 3G mobile packet core solution, now      known as the Tellabs® SmartCore™ 9100 platform. It handles eight times more throughput and four      times more simultaneous Internet sessions than competitors.
	•   Technology: Both Tellabs and WiChorus products use the same Internet Protocol (IP) technology, which      is the key to next-generation 4G mobile networks.
	•   Cultures: Tellabs’ and WiChorus’ cultures both focus on developing best-of-breed products that deliver      superior value to customers and enable us to beat larger competitors.
	•   Market Potential: The growth opportunities ahead are compelling. Mobile packet core is a growing      market that is essential to the mobile Internet.

6

Q. When will growth products be the main driver of Tellabs’ business?

A. Soon. We expect growth products to generate more than half of Tellabs’ overall 2010 revenue. Growth products were 25% of our 2007 revenue, 36% of our 2008 revenue and 46% of our 2009 revenue. Our growth products include the Tellabs^® 6300, 7100, 7300, 8600, 8800 and 9100 platforms, as well as Tellabs professional services.

Q. How will you generate sufficient profit margins with growth products?

A. We constantly work to improve gross profit margins on all of our products. The proof: Tellabs gross profit margins increased to 43.6% in 2009, up from 38.2% in 2008.

Our Tellabs^® 8600, 8800 and 9100 platforms already generate gross profit margins above our corporate average. And gross profit margins on the Tellabs^® 7100 system improved in each quarter of 2009.

Q. Is Tellabs big enough to compete successfully and prosper?

A. Absolutely. As a mid-sized company, we’re big enough to tackle the focused markets we pursue – mobile, optical and business. We offer customers more global capabilities than start-ups and greater agility than the giants.

Our financial position also gives customers confidence. After 36 years in business, Tellabs has a rock-solid balance sheet with more than $1.1 billion in cash and cash equivalents, and zero debt.

Q. Do you intend to continue share repurchases?

A. Yes, we may repurchase shares from time to time. We are authorized to purchase approximately $400 million in our shares.

Q. Do you plan further acquisitions?

A. We’re always looking for opportunities to deliver compelling value to our customers and investors, but for competitive reasons, we can’t share specifics. Today we’re focused on maximizing the value of the WiChorus acquisition. We are determined to fully realize its potential to create value for our customers and our investors.

	TELLABS ANNUAL REPORT 2009
7

“Tellabs can provide both the thinking and also the real-life solutions that can help deliver the ideas that service providers have.”

– Warren Chaisatien

    Research Director, Telsyte

What do mobile users want?	What do service providers need?	What does Tellabs offer?
Mobile Internet, commerce and video with more bandwidth, availability and reliability.	Smart networks that know users’ locations, devices and preferences, so they can deliver personalized mobile Internet experiences.	Innovative mobile, optical and business solutions that enable service providers to deliver new services, generate revenue, reduce expenses and improve user experiences.

8

Fast-forwarding innovation to help our customers succeed

Compelling new mobile applications extend yesterday’s boundaries. You can transfer money with mobile phones in Kenya. See historical images as you tour castles in Italy. Scan a barcode to compare prices in Europe and North America. What you can do with a PC today, the mobile Internet will do for you anywhere tomorrow.

That’s how the mobile Internet will eclipse landlines and PCs. Mobile Internet, video and commerce are transforming our world . With almost 5 billion mobile phones in use today and continuing growth ahead, the extreme demands of the mobile Internet will require service providers to transform their networks.

Tellabs innovations anticipate what’s next

Our solutions and services enable service providers to transform their business models and their networks to prepare for the mobile Internet revolution. We enable customers to generate revenue, extract savings and assure profitability for the long term. Looking through the eyes of our customers, Tellabs focuses on mobile, optical and business solutions, as well as professional services:

• Tellabs ^® Mobile Solutions help customers cut costs and generate revenue as mobile networks evolve to 3G and 4G. Our innovations in mobile solutions include the first purpose-built pseudowire solution to migrate mobile backhaul networks to Ethernet. And with our recent acquisition of WiChorus, Tellabs solutions include breakthrough mobile packet core technology to make networks content-aware, context-aware and application-aware.

• Tellabs ^® Optical Solutions enable service providers to add bandwidth when and where it’s needed, deliver existing services, and lower capital and operating expenses. Our innovations in optical solutions include the first integration of multiservice provisioning platforms (MSPPs), Ethernet switching and dynamic optical layer for more bandwidth with less equipment.

• Tellabs ^® Business Solutions provide businesses high quality, reliability and availability while enabling them to save energy and become more “green.” Our innovations in business solutions include the first service-interworking multiservice edge router to intergrate to new networks with guaranteed service quality.

• Tellabs ^® Global Services provide the specialized expertise to design, build and optimize service providers’ networks.

We help service providers deal effectively and quickly with change, whether it’s planned or unplanned, so they can prepare for what’s ahead.

	TELLABS ANNUAL REPORT 2009
9

“We are growing very fast. Tellabs equipment helps us to define whatever we need.”

– Vladimir Lutchenko

    Manager of the Access Network Planning Unit, Astelit, life:)

Smarter shopping

MOBILE SOLUTIONS

Maria Lopez ensures she’s getting the best price by scanning bar codes and comparing prices with her mobile phone.

Tellabs® Mobile Solutions enable service providers to: •   Achieve faster time-to-revenue with quicker services roll-out. •   Provide bandwidth quickly where and when it is needed. •   Offer high network availability and reliability. •   Use multiple wireless network technologies. •   Deliver new and differentiated applications. •   Transform today’s business model for mobile services. •   Offload up to 70% of traffic at the edge. •   Save up to 50% in capital expense.

10

MOBILE

Empowering networks for the mobile Internet revolution

Today, most people use mobile phones primarily for phone calls. But smartphone sales are growing 30% a year. Fast-forward: one day mobile phones will be smarter and deliver the smart, personalized mobile Internet.

With your permission, the mobile Internet will learn your needs, habits and preferences. It will be aware of your schedule and location to anticipate your needs and deliver what you want, when and how you want it.

To deliver that vision requires smarter networks. Tellabs^® Mobile Solutions offer industry-leading mobile packet core and backhaul applications, backed by specialized professional services. Tellabs innovations enable the intelligent mobile Internet.

Extending mobile solutions into the packet core

Our acquisition of WiChorus almost doubles the size of Tellabs’ addressable mobile market, extending our business into the packet core. WiChorus technology powers the breakthrough Tellabs^® SmartCore™ 9100 platform. It’s the first purpose-built platform for 4G WiMax and LTE, with support for 3G.

This platform offers tremendous advantages, such as eight times more throughput and four times more simultaneous Internet sessions than competitors’ gateways. It uniquely combines a mobile core gateway with world-class application analytics, so customers can optimize networks as never before.

For the long term, our platform enables mobile carriers to transform their business models. Carriers’ profitability has been challenged by flat-rate pricing and 30% or higher growth in mobile data use. Our platform enables customers to analyze and monetize more than 400 of the top mobile Internet applications.

Advancing mobile backhaul networks to 4G

Tellabs serves more than 120 mobile backhaul customers worldwide. One customer expects to save more than 120 million euros during its migration to 4G LTE networks. That’s 60% to 93% savings over three years, compared with the present mode of operation.

Tellabs Global Services helps customers navigate through complex decisions and implementation challenges such as whether to own or lease backhaul facilities.

PRODUCT PORTFOLIO

Tellabs^® 3000 Voice-Quality Enhancement Series

Tellabs^® 6300 Managed Transport System

Tellabs^® 7100 Optical Transport System

Tellabs^® 7300 Metro Ethernet Switching Series

Tellabs^® 8000 Intelligent Network Manager

Tellabs^® 8100 Managed Access System

Tellabs^® 8600 Managed Edge System

Tellabs^® 8800 Multiservice Router Series

Tellabs^® SmartCore^™ 9100 Platform

Tellabs^® Global Services

CUSTOMER EXAMPLES

Asia Pacific: Celcom Axiata Berhad, China Mobile, China Unicom, DTAC, SMART Communications, True Move Co, Ltd., VNPT

MobiFone

Europe, Middle East, Africa: Ericsson, Magyar Telekom, Netcom, Nokia Siemens Networks, Orange Slovakia, Swisscom

(Switzerland) AG, Vodacom South Africa, Vodafone Ireland, Vodafone – Panafone S.A.

North America: SureWest, Telecom Transport Management, Verizon

	TELLABS ANNUAL REPORT 2009
11

“The challenge to constantly improve the performance and efficiency of our global network is effectively addressed with partners like Tellabs who share our passion for excellence and performance.”

– Stuart D. Elby

   Vice President-Network Architecture, Verizon

Mobile Internet video

Juan Garcia and Mark Smith can quickly download and watch Internet videos through Tellabs^® Optical Solutions.

OPTICAL SOLUTIONS

Tellabs^® Optical Solutions enable service providers to:

• Reduce initial installation time by several weeks.

• Turn on services and add capacity in hours, not weeks, improving customer retention.

• Achieve up to 99.9999% availability (limiting downtime to about half a minute per year).

• Deliver up to four times more bandwidth at just 50% to 75% of the cost of upgrading competitive products.

12

OPTICAL

Advancing innovation with optical breakthroughs

User demand for faster and more reliable mobile, business, video and Internet services is surging. Today, to download a high-definition video, you may wait and wait. Fast-forward a few years: you’ll be watching that movie in minutes.

To deliver that vision requires new bandwidth management solutions and more cost-effective ways to carry traffic, including optical and Ethernet networking. With Tellabs^® Optical Solutions, service providers can quickly and cost-effectively add bandwidth in networks — with just a few keystrokes.

Technologies such as ROADM (remote optical add drop multiplexer), Ethernet and OTN (optical transport network) enable customers to deliver high-bandwidth services cost-effectively.

One of Tellabs’ optical customers operates the world’s largest ROADM network, delivering mobile, business and consumer services on an efficient, converged platform. The results: capital expenses decreased 65%, power consumption fell 65% and operating expenses dropped 85%. Tellabs optical customers include wireline service providers, mobile carriers and cable TV multiple system operators around the world.

Professional services enable network efficiencies

Tellabs^® Global Services offers customers a unique depth of experience in planning and architecting high-performance optical networks.

For example, Tellabs has extensive expertise in migrating live traffic from existing equipment to new optical equipment without disrupting service to users. This experience enables customers to increase capacity or reduce costs with minimal impact to user service availability.

We also help customers avoid costly network redesigns and delays in implementation through network planning and design.

PRODUCT PORTFOLIO

Tellabs^® 6300 Managed Transport System

Tellabs^® 7100 Optical Transport System

Tellabs^® 7100 Nano Optical Transport System

Tellabs^® 7300 Metro Ethernet Switching Series

Tellabs^® 8000 Intelligent Network Manager

Tellabs^® Global Services

CUSTOMER EXAMPLES

Asia Pacific: Bharti Airtel, Globe Telecom, KDDI Corporation, Korea Telecom, Power Grid Corp of India Ltd., PT Aplikanusa

Lintasarta, SMART Communications, Time dotcom Berhad

Europe, Middle East, Africa: Astelit, life :), Telenor, Vodacom South Africa

Latin America, Caribbean: Alestra

North America: Bluegrass Network, LLC, Telecom Transport Management, tw telecom (Services), Verizon

	TELLABS ANNUAL REPORT 2009
13

“Financial institutions have a very high level of mission-critical traffic, and with Tellabs we provide a very high level of mission criticality to those institutions.”

– Shunichi Umino

   Executive Manager of IP Networks, NTT Com

Real-time data

Jim Messer and Kevin Kometer of CME Group, the world’s largest futures and options exchange, conduct real-time business on a fast and reliable network through Tellabs^® Business Solutions.

BUSINESS SOLUTIONS

Tellabs offers a comprehensive portfolio of business solutions that enables service providers to deliver what businesses need:

• Tellabs^® Wavelength Services provide advanced optical technology to deliver fast and reliable services, and add on new services almost instantly.

• Tellabs^® Multiservice Edge helps deliver legacy and next-generation services over one converged network that protects legacy revenue streams and delivers new services.

• Tellabs^® Optical Enterprise offers businesses the highest availability, capacity and security, while delivering dramatic savings in capital, space and power requirements.

• Tellabs^® Carrier Ethernet migrates legacy networks to scalable networks with greater speed, reliability and lower costs.

14

BUSINESS

Reducing the cost of mission-critical services

Business users need easy access to software applications, with high levels of speed, availability, service quality and security. Today, businesses must plan months ahead to assess needs, choose software providers and put telecom infrastructure into place. Fast-forward a few years: virtually any business software application will be accessible instantly, and telecom services will be provisioned faster than ever before.

Cloud computing will deliver software applications from servers through the Internet or private networks. That reduces companies’ needs to maintain their own data centers and software applications.

What will be required to deliver cloud computing is a network with unmatched capacity, availability and security. New capabilities may also be needed, such as “cloud switching,” which will enable users to access multiple applications sequentially without placing undue strain on telecom networks.

Tellabs helps service providers deliver vital services to global businesses today and prepare for the growth opportunity of cloud computing tomorrow. With Tellabs^® Business Solutions, a major carrier can now deploy new services quickly to increase its market share.

Innovation means fast, secure and always-on connections

Many Fortune 500 companies rely on Tellabs^® Business Solutions, including financial institutions that have millions riding on each millisecond. Our solutions help customers support enterprise services with reliable, cost-effective Carrier Ethernet and Internet Protocol (IP) technologies. We lower the total cost of ownership, with typical capital expense savings ranging from 20% to 70% and operating expense savings ranging from 40% to 80%.

For example, as we provide Tellabs^® Optical Enterprise to U.S. federal government agencies, they are realizing dramatic savings. By substituting an optical LAN (local area network) for the traditional active Ethernet LAN, we:

• Cut capital expense up to 70%.

• Cut energy consumption up to 80% to support green initiatives.

• Reduce space requirements up to 90% at the access layer.

PRODUCT PORTFOLIO

Tellabs^® 1100/1600 Enterprise GPON Platforms

Tellabs^® 1600 Optical Network Terminal Series

Tellabs^® 6300 Managed Transport System

Tellabs^® 7100 Optical Transport System

Tellabs^® 7300 Metro Ethernet Switching Series

Tellabs^® 8000 Intelligent Network Manager

Tellabs^® 8100 Managed Access System

Tellabs^® 8600 Managed Edge System

Tellabs^® 8800 Multiservice Router Series

Tellabs^® Global Services

CUSTOMER EXAMPLES

Asia Pacific: Bharat Sanchar Nigam Limited, Globe Telecom, Jupiter Telecommunications Co. Ltd. (Services), Mahanagar Telephone Nigam Limited, NTT Communications Corp., Philippine Long Distance Telephone Company, PT Telekomunikasi Indonesia tbk, Sri Lanka Telecom, Telekom Malaysia Berhad, Telstra Corporation, United Information Highway Co. Ltd.

Europe, Middle East, Africa: Vodacom South Africa

North America: Bresnan Communication (Services), Optimum Lightpath, Verizon

	TELLABS ANNUAL REPORT 2009
15

“Carriers around the world are looking at environmental issues. As the traffic grows, so grow power and cooling requirements, so there’s a basic economic need to buy equipment that reduces size and simultaneously reduces power and electrical usage.”

– Michael Howard

   Co-founder and Principal Analyst, Infonetics

Designing for the environment

Engineers in Shanghai engage in a Design for Environment workshop, under Tellabs’ global program to improve energy-efficiency and reduce waste as our products evolve.

16

CORPORATE RESPONSIBILITY

Advancing our sustainability

Successful companies make choices that are sustainable. Tellabs conducts its business in ways that respect people and protect the environment. We act with integrity to create long-term value for our customers, investors, employees, suppliers and communities.

Our top priorities for 2010

• Reduce energy consumption with more efficient products and operations. Our designers hold Design for Environment workshops, under Tellabs’ global program to improve energy-efficiency and reduce waste as our products evolve. To help measure our carbon footprint, Tellabs completes the Carbon Disclosure Project survey. In 2009 we expanded our scope to include 100% of our facilities, which emitted 44,171 metric tons of CO₂ . We will continue to report and work towards reducing our CO₂ emissions.

• Work with supply chain to responsibly manage materials and waste. We conducted our first survey of preferred suppliers and found that 98% of them adhere to a code of conduct. These codes set expectations for ethical, environmental and labor practices.

• Strengthen the communities where we live and work. Tellabs offers to match employee gifts of time and money, up to $2,000 per employee per year. Excluding employee gifts, Tellabs and the Tellabs Foundation contributed $1.4 million in 2009 to worthwhile causes.

• Proactively communicate our plans and progress. On page 19 of this report, Tellabs reports its progress in each area of corporate responsibility. We also share our plans for 2010.

We remain committed to open, honest communication about our efforts. For more detailed information on corporate responsibility, visit www.tellabs.com or contact us at corporate.responsibility@tellabs.com.

	TELLABS ANNUAL REPORT 2009
17

“Tellabs is a special partner in feeding hungry people, and they genuinely want to help. Employees were generous, enthusiastic, and truly made a difference.”

– H. Dennis Smith

   President & CEO,

   Northern Illinois Food Bank

Benefit ride in Petaluma

As part of our employee giving campaign, Ted Meister and a team of Tellabs cyclists from Petaluma, Calif., rode 100 miles to benefit the local food bank.

Inspired by employees, Tellabs matched their gifts of time and money. Tellabs employees and the company pledged gifts to 400 charities in 2009.

18

CORPORATE RESPONSIBILITY

Corporate Social Responsibility (CSR) — managing our business for positive economic, social and environmental outcomes

Commitment	2009 Plans		2009 Progress		2010 Plans
Environment Help protect the environment	>	Complete the Carbon Disclosure Project Survey (CDP7), reporting on all locations	ü	Expanded CDP7 response to all locations with full operational control	>	Complete Carbon Disclosure Project Survey 2010
	> >	Initiate work to determine carbon footprint by product Continue testing reliability of lead-free products	ü	Participated in industry efforts to standardize energy-efficiency measurements, which enable accurate carbon footprint calculation	>	Develop a three-year environmental plan, including Key Performance Indicators (KPIs)
			ü	Continued lead-free testing in anticipation of ANSI standards	>	Comply with anticipated ANSI lead-free standard following its release
			«	Completed Design for Environment workshops in all research and development facilities	>	Espoo, Finland, office will begin using hydroelectric power to reduce carbon emissions
Supply Chain Expect excellence throughout our supply chain	>	Reach all suppliers with our code of conduct expectations	ü	Survey revealed that 98% of preferred suppliers adhere to a code of conduct	>	Educate suppliers about conflict minerals and improve substance reporting
	>	Incorporate CSR expectations in supplier contracts	x	Continue commitment to reflect CSR expectations in supplier contracts	>	Incorporate CSR expectations in supplier contracts
Employees Engage and develop talented people	>	Conduct employee engagement survey	ü	Completed engagement survey	>	Develop action plans in response to employee engagement survey
	>	Update employee data privacy policy	ü	Updated employee data privacy policy	>	Publicly release Tellabs data privacy policy
	>	Expand manager effectiveness, health and wellness initiatives globally	ü	Delivered manager effectiveness training, health and wellness programs globally
			«	Formalized and disclosed Global Human Resources policy
			«	Translated code of conduct and other global policies into local languages
Community Give back to the communities where we live and work	>	Distribute $1 million in Tellabs Foundation grants	«	Tellabs Foundation distributed $1.1 million in grants	>	Distribute $1 million in Tellabs Foundation grants
	>	Maintain high participation in employee giving programs	«	Employee giving increased to more than half of employees	>	Maintain high participation in employee giving programs
Ethics & Governance Meet highest standards for ethics and governance	>	Formalize guidance on political and charitable contributions	ü	Released political and charitable contributions policy to employees in 3Q09	>	Conduct ethics and integrity survey
	>	Update anti-corruption policy	ü	Updated anti-corruption policy

> plan    ü completed plan    « exceeded plan    x missed plan		TELLABS ANNUAL REPORT 2009
	19

Tellabs Common Stock Market Data

	2009
	High		Low
First Quarter	$	4.78	$	3.52
Second Quarter	$	6.02	$	4.45
Third Quarter	$	7.70	$	4.96
Fourth Quarter	$	7.36	$	5.36
	2008
	High		Low
First Quarter	$	7.21	$	5.09
Second Quarter	$	6.32	$	4.60
Third Quarter	$	5.58	$	3.67
Fourth Quarter	$	4.56	$	3.10

Five-Year Cumulative Total Return Comparison

20

Management’s Discussion and Analysis

Introduction and Overview of Business

Tellabs designs, develops and supports telecommunications networking products. We generate revenue principally through the sale of these products to communications service providers worldwide as both stand-alone network elements and as elements of integrated solutions. We also generate revenue by providing services to our customers. We operate in three business segments: Broadband, Transport and Services.

The Broadband segment includes data, access and managed access product portfolios that facilitate mobile communications, wireline business services and bundled consumer services.

• Revenue from data products is driven by the need for wireless and wireline carriers to deliver next-generation mobile voice and Internet services and business-oriented voice, video and Internet services.

• Revenue from access products is primarily driven by the need for wireline carriers to deliver bundled voice, video and Internet services to residential customers.

• Revenue from managed access products is driven by the need for wireless and wireline carriers to deliver mobile voice and Internet services and business-oriented voice, video and Internet services.

The Transport segment includes optical networking systems, digital cross-connect systems and voice-quality enhancement products. Revenue for these products is driven by the needs of wireless and wireline carriers to deliver mobile services, business-oriented services and residential services.

The Services segment includes deployment, support, training and network design/consulting services. Revenue from deployment, support and training services arises primarily from the sales of products and continues to represent the majority of Services revenue, while network design/consulting services is the fastest growing part of the Services portfolio.

Tellabs operates in a dynamic industry. Customer consolidation, primarily in North America, has reduced overall industry capital spending, which has resulted in increased pricing pressure. In addition, customer spending is pressured and competition is heightened on a global basis by the current economic situation. Some equipment suppliers have consolidated in recent years. Heightened competition by these suppliers has also resulted in increased pricing pressure for Tellabs and some of its direct competitors.

Within this backdrop, we continue to transform the company with new products and services. The company is evolving 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 the packet-switching and Internet Protocol (IP) technology used in our data and optical networking products. These new products are taking root as service providers transform their networks with next-generation capabilities.

Some of our products carry gross profit margins lower and some carry gross profit margins higher than the corporate average. While we have significantly improved the profitability of these products over time, the mix of products in any given quarter can affect overall profitability.

Management continues to define and implement initiatives to improve overall performance. On February 5, 2009, and July 6, 2009, management initiated restructuring plans to align costs with customer spending and with current market conditions. These restructuring plans primarily implement workforce reductions. However, as a consequence of the Company’s increased focus on growth markets and growth products, we expect to hire people with different skill sets as needed around the world.

On December 1, 2009, we acquired WiChorus, Inc. (WiChorus), a supplier of industry-leading infrastructure products for the mobile Internet. Under the terms of the transaction, we paid $180 million in cash for WiChorus’ capital stock and vested options, and assumed unvested options. Taking into account WiChorus’ $15 million cash balance, the net cash price was approximately $165 million. We believe this transaction will enable us to quickly enter a large and fast growing market with a 3G/4G mobile-network solution that complements our IP mobile backhaul portfolio.

The consolidated balance sheet at January 1, 2010, includes fair values of the assets and liabilities of WiChorus as determined under the accounting rules for purchase acquisitions. The consolidated statement of operations for 2009 includes the operating results of WiChorus from the date of acquisition.

Results of Operations

Net earnings in 2009 were $113.6 million, compared with a net loss of $930.1 million in 2008 when the company recorded a non-cash goodwill impairment charge of $988.3 million. Net earnings in 2007 were $65.0 million.

In 2009, revenue was $1,525.7 million, compared with $1,729.0 million in 2008 and $1,913.4 million in 2007. The decline in total revenue across the three-year period was primarily due to reduced revenue in the Broadband and Transport product segments.

In 2009, gross margin was 43.6%, compared with 38.2% in 2008 and 35.2% in 2007. The 8.4 percentage point improvement in gross margin across the three-year period was primarily due to profitability improvements on access products and increased data product revenue.

Operating expenses in 2009 were $572.3 million, compared with $1,630.1 million in 2008 when operating expenses included the $988.3 million goodwill impairment charge. Operating expenses in 2008 increased by $983.0 million from $647.1 million in 2007 due to the $988.3 million goodwill impairment charge.

	TELLABS ANNUAL REPORT 2009
21

Segment Revenue							2009 vs. 2008		2008 vs. 2007
In millions	2009		2008		2007
Broadband	$	785.8	$	919.9	$	1,018.6	(14.6	)%	(9.7	)%
Transport		509.6		580.1		672.7	(12.2	)%	(13.8	)%
Services		230.3		229.0		222.1	0.6	%	3.1	%
Total revenue	$	1,525.7	$	1,729.0	$	1,913.4	(11.8	)%	(9.6	)%

Geographic Revenue
In millions	2009		%		2008		%		2007		%
North America	$	1,005.3	66	%	$	1,168.6	68	%	$	1,413.5	74	%
International		520.4	34	%		560.4	32	%		499.9	26	%
Total revenue	$	1,527.7	100	%	$	1,729.0	100	%	$	1,913.4	100	%

Segment Revenue

Revenue from the Broadband segment was $785.8 million in 2009, compared with $919.9 million in 2008 and $1,018.6 million in 2007. Across the three-year period, increased revenue from data products was offset by lower managed access and access revenue.

Revenue from data products, the Tellabs^® 8600 managed edge system and the Tellabs 8800^® multiservice router series, has increased each year since 2003. Data product revenue was $342.0 million in 2009, compared with $215.1 million in 2008 and $160.5 million in 2007. The 112.9% increase in data revenue across the three-year period was primarily driven by the continuing rollout of our next-generation mobile backhaul and business services solutions in multiple geographic regions. Beginning in the fourth quarter of 2009, we are including the Tellabs^® SmartCore^TM 9100 platform with our data products. During the quarter, we began to recognize revenue from this product, which came to us through the December 2009 acquisition of WiChorus.

Access product revenue was $274.4 million in 2009, compared with $414.9 million in 2008 and $566.8 million in 2007. Revenue from the Tellabs^® 1000 and 1100 Access platforms decreased across the three-year period. Revenue from the Tellabs^® 1600 Optical Network Terminal (ONT) declined in 2009 after increasing in 2008. Overall, revenue from access products has declined, and will likely continue to decline, as several key customers transitioned to alternate network architectures.

Managed access revenue was $169.4 million in 2009, compared with $289.9 million in 2008 and $291.3 million in 2007. Revenue from the Tellabs^® 8100 managed access system declined across the three-year period. Revenue for the Tellabs^® 6300 SDH transport system declined in 2009 after increasing in 2008. Revenue from both of these products has been affected by economic weakness in Europe and Latin America. In addition, we see our customers migrating from these products to our newer data products.

Revenue from the Transport segment was $509.6 million in 2009, compared with $580.1 million in 2008 and $672.7 million in 2007. Across the three-year period, lower revenue from Tellabs^® 5500 system and other digital cross-connect products was partially offset by growth from the Tellabs^® 7100 Optical Transport System (OTS). Revenue from Tellabs^® 3000 voice-quality enhancement (VQE) solutions, which grew in 2008, declined in 2009.

Services segment revenue increased to $230.3 million in 2009 from $229.0 million in 2008 and $222.1 million in 2007. The revenue increase is primarily due to increased support and network design/consulting services offset by a decline in deployment services revenues across the three-year period. Revenue from training services grew in 2009 after declining in 2008.

Gross Profit and Margin

In millions	2009			2008			2007
Gross profit	$	665.8		$	660.1		$	674.3
Gross margin		43.6	%		38.2	%		35.2	%
Product gross profit	$	586.2		$	588.0		$	605.4
Product margin		45.3	%		39.2	%		35.8	%
Services gross profit	$	79.6		$	72 .1		$	68.9
Services margin		34.6	%		31.5	%		31.0	%

Gross Margin

Overall gross margin increased 8.4 percentage points from 2007 through 2009. Across the three-year period, product gross margins grew by 9.5 percentage points and services gross margins grew by 3.6 percentage points.

22

Product Gross Margin

The improvement in product gross margin in 2009 from 2008 is the result of profitability improvements on the Tellabs^® 1600 ONT and increased revenue from the Tellabs^® 8600 and 8800 platforms. The improvement in product gross margin in 2008 from 2007 was primarily driven by profitability improvements on the Tellabs^® 1600 ONT and the Tellabs^® 7100 OTS and higher levels of revenue from the Tellabs^® 8600 and 8800 platforms, offset by lower revenue from the Tellabs^® 5500 and 1000 platforms.

Services Gross Margin

The increase in services gross margin across the three-year period is primarily the result of growth in higher margin network design/consulting services and support services revenue, coupled with a decline in lower margin deployment services revenue. In 2008, services gross margin improvement was also offset by investments in our services business outside the United States.

Gross Margin Trend

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. This variability, which tends to affect gross margin on a quarterly basis, is likely to continue.

Operating Expenses

	Expense						Percent of Revenue
In millions	2009		2008		2007		2009		2008		2007
Research and development	$	268.7	$	305.2	$	343.1	17.6	%	17.7	%	17.9	%
Sales and marketing		165.9		170.0		176.6	10.9	%	9.8	%	9.2	%
General and administrative		101.4		101.8		99.1	6.6	%	5.9	%	5.2	%
Subtotal		536.0		577.0		618.8	35.1	%	33.4	%	32.3	%
Intangible asset amortization		24.6		23.9		22.5
Restructuring and other charges		11.7		40.9		5.8
Goodwill impairment		—		988.3		—
Total operating expenses	$	572.3	$	1,630.1	$	647.1

Decreased operating expenses in 2009, compared with 2008, were primarily due to the absence of the $988.3 million goodwill impairment. We also realized savings, primarily in the form of reduced research and development costs, from previously announced cost-reduction programs. Operating expenses in 2008 increased by $983.0 million to $1,630.1 million, compared with 2007, as the $988.3 million goodwill impairment charge and restructuring and other charges of $40.9 million more than offset savings from the previously announced cost-reduction programs. General and administrative expenses in 2008 included increased legal expenses as a result of litigation support.

Intangible Asset Amortization

Intangible asset amortization increased slightly in 2009 from 2008 due to the amortization of developed technology acquired in our acquisition of WiChorus. Intangible asset amortization increased slightly in 2008 from 2007 as we reduced the estimated useful lives of some of our developed technology and customer relationships due to revised sales projections related to access products and customers. In addition, we took a charge of $0.6 million for impaired developed technology related to the Tellabs^® 1100 access platform in 2008 due to reduced demand.

Restructuring and Other Charges

Since 2007, we have consistently reduced expenses to align costs with market conditions and lower revenue. In 2009, restructuring and other charges consisted primarily of severance and facility- and asset-related charges. In 2008, restructuring and other charges consisted primarily of severance, facility- and asset-related charges and charges for the consolidation of several facilities. In 2007, we consolidated research and development into fewer locations to better align resources with strategic business objectives.

Goodwill Impairment

In the third quarter of 2008, we performed an interim review on all three operating segments because our market capitalization was less than book value for a sustained period and we continued to face challenging market conditions. As a result of the interim review, we recorded a goodwill impairment charge of $988.3 million, of which $594.2 million related to the Broadband segment and $394.1 million related to the Transport segment, completely eliminating their goodwill balances. The Services segment did not incur an impairment of its goodwill because the fair value of the segment was determined to be greater than the carrying value.

	TELLABS ANNUAL REPORT 2009
23

Segment Profit*

In millions	2009		2008		2007
Broadband	$	185.7	$	115.7	$	39.1
Transport		139.4		178.0		237.5
Services		81.8		75.5		72.2
Total segment profit	$	406.9	$	369.2	$	348.8

* 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 intangibles, restructuring and other charges, the impact of equity-based compensation (which contains restricted stock and performance stock units granted after June 30, 2006, and stock options), and the goodwill impairment charge.

Broadband segment profit was $185.7 million in 2009, compared with $115.7 million in 2008 and $39.1 million in 2007. The $146.6 million increase in Broadband segment profitability across the three-year-period was driven primarily by margin improvements associated with the Tellabs^® 1600 ONT, higher revenue from data products and reduced research and development expenses.

Transport segment profit for 2009 was $139.4 million, compared with $178.0 million in 2008 and $237.5 million in 2007. The decrease in segment profit across the three-year period was primarily due to lower revenue from Tellabs^® 5500 system and other digital cross-connect products, which carry gross margins higher than corporate average, partially offset by growth in the Tellabs^® 7100 OTS, which carries gross margins below corporate average.

Services segment profit was $81.8 million in 2009, compared with $75.5 million in 2008 and $72.2 million in 2007. Services segment profit increased by $6.3 million in 2009, compared with 2008, due to a decline in lower-margin deployment services revenue. Services segment profit increased $3.3 million in 2008 from 2007 due to increased revenue from higher-margin professional and support services, partially offset by lower-margin deployment services.

Other Income

In millions	2009		2008			2007
Interest income, net	$	19.3	$	34.8		$	50.9
Other income (expense), net		0.4		(17.3	)		(7.9	)
Total other income	$	19.7	$	17.5		$	43.0

Interest income, net, decreased in 2009 compared with 2008 due to lower yields during 2009, compared with 2008. Other income (expense), net, improved in 2009 from 2008 as a result of gains on sales of investments in marketable securities in 2009 compared with losses in 2008. Other income (expense), net, includes charges to write-down long-term equity investments in partnerships and start-up technology companies. These charges were $0.4 million in 2009, $9.9 million in 2008 and $0.5 million in 2007. In addition, we had charges of $0.8 million in 2008 and $5.2 million in 2007 for other-than-temporary impairments from investments in marketable securities.

Income Taxes

In millions	2009			2008			2007
Income tax benefit (expense)	$	0.4		$	22.4		$	(5.2	)
Effective tax rate		0.3	%		2.4	%		7.4	%

Income tax benefit was $0.4 million in 2009, compared with an income tax benefit of $22.4 million in 2008. The income tax benefit decreased due to the absence of tax benefits recorded in 2008 for the resolution of tax audits and for the goodwill impairment. This decrease in tax benefit was offset by tax benefits recorded in 2009 related to accounting for the WiChorus acquisition and a tax refund from the carry back of net operating losses. We recorded an income tax benefit of $22.4 million in 2008, compared with income tax expense of $5.2 million in 2007. The tax benefit reflects a tax provision on income from foreign operations, offset by a partial benefit on the loss from domestic operations, and a $34.8 million tax benefit, which we recorded in the second quarter of 2008, related to the resolution of domestic federal income tax audits for the period 2001 through 2005. The tax benefit on domestic operations was limited due to the valuation allowance established against domestic deferred tax assets. For a more detailed discussion of the valuation allowance established against domestic deferred tax assets, see Footnote 12 – Income Taxes.

Financial Condition, Liquidity and Capital Resources

Our principal source of liquidity remained cash, cash equivalents and marketable securities of $1,104.8 million as of the end of 2009, which decreased by $47.3 million since year-end 2008. The decrease in cash, cash equivalents and marketable securities for the full year 2009 is the result of $164.7 million in net cash used for the acquisition of WiChorus and cash used to repurchase common stock and for normal capital expenditures, offset by cash generated from operating activities. In 2009, we generated $234.4 million of cash from operating activities, compared with $130.8 million in 2008 and $133.4 million in 2007.

In 2009, we repurchased 12.9 million shares of common stock at a cost of $82.9 million. We provide no assurance that we will continue repurchase activity and we may change repurchase activity in the future. We cannot estimate the timing of any such change or the impact on cash, cash equivalents and marketable securities.

The majority of our investments are backed by governments or government agencies. We believe that our investments are highly liquid instruments. We may rebalance the portfolio from time to time, which may affect the duration, credit structure and future income of investments.

24

On January 25, 2010, the Board of Directors approved a cash dividend of $0.02 per share of outstanding common stock payable on February 26, 2010, to stockholders of record as of the close of business on February 12, 2010. The dividend will yield approximately 1.36% annually based upon the stock price on the declaration date. Any future quarterly dividend payment must be approved by the Board of Directors, therefore, we cannot provide any assurance of future dividend payments.

Based on historical performance and current forecasts, we believe the company’s cash, cash equivalents and marketable securities will satisfy working capital needs, capital expenditures and other liquidity requirements related to existing operations for the next 12 months. Future available sources of working capital, including cash, cash equivalents and marketable securities, cash generated from future operations, short-term or long-term financing, equity offerings or any combination of these sources, should allow us to meet long-term liquidity needs. Current policy is to use cash, cash equivalents and marketable securities to fund business operations, to expand business, potentially through acquisitions, to repurchase common stock or pay a cash dividend.

Contractual Obligations

The following table sets forth an overview of contractual obligations, as of January 1, 2010, 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	$	27.1	$	8.8	$	10.1	$	5.6	$	1.8
Operating lease obligations related to restructuring activities, net		17.2		5.8		5.9		4.5		1.0
Purchase commitments to contract manufacturers and suppliers		160.8		160.8		—		—		—
Loan related to other marketable securities1		252.8		252. 8		—		—		—
Borrowing fees on loan related to other marketable securities2		8.4		1.5		3.0		3.0		0. 9
Total contractual obligations	$	466.3	$	429.7	$	19.8	$	13.1	$	3.7

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. See Note 7 for a more complete description of this obligation.

² For purposes of contractual obligations disclosure, we used Cisco’s average share price of $23.74 for the quarter ended January 1, 2010, to determine the hypothetical value of the borrowing fees assuming the loans are settled in 2015.

We use several contract manufacturers and suppliers who provide manufacturing services for our products. During the normal course of business, we enter into agreements with certain contract manufacturers and suppliers that enable them to procure inventory based on criteria defined by us to reduce manufacturing lead times and ensure adequate component supply. Under these agreements, the maximum liability for purchase commitments as of January 1, 2010, was $160.8 million, of which $10.6 million was recorded on the balance sheet.

The borrowing fees on the loan related to other marketable securities 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 January 1, 2010, we had unrecognized tax benefits of $34.3 million 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 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 critical accounting estimates to be revenue recognition, the allowance for excess and obsolete inventory and excess purchase commitments (collectively E&O), goodwill and indefinite-lived intangible asset valuation, the valuation of amortizable finite-lived intangible assets, the estimate of the warranty liability, reserve requirements for lease obligations on vacated facilities, income taxes and equity-based compensation.

	TELLABS ANNUAL REPORT 2009
25

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 judgments about the application of the accounting rules based on the facts and circumstances of each customer arrangement.

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 cases involving sales of new products, for example, we defer revenue until we receive formal customer acceptance. In cases where we can demonstrate that the product or service has met all 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. 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 inventory cost using the first-in, first-out method, and we value 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 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’s 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 the accounting estimate related to E&O is a critical accounting estimate because it requires us to make assumptions about sales volumes and product mix, which can be highly uncertain. Changes in these estimates can have a material effect on our financial statements.

Goodwill

Goodwill impairment is reviewed annually and when impairment indicators exist by comparing the segment’s net book value to fair value. If the segment’s fair value is greater than its net book value, then further impairment tests are not deemed necessary. If the segment’s fair value is less than its net book value, then further tests are performed to determine the segment’s implied fair value of goodwill. The implied fair value is then compared against the book value of goodwill to determine the level of impairment.

The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions. The discounted cash flow method requires us to use estimates and judgments about the future cash flows of the operating segments. Although we base 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 market approach is based on a comparison of the Company to comparable publicly traded firms in similar lines of business. This method requires us to use estimates and judgments when determining comparable companies. We assess such factors as size, growth, profitability, risk and return on investment.

We believe 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. The recognition of an impairment could be material to our financial statements.

Intangible Assets

We categorize intangible assets as finite-lived and indefinite-lived. Finite-lived intangible assets consist primarily of purchased technology, which arose primarily from acquisitions of businesses in 2009, 2004 and 2003. Indefinite-lived intangible assets consist primarily of in-process research and development (IPR&D), which arose from the acquisition of WiChorus in the fourth quarter of 2009.

We evaluate the carrying value of finite-lived 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, a further review is performed to determine the asset’s fair value. If an asset’s calculated fair value is less than its net book value, 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.

26

We evaluate the carrying value of indefinite-lived intangible assets annually and when impairment indicators exist by comparing the asset’s net book value to its fair value. If the asset’s fair value is less than its net book value, then further tests are performed to determine the asset’s implied fair value. The implied fair value is then compared with the asset’s net book value to determine the level of impairment.

We believe 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 volumes for products that involve new technologies and applications where customer acceptance of new products or timely introduction of new technologies into their networks are uncertain. The recognition of an impairment could be material to our financial statements.

Warranty Costs

We provide warranties for all of our products, with 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 to six years. We record warranty expense in cost of revenue on the consolidated statement of operations. We estimate 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 customers’ sites, among others. Consequently, the changes in warranty reserves could be material to our financial statements.

Restructuring Reserves – Leases

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 the reserve by an estimate of potential sublease income. We examine real estate market conditions in each location where we have a vacated facility.

We believe the 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 tax returns. When we calculate income tax expense and the related tax liabilities and assets for the 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 the 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 2008, we reached a settlement with the IRS in connection with their examination of all tax years prior to 2006. During the fourth quarter of 2009, the IRS began its audit of our 2007 and 2008 tax periods. Of our other major jurisdictions, we are currently under audit by the State of California for the 2004 through 2006 tax periods. Although we have accrued tax and related interest for potential adjustments to tax liabilities for prior years, we cannot provide assurance that a material adjustment to our financial statements, either positive or negative, will not result when the audits are concluded.

Valuation Allowance for Deferred Tax Assets

Deferred tax assets arise when we recognize charges or expenses in our financial statements that will not be allowed as income tax deductions until future periods. The term deferred tax asset also includes unused tax net operating losses and tax credits that we are allowed to carry forward to future years. Accounting rules permit us to carry deferred tax assets on the balance sheet at full value as long as it is “more likely than not” the deductions, losses, or credits will be used in the future. A valuation allowance must be recorded against a deferred tax asset if this test cannot be met. The accounting rules state that a company with a recent history of losses would have a difficult, perhaps impossible, time supporting a position that utilization of its deferred tax assets was more likely than not to occur.

We believe that the cumulative loss incurred by the Company in the 2007 through 2009 period, represents sufficient negative evidence to determine that the establishment of a valuation allowance against domestic

	TELLABS ANNUAL REPORT 2009
27

deferred tax assets is appropriate. Until an appropriate level of profitability is attained, we expect to maintain a valuation allowance on net deferred tax assets related to future U.S. and certain non-U.S. tax benefits.

Equity-Based Compensation

We account for equity-based compensation in accordance with the Financial Accounting Standards Board (FASB) authoritative guidance related to accounting for share-based payments. Under the fair value recognition provisions of this guidance, we measure equity-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 equity-based awards at the grant date requires several assumptions, and a change in these assumptions could materially impact equity-based compensation expense and 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, we estimate the amount of equity-based awards that are expected to be forfeited.

Strategy and Outlook

Tellabs operates in a challenging, exciting industry.

In the wireline sector, telecom service providers face significant competitive threats to their most profitable residential services from cable TV providers in North America and globally from the substitution of mobile services. In an effort to counter line loss and declining voice revenues, in recent years carriers have undertaken ambitious and expensive programs to transform their wireline access 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. After several years of aggressive spending, carriers in North America have signalled that they are moderating investment in their wireline access networks.

On the business side, wireline carriers and cable TV service providers have also introduced next-generation data technology to deliver new business-oriented voice, video and data/Internet services to their corporate customers.

Over the past few years, wireless carriers, also under competitive pressure, have aggressively invested in network infrastructure to deliver new third-generation (3G) data-oriented services. As consumers embrace smart-phones and new bandwidth-hungry mobile Internet applications, Tier 1 carriers need to expand the capacity of these networks to keep up with increasing mobile Internet traffic. Looking ahead, carriers are evaluating fourth-generation (4G) network equipment for potential deployment in 2011 and beyond.

Many carriers in North America 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 overall capital spending by 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 increased pricing pressure for Tellabs and some of its direct competitors.

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

We are presented with a challenging economic environment amidst the continuing global financial recession. Expectations for capital spending levels by our customers in 2010 vary , and generally speaking, we expect overall global capital spending to increase slightly this year, as carriers continue to shift investment from delivering residential wireline services to expanding mobile network capacity.

We cannot predict how macroeconomic issues will continue to affect capital spending by our customers in 2010. While the economic environment may be challenging, we believe we are invested in the right solutions for growing markets.

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 the fiber-access and ROADM technologies needed for the delivery of combined voice, data and video services to residential customers. In addition, our ROADM products address the need to deliver next-generation voice, data and video services to corporate users. Our data products address the changing nature of wireless services and enterprise computing on a global basis. In late 2009, we expanded our data portfolio through the acquisition of WiChorus, which gives us a leadership position in the growing market for Internet-based mobile core networks.

The Company operates using a three-part strategy. Under this strategy we are:

• Focusing our development activities on the fastest growing parts of our product and service portfolio: our Carrier Ethernet and Packet Core products, our Packet Optical products and our Network Design/Consulting Services offerings.

• Innovating in growth markets where we have incumbent positions and our fastest growing products are gaining traction: Mobile, Optical and Business.

• Pursuing flawless execution as we work to improve quality, reduce costs and meet commitments.

We expect that executing this strategy of directing resources to create innovative products and services that help customers succeed will further improve our financial performance.

28

Since 2005, we have actively returned capital to stockholders through stock buybacks. In 2010, we announced that the Company would pay its first cash dividend to stockholders. Given new product traction and our ability to generate positive cash flow, we have resources in place to fund both organic and inorganic growth, buy back shares and provide a dividend to stockholders.

Forward-Looking Statements

Except for historical information, the matters discussed or incorporated by reference into this report, including the Management’s Discussion and Analysis, 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 current and available information at the time the document was prepared. These forward-looking statements include, but are not limited to, statements regarding future events, plans, goals, objectives and expectations. The words “anticipate,” “believe,” “estimate,” “target,” “expect,” “predict,” “plan,” “possible,” “project,” “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: overall negative economic conditions generally and disruptions in credit and capital markets, including specific impacts of these conditions on the telecommunications industry; financial condition of telecommunications service providers, equipment vendors and contract manufacturers, including the impact of any bankruptcies; the impact of customer and vendor consolidation; integration of a new business; successful expansion into adjacent markets with new and existing products and platforms; 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 and the ability to realize anticipated savings under such cost-reduction initiatives; 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 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 are advised not to rely on these forward-looking statements when making investment decisions. 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 risk factors, financial statements and related notes and Management’s Discussion and Analysis in this 2009 Annual Report.

	TELLABS ANNUAL REPORT 2009
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 January 1, 2010, 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 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, our management concluded that internal control over financial reporting was effective as of January 1, 2010. The effectiveness of internal control over financial reporting as of January 1, 2010, has been audited by Ernst & Young, LLP, an independent registered certified public accounting firm, as stated in their attestation report, which is included herein.

Robert W. Pullen

President and

Chief Executive Officer

Timothy J. Wiggins

Executive Vice President and

Chief Financial Officer

March 1, 2010

Report of Independent Registered Public Accounting Firm

To 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 January 1, 2010 and January 2, 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended January 1, 2010. These consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at January 1, 2010, and January 2, 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 1, 2010, in conformity with U.S. generally accepted accounting principles.

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 January 1, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2010, expressed an unqualified opinion thereon.

Ernst & Young LLP

Chicago, Illinois

March 1, 2010

30

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

To 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 January 1, 2010, 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 effectiveness of 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 January 1, 2010, 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 January 1, 2010, and January 2, 2009, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended January 1, 2010, and our report dated March 1, 2010, expressed an unqualified opinion thereon.

Ernst & Young LLP

Chicago, Illinois

March 1, 2010

	TELLABS ANNUAL REPORT 2009
31

Consolidated Statements of Operations

In millions, except per-share data	Year Ended 1/1/10		Year Ended 1/2/09			Year Ended 12/28/07
Revenue
Products	$	1,295.4	$	1,500.0		$	1,691.3
Services		230.3		229.0			222.1
Total revenue		1,525.7		1,729.0			1,913.4
Cost of Revenue
Products		709.2		912.0			1,085.9
Services		150.7		156.9			153.2
Total cost of revenue		859.9		1,068.9			1,239.1
Gross Profit		665.8		660.1			674.3
Operating Expenses
Research and development		268.7		305.2			343.1
Sales and marketing		165.9		170.0			176.6
General and administrative		101.4		101.8			99.1
Intangible asset amortization		24.6		23.9			22.5
Restructuring and other charges		11.7		40.9			5.8
Goodwill impairment		—		988.3			—
Total operating expenses		572.3		1,630.1			647.1
Operating Earnings (Loss)		93.5		(970.0	)		27.2
Other Income
Interest income, net		19.3		34.8			50.9
Other income (expense), net		0.4		(17.3	)		(7.9	)
Total other income		19.7		17.5			43.0
Earnings (Loss) Before Income Tax		113.2		(952.5	)		70.2
Income tax benefit (expense)		0.4		22.4			(5.2	)
Net Earnings (Loss)	$	113.6	$	(930.1	)	$	65.0
Net Earnings (Loss) Per Share
Basic	$	0.29	$	(2.32	)	$	0.15
Diluted	$	0.29	$	(2.32	)	$	0.15
Weighted Average Shares Outstanding
Basic		392.5		400.1			436.6
Diluted		394.2		400.1			441.1

The accompanying notes are an integral part of these statements.

32

Consolidated Balance Sheets

In millions, except share data	1/1/10			1/2/09
ASSETS
Current Assets
Cash and cash equivalents	$	154.0		$	376.1
Investments in marketable securities		950.8			776.0
Total cash, cash equivalents and marketable securities		1,104.8			1,152.1
Other marketable securities		252.8			179.1
Accounts receivable, net of allowances of $1.4 and $1.4		334.2			332.7
Inventories
Raw materials		24.0			34.2
Work in process		3.8			13.9
Finished goods		99.9			128.8
Total inventories		127.7			176.9
Income taxes		24.2			38.7
Miscellaneous receivables and other current assets		54.4			56.3
Total Current Assets		1,898.1			1,935.8
Property, Plant and Equipment
Land		21.2			21.1
Buildings and improvements		199.6			201.6
Equipment		415.9			420.0
Total property, plant and equipment		636.7			642.7
Accumulated depreciation		(366.1	)		(364.4	)
Property, plant and equipment, net		270.6			278.3
Goodwill		207.2			122.4
Intangible Assets, Net of Amortization		123.2			44.2
Other Assets		123.7			130.5
Total Assets	$	2,622.8		$	2,511.2
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	71.5		$	84.1
Accrued compensation		82.0			60.7
Restructuring and other charges		9.8			17.7
Income taxes		80.8			92.0
Loan related to other marketable securities		252.8			179.1
Deferred revenue		31.3			34.6
Other accrued liabilities		81.2			91.4
Total Current Liabilities		609.4			559.6
Long-Term Restructuring Liabilities		7.2			13.3
Income Taxes		41.9			43.7
Other Long-Term Liabilities		49.4			48.1
Stockholders’ Equity
Preferred stock: authorized 5,000,000 shares of $0.01 par value; no shares issued and outstanding		—			—
Common stock: authorized 1,000,000,000 shares of $0.01 par value; 497,734,034 and 495,757,314 shares issued		5.0			5.0
Additional paid-in capital		1,511.2			1,485.9
Treasury stock, at cost: 113,457,637 and 100,088,341 shares		(1,037.9	)		(952.4	)
Retained earnings		1,296.8			1,183.2
Accumulated other comprehensive income		139.8			124.8
Total Stockholders’ Equity		1,914.9			1,846.5
Total Liabilities and Stockholders’ Equity	$	2,622.8		$	2,511.2

The accompanying notes are an integral part of these statements.

	TELLABS ANNUAL REPORT 2009
33

Consolidated Statements of Stockholders’ Equity

In millions	Shares		Common Stock		Additional Paid-In Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
Balance, December 29, 2006	439.1		$	4.9	$	1,395.3		$	(598.7	)	$	2,042.0		$	94.8		$	2,938.3
Net earnings												65.0						65.0
Reclassification adjustment for net gain included in net earnings, net of tax of $1.7	—			—		—			—			—			(2.5	)		(2.5	)
Unrealized net gain on available-for-sale securities, net of tax of $(1.8)	—			—		—			—			—			3.0			3.0
Unrealized net loss on cash flow hedges, net of tax of $0.2	—			—		—			—			—			(0.2	)		(0.2	)
Foreign currency translation adjustment	—			—		—			—			—			34.9			34.9
Unrealized net gain on retiree medical plan, net of tax of $(1.3)	—			—		—			—			—			2.3			2.3
Comprehensive Income																		102.5
Stock issued for employee stock programs	4.9			—		—			—			—			—			—
Restricted stock award activity	—			—		10.2			—			—			—			10.2
Stock option activity	—			—		50.4			—			—			—			50.4
Stock purchase plan activity	—			—		3.9			—			—			—			3.9
Performance stock units	—			—		(0.3	)		—			—			—			(0.3	)
Purchase of treasury stock	(25.3	)		—		—			(198.0	)		—			—			(198.0	)
Provision of FIN 48, adjustment to beginning retained earnings	—			—		—			—			6.3			—			6.3
Balance, December 28, 2007	418.7		$	4.9	$	1,459.5		$	(796.7	)	$	2,113.3		$	132.3		$	2,913.3
Net loss												(930.1	)					(930.1	)
Reclassification adjustment for net gain included in net earnings, net of tax of $1.5	—			—		—			—			—			(2.2	)		(2.2	)
Unrealized net gain on available-for-sale securities, net of tax of $(2.5)	—			—		—			—			—			2.9			2.9
Unrealized net gain on cash flow hedges, net of tax of $(2.0)	—			—		—			—			—			2.9			2.9
Unrealized net gain on net investment hedges, net of tax of $0.0	—			—		—			—			—			10.3			10.3
Foreign currency translation adjustment	—			—		—			—			—			(23.0	)		(23.0	)
Unrecognized prior service cost, net of tax of $0.0	—			—		—			—			—			0.2			0.2
Unrealized net gain on retiree medical plan, net of tax of $0.0	—			—		—			—			—			1.4			1.4
Comprehensive Loss																		(937.6	)
Stock issued for employee stock programs	1.9			0.1		—			—			—			—			0.1
Restricted stock award activity	—			—		15.3			—			—			—			15.3
Stock option activity	—			—		11.0			—			—			—			11.0
Performance stock units	—			—		0.1			—			—			—			0.1
Purchase of treasury stock	(24.9	)		—		—			(155.7	)		—			—			(155.7	)
Balance, January 2, 2009	395.7		$	5.0	$	1,485.9		$	(952.4	)	$	1,183.2		$	124.8		$	1,846.5
Net earnings												113.6						113.6
Reclassification adjustment for net gain included in net earnings, net of tax of $1.5	—			—		—			—			—			(3.8	)		(3.8	)
Unrealized net gain on available-for-sale securities, net of tax of $(1.1)	—			—		—			—			—			4.2			4.2
Unrealized net loss on cash flow hedges, net of tax of $1.1	—			—		—			—			—			(2.9	)		(2.9	)
Unrealized net gain on net investment hedges	—			—		—			—			—			2.9			2.9
Foreign currency translation adjustment	—			—		—			—			—			14.5			14.5
Unrecognized prior service cost, net of tax of $0.0	—			—		—			—			—			0.1			0.1
Comprehensive Income																		128.6
Stock issued for employee stock programs	2.0			—		—			—			—			—			—
Restricted stock award activity	—			—		12.5			—			—			—			12.5
Stock option activity	—			—		8.1			—			—			—			8.1
Performance stock units	—			—		2.7			—			—			—			2.7
Fair value of stock options exchanged in acquisition	—			—		2.0			—			—			—			2.0
Purchase of treasury stock	(13.4	)		—		—			(85.5	)		—			—			(85.5	)
Balance, January 1, 2010	384.3		$	5.0	$	1,511.2		$	(1,037.9	)	$	1,296.8		$	139.8		$	1,914.9

The accompanying notes are an integral part of these statements.

34

Consolidated Statements of Cash Flows

In millions	Year Ended 1/1/10			Year Ended 1/2/09			Year Ended 12/28/07
Operating Activities
Net earnings (loss)	$	113.6		$	(930.1	)	$	65.0
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization		75.3			84.5			90.7
Loss on disposal of property, plant and equipment		0.8			1.7			2.0
Goodwill impairment		—			988.3			—
Equity-based compensation		20.7			26.4			32.1
Deferred income taxes		(9.2	)		(34.6	)		(2.7	)
Excess tax benefits from equity-based compensation		(0.3	)		(0.1	)		(2.1	)
Restructuring and other charges		11.7			40.9			5.8
Other-than-temporary impairment charges on investments		0.4			10.7			5.7
Net changes in assets and liabilities, net of effects from acquisition:
Accounts receivable		8.8			16.2			68.4
Inventories		56.4			(15.0	)		3.7
Miscellaneous receivables and other current assets		9.4			(18.5	)		2.5
Other assets		0.1			13.4			14.9
Accounts payable		(21.4	)		1.3			(40.0	)
Restructuring and other charges		(21.1	)		(25.1	)		(10.7	)
Deferred revenue		(3.7	)		4.6			(25.4	)
Other accrued liabilities		2.8			(13.0	)		(32.2	)
Income taxes		(10.9	)		(11.5	)		(29.3	)
Other long-term liabilities		1.0			(9.3	)		(15.0	)
Net Cash Provided by Operating Activities		234.4			130.8			133.4
Investing Activities
Capital expenditures		(45.9	)		(50.1	)		(57.7	)
Proceeds on disposals of property, plant and equipment		1.0			0.3			0.1
Payments for purchases of investments		(1,112.2	)		(1,661.7	)		(1,240.4	)
Proceeds from sales and maturities of investments		941.5			1,896.9			1,380.9
Payments for acquisition, net of cash acquired		(164.7	)		—			—
Net Cash (Used for) Provided by Investing Activities		(380.3	)		185.4			82.9
Financing Activities
Proceeds from issuance of common stock under stock plans		1.7			0.8			31.4
Repurchase of common stock		(85.5	)		(155.7	)		(198.0	)
Excess tax benefits from equity-based compensation		0.3			0.1			2.1
Net Cash Used for Financing Activities		(83.5	)		(154.8	)		(164.5	)
Effect of Exchange Rate Changes on Cash		7.3			1.7			7.6
Net (Decrease) Increase in Cash and Cash Equivalents		(222.1	)		163.1			59.4
Cash and Cash Equivalents at Beginning of Year		376.1			213.0			153.6
Cash and Cash Equivalents at End of Year	$	154.0		$	376.1		$	213.0
Other Information
Interest paid	$	1.5		$	2.0		$	3.0
Income taxes paid	$	12.7		$	35.7		$	35.0

The accompanying notes are an integral part of these statements.

	TELLABS ANNUAL REPORT 2009
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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 businesses and consumers. We also provide deployment and network design/consulting services that support our products.

Principles of Consolidation

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

Reclassifications

Certain reclassifications have been made to prior year balances in order to conform to the current year’s presentation.

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 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 and derivatives based on observable inputs such as quoted prices in active markets, or other than quoted prices in active markets, that are observable either directly or indirectly. See discussion in Notes 7 and 8 regarding investments and derivatives, respectively.

Accounts Receivable Allowances

We base the reserve for allowances on an assessment of aged receivables and the collectibility of customers’ 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 the accounts receivable aging.

Inventories and Suppliers

We determine inventory cost using the first-in, first-out method. We value 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 outsource the manufacturing of products to third-party suppliers. 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 could 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 or fair value if acquired in a business combination, less accumulated depreciation and amortization. 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.

Equity-Based Compensation

We recognize compensation expense for employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards over the requisite service period for the respective award.

Income Taxes

Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected in the consolidated financial statements. Deferred tax liabilities and assets are determined based on the differences between the book and tax bases of particular assets and liabilities as well as tax credit and operating loss carryforwards using tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to offset deferred tax assets if, based upon 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

Goodwill impairment is reviewed annually and when impairment indicators exist. Goodwill impairment reviews are conducted in two steps, the first of which is by comparing the segment’s net book value to fair value. The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and

36

assumptions. We calculate the fair value of the segment using a blended analysis of the discounted cash flow method and the market approach of valuation. The discounted cash flow method requires us to use estimates and judgments about the future cash flows of the segment. The assumptions used in our cash flow forecasts are consistent with plans and estimates we use to manage the underlying segment. The market approach requires us to make judgments to determine comparable publicly-traded companies. See the discussion in Note 5 regarding goodwill.

Intangible Assets

Intangible assets with a finite life are made up primarily of purchased technology and customer relationships from acquisitions. These assets are amortized over their estimated useful lives and reviewed for impairment when indicators of impairment exist, such as loss of customer relationships, customer nonacceptance of products and underlying technology, and reduced product margins indicating declining operating performance or cash flows. The estimated useful lives of these assets are evaluated to determine if a change in an estimate is required. The remaining carrying value of the asset is amortized prospectively over the remaining adjusted useful life of the asset. The review for potential impairment and change in estimated useful lives requires us to use estimates and judgments of future cash flows, consistent with plans and estimates we use to manage related product cash flows.

Intangible assets with an indefinite life are made up of in-process research and development (IPR&D). IPR&D is reviewed annually for impairment or when indicators of impairment exist by comparing the asset’s book value with its fair value. The process of evaluating the potential impairment of IPR&D is subjective because it requires the use of estimates and assumptions related to our cash flow projections and market acceptance.

Revenue Recognition

Determining the proper revenue recognition in our financial statements requires us to make judgments about the application of the accounting rules based on the facts and circumstances of each customer arrangement.

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.

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 credit worthiness of the customer as determined by credit checks and the customer’s payment history to the Company. If collectibility is not considered probable, revenues is not recognized until the fee is collected.

The majority of 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 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 products meet the specifications, we recognize revenue upon shipment or delivery.

Some customer agreements grant the right to return or exchange product based on subjective criteria. We accrue for returns 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 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 network design/consulting services. Deployment services revenue results from installation of products at customer sites. Installation services, which generally occur over a short time period, are not services required for the functionality of products, as customers may purchase installation services from us, install 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 network design/consulting services revenue upon completion.

Some customer arrangements include multiple deliverables, such as product sales that include services to be performed after delivery of the product. 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

	TELLABS ANNUAL REPORT 2009
37

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 or the arrangement includes non-software elements for which software is essential to the functionality of the element, all elements of the arrangement are accounted for using software revenue recognition guidance.

Many 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. The cost of shipping products to customers is recorded as cost of revenue.

Accounting guidance allows revenue to be presented either gross or net of sales-related taxes. We record revenue net of any sales-related taxes that are billed to customers. We believe this approach results in financial statements that are more easily understood by investors.

Net Earnings Per Share

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

Foreign Currency Translation

We generally measure the financial statements of 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 income (expense), net.

Subsequent Events

Subsequent events that occurred after January 1, 2010, and before these financial statements were filed with the Securities and Exchange Commission on March 1, 2010, were considered in the preparation of these financial statements. Subsequent events occurred on January 25, 2010; see Note 19.

2. New Accounting Pronouncements

In October 2009, the FASB issued new authoritative guidance on accounting for revenue arrangements with multiple deliverables. This new standard provides principle and application guidance on whether multiple deliverables exist and how the arrangement should be separated. It also requires an entity to allocate revenue using estimated selling prices of deliverables in the absence of vendor-specific objective evidence or third party evidence of selling price to all deliverables using the relative selling price method. This standard is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, on a prospective basis, with earlier application permitted. We will early adopt this standard in fiscal year 2010 for all revenue arrangements entered into or materially modified after January 1, 2010. The new standard will not have an impact on our financial statements upon adoption since it impacts arrangements entered into after the start of fiscal year 2010.

In October 2009, the FASB issued new authoritative guidance on accounting for certain revenue arrangements that include software elements. This standard clarifies that tangible products containing software components and non-software components that function together to deliver the product’s essential functionality are not within the scope of software revenue recognition guidance. This standard is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, on a prospective basis, with earlier application permitted. We will early adopt this standard in fiscal year 2010 for all revenue arrangements entered into or materially modified after January 1, 2010. The new standard will not have an impact on our financial

38

statements upon adoption since it impacts arrangements entered into after the start of fiscal year 2010.

In April 2009, the FASB issued authoritative guidance that principally requires publicly traded companies to provide disclosures about the fair value of financial instruments on a quarterly basis (rather than just annually). The required disclosures can be found in Notes 6 and 7 regarding fair value measurements and investments disclosures.

On January 3, 2009, we adopted the FASB’s authoritative accounting guidance regarding disclosure requirements for derivative instruments and hedging activities. This new standard is designed to improve the transparency of an entity’s financial reporting by requiring enhanced disclosures about an entity’s derivative and hedging activities. See the discussion in Note 8 regarding derivative financial instruments disclosures.

On January 3, 2009, we adopted the FASB’s revised authoritative guidance for business combinations. This revised standard establishes principles and requirements for an acquirer that are designed to improve the relevance, representational faithfulness and comparability of information provided by a reporting entity in its financial reports about business combinations and their effects. Upon adoption, the revised standard did not have an impact on our financial statements.

3. Restructuring and Other Charges

Since 2007, we have consistently reduced expenses to align costs with market conditions and lower revenue.

On July 6, 2009, management initiated a restructuring plan as we align costs with customer spending and current market conditions. The cost and cash payments under this plan are expected to be between $5 million and $6 million primarily for workforce reductions of approximately 150 employees. We recorded $5.4 million for severance accruals relating to this plan in 2009. Restructuring actions under this plan are expected to be completed by the end of the second quarter of 2010.

On February 5, 2009, management initiated a restructuring plan as we align costs with customer spending and current market conditions. The cost and cash payments under this plan were $1.7 million for workforce reductions of 49 employees. We recorded $1.7 million for severance related activities relating to this plan in 2009. Restructuring actions under this plan were completed in the third quarter of 2009.

During the fourth quarter of 2008, management initiated a plan that resizes Tellabs business to reflect market conditions. Restructuring actions under this plan include reducing future investment in access products and freeing up resources to focus on data and transport products. The pretax restructuring charges for this plan were $22.2 million, which includes $9.9 million in severance charges for workforce reductions and $12.3 million for facility- and asset-related charges. In 2009, we recorded $4.9 million for this plan, of which $5.3 million was for facility- and asset-related charges and a reduction of $0.4 million was for severance. Cash payments under this plan were $15.5 million. Restructuring actions under this plan were completed in the third quarter of 2009.

During the second quarter of 2008, management initiated a plan to consolidate several facilities as a result of the discontinuation of the Tellabs^® 8865 optical line terminal. The facility consolidations were also impacted by the headcount reductions that were announced in September 2007 and January 2008. We incurred $12.4 million for this plan, of which $12.3 million was for facility reductions and fixed asset write-downs and $0.1 million was for other obligations. During 2009, facility lease assumptions changed, resulting in a net expense of $0.1 million. Cash payments under this plan are expected to be $7 million. Actions under this plan were completed in the third quarter of 2008.

During the first quarter of 2008, management committed to a plan to improve gross profit margins and reduce operating expenses. The pretax restructuring charges for this plan were $11.5 million, which includes $6.8 million in severance charges for workforce reductions and $4.7 million in facility- and asset-related charges. We incurred a credit of $0.1 million for severance in 2009. Total cash payments under this plan were $10 million, of which $7 million were severance related and $3 million facility related. Actions under this plan were completed in the first quarter of 2009.

During the third quarter of 2007, management initiated a plan to better align resources with strategic business objectives. The primary activity was a reduction of headcount in both the Broadband and Transport segments. 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 completed the objectives of this plan in the fourth quarter of 2007.

A reduction of $0.3 million to prior restructuring plans in 2009 consists of a credit for facility-related charges. A reduction of $0.3 million to prior restructuring plans in 2008 primarily consists of a reduction in severance. 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. The changes in 2009, 2008 and 2007 are due to changes in estimates to previous restructuring plans.

The accrual for restructuring plans as of January 1, 2010, was $17.0 million. The 2009 restructuring plans balance of $3.6 million consists of cash severance that we expect to pay through the fourth quarter of 2010. The 2008 restructuring plans balance of $7.8 million consists

	TELLABS ANNUAL REPORT 2009
39

of $0.3 million in cash severance that we expect to pay through the second quarter of 2010 and $7.5 million in net lease obligations that expire through 2015. The $5.6 million balance for previous restructuring plans relates to net lease obligations that expire through 2011.

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

In millions	2009		2008		2007
Severance and other termination benefits	$	6.6	$	16.7	$	5.4
Facility and other exit costs		5.1		23.6		0. 4
Other obligations		—		0.6		—
Total restructuring and other charges	$	11.7	$	40.9	$	5.8

The following table summarizes our restructuring and other charges activity by segment during 2009 and 2008 and the status of the reserves at year end:

In millions	Balance at 1/2/09		Restructuring Expense			Cash Payments			Other Activities1			Balance at 1/1/10
2009 Restructuring Plans
Broadband	$	—	$	2.3		$	(1.2	)	$	—		$	1.1
Transport		—		2.6			(1.6	)		—			1.0
Services		—		2.2			(0.7	)		—			1.5
Subtotal 2009 Restructuring Plans		—		7.1			(3.5	)		—			3.6
2008 Restructuring Plans
Broadband		15.9		3.8			(8.4	)		(3.6	)		7.7
Transport		1.5		1.0			(1.6	)		(0.8	)		0.1
Services		1.1		0.1			(1.2	)		—			—
Subtotal 2008 Restructuring Plans		18.5		4.9			(11.2	)		(4.4	)		7.8
Previous Restructuring Plans
Broadband		2.3		(0.4	)		(1.7	)		(0.2	)		—
Transport		10.2		0.1			(4.7	)		—			5.6
Subtotal Previous Restructuring Plans		12.5		(0.3	)		(6.4	)		(0.2	)		5.6
Total All Restructuring Plans	$	31.0	$	11.7		$	(21.1	)	$	(4.6	)	$	17.0
In millions	Balance at 12/28/07		Restructuring Expense			Cash Payments			Other Activities1			Balance at 1/2/09
2008 Restructuring Plans
Broadband	$	—	$	31.9		$	(8.1	)	$	(7.9	)	$	15.9
Transport		—		5.2			(2.1	)		(1.6	)		1.5
Services		—		4.1			(2.5	)		(0.5	)		1.1
Subtotal 2008 Restructuring Plans		—		41.2			(12.7	)		(10.0	)		18.5
2007 Restructuring Plan
Broadband		3.6		(0.4	)		(3.1	)		—			0.1
Transport		0.4		—			(0.4	)		—			—
Subtotal 2007 Restructuring Plans		4.0		(0.4	)		(3.5	)		—			0.1
Previous Restructuring Plans
Broadband		5.5		(0.1	)		(3.2	)		—			2.2
Transport		15.7		0.2			(5.7	)		—			10.2
Subtotal Previous Restructuring Plans		21.2		0.1			(8.9	)		—			12.4
Total All Restructuring Plans	$	25.2	$	40.9		$	(25.1	)	$	(10.0	)	$	31.0

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

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4. Business Combinations

On December 1, 2009, we acquired WiChorus, a privately held developer of mobile packet core products. We paid $180.0 million in cash for 100% of WiChorus’ capital stock and vested employee stock options. Taking into account WiChorus’ $15.3 million cash balance, the net cash price was $164.7 million. The acquisition enables Tellabs, a leader in mobile backhaul networks, to expand into mobile packet core networks, deliver new applications and provide significant savings for mobile carriers. The acquisition brings a new breakthrough product to Tellabs that is purpose-built for 4G mobile networks. By combining operations and using our resources, the innovative Tellabs SmartCore^TM technology developed by WiChorus can be more quickly leveraged for broader market applications. Significant value is expected to be created through the sales of current and future SmartCore^TM products through our extensive direct and indirect sales channels.

Goodwill from this acquisition was $84.7 million, which reflects current market pricing and synergies created by combining Tellabs resources with the innovative SmartCore^TM technology. All goodwill was allocated to the Broadband segment and is not deductible for income tax purposes.

Intangible assets from this acquisition with an indefinite useful life, which consist of IPR&D, were $20.0 million. No amortization was recorded for indefinite life IPR&D costs in 2009. The remaining intangible assets of $83.6 million will be amortized on a straight-line basis over a weighted average amortization period of approximately 5 years.

Components of the purchase consideration follow:

In millions
Cash paid to WiChorus stockholders	$	180.0
Fair value of unvested stock options exchanged		2.0
Purchase consideration	$	182.0

We incurred $1.3 million in acquisition costs included in Research and development expenses in the Statement of Operations.

We issued 628,517 Tellabs options, with a weighted average remaining vesting period of 1.5 years in exchange for unvested WiChorus employee stock options. The options had a total fair value, estimated using the Black-Scholes option pricing model, of $3.3 million, $2.0 million of which was allocated to the acquisition and $1.3 million allocated to post-acquisition employee service. Compensation expense for these stock options was $0.1 million in 2009.

The allocation of the purchase consideration follows:

In millions
Cash, cash equivalents and marketable securities	$	15.3
Accounts receivable		2.0
Other current assets		1.1
Property, plant and equipment		1.4
Intangible assets		83.6
Purchased in-process research and development costs		20.0
Goodwill		84.7
Deferred tax assets		14.1
Total assets		222.2
Other current liabilities		1.7
Deferred tax liabilities		38.5
Total liabilities		40.2
Purchase consideration	$	182.0

We accounted for this acquisition under the purchase method of accounting. We have included the operating results of the business in the accompanying results of operations from the date of acquisition.

5. Goodwill and Intangible Assets

Goodwill

We report operating results for three segments: Broadband, Transport and Services. Goodwill associated with the WiChorus acquisition in the fourth quarter of 2009 is allocated to the Broadband segment.

We test each operating segment for possible goodwill impairment by comparing each segment’s net book value with fair value. We review goodwill annually for impairment, unless potential interim indicators exist that could result in impairment. We calculate the fair value of each segment by using a blended analysis of the present value of future discounted cash flows and the market approach of valuation. We believe the blended approach, which weighs both valuations equally, is the best method for determining fair value because this approach compensates for inherent risks associated with either model on a stand-alone basis. The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions. The discounted cash flow method requires us to use estimates and judgments about the future cash flows of the operating segments. Although we base 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 market approach is based on a comparison of the Company to comparable publicly traded firms in similar lines of business. The estimates and judgments used to determine comparable companies include such factors as size, growth, profitability, risk and return on investment.

	TELLABS ANNUAL REPORT 2009
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During the fourth quarter of 2009 and 2008, we tested the Services segment for possible goodwill impairment as part of our annual review. As the Services segment’s fair value was greater than its net book value and no impairment indicators existed, further impairment tests were not deemed necessary and no impairment loss was recorded.

In the third quarter of 2008, we performed an interim review on all three operating segments since market capitalization was less than book value for a sustained period and we continued to face challenging market conditions. As a result of our interim review, we recorded a goodwill impairment charge of $988.3 million, of which $594.2 million related to the Broadband segment and $394.1 million related to the Transport segment, completely eliminating their goodwill balances. The Services segment did not incur an impairment of its goodwill since the fair value of the segment was determined to be greater than the carrying value.

In 2009, we recorded $84.7 million of goodwill associated with the acquisition of WiChorus. In 2008, we reduced goodwill by $0.2 million due to state tax audit settlements of a subsidiary’s pre-acquisition year.

The allocation of goodwill and goodwill activity by segment follows:

	1/1/10								1/2/09
In millions	Broadband		Transport		Services		Total		Broadband			Transport			Services			Total
Beginning balance	$	—	$	—	$	122.4	$	122.4	$	593.9		$	394.0		$	122.6		$	1,110.5
Additions (reductions)		84 .7		—		—		84.7		(0.1	)		(0.1	)		—			(0.2	)
Currency translation adjustments		—		—		0.1		0.1		0.4			0.2			(0 .2	)		0.4
Impairment		—		—		—		—		(594.2	)		(394.1	)		—			(988.3	)
Ending balance	$	84.7	$	—	$	122.5	$	207.2	$	—		$	—		$	122.4		$	122.4

Intangible Assets

We amortize intangible assets with finite lives on a straight-line basis over their estimated useful lives. Trade names/trademarks are amortized over 4 to 12 months; customer relationships/backlog over 6 months to 9 years; non-compete agreements from 1.5 to 3 years; developed technology over 2 to 7.5 years; and leasehold estates over 4 to 10 years.

During 2009, we acquired intangible assets related to the purchase of WiChorus. Additions included $66.0 million related to developed technology amortized up to 7.5 years; $4.3 million of customer relationships amortized over 8 years; $0.2 million of trade names amortized over 1 year; $13.1 million for non-compete agreements amortized over 1.5 to 3 years and $20.0 million related to IPR&D. We expect the IPR&D to be technologically feasible beginning in the fourth quarter of 2010 with an estimated useful life of approximately 5 years.

Intangible assets with finite lives are reviewed for impairment when events or circumstances indicate their carrying amount may not be recoverable. No impairment was recorded in 2009. In 2008, we recorded a charge of $0.6 million for impaired developed technology related to the Tellabs^® 1100 access platform due to reduced demand. This impairment adjustment is included in Intangible asset amortization. Total impairment for these assets relates to the Broadband segment. No impairment was recorded in 2007.

Intangible assets with indefinite lives, which include IPR&D, are reviewed for impairment annually unless potential interim indicators exist that could result in impairment.

We review the estimated useful lives of intangible assets to determine if events or circumstances warrant a change in the remaining useful life of an asset. During the fourth quarter of 2008, the estimated useful lives of some developed technology and customer relationships changed due to revised sales projections related to access products and customers, thus increasing accumulated amortization by approximately $1.2 million.

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

In millions	1/1/10									1/2/09
	Gross Assets			Accumulated Amortization			Net			Gross Assets			Accumulated Amortization			Net
Developed technology	$	215.2		$	(144.1	)	$	71.1		$	149.2		$	(123.8	)	$	25.4
Customer relationships/backlog		38.5			(17.6	)		20.9			34.2			(13.5	)		20.7
Trade names/trademarks		2.2			(2.0	)		0.2			2.0			(2.0	)		—
Leasehold estates1		(2.9	)		1.3			(1.6	)		(2.9	)		1.0			(1.9	)
Non-compete arrangements		13.1			(0.5	)		12.6			—			—			—
IPR&D		20.0			—			20.0			—			—			—
Total	$	286.1		$	(162.9	)	$	123.2		$	182.5		$	(138.3	)	$	44.2

¹ Leasehold estates as of January 2, 2009, reflects a net reclass of $1.1 million to Restructuring and other charges due to the consolidation of a facility.

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

In millions
2010	$	27.9
2011	$	24.0
2012	$	21.5
2013	$	19.2
2014	$	14.6

6. Fair Value Measurements

Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, marketable securities 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 and derivatives based on observable inputs such as quoted prices in active markets, or other than quoted prices in active markets, that are observable either directly or indirectly.

Fair value is measured as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

• Level 1 – Observable inputs, such as quoted prices in active markets;

• Level 2 – Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

• Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. In determining fair value for recurring financial assets and liabilities, we separate our financial instruments into three categories: marketable securities, other marketable securities and loan related to other marketable securities, and derivative financial instruments. These assets and liabilities are all valued based on the market approach that uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Marketable Securities

We use a third-party provider to determine fair values of marketable securities. The third-party provider receives market prices for each marketable security from a variety of industry standard data providers, security master files from large financial institutions and other third-party sources with reasonable levels of price transparency. The third-party provider uses these multiple prices as inputs into a pricing model to determine a weighted average price for each security. We classify U.S. Treasury bills and bonds as Level 1 based upon quoted prices in active markets. All other marketable securities are classified as Level 2 based upon the other than quoted prices with observable market data. The type of instruments valued based upon the observable market data include U.S. government sponsored enterprise (agency) debt obligations, Federal Deposit Insurance Corporation (FDIC)-backed corporate debt obligations, investment grade corporate bonds, state and municipal debt obligations, mortgaged backed debt obligations guaranteed by Government National Mortgage Association (GNMA), certain FDIC-backed bank certificates of deposit, foreign government debt obligations and foreign corporate debt obligations guaranteed by foreign governments.

Other Marketable Securities and Loan Related to Other Marketable Securities

We classify holdings in other marketable securities (Cisco common stock) and the related loan as Level 1 in the fair value hierarchy. We classify these as Level 1 since they are actively traded through a governed exchange.

	TELLABS ANNUAL REPORT 2009
43

Derivative Financial Instruments

Our foreign currency forward contracts are executed as exchange-traded. Market participants can be described as large money center or regional banks. Exchange-traded derivatives typically fall within Level 1 or Level 2 in the fair value hierarchy depending on whether they are deemed to be actively traded or not.

We have elected to value derivatives as Level 2, using observable market data at the measurement date and standard valuation techniques to convert future amounts to a single present amount (discounted). Mid-market pricing is used as a practical expedient for fair value measurements. Key inputs for currency derivatives are the spot rate, interest rates and credit derivative markets. The spot rate for each currency is the same spot rate used for all balance sheet translations at the measurement date. The following values are calculated from commonly quoted intervals available from a third-party financial information provider. Forward points and LIBOR rates are used to calculate a discount rate to apply to assets and liabilities. One-year credit default swap spreads are used to discount derivative assets, all of which have final maturities of less than 12 months. We calculate the discount to the derivative liabilities to reflect the potential credit risk to lenders and have used the spread over LIBOR based on the credit risk of our counterparties. Each asset is individually discounted to reflect our potential credit risk and we have used the spread over LIBOR based on similar credit risk. We do not adjust the fair value for immaterial credit risk.

We have applied a valuation method for financial assets and liabilities and recurring non-financial assets consistently during this period and prior periods. The following table sets forth by level within the fair value hierarchy “Financial instruments owned at fair value.” Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Assets and liabilities measured at fair value on a recurring basis are:

	Fair Value Measurements at January 1, 2010
In millions	Balance at 1/1/10		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Investments in marketable securities
U.S. government debt obligations	$	223.9	$	223.9	$	—	$	—
U.S. government-sponsored enterprise (agency) debt obligations		32.6		—		32.6		—
Municipal tax-exempt debt obligations		47.3		—		47.3		—
Corporate debt obligations guaranteed by FDIC		163.7		—		163.7		—
Corporate debt obligations		41.4		—		41.4		—
Mortgaged backed debt obligations guaranteed by GNMA		129.8		—		129.8		—
Certificates of deposit guaranteed by FDIC		8.6		—		8.6		—
Foreign government debt obligations		267.0		—		267.0		—
Foreign corporate debt obligations guaranteed by foreign governments		36.5		—		36.5		—
Subtotal		950.8		223.9		726.9		—
Other marketable securities		252.8		252.8		—		—
Derivative financial instruments		1.3		—		1.3		—
Total Assets	$	1,204.9	$	476.7	$	728.2	$	—
Liabilities
Loan related to other marketable securities	$	252.8	$	252.8	$	—	$	—
Derivative financial instruments		1.9		—		1.9		—
Total Liabilities	$	254.7	$	252.8	$	1.9	$	—

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	Fair Value Measurements at January 2, 2009
In millions	Balance at 1/2/09		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Investments in marketable securities
U.S. government debt obligations	$	223.5	$	223.5	$	—	$	—
U.S. government-sponsored enterprise (agency) debt obligations		103.4		—		103.4		—
Municipal tax-exempt debt obligations		36.9		—		36.9		—
Corporate debt obligations guaranteed by FDIC		69.5		—		69.5		—
Corporate debt obligations		41.9		—		41.9		—
Mortgaged backed debt obligations guaranteed by GNMA		35.4		—		35.4		—
Certificates of deposit guaranteed by FDIC		33.7		—		33.7		—
Foreign government debt obligations		214.5		—		214.5		—
Foreign corporate debt obligations guaranteed by foreign governments		17.2		—		17.2		—
Subtotal		776.0		223. 5		552.5		—
Other marketable securities		179.1		179. 1		—		—
Derivative financial instruments		3.7		—		3.7		—
Total Assets	$	958.8	$	402.6	$	556.2	$	—
Liabilities
Loan related to other marketable securities	$	179.1	$	179.1	$	—	$	—
Derivative financial instruments		0.3		—		0.3		—
Total Liabilities	$	179.4	$	179.1	$	0.3	$	—

7. Investments

We account for investments in marketable securities at fair value, 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 January 1, 2010, and January 2, 2009, available-for-sale marketable securities consisted of the following:

In millions	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair Value
January 1, 2010
U.S. government debt obligations	$	223.6	$	0.5	$	(0.2	)	$	223.9
U.S. government-sponsored enterprise
(agency) debt obligations		32 .3		0.3		—			32.6
Municipal tax-exempt debt obligations		46.9		0.4		—			47.3
Corporate debt obligations guaranteed by FDIC		162.2		1.6		(0.1	)		163.7
Corporate debt obligations		40.9		0.5		—			41.4
Mortgaged backed debt obligations guaranteed by GNMA		128.8		1.5		(0.5	)		129.8
Certificates of deposit guaranteed by FDIC		8.6		—		—			8.6
Foreign government debt obligations		264.7		2.7		(0.4	)		267.0
Foreign corporate debt obligations guaranteed by foreign governments		35.9		0.6		—			36.5
Total	$	943.9	$	8.1	$	(1.2	)	$	950.8

	TELLABS ANNUAL REPORT 2009
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In millions	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair Value
January 2, 2009
U.S. government debt obligations	$	223.4	$	0.5	$	(0.4	)	$	223.5
U.S. government-sponsored enterprise
(agency) debt obligations		102.0		1.4		—			103.4
Municipal tax-exempt debt obligations		36.8		0.1		—			36.9
Corporate debt obligations guaranteed by FDIC		68.3		1.2		—			69.5
Corporate debt obligations		42.2		0.2		(0.5	)		41.9
Mortgaged backed debt obligations guaranteed by GNMA		35.3		0.2		(0.1	)		35.4
Certificates of deposit guaranteed by FDIC		33.7		—		—			33.7
Foreign government debt obligations		211.9		2.9		(0.3	)		214.5
Foreign corporate debt obligations guaranteed by foreign governments		17.1		0.1		—			17.2
Total	$	770.7	$	6.6	$	(1.3	)	$	776.0

Of the available-for-sale debt obligations at January 1, 2010, $159.5 million have contractual maturities of less than 12 months, $661.6 million have contractual maturities of greater than one year up to five years and $129.7 million have contractual maturities greater than five years.

Gross unrealized gains and losses related to fixed-income securities were caused by interest rate fluctuations. 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 of the unrealized loss. We also assessed our intent to sell the security, whether it is more likely than not that the security will be required to be sold before recovery, or the security is not expected to recover its entire amortized cost basis. Based on our review, we do not intend to sell these securities and believe that they will recover their entire amortized cost basis; therefore, we do not consider these investments to be other-than-temporarily impaired at January 1, 2010. No other- than-temporary impairments were recorded in 2009. We recognized other-than-temporary impairments of $0.8 million for the year ended January 2, 2009, and $5.2 million for the year ended December 28, 2007.

Investments in marketable securities with unrealized losses at January 1, 2010, and January 2, 2009, 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
January 1, 2010
U.S. government debt obligations	$	48.6	$	(0.2	)	$	—	$	—		$	48.6	$	(0.2	)
Corporate debt obligations guaranteed by FDIC		15.9		(0.1	)		—		—			15.9		(0.1	)
Mortgaged backed debt obligations guaranteed by GNMA		39.9		(0.5	)		—		—			39.9		(0.5	)
Foreign government debt obligations		94.8		(0.4	)		—		—			94.8		(0.4	)
Total	$	199.2	$	(1.2	)	$	—	$	—		$	199.2	$	(1.2	)
January 2, 2009
U.S. government debt obligations	$	4.0	$	—		$	44.6	$	(0.4	)	$	48.6	$	(0.4	)
Corporate debt obligations		17.2		(0.4	)		6.6		(0.1	)		23.8		(0.5	)
Mortgaged backed debt obligations guaranteed by GNMA		—		—			16.6		(0.1	)		16.6		(0.1	)
Foreign government debt obligations		—		—			15.6		(0.3	)		15.6		(0.3	)
Total	$	21.2	$	(0.4	)	$	83.4	$	(0.9	)	$	104.6	$	(1.3	)

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

In millions	2009			2008			2007
Gross realized gains	$	6.0		$	19.3		$	3.2
Gross realized losses 1		(1.3	)		(22.9	)		(8.7	)
Total	$	4.7		$	(3.6	)	$	(5.5	)

¹ Includes other-than-temporary impairments of $0.8 million for the year ended January 2, 2009, and $5.2 million for the year ended December 28, 2007.

As a result of the acquisition of Advanced Fibre Communications, Inc. (AFC) in 2004, 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 is reflected as a current liability on our balance sheets as of January 1, 2010, and January 2, 2009. 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 January 1, 2010, Other marketable securities and Loan related to other marketable securities was $252.8 million at a market price of $23.94 per share and $179.1 million at a market price of $16.96 per share at January 2, 2009. The fees for 2009 associated with the stock loan agreement were $1.5 million.

In addition to the above investments, we maintain investments in partnerships and start-up technology companies. We record these investments in Other Assets, at cost. These investments totaled $7.2 million at January 1, 2010, and $8.7 million at January 2, 2009. We review each investment 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 $0.4 million for the year ended January 1, 2010, $9.9 million for the year ended January 2, 2009, and $0.5 million for the year ended December 28, 2007. Other-than-temporary impairments are included in Other income (expense), net in the Consolidated Statements of Operations.

8. Derivative Financial Instruments

Financial Contracts and Market Risk

We conduct business on a global basis in U.S. and foreign currencies subjecting us to risks associated with fluctuating foreign exchange rates. To mitigate these risks, we use derivative foreign exchange contracts to address nonfunctional exposures that are expected to be settled in one year or less. The derivative foreign exchange contracts consist of foreign currency forward and option contracts.

Derivative financial contracts involve elements of market and credit risk. 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. We monitor the counterparties’ credit ratings and other market data to minimize credit risk. In addition, we also limit the aggregate contract amount entered into with any one financial institution to mitigate credit risk.

Cash Flow Hedges

We use foreign currency forward and option contracts, designated as cash flow hedges, to mitigate currency risk related to an imbalance of nonfunctional currency denominated costs and related revenue. We conduct monthly effectiveness tests of these hedging relationships on a spot-to-spot basis, excluding forward points. Effective gains and losses from derivative contracts are recorded in Accumulated other comprehensive income until the underlying transactions occur, at which time they are reclassified to Total cost of revenue. Ineffectiveness is recorded to Other income (expense), net. If it becomes probable that an anticipated transaction that is hedged will not occur, we immediately reclassify the gains or losses related to that hedge from Accumulated other comprehensive income to Other income (expense), net. At January 1, 2010, we had a net unrealized loss of $1.4 million in Accumulated other comprehensive income, which is expected to be reclassified to income within the next 12 months. At January 1, 2010, we held derivatives designated as cash flow hedges in one currency, with a gross notional equivalent of $29.3 million.

Balance Sheet Hedges (Non-designated Hedges)

Short-term monetary assets and liabilities denominated in currencies other than the functional currency of the Tellabs entity entering into the transaction are remeasured through income as foreign currency rates fluctuate. Changes in the value of derivative contracts intended to offset these fluctuations are also recorded in income. The gain or loss from changes in the fair value of the derivative contracts are generally offset by gains or losses of the underlying transactions being hedged. These derivative

	TELLABS ANNUAL REPORT 2009
47

contracts are not designated as hedges. At January 1, 2010, we held non-designated foreign currency forward contracts in nine currencies, with a gross notional equivalent of $173.3 million.

Net Investment Hedges

We entered into three-month foreign currency forward contracts, designated as net investment hedges, to hedge a portion of our net investment in one of our foreign subsidiaries to preserve the U.S. dollar value of our Euro cash. Effective changes in the fair value of these contracts due to exchange rate fluctuations are recorded within Accumulated other comprehensive income. Those amounts will be reflected in income only when we dispose of the investment in the foreign subsidiary. We conduct monthly effectiveness tests of net investment hedges on a spot-to-spot basis, excluding forward points, and any measurement of ineffectiveness is recorded in income. As of January 1, 2010, we had a net unrealized gain of $10.2 million in Accumulated other comprehensive income, which includes a net gain of $9.3 million related to settled contracts and a net gain of $0.9 million related to unsettled contracts. We held net investment hedges with a notional value of 100 million Euros at the end of 2009.

The fair value of derivative instruments in the Consolidated Balance Sheet as of January 1, 2010, was as follows:

In millions	Asset Derivatives Reported in Miscellaneous Receivables and Other Current Assets		Liability Derivatives Reported in Other Accrued Liabilities
Cash flow and net investment hedges	$	0.9	$	(1.6	)
Balance sheet hedges (Non-designated hedges)		0.4		(0.3	)
Total derivatives	$	1.3	$	(1.9	)

The fair value of derivative instruments in the Consolidated Balance Sheet as of January 2, 2009, was as follows:

In millions	Asset Derivatives Reported in Miscellaneous Receivables and Other Current Assets		Liability Derivatives Reported in Other Accrued Liabilities
Cash flow and net investment hedges	$	3.5	$	—
Balance sheet hedges (Non-designated hedges)		0.3		(0.3	)
Total derivatives	$	3.8	$	(0.3	)

The effect of derivative instruments designated as hedging instruments on the Consolidated Statements of Operations for the years ended January 1, 2010, January 2, 2009, and December 31, 2007, was as follows:

In millions	Gain (Loss) Recognized in Accumulated OCI, net (Effective Portion)
	2009			2008			2007
Cash flow hedges	$	(3.0	)	$	2.7		$	(0.9	)
Net investment hedges	$	2.9		$	10.3		$	—
In millions	Gain (Loss) Reclassified from Accumulated OCI into Total Cost of Revenue (Effective Portion)
	2009			2008			2007
Cash flow hedges	$	1.9		$	(1.0	)	$	(0.3	)
In millions	Loss Recognized in Other Income (Expense), net: Excluded from Effectiveness Testing Gain (Loss)
	2009			2008			2007
Cash flow hedges	$	(0.3	)	$	(0.5	)	$	(0.4	)
Net investment hedges	$	(0.5	)	$	(0.6	)	$	—

The effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Operations for the years ended January 1, 2010, January 2, 2009, and December 31, 2007, was as follows:

In millions	Gain (Loss) Recognized in Other Income (Expense), net
	2009			2008			2007
Foreign currency forward and option contracts	$	(3.2	)	$	(2.4	)	$	2.2

9. 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.

The estimate of warranty liability involved 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 the recorded warranty liability and adjust the amounts as necessary. The decline in accruals for product warranties issued during 2009 represents a lower number of units shipped and lower anticipated rates of warranty claims. Other adjustments to accruals for product warranties issued represent reductions due to favorable experience to previous estimates.

We classify the portion of warranty liability that we expect to incur in the next 12 months as a current liability. We classify the portion of warranty liability that

48

we expect to incur more than 12 months in the future as a long-term liability.

Product warranty liabilities are as follows:

In millions	1/1/10			1/2/09			12/28/07
Balance – beginning of year	$	39.3		$	49.1		$	45.0
Accruals for product warranties issued		12.1			12.8			24.0
Settlements		(7.6	)		(13.0	)		(13.6	)
Other adjustments to accruals for product warranties issued		(12.4	)		(9.6	)		(6.3	)
Balance – end of year	$	31.4		$	39.3		$	49.1
Balance sheet classification at end of year
Other accrued liabilities	$	13.7		$	19.1		$	25.1
Other long-term liabilities		17.7			20.2			24.0
Total product warranty liabilities	$	31.4		$	39.3		$	49.1

10. Equity-Based Compensation

The Tellabs, Inc. Amended and Restated 2004 Incentive Compensation Plan (2004 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 (PSUs). Stockholders previously approved 53,889,977 shares for grant under the 2004 Plan, of which 29,827,886 remain available for grant at January 1, 2010. Under the 2004 Plan and predecessor plans, we granted awards at market value on the date of grant.

Stock Options

Stock options granted in 2009, 2008 and 2007 generally vest in three annual installments on the anniversary of the grant date. WiChorus options that converted to Tellabs options on the acquisition date of December 1, 2009, vest over four years and expire 10 years from the grant date . 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 was $5.4 million in 2009, $11.0 million in 2008 and $21.9 million in 2007. Options granted but unexercised expire 10 years from the grant date.

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

	2009		2008		2007
Expected volatility	47.2	%	46.3	%	41.2	%
Risk-free interest rate	2.0	%	3.0	%	4.5	%
Expected term (in years)	4.5		4.5		4.6
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 granted. We based the risk-free interest rate on the U.S. Treasury yield curve in effect at the date of grant. We estimated the expected term of the options using their vesting period, post-vesting employment termination behavior and historical exercise patterns.

The following is a summary of stock option activity during 2009, and status at January 1, 2010:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding—beginning of year	32,851,918		$	17.12
Granted/converted1	2,628,460		$	3.98
Exercised	(305,546	)	$	5.80
Forfeited/expired	(4,484,265	)	$	26.01
Outstanding—end of year	30,690,567		$	14.81	4.0	$	5.8
Exercisable—end of year	26,671,827		$	16.28	3.3	$	1.0
Shares expected to vest	30,430,069		$	14.89	4.0	$	5.6

¹ WiChorus stock options as of the acquisition date were converted into 628,517 Tellabs stock options with a weighted average exercise price of $0.25.

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our closing stock price as of January 1, 2010, 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 $0.3 million in 2009, $0.9 million in 2008 and $13.2 million in 2007.

As of January 1, 2010, we had $6.2 million of unrecognized compensation cost related to stock options that we expect to recognize over a weighted average period of 1.7 years. The weighted average fair value of stock options granted was $2.12 in 2009, $2.20 in 2008 and $4.21 in 2007.

	TELLABS ANNUAL REPORT 2009
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Cash-Settled Stock Appreciation Rights

The 2004 Plan provides for the granting of cash-settled SARs in conjunction with, or independent of, the stock options under the 2004 Plan. These SARs allow the holder to receive in cash the difference between the cash-settled SARs’ grant price (the 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 2009, 2008 and 2007. The cash-settled SARs are generally assigned 10-year terms and typically vest in three annual installments on the anniversary of the grant date. At January 1, 2010, there were 340,489 cash-settled SARs outstanding with exercise prices that ranged from $3.75 to $50.31. The weighted average price of the 101,150 cash-settled SARs granted in 2009 was $5.64. The weighted average price of the 78,400 cash-settled SARs granted in 2008 was $5.29. The weighted average price of the 151,243 cash-settled SARs granted in 2007 was $10.24.

Restricted Stock

We granted 2,990,544 restricted shares in 2009, 2,205,603 restricted shares in 2008 and 2,903,869 restricted shares in 2007. Of the shares granted in 2009,534,418 shares vest over a four-year period, 2,364,526 shares vest over a three-year period and 91,600 shares vest over a one-year period. Of the shares granted in 2008 2,065,603 shares vest over a three-year period, 100,000 shares vest over a two-year period and 40,000 shares vest over a one-year period. Of the shares granted in 2007, 1,448,723 shares 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. 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 $12.5 million in 2009, $15.3 million in 2008 and $10.2 million in 2007. The fair market value of restricted stock vested was $9.5 million in 2009, $7.1 million in 2008 and $8.8 million in 2007. The weighted average issuance price of restricted stock granted was $5.28 per share in 2009, $5.46 per share in 2008 and $9.84 per share in 2007. Non-vested stock award activity for 2009 follows:

	Shares		Weighted Average Grant Date Fair Value
Non-vested—beginning of year	3,415,825		$	7.19
Granted	2,990,544		$	5.28
Vested	(1,687,585	)	$	5.65
Forfeit ed	(161,814	)	$	6.87
Non-vested—end of year	4,556,970		$	5.67

As of January 1, 2010, we had $19.1 million of unrecognized compensation cost related to restricted stock that we expect to recognize over a weighted average period of 1.9 years.

Performance Stock Units

The 2004 Plan provides for the granting of PSUs. We granted 959,100 PSUs in 2009, 777,000 PSUs in 2008 and 375,000 PSUs in 2007. The PSUs granted in 2009 entitle the recipients to receive shares of our common stock commencing in March 2010, contingent on the achievement of operating earnings targets for the 2009 fiscal year. Following achievement of this financial measure and subject to continued employment, one-third of such shares will be issued in annual installments in March 2010, March 2011 and March 2012. At maximum target performance, we will issue two shares for each PSU granted. The weighted average price of PSUs granted in 2009 was $3.75 per share. The number of PSUs to be issued for the 2009 fiscal year will be determined in the first quarter of fiscal year 2010.

The PSUs granted in 2008 would have entitled the recipients to receive shares of our common stock commencing in March 2009, contingent on the achievement of company operating earnings and revenue-based targets for the 2008 fiscal year. None of the 2008 grants were earned, since 2008 performance fell below threshold performance. The weighted average issuance price of the PSUs granted in 2008 was $5.40 per share.

The PSUs granted in 2007 would have entitled the recipients to receive shares of our common stock commencing in March 2008, contingent on the achievement of company operating earnings and revenue-based targets for the 2007 fiscal year. None of the 2007 grants were earned, since 2007 performance fell below threshold performance. The weighted average issuance price of the PSUs granted in 2007 was $12.53 per share.

Compensation expense for PSUs was $2.7 million in 2009, $0.1 million in 2008 and a credit of $0.3 million in 2007. PSU activity for 2009 follows:

	Shares		Weighted Average Grant Date Fair Value
Non-vested—beginning of year	697,000		$	5.40
Granted	959,000		$	3.75
Cancelled	(738,400	)	$	5.31
Non-vested—end of year	917,700		$	3.75

As of January 1, 2010, we had $2.4 million of unrecognized compensation cost related to PSUs that we expect to recognize over a weighted average period of 2.2 years.

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

50

under the plan at January 2, 2009. Compensation expense for the plan was $0.4 million in 2007. 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.

Equity-Based Compensation Expense

The following table sets forth the total equity-based compensation expense resulting from stock options, SARs, restricted stock, and PSUs:

In millions	2009			2008			2007
Cost of revenue—products	$	1.7		$	2.3		$	2.5
Cost of revenue—services		2.2			3. 3			3.5
Research and development		6.0			8. 9			12.3
Sales and marketing		4.2			5. 2			6.4
General and administrative		6.6			6. 7			7.4
Equity-based compensation expense before income taxes		20.7			26.4			32.1
Income tax benefit 1		(0.5	)		(5.7	)		(11.0	)
Total equity-based compensation expense after income taxes	$	20.2		$	20.7		$	21.1

¹ For 2008, the disclosure of the income tax benefit on equity-based compensation expense has been adjusted to reflect the actual impact in our financial statements of establishing and maintaining a valuation allowance against domestic deferred tax assets.

11. 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 match (dollar-for-dollar) up to the first 4% of the employee’s 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, if approved, is based on a percent of pay for a specific period. 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 approved a 2% contribution in 2009, 2008 and 2007. We maintain similar plans for the benefit of eligible employees at most subsidiaries outside North America.

Contributions to these programs were $26.5 million in 2009, $25.6 million in 2008 and $26. 5 million in 2007.

Deferred Income Plan

We provide a Deferred Income Plan that permits certain officers and management employees to defer portions of their compensation. As of January 1, 2010, the $16.6 million long-term portion of the deferred income obligation is included in Other Long-Term Liabilities and the $2.0 million current portion is included in Other accrued liabilities. 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 insurance premiums and allow the retirees to participate in the Company-sponsored health-care plan. We made no contributions in 2009 or 2008. We currently do not anticipate making a contribution to the plan in 2010, as it is adequately funded.

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

In millions	1/1/10			1/2/09
Change in benefit obligation
Accumulated postretirement benefit obligation – beginning of year	$	9.1		$	10.9
Service cost		0.6			0.9
Interest cost		0.6			0.6
Actuarial gain		—			(2.3	)
Benefits paid		(0.2	)		(0.2	)
Curtailment		—			(0.8	)
Accumulated postretirement benefit obligation – end of year	$	10.1		$	9.1
Change in plan assets
Assets at fair value – beginning of year	$	8.8		$	9.1
Return on plan assets		1.0			(0.1	)
Benefits paid		(0.3	)		(0.2	)
Assets at fair value – end of year	$	9.5		$	8.8
Funded status	$	(0.6	)	$	(0.3	)

Our investment strategy for the plan’s assets focuses on asset allocation and diversification. As a result, the assets are diversified across asset classes to achieve a conservative risk profile approximating the risk of a fixed income portfolio. The plan’s assets were 62% invested in a guaranteed income fund, 21% in vested in equity securities and 17% invested in fixed income securities at January 1, 2010. The plan’s assets were 84% invested in a guaranteed income fund, 8% invested in equity securities and 8% invested in fixed income securities at January 2, 2009. The actuarial gain in 2008 was caused primarily by demographic changes and by a change in the participation assumption. The curtailment of $0.8 million in 2008 was primarily due to the reduction of employees during 2008.

We use the three-tier fair value hierarchy to measure the fair value of these investments. We classify the

	TELLABS ANNUAL REPORT 2009
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guaranteed fund as a Level 2 asset because the fund’s value is based on the contract value as determined by the custodian. The other assets are classified as Level 1 because they are invested in highly liquid, publicly traded securities which are valued daily using quoted prices in active markets.

The following table presents by level, within the fair value hierarchy, the value of assets of the Retiree Medical Plan at January 1, 2010:

In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance
Equity securities	$	2.0	$	—	$	—	$	2.0
Fixed income securities		1.6		—		—		1.6
Guaranteed income fund		—		5.9		—		5.9
Total assets	$	3.6	$	5.9	$	—	$	9.5

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

In millions	2009			2008			2007
Components of net periodic postretirement benefit cost
Service cost	$	0.6		$	0.9		$	1. 1
Interest cost		0.6			0.6			0.6
Expected return on assets		(0.6	)		(0.6	)		(0.4	)
Amortization of actuarial gain		(0.3	)		(0.2	)		—
Amortization of unrecognized prior service cost		0.1			0. 1			0.1
Net periodic postretirement benefit cost	$	0.4		$	0.8		$	1.4
Curtailment		—			(0.6	)		—
Total cost for the year	$	0.4		$	0.2		$	1.4

The curtailment of $0.6 million in 2008 was primarily due to the reduction of employees during 2008. 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 $0.2 million of actuarial gain in 2010.

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

	2009		2008		2007
Discount rate used to determine benefit costs	6.75	%	6.75	%	5.75	%
Discount rate used to determine benefit obligation	6.00	%	6.75	%	6.75	%
Expected long-term rate of return on assets	6.50	%	7.00	%	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 rates used to determine benefit costs and benefit obligations were based on hypothetical zero coupon corporate bond yield curves that replicate the cash flows of the plan. The discount rates used decreased in 2009 due to the decrease in the hypothetical zero coupon corporate bond yield curve. The discount rates used increased in 2008 due to the increase in the hypothetical zero coupon corporate bond yield curve. The expected long-term rate of return on assets increased in 2008 due to changing the allocation of plan assets to higher potential return categories.

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 January 1, 2010:

In millions
2010	$	0.3
2011	$	0.3
2012	$	0.4
2013	$	0.4
2014	$	0.4
2015–2019	$	3.3

There is $0.4 million of unrecognized prior service cost, net of tax, and $3.2 million of unrecognized net gain, net of tax, in Accumulated other comprehensive income at January 1, 2010.

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12. Income Taxes

Components of earnings (loss) before income taxes are as follows:

In millions	2009		2008			2007
Domestic source	$	4.1	$	(1,042.6	)	$	0.2
Foreign source		109.1		90.1			70.0
Earnings (loss) before income tax	$	113.2	$	(952.5	)	$	70.2

The provision for income tax benefit (expense) consists of the following:

In millions	2009			2008			2007
Current
Federal	$	10.5		$	25.7		$	2.2
State		(1.8	)		(0.1	)		0.1
Foreign		(17.0	)		(33.6	)		(22.6	)
Subtotal		(8.3	)		(8.0	)		(20.3	)
Deferred
Federal and state		24.9			17.4			11. 8
Foreign		(16.2	)		13.0			3.3
Subtotal		8.7			30.4			15.1
Total income tax benefit (expense)	$	0.4		$	22.4		$	(5.2	)

Deferred tax assets (liabilities) for 2009 and 2008 consist of the following:

In millions	1/1/10			1/2/09
Deferred tax assets
Net operating loss and tax credit carryforwards	$	142.8		$	139.1
Amortizable in tangibles		34.3			74.1
Accrued liabilities		29.0			38.3
Inventory reserves		25.5			38.2
Deferred employee benefit expenses		30.0			20.5
Deferred compensation plan		12.5			12.0
Restructuring accruals		5.8			11.2
Fixed assets and depreciation		8.6			2.7
Deferred revenue and advance payments		1.4			1.0
Other		9.3			11.4
Deferred tax assets	$	299.2		$	348.5
Deferred tax liabilities
Unrealized gain on marketable securities	$	(197.5	)	$	(198.4	)
Other		(6.4	)		(7.3	)
Deferred tax liabilities	$	(203.9	)	$	(205.7	)
Valuation allowance	$	(80.3	)	$	(113.8	)
Net deferred tax assets	$	15.0		$	29.0

The net deferred income tax asset decreased from $29.0 million at January 2, 2009, to $15.0 million at January 1, 2010. The $14.0 million change is attributable to our foreign operations during the year. The deferred tax liability includes $195.8 million representing taxes that will be due on certain hedge contract gains upon termination of our Loan related to other marketable securities.

A reconciliation of the reported effective income tax rates to the domestic federal income tax rate is as follows:

In percentages	2009		2008		2007
Statutory Federal income tax rate	35.0	%	35.0	%	35.0	%
Goodwill impairment	—		(29.5	)	—
Valuation allowance on net domestic deferred tax assets	(31.8	)	(8.7	)	4.9
Research and development credits	(4.8	)	1.5		(15.7	)
Nondeductible equity-based compensation expense	1.2		(0.8	)	0.9
State income tax, net of federal benefits	0.5		0.6		4.9
Foreign earnings taxed at different rates1	0.5		1.7		(21.9	)
Interest related to prior year tax matters	0.5		(0.3	)	7.6
Tax exempt interest	(0.3	)	0.2		(6.3	)
Loss on investment in subsidiary	—		2.9		—
Other, net	(1.1	)	(0.2	)	(2.0	)
Effective income tax rate	(0.3	)%	2.4	%	7.4	%

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

A valuation allowance is established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Prior to 2008, valuation allowances were established primarily for future tax benefits from capital losses, state net operating losses and state tax credits with relatively short carry forward periods, and certain foreign net operating losses. During the year ended January 2, 2009, we determined it appropriate to establish a full valuation allowance against our net U.S. deferred tax assets. This valuation allowance offsets assets associated with future tax deductions, as well as carryforward items. For the year ended January 1, 2010, we continued to maintain a full valuation allowance on our net U.S. deferred tax assets. Until an appropriate level of profit -ability is attained, we expect to maintain a valuation allowance on our net deferred tax assets related to future U.S. and certain non-U.S. tax benefits.

	TELLABS ANNUAL REPORT 2009
53

During 2009, our valuation allowance decreased by $33.5 million, of which $24.2 million is a result of recording net deferred tax liabilities in accounting for the WiChorus acquisition. This reduction in the valuation allowance was recorded as a benefit to tax expense. Our domestic valuation allowance also reflects a reduction in deferred tax assets of $13.9 million as a result of current year activity and the use of net operating loss and credit carryforwards. The valuation allowance against our foreign deferred tax assets increased by $4.5 million as the result of an increase in foreign net operating losses and the reduction in projected future profits in certain foreign subsidiaries.

Summary of Carryforwards

We had the following tax net operating loss (tax effected) and credit carryforwards as of January 1, 2010:

			Years of Expiration
In millions	1/1/10		Beginning	Ending
U.S. net operating loss and credit carryforwards	$	95.0	2015	2029
State net operating loss and credit carryforwards		24.0	2010	2028
State credit carryforwards		18.1	no expiration
Foreign net operating loss carryforwards		6.2	no expiration
U.S. capital loss carryforwards		10.9	2010	2013
Foreign net operating loss carryforwards		3.0	2011	2019
Total	$	157.2

Accounting for Uncertainty in Income Taxes

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

In millions	1/1/10			1/2/09
Balance – beginning of year	$	28.6		$	63.8
Additions based on tax positions related to the current year		2.7			2.2
Additions for tax positions of prior years		0.6			1.8
Reductions for tax positions of prior years as a result of a lapse in the statute of limitations		(4.3	)		—
Reductions for tax positions of prior years relating to settlements with taxing authorities		(1.2	)		(39.2	)
Balance – end of year	$	26.4		$	28.6

The ending balance at January 1, 2010, includes an accrual of $21.5 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate. We continue to recognize interest and penalties related to income tax matters as part of income tax expense. Our tax provision included $1.8 million of interest and penalties for 2009 and $4.6 million for 2008. The balance of interest and penalties accrued was $8.4 million as of January 1, 2010, and $9.8 million as of January 2, 2009. At January 1, 2010, the noncurrent accrual for taxes and interest was $34.8 million.

It is reasonably possible that unrecognized benefits related to state income taxes will decrease by approximately $16.8 million as a result of the settlement of audits or the expiration of the statute of limitations within the next 12 months.

It is reasonably possible that unrecognized benefits related to foreign income taxes will decrease by approximately $0.6 million as a result of the settlement of audits or the expiration of the 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 $588.8 million at January 1, 2010. Upon repatriation of these earnings, we would be subject to U.S. income tax, net of available foreign tax credits. At January 1, 2010, 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 $87.8 million.

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 2003. Our major jurisdictions currently include the United States, California, Illinois, Finland, Denmark and Mexico. During 2008, we reached a settlement with the Internal Revenue Service (IRS) in connection with their examination of all tax years prior to 2006. Of our major jurisdictions, we are currently under audit by the Internal Revenue Service for the 2007 and 2008 tax periods and the State of California for the 2004 through 2006 tax periods. Although we have accrued tax and related interest for potential adjustments to tax liabilities for prior years, we cannot provide assurance that a material adjustment to our financial statements, either positive or negative, will not result when the audits are concluded.

13. Accumulated Other Comprehensive Income

Accumulated other comprehensive income has no impact on our net earnings (loss) but is reflected in our consolidated balance sheet through adjustments to stockholders’ equity. Accumulated other comprehensive income derives from

54

unrealized gains (losses) and related adjustments on available-for-sale securities, unrealized gains (losses) on cash flow and net investment hedges, foreign currency translation adjustments, unrecognized prior service costs and unrecognized net gains (losses) on our retiree medical plan.

Accumulated other comprehensive income (net of tax) for 2009, 2008 and 2007 consists of the following:

In millions	Unrealized Net Gain (Loss) on Available- for-Sale Securities			Unrealized Net Gain (Loss) on Cash Flow Hedges			Foreign Currency Translation Adjustments			Unrecognized Prior Service Cost			Unrecognized Net Gain (Loss) on Retiree Medical Plan			Accumulated Other Comprehensive Income
Balance at December 29, 2006	$	1.5		$	0.2		$	94.3		$	(0.7	)	$	(0.5	)	$	94.8
Unrealized net gain on available-for-sale securities		3.0			—			—			—			—			3.0
Net loss on cash flow hedges		—			(0.2	)		—			—			—			(0.2	)
Net translation gain		—			—			34.9			—			—			34.9
Unrecognized net gain on retiree medical plan		—			—			—			—			2.3			2.3
Reclassification adjustment for gain included in net earnings		(2.1	)		(0.4	)		—			—			—			(2.5	)
Balance at December 28, 2007	$	2.4		$	(0.4	)	$	129.2		$	(0.7	)	$	1.8		$	132.3
Unrealized net gain on available-for-sale securities		2.9			—			—			—			—			2.9
Net gain on cash flow hedges		—			2.9			—			—			—			2.9
Net gain on net investment hedges		—			—			10.3			—			—			10.3
Net translation loss		—			—			(23.0	)		—			—			(23.0	)
Unrecognized prior service cost		—			—			—			0.2			—			0.2
Unrecognized net gain on retiree medical plan		—			—			—			—			1.4			1.4
Reclassification adjustment for (gain) loss included in net loss		(2.6	)		0.4			—			—			—			(2.2	)
Balance at January 2, 2009	$	2.7		$	2.9		$	116.5		$	(0.5	)	$	3.2		$	124.8
Unrealized net gain on available-for-sale securities		4.2			—			—			—			—			4.2
Net loss on cash flow hedges		—			(2.9	)		—			—			—			(2.9	)
Net gain on net investment hedges		—			—			2.9			—			—			2.9
Net translation gain		—			—			14.5			—			—			14.5
Unrecognized prior service cost		—			—			—			0.1			—			0.1
Reclassification adjustment for gain included in net earnings		(2.2	)		(1.4	)		(0.2	)		—			—			(3.8	)
Balance at January 1, 2010	$	4.7		$	(1.4	)	$	133.7		$	(0.4	)	$	3.2		$	139.8

14. Segment Information

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

The Broadband segment includes data, access and managed access 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. Data products include the Tellabs^® 8600 managed edge system, the Tellabs^® 8800 multi-service router series and the Tellabs^® 9100 SmartCore platform. Access offerings include the Tellabs^® 1000 multiservice access series, the Tellabs^® 1100 multi-service access series and the Tellabs^® 1600 optical network terminal (ONT) series. Managed access products include the Tellabs^® 6300 managed transport system, the Tellabs^® 8000 network manager and the Tellabs^® 8100 managed access system.

The 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 and the long haul 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^® 7100 optical transport system (OTS) and the Tellabs^® 7300 metro Ethernet switching series.

	TELLABS ANNUAL REPORT 2009
55

The Services segment includes deployment, support, training, systems integration and network design/consulting services. 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 intangibles, restructuring and other charges, the impact of equity-based compensation (which includes restricted stock and PSUs granted after June 30, 2006, and stock options) and the goodwill impairment charge.

Consolidated revenue by segment follows:

In millions	2009		2008		2007
Broadband	$	785.8	$	919.9	$	1,018.6
Transport		509.6		580.1		672.7
Services		230.3		229.0		222.1
Total	$	1,525.7	$	1,729.0	$	1,913.4

Segment profit and reconciliation to operating earnings (loss) by segment follows:

In millions	2009			2008			2007
Broadband	$	185.7		$	115.7		$	39.1
Transport		139.4			178.0			237.5
Services		81.8			75.5			72.2
Total segment profit	$	406.9		$	369.2		$	348.8
Sales and marketing expenses		(165.9	)		(170.0	)		(176.6	)
General and administrative expenses		(101.4	)		(101.8	)		(99.1	)
Equity-based compensation		(9.8	)		(14.3	)		(17.6	)
Intangible asset amortization		(24.6	)		(23.9	)		(22.5	)
Restructuring and other charges		(11.7	)		(40.9	)		(5.8	)
Goodwill impairment		—			(988.3	)		—
Operating earnings (loss)	$	93.5		$	(970.0	)	$	27.2

The 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 2009, revenue from two customers accounted for 30% and 21% of consolidated revenue. In 2008, revenue from two customers accounted for 33% and 16% of consolidated revenue. In 2007, revenue from two customers accounted for 37% 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 the three operating segments.

Consolidated revenue by country based on customer location follows:

In millions	2009		2008		2007
United States	$	993.3	$	1,174.0	$	1,398.6
All other countries		532.4		555.0		514.8
Total	$	1,525.7	$	1,729.0	$	1,913.4

Long-lived assets by country follow:

In millions	1/1/10		1/2/09
United States	$	544.0	$	396.5
Finland		62.0		53.9
All other countries		20.8		20.0
Total	$	626.8	$	470.4

15. 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 January 1, 2010, future minimum lease commitments under non-cancelable leases are as follows:

In millions
2010	$	8.8
2011		6.2
2012		4.7
2013		3.4
2014		2.2
2015 and thereafter		1.8
Total minimum lease payments	$	27.1

Total future minimum lease payments have not been reduced by $0.2 million of future sublease payments to be received under non-cancelable subleases. Total rental expense was $11.1 million for 2009, $11.0 million for 2008 and $18.4 million for 2007.

16. Stock Repurchase Programs

We repurchase outstanding common stock under Rule 10b5-1. 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 January 1, 2010, we have purchased 7.5 million shares of our common stock under this program since February 2006, at a total cost of $93.4 million, including $1.8 million (0.2 million shares) in 2009 and $0.9 million (0.2 million shares) in 2008. On January 27, 2010, our Board of Directors authorized a one-year extension of this program.

56

On July 31, 2006, our Board of Directors authorized a repurchase program of up to $300 million of outstanding common stock. As of February 1, 2008, we purchased 37.0 million shares of our common stock under this program at a total cost of $300 million, completing this program. This total includes purchases of $29.9 million (4.6 million shares) in 2008.

On November 8, 2007, our Board of Directors authorized a repurchase program of up to $600 million of outstanding common stock. As of January 1, 2010, we purchased 32.4 million shares of our common stock under this program at a total cost of $204.0 million, leaving $396.0 million available to be purchased under this program. This total includes purchases of $81.1 million (12.7 million shares) in 2009 and $122.9 million (19.7 million shares) in 2008. We provide no assurance that we will continue our repurchase activity and we may change our repurchase activity in the future.

In addition, during 2009 we purchased 0.5 million shares for $2.6 million to cover withholding taxes on shares issued under employee stock plans. In 2008, we purchased 0.4 million shares for $2.0 million to cover withholding taxes on shares issued under employee stock plans.

We record repurchased shares as Treasury stock.

17. Net Earnings (Loss) Per Share

The following table sets forth the computation of net earnings (loss) per share:

In millions, except per-share data	2009		2008			2007
Numerator:
Net earnings (loss)	$	113.6	$	(930.1	)	$	65.0
Denominator:
Denominator for basic net earnings (loss) per share - weighted average shares outstanding		392.5		400.1			436.6
Effect of dilutive securities:
Employee stock options and restricted and performance stock awards		1.7		—			4.5
Denominator for diluted net earnings (loss) per share - adjusted weighted average shares outstanding and assumed conversions		394.2		400.1			441.1
Net earnings (loss) per share, basic	$	0.29	$	(2.32	)	$	0.15
Net earnings (loss) per share, diluted	$	0.29	$	(2.32	)	$	0.15

The number of securities excluded from the weighted average shares outstanding computation was 31.5 million in 2009, 35.0 million in 2008 and 21.7 million in 2007 because the exercise price was greater than the average market price of the common shares; therefore, the effect would have been anti-dilutive. Dilutive securities are not included in the computation of diluted earnings per share when a company is in a loss position. As such, the numerator and the denominator used in computing both basic and diluted net loss per share for 2008 are the same. Diluted weighted average shares outstanding were 400.9 million in 2008.

	TELLABS ANNUAL REPORT 2009
57

18. Quarterly Financial Data (Unaudited)

Selected quarterly financial data for 2009 and 2008 follows:

In millions, except per-share data	First Quarter		Second Quarter		Third Quarter			Fourth Quarter
2009
Revenue	$	361.7	$	385.4	$	389.3		$	389.3
Gross profit	$	159.8	$	167.5	$	162.3		$	176.2
Net earnings	$	6.5	$	15.7	$	29.3		$	62.1
Net earnings per share -
Basic	$	0.02	$	0.04	$	0.07		$	0.16
Diluted	$	0.02	$	0.04	$	0.07		$	0.16
2008
Revenue	$	464.1	$	432.5	$	424.1		$	408.3
Gross profit	$	177.9	$	150.2	$	162.2		$	169.8
Net earnings (loss)	$	16.6	$	39.0	$	(998.5	)	$	12.8
Net earnings (loss) per share -
Basic	$	0.04	$	0.10	$	(2.51	)	$	0.03
Diluted	$	0.04	$	0.10	$	(2.51	)	$	0.03

The per-share computation for the year is a separate, annual calculation. Accordingly, the sum of the quarterly per-share amounts does not necessarily equal the annual per-share amount.

19. Subsequent Events

On January 25, 2010, management initiated a restructuring plan that will enable Tellabs to shift investment from TDM (Time Division Multiplexing) to Ethernet and IP (Internet Protocol) products, move supply chain closer to our suppliers and reduce general and administrative expenses. Actions under this plan are expected to be completed by the end of the first quarter of 2011. We expect to record pretax charges in the first quarter of 2010 through the first quarter of 2011 in the range of $11 million to $14 million. The pretax charges will consist of $9 million to $11 million for workforce reductions of approximately 200 employees and $2 million to $3 million for facility- and asset-related charges. Estimated cash payments under this plan are expected to be in the range of $9 million to $11 million beginning in the first quarter of 2010 and continuing through the second quarter of 2011.

On January 25, 2010, the Board of Directors approved a cash dividend of $0.02 per share of outstanding common stock payable on February 26, 2010, to stockholders of record as of the close of business on February 12, 2010.

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5-Year Summary of Selected Financial Data (Unaudited)

In millions, except per-share, employee and stockholder data	2009			20083			2007			2006			2005
Statement of Operations Data
Revenue	$	1,525.7		$	1,729.0		$	1,913.4		$	2,041.2		$	1,883.4
Gross profit	$	665.8		$	660.1		$	674.3		$	933.6		$	855.0
Operating earnings (loss)	$	93.5		$	(970.0	)	$	27.2		$	246.8		$	188.8
Earnings (loss) before income tax	$	113.2		$	(952.5	)	$	70.2		$	284.7		$	213.1
Net earnings (loss)	$	113.6		$	(930.1	)	$	65.0		$	194.1		$	175.8
Net earnings (loss) per share	$	0.29		$	(2.32	)	$	0.15		$	0.43		$	0.39
Net earnings (loss) per share – diluted	$	0.29		$	(2.32	)	$	0.15		$	0.43		$	0.39
Weighted average shares outstanding – diluted		394.2			400.1			441.1			454.1			454.5
Balance Sheet Data
Total assets	$	2,622.8		$	2,511.2		$	3,746.6		$	3,922.4		$	3,514.9
Total liabilities	$	707.9		$	664.7		$	833.3		$	984.1		$	700.2
Stockholders’ equity	$	1,914.9		$	1,846.5		$	2,913.3		$	2,938.3		$	2,814.7
Other Information
Net cash provided by operating activities	$	234.4		$	130.8		$	133.4		$	320.1		$	258.4
Working capital	$	1,288.7		$	1,376.2		$	1,438.7		$	1,470.4		$	1,347.8
Research and development expense 1	$	268.7		$	305.2		$	343.1		$	356.9		$	344.0
Return on average stockholders’ equity		6.0	%		(39.1	)%		2.2	%		6.7	%		6.3	%
Stock price at year-end	$	5.68		$	4.20		$	6.70		$	10.26		$	10.90
Number of employees		3,295			3,228			3,716			3,713			3,609
Number of stockholders 2		6,961			7,088			7,356			7,678			8,262

¹ Research and development expense does not include purchased in-process research and development costs of $2.2 million in 2005.

² For 2009 represents the number of stockholders at February 12, 2010. For 2008 represents the number of stockholders at February 20, 2009. For 2007 represents the number of stockholders at February 15, 2008. For 2006 represents the number of stockholders at February 16, 2007. For 2005 represents the number of stockholders at the record date for the next annual meeting of stockholders.

³ Includes a non-cash goodwill impairment charge of $988.3 million.

	TELLABS ANNUAL REPORT 2009
59

BOARD OF DIRECTORS

	Michael J. Birck, 72, chairman and co-founder of Tellabs. Chairman since 2000; chief executive officer 2002-2004; chief executive officer and president 1975-2000. Director, Molex Incorporated. M.S.E.E., New York University; B.S.E.E., Purdue University. Tellabs director since 1975.
	Bo Hedfors, 66, president of Hedfone Consulting, Inc. (telecom and Internet consulting) 2002-2009. President, Motorola Networks 1998-2002; president and chief executive officer of Ericsson, Inc. 1994-1998; chief technology officer of LM Ericsson 1990-1993. M.S.E.E., Chalmers University of Technology. Tellabs director since 2003.
	Frank Ianna, 60, chief executive officer 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. Director, Clearwire Corporation and Sprint Nextel. M.S.E.E., Massachusetts Institute of Technology; B.E.E.E., Stevens Institute of Technology. Tellabs director since 2004.
	Linda Wells Kahangi, 46, executive director of Alpha Phi International Fraternity since 2009. President of New Edge Networks, an EarthLink subsidiary, 2007-2008; 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.
	Fred A. Krehbiel, 68, co-chairman of Molex Incorporated since 1999. Co-chairman and chief executive officer 2004-2005; chairman of the board and chief executive officer 1993-1999; vice chairman and chief executive officer 1988-1993. Director, DeVry, Inc. 1996-2008. B.A., Lake Forest College. Tellabs director since 1985.
	Michael E. Lavin, 64, Midwest area managing partner KPMG LLP 1993-2002. Partner 1977-2002. Director, Integrys Energy Group, Inc. Director, SPSS, Inc. 2005-2009. B.B.A., University of Wisconsin. Tellabs director since 2003.
	Stephanie Pace Marshall, Ph.D., 64, 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, 47, 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 emeritus, executive board of Telecommunications Industry Association. M.B.A., Northwestern University; B.S., University of Illinois. Tellabs director since 2008.
	William F. Souders, 81, 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, 68, professor of Business and Operations, Cornell University, Johnson Graduate School of Management since 1996. 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 operates under the direction of its Board of Directors.

Each director who is not an officer of the Company receives an annual retainer for board service and for committee service. In addition, each committee chair receives an annual retainer. Each director receives equity compensation. (Details can be found in the Tellabs 2010 proxy statement.)

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 - Chair, Linda Wells Kahangi, William Souders and Jan Suwinski.

Members of the nominating and governance committee are Stephanie Pace Marshall – Chair, Bo Hedfors, Frank Ianna, Linda Wells Kahangi and Fred Krehbiel.

Members of the compensation committee are William Souders – Chair, Bo Hedfors, Michael Lavin, 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 nominating and governance committee is responsible for reviewing and recommending Tellabs governance practices to the Board. The nominating and governance committee discusses Tellabs corporate governance at each committee meeting.

	TELLABS ANNUAL REPORT 2009
61

The Tellabs leadership team includes (left to right): Rizwan Khan, Daniel P. Kelly, Dr. Vikram Saksena, Michael J. Birck, Robert W. Pullen, Timothy J. Wiggins, Jean K. Holley, John M. Brots, James M. Sheehan and Roger J. Heinz.

Michael J. Birck, 72, chairman and co-founder of Tellabs. Chairman since 2000; chief executive officer 2002-2004; chief executive officer and president 1975-2000. Director, Molex Incorporated. M.S.E.E., New York University; B.S.E.E., Purdue University. Tellabs director since 1975.

Robert W. Pullen, 47, 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 emeritus, executive board of Telecommunications Industry Association. M.B.A., Northwestern University; B.S., University of Illinois. Tellabs director since 2008.

John M. Brots, 49, 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.

Roger J. Heinz, 47, executive vice president, global sales and services since 2008. President, IP-NGN core business unit at Alcatel-Lucent 2006-2008; vice president, converged IP core solutions; vice president, Sprint sales and various management positions at Lucent Technologies 1999-2006; senior positions at Astral Point Communications, Lucent Technology and AT&T Bell Laboratories 1986-1999. M.S.E.E., Cornell University; B.S.E.E., University of Illinois.

Jean K. Holley, 50, executive vice president and chief information officer since 2005. Senior vice president and chief information officer 2004; chief information officer at USG Corp. 1998-2003; various positions at Waste Management 1989-1998; director, VASCO Data Security International, Inc. M.S., Illinois Institute of Technology; B.S., Missouri University of Science and Technology.

Daniel P. Kelly, 48, 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.

Rizwan Khan, 43, executive vice president, global marketing since 2008. Senior vice president of global marketing 2005-2008; various director roles including Tellabs’ APAC region 2001-2005; engineering and management positions at Motorola, Newbridge and Siemens 1988-2001. B.S.E.E., University of Engineering and Technology Lahore, Pakistan.

Dr. Vikram Saksena, 53, executive vice president and chief technology officer since 2008. CTO at Sonus Networks 2003-2008; various positions as CTO and chief architect at start-ups MaxComm Technologies, Narad Networks and Cisco 1998-2003; responsible for data network infrastructure at AT&T 1982-1998. Senior member of the IEEE. Ph.D. and M.S. in E.E., University of Illinois; B.S.E.E., Indian Institute of Technology.

James M. Sheehan, 47, executive vice president, chief administrative officer since 2005 and 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, 53, 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 Mobile — Wireless networks built for digital voice and high-speed data, including video.

4G Mobile — The future generation of wireless networks, designed to offer broadband speeds and integrate different types of mobile technology.

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

ANSI (American National Standards Institute) — A private non-profit organization that oversees the development of standards for products, services, processes and personnel in the United States.

Bandwidth — The carrying capacity of a communications channel.

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

Carrier Ethernet — A scalable, manageable carrier-class network that delivers standardized Ethernet services with Quality of Service and high levels of reliability.

Cloud Computing — A process that involves delivering hosted or virtualized services over the Internet.

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

Deployment Services — Services such as installation, training and support.

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

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.

Gateway — A network device that acts as an entrance to another network and performs functions including signaling control, QoS and security.

HSPA+ (Evolved High-Speed Packet Access) — A 3G wireless broadband standard.

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.

LAN (Local-Area Network) — A computer or data network that covers a small physical area, like a home, office, or small group of buildings.

LTE (Long-Term Evolution) — The next generation of mobile communications services with improved performance and faster speeds.

Managed Access — An access and transport system that simplifies end-to-end management of mobile transport and business services.

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

Mobile Backhaul — A process of aggregating and transmitting mobile traffic from remote sites to a main transmission network.

Mobile Packet Core — The signaling and gateway core infrastructure in a mobile network for 3G and 4G networks.

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.

Network Management — A set of procedures, software, equipment and operations techniques designed to keep a network operating at maximum efficiency.

Offloading — A process of transferring data or bypassing non-required network elements to reduce costs.

Optical Network — A communication system using fiber optics as the means for carrying information between equipment.

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 — A technology that transmits communications traffic in the form of laser light over fiber-optic cable.

Professional Services — Services such as network optimization, business case analysis and network performance enhancements.

QoS (Quality of Service) — A measurement of 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, reducing the need to dispatch technicians.

Router — A device that sends internet protocol (IP) traffic, or packets, to specific destinations.

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

Smartphone — A mobile device that integrates the functionality of a mobile phone, personal digital assistant or other information appliance, often with personal computer functionality.

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

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

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

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.

WiMax — A technology that provides wireless transmission of data for both point-to-point and mobile applications.

Wireline — Networks that use cables rather than radio frequency.

	TELLABS ANNUAL REPORT 2009
63

INVESTOR INFORMATION

Stock Listing

NASDAQ: TLAB. Tellabs is a component of the NASDAQ Global Select Market, Ocean Tomo 300™ Patent Index, the Standard & Poor’s 500 Index and several corporate responsibility indexes including the Maplecroft Climate Innovation Index, FTSE4Good and eight FTSE KLD indexes.

Voting Rights

All Tellabs stockholders are entitled to one vote for each share held. Only stockholders of record as of March 1, 2010, 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. For details, see Tellabs proxy statement.

Stockholders Owning More than 5% of the Company’s Shares

As of December 31, 2009:

Black Rock

Michael J. Birck

Janus Capital Management

Third Avenue Management

Independent Auditors

Ernst & Young LLP

Chicago, IL U.S.A.

2010 Stockholder Calendar

(Dates subject to change)

First Quarter 2010

Earnings Call: April 27, 7:30 a.m. CT

Second Quarter 2010

Annual Meeting

April 29, 2010, 2 p.m. CT

Northern Illinois University

1120 East Diehl Road

Naperville, IL 60563 U.S.A.

Earnings Call: July 27, 7:30 a.m. CT

Third Quarter 2010

Earnings Call: Oct. 26, 7:30 a.m. CT

Corporate Secretary

To request information, communicate with the board of directors, make a stockholder proposal or nominate a director, contact:

James M. Sheehan

Corporate Secretary

Tellabs, Inc.

1415 West Diehl Road

Naperville, IL 60563 U.S.A.

Transfer Agent

To transfer stock, change ownership, report lost or stolen certificates or change your address, contact:

Computershare Investor Services

+1.312.360.5389

Investor Relations

Tom Scottino

Senior Manager, Investor Relations

+1.630.798.3602

tom.scottino@tellabs.com

Tellabs Foundation

For information of grants in education, health and environment, visit www.tellabs.com/about/foundations.shtml, or contact:

Meredith Hilt

Executive Director,

Tellabs Foundation

meredith.hilt@tellabs.com

Locations

See www.tellabs.com/locations for complete information.

Headquarters

1415 West Diehl Road

Naperville, IL 60563 U.S.A.

Phone: +1.630.798.8800

www.tellabs.com

Worldwide Sales and Service

Asia Pacific Phone: +65.6215.6411

Europe, Middle East and Africa

Phone: +44.870.238.4700

Latin America and Caribbean Phone:

+1.954.839.2800

North America Phone:

+1.630.798.8800

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.

Certificate of Incorporation and Bylaws

Tellabs’ current bylaws and certificate of incorporation are available online at www.tellabs.com/investors.

64

For current electronic information about Tellabs, see the following resources:

Tellabs.com

To read Tellabs’ news releases, our customer magazine Inspire and recent articles mentioning Tellabs, visit www.tellabs.com.

Tellabs.com Investor Information

To see the electronic annual report, Tellabs SEC filings, our investor calendar and investor webcasts, visit www.tellabs.com/investor.

E-mail Alerts

To automatically receive Tellabs financial information by e-mail, you can sign up for alerts at www.tellabs/investor, or send an e-mail to Investor Relations at tom.scottino@tellabs.com.

Tellabs Blog

To hear what Tellabs experts say about the newest trends and innovations, sign up to automatically receive their updates at visit www.tellabs.com/blog.

Tellabs Corporate Social Responsibility

To learn more about how Tellabs manages its business for positive economic, social and environmental outcomes, visit www.tellabs.com/about/corpresp.shtml.

Tellabs Facebook and Tellabs Twitter

To follow Tellabs’ social media conversations, visit www.facebook.com/tellabs or www.twitter.com/tellabsinc.

EX-21

Exhibit 21

Tellabs, Inc. and Subsidiaries

Subsidiaries of the Registrant

as of January 1, 2010

Name	State or Other Jurisdiction of Incorporation
Tellabs Operations, Inc.	Delaware
Tellabs International, Inc.	Illinois
Tellabs de Colombia Ltda	Colombia
Tellabs South Africa (S.A.) (Proprietary) Limited	South Africa
Tellabs Communications Canada Ltd.	Canada
Tellabs do Brasil, 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 Limited	Ireland
Tellabs Limited	Ireland
Tellabs Research Limited	Ireland
Tellabs EMEA Holdings Limited	Ireland
Tellabs AB	Sweden
Tellabs Holdings SA (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 FZ-LLC	Dubai
EMEA TEL LAMP (EMEA TEL LAB)	Greece
Telecommunications Single Partner Limited Liability Company
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
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
WiChorus, Inc.	Delaware
Wichorus Design and Development Private Limited	India
WICHORUS (PRIVATE) LIMITED	Pakistan

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 March 1, 2010, with respect to the consolidated financial statements of Tellabs, Inc. and subsidiaries and the effectiveness of internal control over financial reporting of Tellabs, Inc. and subsidiaries, included in the 2009 Annual Report to Shareholders of Tellabs, Inc.

Our audits also included the financial statement schedule of Tellabs, Inc. and subsidiaries 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 March 1, 2010, 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 also consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-45788, 33-48972, 33-55487, 333-87637, 333-81360, 333-107457, 333-122712, 333-128076, 333-159258 and 333-163900 and Form S-4 No. 333-116794) and related prospectuses of our reports dated March 1, 2010, with respect to the consolidated financial statements of Tellabs, Inc. and subsidiaries and the effectiveness of internal control over financial reporting of Tellabs, Inc. and subsidiaries incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule of Tellabs, Inc. and subsidiaries included in this Annual Report (Form 10-K) of Tellabs, Inc. for the year ended January 1, 2010.

/s/ Ernst & Young, LLP

Chicago, Illinois

March 1, 2010

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert W. Pullen, 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: March 1, 2010

/s/ Robert W. Pullen

Robert W. Pullen

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: March 1, 2010

/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 January 1, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert W. Pullen, 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/ Robert W. Pullen

Robert W. Pullen

Chief Executive Officer

Date: March 1, 2010

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 January 1, 2010, 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: March 1, 2010

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.