UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 29, 2012

OR

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

For the transition period from                      to                     

Commission file Number: 0-09692

TELLABS, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

Indicate by check mark whether the registrant 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  x    NO  ¨

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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

Common Shares, $0.01 Par Value – 367,361,127 shares outstanding on July 27, 2012.

TELLABS, INC.

INDEX

		PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Operations and Comprehensive Loss	3
	Consolidated Balance Sheets	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition	24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34
Item 4.	Controls and Procedures	35
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 6.	Exhibits	36
SIGNATURE		37

2

PART I . FINANCIAL INFORMATION

Item 1. Financial Statements

TELLABS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(Unaudited)

	Second Quarter						Six Months
	6/29/12			7/1/11			6/29/12			7/1/11
In millions, except per-share data
Revenue
Products	$	237.4		$	259.5		$	447.1		$	531.9
Services		50.7			57.2			98.9			107.2
Total revenue		288.1			316.7			546.0			639.1
Cost of Revenue
Products		140.0			165.3			268.7			324.8
Services		33.9			36.2			67.4			76.8
Total cost of revenue		173.9			201.5			336.1			401.6
Gross Profit		114.2			115.2			209.9			237.5
Gross profit as a percentage of revenue		39.6	%		36.4	%		38.4	%		37.2	%
Gross profit as a percentage of revenue – products		41.0	%		36.3	%		39.9	%		38.9	%
Gross profit as a percentage of revenue – services		33.1	%		36.7	%		31.9	%		28.4	%
Operating Expenses
Research and development		58.8			83.5			125.7			163.8
Sales and marketing		32.2			40.8			68.6			85.5
General and administrative		19.7			21.0			40.8			44.7
Intangible asset amortization		1.0			5.1			3.2			10.3
Restructuring and other charges		0.9			—			106.9			1.0
Total operating expenses		112.6			150.4			345.2			305.3
Operating Earnings (Loss)		1.6			(35.2	)		(135.3	)		(67.8	)
Operating earnings (loss) as a percentage of revenue		0.6	%		-11.1	%		-24.8	%		-10.6	%
Other Income
Interest income, net		1.6			3.1			3.4			6.4
Other expense, net		(1.1	)		(1.1	)		(2.1	)		(1.7	)
Total other income		0.5			2.0			1.3			4.7
Earnings (Loss) Before Income Tax		2.1			(33.2	)		(134.0	)		(63.1	)
Income tax (expense) benefit		(6.8	)		3.9			(10.5	)		9.7
Net Loss	$	(4.7	)	$	(29.3	)	$	(144.5	)	$	(53.4	)
Weighted Average Shares Outstanding
Basic		367.1			364.6			366.4			363.8
Diluted		367.1			364.6			366.4			363.8
Net Loss Per Share
Basic	$	(0.01	)	$	(0.08	)	$	(0.39	)	$	(0.15	)
Diluted	$	(0.01	)	$	(0.08	)	$	(0.39	)	$	(0.15	)
Comprehensive Loss	$	(35.8	)	$	(16.5	)	$	(162.9	)	$	(15.1	)
Cash Dividends Per Share	$	0.02		$	0.02		$	0.04		$	0.04

The accompanying notes are an integral part of these statements.

3

TELLABS, INC.

CONSOLIDATED BALANCE SHEETS

	6/29/12			12/30/11
In millions, except share data	Unaudited
Assets
Current Assets
Cash and cash equivalents	$	166.5		$	132.7
Investments in marketable securities		771.2			843.9
Total cash, cash equivalents and marketable securities		937.7			976.6
Other marketable securities		181.3			190.9
Accounts receivable, net of allowances of $1.3 and $1.3		277.4			317.6
Inventories
Raw materials		39.5			33.7
Finished goods		84.1			110.3
Total inventories		123.6			144.0
Income taxes		25.5			27.9
Miscellaneous receivables and other current assets		35.3			39.8
Total Current Assets		1,580.8			1,696.8
Property, Plant and Equipment
Land		19.8			20.0
Buildings and improvements		188.5			197.4
Equipment		404.7			446.9
Total property, plant and equipment		613.0			664.3
Accumulated depreciation		(383.4	)		(390.8	)
Property, plant and equipment, net		229.6			273.5
Goodwill		121.9			122.0
Intangible Assets, Net of Amortization		6.5			57.1
Other Assets		94.4			98.6
Total Assets		$2,033.2			$2,248.0
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	73.0		$	97.1
Accrued compensation		42.2			46.3
Restructuring and other charges		16.2			13.0
Income taxes		60.5			63.5
Loan related to other marketable securities		181.3			190.9
Deferred revenue		34.0			40.8
Other accrued liabilities		78.5			78.4
Total Current Liabilities		485.7			530.0
Long-Term Restructuring Liabilities		5.7			4.7
Income Taxes		20.6			21.2
Other Long-Term Liabilities		46.7			47.4
Stockholders’ Equity
Preferred stock: authorized 5,000,000 shares of $0.01 par value; no shares issued and outstanding		—			—
Common stock: authorized 1,000,000,000 shares of $0.01 par value; 508,071,837 and 505,238,503 shares issued		5.1			5.1
Additional paid-in capital		1,582.7			1,572.4
Treasury stock, at cost: 141,026,970 and 140,250,476 shares		(1,230.2	)		(1,227.2	)
Retained earnings		1,045.5			1,204.6
Accumulated other comprehensive income		71.4			89.8
Total Stockholders’ Equity		1,474.5			1,644.7
Total Liabilities and Stockholders’ Equity	$	2,033.2		$	2,248.0

The accompanying notes are an integral part of these statements.

4

TELLABS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months
	6/29/12			7/1/11
In millions
Operating Activities
Net loss	$	(144.5	)	$	(53.4	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		26.6			38.6
Loss on disposal of property, plant and equipment		0.8			0.1
Equity-based compensation		10.4			15.6
Deferred income taxes		(0.1	)		(2.8	)
Restructuring and other charges		106.9			1.0
Net loss on investments in marketable securities		—			0.4
Other-than-temporary impairment charges on investments		—			1.2
Excess tax benefits from equity-based compensation		—			(0.2	)
Net changes in assets and liabilities:
Accounts receivable		33.8			12.2
Inventories		18.3			1.7
Miscellaneous receivables and other current assets		6.4			(5.2	)
Other assets		(0.8	)		(0.9	)
Accounts payable		(22.8	)		(18.2	)
Restructuring and other charges		(26.6	)		(5.5	)
Deferred revenue		(6.1	)		38.1
Other accrued liabilities		(6.1	)		(67.9	)
Income taxes		(1.2	)		(11.7	)
Other long-term liabilities		(0.6	)		3.6
Net Cash Used for Operating Activities		(5.6	)		(53.3	)
Investing Activities
Capital expenditures		(9.9	)		(32.1	)
Payments for purchases of investments		(232.0	)		(384.9	)
Proceeds from sales and maturities of investments		303.2			485.1
Net Cash Provided by Investing Activities		61.3			68.1
Financing Activities
Proceeds from short-term borrowings		—			1.3
Payments of short-term borrowings		—			(1.3	)
Proceeds from issuance of common stock under stock plans		—			0.5
Repurchase of common stock		(3.0	)		(4.8	)
Excess tax benefits from equity-based compensation		—			0.2
Dividends paid		(14.6	)		(14.5	)
Net Cash Used for Financing Activities		(17.6	)		(18.6	)
Effect of Exchange Rate Changes on Cash		(4.3)			8.6
Net Increase in Cash and Cash Equivalents		33.8			4.8
Cash and Cash Equivalents – Beginning of Year		132.7			208.8
Cash and Cash Equivalents – End of Period		$166.5			$213.6

The accompanying notes are an integral part of these statements.

5

TELLABS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

IN MILLIONS, EXCEPT SHARE AND PER-SHARE DATA

1. Basis of Presentation

We prepared the accompanying unaudited consolidated financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial statements, the requirements of Form 10-Q and applicable rules of the U.S. Securities and Exchange Commission’s Regulation S-X. Therefore, they do not include all disclosures normally required by U.S. generally accepted accounting principles for complete financial statements. Accordingly, the financial statements and notes herein are to be read in conjunction with our Annual Report on Form 10-K for the year ended December 30, 2011.

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

The segment disclosures in this Form 10-Q reflect our new reporting segments. See Note 11, Segment Information, for a more detailed discussion and explanation of the change.

We record revenue net of any sales-related taxes that are imposed on a sale to our customers regardless of whether or not we bill the customer for such tax. We believe this approach results in financial statements that are more easily understood by investors. We recorded a $3.2 million reduction to revenue in the second quarter of 2012, attributable to prior periods’ taxes on sales transactions involving deployment services in a foreign jurisdiction. The impact of this prior period adjustment on net loss was $3.2 million and $0.01 per share for the second quarter of 2012, and $2.9 million and $0.01 per share for the first six months of 2012.

2. Restructuring and Other Charges

On January 30, 2012, management initiated a restructuring plan that aligns expenses with revenue. Tellabs is stopping new development on the Tellabs^® SMARTCORE 9100 series for mobile packet core and consolidating research and development into fewer locations. The pretax charges for this plan will consist of $21 million for severance-related charges of approximately 490 employees, $37 million for facility- and asset-related charges and $48 million for the accelerated amortization for abandoned intangible assets. Restructuring expense for this plan for the second quarter of 2012 was $0.8 million, which consists of a reduction of $1.6 million for severance-related charges and a $2.4 million charge for facility- and asset-related charges. Restructuring expense for this plan for the first six months of 2012 was $105.3 million, which consists of $21.3 million for severance-related charges, $35.1 million for facility- and asset-related charges, $47.7 million for the accelerated amortization of abandoned intangible assets, and $1.2 million for other obligations. By segment, total charges to date under this plan are $4.0 million for Optical, $98.2 million for Data, $1.3 million for Access, and $1.8 million for Services. Estimated cash payments under this plan are expected to be $29.6 million through 2017. Other than the cash payments, actions under this plan are expected to be substantially completed by the end of the first quarter of 2013.

On July 25, 2011, management initiated a restructuring plan to align our cost structure to business conditions at that time. Restructuring expense for this plan for the second quarter of 2012 was $0.1 million, which consists of a reduction of $0.4 million for severance-related charges and a $0.5 million charge for facility- and asset-related charges. Restructuring expense for this plan for the first six months of 2012 was $1.7 million, which consists of $0.9 million for severance-related charges and $0.8 million for facility- and asset-related charges. Cumulative restructuring charges for this plan are $21.4 million, which consists of $15.4 million for severance-related charges, $5.4 million for facility- and asset-related charges, and $0.6 million for other obligations. By segment, total charges to date under this plan are $8.4 million for Optical, $7.3 million for Data, $1.7 million for Access and $4.0 million for Services. Estimated cash payments under this plan are expected to be $18.5 million through the third quarter of 2014. Other than the cash payments, restructuring actions under this plan were substantially completed in the second quarter of 2012.

A net restructuring credit for previous restructuring plans for the first six months of 2012 was $0.1 million for severance-related charges.

The balance for restructuring plans relates to net lease obligations that expire through 2017 and cash severance that we expect to pay through the first quarter of 2014.

6

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

	Second Quarter					Six Months
	6/29/12			7/1/11		6/29/12		7/1/11
Severance and other termination benefits	$	(2.0	)	$	—	$	22.1	$	1.2
Facility and other exit costs		2.9			—		35.9		(0.2	)
Accelerated amortization of intangible assets		—			—		47.7		—
Other obligations		—			—		1.2		—
Total restructuring and other charges	$	0.9		$	—	$	106.9	$	1.0

The following table summarizes restructuring and other charges activity by segment for the second quarter and the first six months of 2012 and the status of the reserves at June 29, 2012:

			Second Quarter Activity
	Balance at 3/30/12		Restructuring Expense			Cash Payments			Other Activities1			Balance at 6/29/12
2012 Restructuring Plan
Optical	$	3.0	$	(0.3	)	$	(0.7	)	$	(0.1	)	$	1.9
Data		16.7		1.9			(7.5	)		(2.4	)		8.7
Access		1.1		(0.1	)		(0.2	)		—			0.8
Services		2.0		(0.7	)		(0.6	)		—			0.7
Subtotal 2012 Restructuring Plan		22.8		0.8			(9.0	)		(2.5	)		12.1
2011 Restructuring Plan
Optical		2.8		1.5			(1.8	)		(0.5	)		2.0
Data		4.2		—			(1.3	)		(0.1	)		2.8
Access		0.9		(0.1	)		(0.3	)		—			0.5
Services		1.7		(1.3	)		0.1			—			0.5
Subtotal 2011 Restructuring Plan		9.6		0.1			(3.3	)		(0.6	)		5.8
Previous Restructuring Plans
Optical		0.3		—			(0.1	)		—			0.2
Data		1.7		—			(0.2	)		—			1.5
Access		2.3		—			(0.1	)		—			2.2
Services		0.1		—			—			—			0.1
Subtotal Previous Restructuring Plans		4.4		—			(0.4	)		—			4.0
Total Restructuring Plans	$	36.8	$	0.9		$	(12.7	)	$	(3.1	)	$	21.9

7

			Six Months Activity
	Balance at 12/30/11		Restructuring Expense			Cash Payments			Other Activities1			Balance at 6/29/12
2012 Restructuring Plan
Optical	$	—	$	4.0		$	(1.2	)	$	(0.9	)	$	1.9
Data		—		98.2			(15.2	)		(74.3	)		8.7
Access		—		1.3			(0.4	)		(0.1	)		0.8
Services		—		1.8			(1.1	)		—			0.7
Subtotal 2012 Restructuring Plan		—		105.3			(17.9	)		(75.3	)		12.1
2011 Restructuring Plan
Optical		4.4		1.6			(3.4	)		(0.6	)		2.0
Data		5.5		—			(2.5	)		(0.2	)		2.8
Access		1.1		—			(0.6	)		—			0.5
Services		1.6		0.1			(1.2	)		—			0.5
Subtotal 2011 Restructuring Plan		12.6		1.7			(7.7	)		(0.8	)		5.8
Previous Restructuring Plans
Optical		0.4		(0.1	)		(0.1	)		—			0.2
Data		1.9		—			(0.4	)		—			1.5
Access		2.6		—			(0.4	)		—			2.2
Services		0.2		—			(0.1	)		—			0.1
Subtotal Previous Restructuring Plans		5.1		(0.1	)		(1.0	)		—			4.0
Total Restructuring Plans	$	17.7	$	106.9		$	(26.6	)	$	(76.1	)	$	21.9

¹ Other activities include accelerated amortization related to abandoned intangible assets, accelerated depreciation of property, plant and equipment to be disposed, the effects of currency translation as well as other changes that do not flow through restructuring expense.

3. Intangible Assets

We amortize intangible assets with finite lives on a straight-line basis over their estimated useful lives. Intangible assets are reviewed for impairment when events or circumstances indicate their carrying amount may not be recoverable. 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.

In conjunction with the January 30, 2012, restructuring plan, we recorded $47.7 million of accelerated amortization to Restructuring and other charges for abandoned intangible assets in the first quarter of 2012 related to the mobile packet core technology. As a result of the abandonment, we wrote these assets down to zero in the first quarter of 2012.

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

	6/29/12
	Gross Assets		Accumulated Amortization			Net
Developed technology	$	147.6	$	(147.3	)	$	0.3
Customer relationships		30.9		(24.7	)		6.2
Total	$	178.5	$	(172.0	)	$	6.5

	12/30/11
	Gross Assets			Accumulated Amortization			Net
Developed technology	$	212.8		$	(169.1	)	$	43.7
Customer relationships		35.2			(23.7	)		11.5
Trade names/trademarks		0.2			(0.2	)		—
Leasehold improvements		(2.7	)		2.3			(0.4	)
Non-compete arrangements		13.1			(10.8	)		2.3
Total	$	258.6		$	(201.5	)	$	57.1

8

The estimated future amortization expense of intangible assets subject to amortization as of June 29, 2012 follows:

2012 (remaining six months)	$	2.1
2013	$	4.2
2014	$	0.1
2015	$	0.1

4. Fair Value Measurements

We measure certain financial assets and liabilities at fair value on a recurring basis, and certain non-financial assets and liabilities on a nonrecurring basis. Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. 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 the principal or most advantageous market in an orderly transaction between market participants on the measurement date. 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. Tellabs management compares the third-party pricing with pricing from outside investment managers and other market sources to ensure the third-party pricing is reasonable. 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 Federal Deposit Insurance Corporation (FDIC)-backed corporate debt obligations, investment grade corporate bonds, mortgaged backed debt obligations guaranteed by the Government National Mortgage Association (GNMA), certain FDIC-backed bank certificates of deposit, foreign government debt obligations and foreign corporate debt obligations.

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.

9

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). Key inputs for currency derivatives are the spot rate, interest rates and credit derivative swap spreads. 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 June 29, 2012
	Balance at 6/29/12		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	$	158.7	$	158.7	$	—	$	—
Corporate debt obligations guaranteed by FDIC		20.3		—		20.3		—
Corporate debt obligations		191.4		—		191.4		—
Mortgaged backed debt obligations guaranteed by GNMA		90.0		—		90.0		—
Certificates of deposit guaranteed by FDIC		1.2		—		1.2		—
Foreign government debt obligations		194.5		—		194.5		—
Foreign corporate debt obligations		115.1		—		115.1		—
Subtotal		771.2		158.7		612.5		—
Other marketable securities		181.3		181.3		—		—
Derivative financial instruments		0.4		—		0.4		—
Total Assets	$	952.9	$	340.0	$	612.9	$	—
Liabilities
Loan related to other marketable securities	$	181.3	$	181.3	$	—	$	—
Derivative financial instruments		0.5		—		0.5		—
Total Liabilities	$	181.8	$	181.3	$	0.5	$	—

10

			Fair Value Measurements at December 30, 2011
	Balance at 12/30/11		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	$	195.7	$	195.7	$	—	$	—
Corporate debt obligations guaranteed by FDIC		66.8		—		66.8		—
Corporate debt obligations		201.5		—		201.5		—
Mortgaged backed debt obligations guaranteed by GNMA		91.2		—		91.2		—
Certificates of deposit guaranteed by FDIC		1.5		—		1.5		—
Foreign government debt obligations		223.0		—		223.0		—
Foreign corporate debt obligations		64.2		—		64.2		—
Subtotal		843.9		195.7		648.2		—
Other marketable securities		190.9		190.9		—		—
Derivative financial instruments		0.2		—		0.2		—
Total Assets	$	1,035.0	$	386.6	$	648.4	$	—
Liabilities
Loan related to other marketable securities	$	190.9	$	190.9	$	—	$	—
Derivative financial instruments		0.2		—		0.2		—
Total Liabilities	$	191.1	$	190.9	$	0.2	$	—

5. Investments

We account for investments in marketable securities at fair value, with the unrealized gain or loss, less deferred income taxes, included in Other comprehensive loss and shown as a separate component of stockholders’ equity. We base realized gains and losses on specific identification of the security sold. At June 29, 2012, and December 30, 2011, available-for-sale marketable securities consisted of the following:

	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair Value
June 29, 2012
U.S. government debt obligations	$	158.4	$	0.4	$	(0.1	)	$	158.7
Corporate debt obligations guaranteed by FDIC		20.2		0.1		—			20.3
Corporate debt obligations		190.4		1.2		(0.2	)		191.4
Mortgaged backed debt obligations guaranteed by GNMA		89.6		0.6		(0.2	)		90.0
Certificates of deposit guaranteed by FDIC		1.2		—		—			1.2
Foreign government debt obligations		192.7		1.9		(0.1	)		194.5
Foreign corporate debt obligations		114.7		0.5		(0.1	)		115.1
Total	$	767.2	$	4.7	$	(0.7	)	$	771.2
December 30, 2011
U.S. government debt obligations	$	195.2	$	0.5	$	—		$	195.7
Corporate debt obligations guaranteed by FDIC		66.6		0.2		—			66.8
Corporate debt obligations		201.4		0.8		(0.7	)		201.5
Mortgaged backed debt obligations guaranteed by GNMA		90.9		0.4		(0.1	)		91.2
Certificates of deposit guaranteed by FDIC		1.5		—		—			1.5
Foreign government debt obligations		221.5		1.5		—			223.0
Foreign corporate debt obligations		64.1		0.2		(0.1	)		64.2
Total	$	841.2	$	3.6	$	(0.9	)	$	843.9

11

The following table summarizes the maturities of our available-for-sale marketable securities at June 29, 2012:

	Amortized Cost		Fair Value
Less than 12 months	$	188.0	$	188.3
Due in 1 to 5 years		489.7		492.9
Due after 5 years		89.5		90.0
Total	$	767.2	$	771.2

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 June 29, 2012. No other-than-temporary impairments were recorded in the second quarter or six months of 2012.

Investments in marketable securities with unrealized losses at June 29, 2012, and December 30, 2011, were as follows:

	Unrealized Loss Less than 12 months					Unrealized Loss Greater than 12 months				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
June 29, 2012
U.S. government debt obligations	$	46.2	$	(0.1	)	$	—	$	—	$	46.2	$	(0.1	)
Corporate debt obligations		46.3		(0.2	)		—		—		46.3		(0.2	)
Mortgaged backed debt obligations guaranteed by GNMA		37.1		(0.2	)		—		—		37.1		(0.2	)
Foreign government debt obligations		49.1		(0.1	)		—		—		49.1		(0.1	)
Foreign corporate debt obligations		32.6		(0.1	)		—		—		32.6		(0.1	)
Total	$	211.3	$	(0.7	)	$	—	$	—	$	211.3	$	(0.7	)
December 30, 2011
Corporate debt obligations	$	81.0	$	(0.7	)	$	—	$	—	$	81.0	$	(0.7	)
Mortgaged backed debt obligations guaranteed by GNMA		31.4		(0.1	)		—		—		31.4		(0.1	)
Foreign corporate debt obligations		24.1		(0.1	)		—		—		24.1		(0.1	)
Total	$	136.5	$	(0.9	)	$	—	$	—	$	136.5	$	(0.9	)

The following table presents gross realized gains and losses related to fixed income investments for the three months and six months ending June 29, 2012, and July 1, 2011:

	Second Quarter						Six Months
	6/29/12			7/1/11			6/29/12			7/1/11
Gross realized gains	$	0.2		$	1.0		$	0.5		$	1.4
Gross realized losses		(0.2	)		(1.3	)		(0.5	)		(1.8	)
Total	$	—		$	(0.3	)	$	—		$	(0.4	)

12

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, through the exchange of AFC’s ownership in Cerent Corporation for Cisco stock. In 2000, AFC entered into two three-year hedge contracts, pledging all of the Cisco stock to secure the obligations under the contracts and recognizing unrealized gains in their financial statements. 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. As a result, AFC received cash proceeds for which a significant portion of the net gains were deferred for income tax purposes, and a deferred tax liability was established. Since the same number of shares was borrowed, AFC’s net position in Cisco was reduced to zero, eliminating any market risk exposure. This structure is maintained to preserve the deferral of a potentially significant sum of cash tax payments. In the future, however, we may settle all or a portion of this arrangement to the extent we are able to minimize any adverse impact to our cash balance and/or tax provision.

The deferred tax liability was $195.2 million as of June 29, 2012, and December 30, 2011, and is netted against other tax items in Income Taxes in the current liabilities section of our Consolidated Balance Sheets. The aggregate amount of the fair values of those stock loans is reflected as a current liability on the balance sheets as of June 29, 2012 and December 30, 2011. 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 June 29, 2012, Other marketable securities and Loan related to other marketable securities was $181.3 million at a market price of $17.17 per share and $190.9 million at a market price of $18.08 per share at December 30, 2011. The fees associated with the stock loan agreement were $0.3 million in the second quarter of 2012 and 2011, and $0.6 million in the first six months of 2012 and 2011.

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 $2.7 million at June 29, 2012, and $3.2 million at December 30, 2011. 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. No other-than-temporary impairments were recorded in the second quarters and first six months of 2012 and 2011.

6. 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 the 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.

Balance Sheet Hedges (Non-designated Hedges)

Short-term monetary assets and liabilities denominated in currencies other than the functional currency 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. These derivative contracts are not designated as hedges. At June 29, 2012, we held non-designated foreign currency forward contracts in 14 currencies, with a gross notional equivalent of $212.3 million.

Net Investment Hedges

We entered into three-month foreign currency forward contracts and a three-month foreign currency collar contract, 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, less applicable deferred income taxes 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 June 29, 2012, we had a net unrealized gain of $21.2 million in Accumulated other comprehensive income related to settled contracts. We held net investment hedges with a notional value of 200 million Euros at the end of the quarter.

13

The fair value of derivative instruments in the Consolidated Balance Sheet as of June 29, 2012, was as follows:

	Asset Derivatives Reported in Miscellaneous Receivables and Other Current Assets		Liability Derivatives Reported in Other Accrued Liabilities
Net investment hedges	$	0.1	$	—
Balance sheet hedges (Non-designated hedges)		0.3		0.5
Total derivatives	$	0.4	$	0.5

The fair value of derivative instruments in the Consolidated Balance Sheet as of December 30, 2011, was as follows:

	Asset Derivatives Reported in Miscellaneous Receivables and Other Current Assets		Liability Derivatives Reported in Other Accrued Liabilities
Net investment hedges	$	0.1	$	—
Balance sheet hedges (Non-designated hedges)		0.1		0.2
Total derivatives	$	0.2	$	0.2

The effect of derivative instruments designated as hedging instruments on the Consolidated Statements of Operations and Comprehensive Loss follows:

	Second Quarter
	Gain (Loss) Recognized in Accumulated OCI, net (Effective Portion)					Gain (Loss) Recognized in Other Expense, net: Excluded from Effectiveness testing
	6/29/12		7/1/11			6/29/12		7/1/11
Net investment hedges	$	6.7	$	(2.7	)	$	0.1	$	(0.2	)

	Six Months
	Gain (Loss) Recognized in Accumulated OCI, net (Effective Portion)					Gain (Loss) Recognized in Other Expense, net: Excluded from Effectiveness testing
	6/29/12		7/1/11			6/29/12		7/1/11
Net investment hedges	$	2.5	$	(10.0	)	$	0.2	$	(0.3	)

The effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Operations and Comprehensive Loss follows:

	Second Quarter					Six Months
	(Loss) Gain Recognized in Other Expense, net 1					(Loss) Gain Recognized in Other Expense, net 1
	6/29/12			7/1/11		6/29/12			7/1/11
Foreign currency forward and option contracts	$	(2.0	)	$	2.1	$	(0.6	)	$	6.5

¹ The gains or losses from changes in the fair value of the derivative contracts are generally offset by gains or losses of the underlying transactions being hedged.

14

7. Product Warranties

We provide warranties for all of our products. The specific terms and conditions of those warranties vary depending on the product. We provide a basic limited warranty for periods ranging from 90 days to 6 years.

The estimate of warranty liability involves many factors, including the number of units shipped, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of the recorded warranty liability and adjust the amounts as necessary. Other adjustments to accruals for product warranties 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 we expect to incur more than 12 months in the future as a long-term liability. Product warranty liabilities are as follows:

	Second Quarter						Six Months
	6/29/12			7/1/11			6/29/12			7/1/11
Balance – beginning of period	$	17.3		$	21.2		$	17.0		$	19.4
Accruals for product warranties		1.0			2.1			2.9			4.9
Settlements		(1.3	)		(1.9	)		(2.2	)		(2.3	)
Other adjustments to accruals for product warranties		(0.7	)		(1.4	)		(1.4	)		(2.0	)
Balance – end of period	$	16.3		$	20.0		$	16.3		$	20.0

	Balance at 6/29/12		Balance at 7/1/11
Balance sheet classification - end of period
Other accrued liabilities	$	7.4	$	8.7
Other long-term liabilities		8.9		11.3
Total product warranty liabilities	$	16.3	$	20.0

8. 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). Equity-based grants vest over one to four years, with the majority vesting over a three-year period. We recognize compensation expense for stock options, restricted stock and PSUs over the service period based on the fair value on the grant date. Stock options and SARs granted but unexercised expire 10 years from the grant date. Stockholders previously approved 53,889,977 shares for grant under the 2004 Plan, of which 17,451,007 remain available for grant at June 29, 2012.

Stock Options

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:

	6/29/12			7/1/11
Expected volatility		43.3	%		46.4	%
Risk-free interest rate		0.9	%		2.2	%
Expected term (in years)		5.3			5.3
Expected dividend yield		2.0	%		1.5	%

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. We based the expected dividend yield on the option’s exercise price and annualized dividend rate at the date of grant.

15

The following is a summary of stock option activity during 2012 as of June 29, 2012:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in  millions)
Outstanding – beginning of year		20,719,482		$	7.68
Granted		2,099,707		$	3.95
Exercised		(110,577	)	$	0.32
Forfeited/expired		(1,667,813	)	$	8.21
Outstanding – end of period		21,040,799		$	7.31		3.8	$	0.2
Exercisable – end of period		17,111,853		$	7.86		2.8	$	0.2
Shares vested or expected to vest		20,687,345		$	7.35		3.7	$	0.2

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our closing stock price as of June 29, 2012, that the option holders would have received had all holders exercised their options as of that date. The aggregate intrinsic value of exercised stock options during the second quarter of 2012 was $0.2 million.

The weighted average fair value of stock options granted during the first six months of 2012 was $1.29.

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. There were no cash payments during the first half of 2012 and 2011.

The following is a summary of cash-settled SARs activity during 2012 as of June 29, 2012:

	Shares			Weighted Average Exercise Price
Outstanding – beginning of year		492,131		$	6.81
Granted		16,200		$	3.98
Forfeited/expired		(31,822	)	$	7.37
Outstanding – end of period		476,509		$	6.67

Restricted Stock

The fair market value of restricted stock vested was $7.9 million in the first half of 2012. The weighted average grant date fair value of restricted stock was $3.95 per share in the first six months of 2012 and $5.37 per share in the first six months of 2011.

The following is a summary of restricted stock activity during 2012 as of June 29, 2012:

	Shares			Weighted Average Grant Date Fair Value
Non-vested – beginning of year		4,854,587		$	6.29
Granted		2,304,298		$	3.95
Vested		(2,042,116	)	$	6.25
Forfeited		(1,028,297	)	$	6.52
Non-vested – end of period		4,088,472		$	4.93

16

Performance Stock Units

The 2004 Plan provides for the granting of PSUs. We granted 1,962,549 PSUs in the first six months of 2012 and 1,640,832 PSUs in the first six months of 2011. The PSUs granted in the first six months of 2012 entitle the recipients to receive shares of our common stock commencing in the first quarter of 2013, contingent on the achievement of operating earnings targets and strategic goals for the 2012 fiscal year. Following achievement of these measures and subject to continued employment, one-third of such shares will be issued in annual installments beginning in the first quarter of 2013. At maximum target performance, we will issue two shares for each PSU granted. The weighted average fair value of PSUs granted in the first six months of 2012 was $3.98 per share and the weighted average fair value of PSUs granted in the first six months of 2011 was $5.40 per share.

The PSUs granted in 2011 entitle the recipients to receive shares of our common stock commencing in the first quarter of 2012, contingent on the achievement of strategic goals for 2011. Performance was based upon achieving market share and market penetration gains, product development achievement, and a customer service objective with respect to strategic goals. Under the executive plan, 50% of the PSUs were earned and 0.50 shares for each PSU will be paid out, subject to continued employment. We issued one-third (99,420 shares) of the total shares in the first quarter of 2012 and generally, one-third of such shares will be issued in annual installments in the first quarter of 2013 and the first quarter of 2014. Since 2011 minimum strategic goals were not met for the mobile internet plan, none of the PSUs were earned, no expense was incurred, and no amounts will be paid out with respect to them.

The following is a summary of PSU activity during 2012 as of June 29, 2012:

	Shares			Weighted Average Grant Date Fair Value
Non-vested – beginning of year		2,269,410		$	5.51
Granted		1,962,549		$	3.98
Vested		(734,185	)	$	5.15
Forfeited		(1,191,681	)	$	5.31
Non-vested – end of period		2,306,093		$	4.43

Equity-Based Compensation Expense

The following table sets forth the total equity-based compensation expense resulting from stock options, SARs, restricted stock, and PSUs by line item on the Statements of Operations and Comprehensive Loss:

	Second Quarter						Six Months
	6/29/12			7/1/11			6/29/12			7/1/11
Cost of revenue – products	$	0.2		$	0.5		$	0.6		$	1.0
Cost of revenue – services		0.4			0.6			0.9			1.2
Research and development		1.4			3.1			3.2			5.6
Sales and marketing		0.8			1.3			1.7			2.6
General and administrative		2.0			2.5			4.0			5.2
Equity-based compensation expense before income taxes		4.8			8.0			10.4			15.6
Income tax benefit		(0.1	)		(1.2	)		(0.2	)		(2.6	)
Total equity-based compensation expense after income taxes	$	4.7		$	6.8		$	10.2		$	13.0

17

The following table sets forth the total equity-based compensation expense by type:

	Second Quarter						Six Months
	6/29/12			7/1/11			6/29/12			7/1/11
Stock options	$	0.9		$	1.3		$	2.0		$	2.6
Cash-settled SARs		(0.2	)		(0.1	)		(0.1	)		(0.2	)
Restricted stock		2.4			5.4			5.8			9.8
Performance stock units		1.7			1.4			2.7			3.4
Total	$	4.8		$	8.0		$	10.4		$	15.6

As of June 29, 2012, we had $26.1 million of unrecognized equity-based compensation cost that we expect to recognize over a weighted average period of 1.8 years.

9. Income Taxes

We recorded tax expense of $6.8 million in the second quarter and $10.5 million in the first six months of 2012. Our tax expense results in an effective tax rate above the federal statutory rate of 35% because we are unable to recognize tax benefits on domestic losses due to the valuation allowance maintained against domestic deferred tax assets, combined with tax expense on income from foreign operations. We expect to continue to maintain a valuation allowance against domestic and certain non-U.S. deferred tax assets until a sufficient level of profitability is attained.

10. Comprehensive Loss

Comprehensive loss for the second quarter and the first six months of 2012 and 2011 consists of the following:

	Second Quarter						Six Months
	6/29/12			7/1/11			6/29/12			7/1/11
Net loss	$	(4.7	)	$	(29.3	)	$	(144.5	)	$	(53.4	)
Net change in unrealized gains (losses) related to:
Available-for-sale securities, net of tax		(0.2	)		2.4			0.9			(0.6	)
Net investment hedges, net of tax		6.7			(2.7	)		2.6			(10.0	)
Foreign currency translation adjustments		(37.6	)		13.1			(21.9	)		48.9
Comprehensive loss	$	(35.8	)	$	(16.5	)	$	(162.9	)	$	(15.1	)

Accumulated other comprehensive income has no impact on our net loss but is reflected in our consolidated balance sheet through adjustments to stockholders’ equity. Accumulated other comprehensive income derives from unrealized gains (losses) and related adjustments on available-for-sale securities, unrealized gains (losses) on net investment hedges, foreign currency translation adjustments, unrecognized prior service costs and unrecognized net gains on our retiree medical plan.

Accumulated other comprehensive income (net of tax) for the first six months of 2012 consists of the following:

	Unrealized Net Gain (Loss) on Available-for- Sale Securities			Net Investment Hedges			Foreign Currency Translation Adjustments			Unrecognized Prior Service Cost			Unrecognized Net Gain on Retiree Medical Plan		Accumulated Other Comprehensive Income
Balance at December 30, 2011	$	1.9		$	18.6		$	67.5		$	(0.2	)	$	2.0	$	89.8
Pretax activity, net		1.2			4.1			(21.9	)		—			—		(16.6	)
Tax effect		(0.3	)		(1.5	)		—			—			—		(1.8	)
Balance at June 29, 2012	$	2.8		$	21.2		$	45.6		$	(0.2	)	$	2.0	$	71.4

11. Segment Information

Prior to the second quarter of 2012, we reported results of operations for three reporting segments: Broadband, Transport, and Services. As a result of strategy changes and internal reorganizations at the beginning of the second quarter of 2012, we are focusing on the growth markets of Packet Optical (primarily our optical portfolio) and Mobile Backhaul (primarily our data portfolio) in addition to the on-going Access and Services businesses. With these strategic adjustments, we changed our reporting segments accordingly. Therefore, beginning with the second quarter of 2012, we have reported in the following four segments: Optical, Data, Access and Services (the Services segment is unchanged).

18

Optical segment products are primarily used to manage large volumes of telecommunication traffic in metro areas. The Optical segment includes the Tellabs^® 7000 series of optical transport systems, as well as the Tellabs^® 5000 and 6300 series of transport systems equipped with optical interfaces.

Data segment products are primarily used in mobile backhaul applications, and for business services and various edge routing applications. The Data segment includes the packet-switched Tellabs^® 8600 Managed Edge System, the Tellabs^® 8800 Multiservice Router Series, and Tellabs^® 9200 Content-Aware Router Series, as well as the Tellabs^® 8100 Managed Access System.

Access segment products are primarily used to enable service providers to bundle Internet, video, and voice over high-speed fiber-based networks and in Optical LAN applications. The Access segment includes the Tellabs^® 1000 and 1100 Multi-service Access systems, and the Tellabs^® 1600 Optical Network Terminals.

The Services segment includes services that support all phases of the network: planning, building and operating. The Services segment includes deployment, support, training and professional services for customers of the Optical, Data and Access segments.

We define segment profit (loss) as gross profit less research and development expenses. Segment profit (loss) excludes sales and marketing expenses, general and administrative expenses, the amortization of intangibles, restructuring and other charges, the intangible asset impairment charge and the impact of equity-based compensation.

Consolidated revenue by segment follows:

	Second Quarter				Six Months
	6/29/12		7/1/11		6/29/12		7/1/11
Optical	$	122.4	$	127.5	$	226.8	$	248.4
Data		77.7		92.2		147.1		203.6
Access		37.3		39.8		73.2		79.9
Services		50.7		57.2		98.9		107.2
Total	$	288.1	$	316.7	$	546.0	$	639.1

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

	Second Quarter						Six Months
	6/29/12			7/1/11			6/29/12			7/1/11
Optical	$	29.0		$	21.1		$	43.8		$	46.5
Data		5.4			(15.0	)		0.4			(15.8	)
Access		6.0			8.3			12.4			19.4
Services		17.2			21.6			32.4			31.6
Total segment profit	$	57.6		$	36.0		$	89.0			81.7
Sales and marketing expenses		(32.2	)		(40.8	)		(68.6	)		(85.5	)
General and administrative expenses		(19.7	)		(21.0	)		(40.8	)		(44.7	)
Equity-based compensation		(2.2	)		(4.3	)		(4.8	)		(8.0	)
Intangible asset amortization		(1.0	)		(5.1	)		(3.2	)		(10.3	)
Restructuring and other charges		(0.9	)		—			(106.9	)		(1.0	)
Operating earnings (loss)	$	1.6		$	(35.2	)	$	(135.3	)	$	(67.8	)

The segments use many of the same assets. For internal reporting purposes, we do not allocate assets by segment and therefore asset, depreciation and amortization, or capital expenditure by segment information is not provided to our chief operating decision maker.

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12. Contingencies

Legal Proceedings

We are subject to legal claims and litigation arising in the ordinary course of business, such as employment or intellectual property claims, including the matters described below. We are unable to determine the likelihood of an unfavorable outcome against us and are unable to reasonably estimate a range of loss, if any.

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 (Case No. 1:09-cv-04530). 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. On November 4, 2010, the Court dismissed with prejudice Fujitsu’s claim for infringement of Fujitsu’s U.S. Patent No. 6,487,686. In conjunction with the dismissal, Fujitsu signed a covenant not to sue Tellabs for infringement as to any claim of Fujitsu’s U.S. Patent No. 6,487,686, as to any Tellabs products as they currently exist or existed in the past. On March 31, 2011, the Court issued an Order denying a motion by Tellabs for summary judgment of invalidity based on indefiniteness of Fujitsu’s U.S. Patent No. 5,386,418, and granting a motion by Fujitsu for summary judgment for judicial correction of an error in asserted Claim 1 of the same patent as originally issued. The Court issued a Markman ruling on Fujitsu’s U.S. Patent Nos. 5,526,163, 5,521,737 and 5,386,418, as well as patents from the consolidated action, in a Memorandum Opinion and Order dated September 29, 2011. On this same date the Court denied Fujitsu’s Motion for Leave to File First Amended Complaint and granted Tellabs’ motion to disallow the filing of Fujitsu’s First Amended Complaint and Fujitsu’s supplemental infringement contentions. Fujitsu’s motion had sought to amend its allegations of direct infringement with respect to products from Tellabs’ 5500, NGX, 7100 and 6300 product lines with various additional allegations, including allegations of indirect infringement. Fujitsu thereafter filed a further motion to amend its final infringement contentions, and on March 22, 2012, the Court denied Fujitsu’ motion. In turn, on April 30, 2012, Fujitsu Limited filed a new complaint against Tellabs in the Northern District of Illinois (see Civil Action No. 1:12-cv-03229 set forth below), setting forth additional allegations of infringement of the same patents that Fujitsu unsuccessfully sought to add to the present action. A trial date was set for July 16, 2012, however in an Order dated May 22, 2012, the Court reset the schedule so as to commence trial on Fujitsu’s U.S. Patent No. 7,227,681 (Civil Action No. 1:08-cv-3379, described below) on August 27, 2012, while deferring to a later time the setting of any trial date as to the remaining patents at issue between the parties. The parties conducted a non-binding mediation on May 30-31, 2012, which did not result in any settlement, and no other mediation between the parties is presently scheduled. As an ordinary component of expert discovery, each of the parties served an expert report prepared by the party’s respective damages experts, which are subject to a governing Protective Order of confidentiality. Notwithstanding these reports, the two sides remain far apart, and Tellabs cannot estimate the possible loss or range of loss. Tellabs contests any liability and will continue to vigorously defend itself accordingly.

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 two U.S. patents, namely 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. On September 15, 2009, the Court in the Northern District of Illinois consolidated this action, for discovery purposes only, with the action filed by Fujitsu transferred to the Northern District of Illinois by the Eastern District of Texas. On March 31, 2011, the Court issued an Order granting Tellabs’ motion for summary judgment of invalidity of all claims of Fujitsu’s U.S. Patent No. 5,533,006. The Court issued a Markman ruling on U.S. Patent Nos. 7,369,772 and 7,227,681, as well as patents from the consolidated action, in a Memorandum Opinion and Order dated September 29, 2011. On March 22, 2012, the Court denied

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Tellabs’ motion to sever and stay Tellabs’ claims involving U.S. Patent No. 7,369,772, in view of Tellabs’ January 12, 2012, filing of an amendment of the claims of the patent for further consideration by the United States Patent and Trademark Office, following a December 12, 2011, decision by the Board of Patent Appeals and Interferences (BPAI) to reverse the Examiner’s decision to not reject the claims of U.S. Patent No. 7,369,772 in an inter partes reexamination of the patent requested by Fujitsu in the Patent Office. On the same date the Court also denied a motion by Fujitsu to amend its final infringement contentions. In turn, on April 30, 2012, Fujitsu Limited filed a new complaint against Tellabs in the Northern District of Illinois (see Civil Action No. 1:12-cv-03229 set forth below), setting forth additional allegations of infringement of the same patents that Fujitsu unsuccessfully sought to add to the present action. A trial date had been set for July 16, 2012, however in an Order dated May 22, 2012, the Court reset the schedule so as to commence trial on Fujitsu’s U.S. Patent No. 7,227,681 on August 27, 2012, while deferring to a later time the setting of any trial date as to the remaining patents at issue between the parties. The parties conducted a non-binding mediation on May 30-31, 2012, which did not result in any settlement, and no other mediation between the parties is presently scheduled. On July 27, 2012, the Court responded to Fujitsu’s further motions related to claim construction of Fujitsu’s U.S. Patent No. 7,227,681, and denied a motion by Tellabs for summary judgment of invalidity of Fujitsu’s U.S. Patent No. 7,227,681. On July 31, 2012, the Court granted Fujitsu’s motion for summary judgment finding no inequitable conduct as to Fujitsu’s U.S. Patent No. 7,227,681. As an ordinary component of expert discovery, each of the parties served an expert report prepared by the party’s respective damages experts, which are subject to a governing Protective Order of confidentiality. Notwithstanding these reports, the two sides remain far apart, and Tellabs cannot estimate the possible loss or range of loss. Tellabs contests any liability and will continue to vigorously defend itself accordingly.

Fujitsu Limited v. Tellabs, Inc. On April 30, 2012, Fujitsu Limited filed a complaint in the United States District Court for the Northern District of Illinois against Tellabs in a case captioned Fujitsu Limited v. Tellabs Operations, Inc., Tellabs, Inc., and Tellabs North America, Inc., Civil Action No. 1:12-cv-03229. The complaint alleges infringement of U.S. Patent Nos. 5,526,163, 5,521,737, 5,386,418 and 7,227,681, the same patents at issue in pending Civil Action Nos. 1:09-cv-04530 and 1:08-cv-3379, and seeks unspecified damages including enhanced damages, as well as attorney fees and other remedies including injunctive relief. The complaint includes allegations of infringement that Fujitsu previously sought unsuccessfully to add to pending Civil Action Nos. 1:09-cv-04530 and 1:08-cv-3379. By the grant of a joint motion by the parties, Civil Action No. 1:12-cv-03229 was reassigned to the calendar of Chief Judge Holderman, who is also presiding over Civil Action Nos. 1:08-cv-03379 and 1:09-cv-04530. On June 4, 2012, the Tellabs defendants filed a motion to dismiss the Complaint pursuant to Fed. R. Civ. P. 12(B)(6), which is pending before the Court.

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 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 (Case No. 1:2009cv00978). The parties are in the early phases of discovery. A trial date has not yet been set.

Cheetah Omni, LLC v. Alcatel-Lucent USA Inc. et al. On July 29, 2011, a complaint was filed in the United States District Court for the Eastern District of Texas, Tyler Division, against Tellabs and several other companies in a case captioned Cheetah Omni LLC v. Alcatel-Lucent USA Inc. et al., Civil Action No. 6:11cv390. The complaint includes allegations of infringement by Tellabs, Inc., Tellabs Operations, Inc., and Tellabs North America, Inc., of U.S. Patent Nos. 6,888,661, 6,847,479, 6,856,459 and 6,940,647, and seeks unspecified damages, as well as interest, costs, disbursements, attorney fees and other remedies including injunctive relief. Tellabs was served with the original complaint on August 31, 2011. Before any response to the original complaint was due, Tellabs was served with an amended complaint on October 14, 2011. On November 8, 2011, the Tellabs entities filed their answers, defenses and counterclaims in response to the amended complaint. The parties are in discovery. A trial date has been set for March 10, 2014.

Internet Machines LLC v. Avnet, Inc., et al. On February 13, 2012, a second amended complaint was filed in the United States District Court for the Eastern District of Texas, Tyler Division, naming Tellabs, Inc. among several defendants in a case captioned Internet Machines LLC v. Avnet, Inc., et al., Civil Action Nos. 6:10-CV-548-MHS and 6:11-CV-250-MHS (Consolidated). The plaintiff thereafter filed a third amended complaint on March 2, 2012. The amended complaints allege infringement of U.S. Patent Nos. 7,454,552, 7,421,532, 7,814,259 and 7,945,722, and seek unspecified damages including enhanced damages, as well as interest, costs, expenses, attorney fees and other remedies including injunctive relief. On March 27, 2012, Tellabs filed its answer, defenses and counterclaims in response to the third amended complaint. The parties are in discovery. A pretrial conference has been set for February 4, 2013.

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Apart from the matters described above, we are and in the future may be subject to various legal proceedings, claims and litigation arising in the ordinary course of business.

The proceedings described above, including the Fujitsu matters, the Telcordia matter, the Cheetah Omni matter, and the Internet Machines matter, involve costly litigation and may result in diverting management’s time, attention and resources, delaying or halting product shipments or services delivery, requiring us to pay amounts in any damages and/or settlements, requiring us to enter into royalty-bearing licensing arrangements or to obtain substitute technology of lower quality or higher costs, and otherwise imposing obligations or restrictions on us and our business. We may be unsuccessful in any such litigation, despite the time, money, energy and bases for our assertion and/or defense of the matters. We may also be unable, if necessary, to enter into licensing arrangements or to obtain substitute technology on commercially reasonable terms or any terms. Any such settlements or inability to prevail or mitigate any liability or to obtain such licensing arrangements or substitute technology may adversely affect our business, financial condition and operating results. See Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 30, 2011.

In addition to the matters described above, Tellabs has recently settled or is in the process of settling the following claims.

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

On January 17, 2003, Tellabs and the other named defendants filed a motion to dismiss the consolidated amended class action complaint in its entirety. On May 19, 2003, the Court granted our motion and dismissed all counts of the consolidated amended complaint, while affording plaintiffs an opportunity to replead. On July 11, 2003, plaintiffs filed a second consolidated amended class action complaint against Tellabs, Messrs. Birck and Notebaert, and many (although not all) of the other previously named individual defendants, realleging claims similar to those contained in the previously dismissed consolidated amended class action complaint. We filed a second motion to dismiss on August 22, 2003, seeking the dismissal with prejudice of all claims alleged in the second consolidated amended class action complaint. On February 19, 2004, the Court issued an order granting that motion and dismissed the action with prejudice. On March 18, 2004, the plaintiffs filed a Notice of Appeal to the United States Federal Court of Appeal for the Seventh Circuit, appealing the dismissal. The appeal was fully briefed and oral argument was heard on January 21, 2005. On January 25, 2006, the Seventh Circuit issued an opinion affirming in part and reversing in part the judgment of the district court, and remanding for further proceedings. On February 8, 2006, defendants filed with the Seventh Circuit a petition for rehearing with suggestion for rehearing en banc. On April 19, 2006, the Seventh Circuit ordered plaintiffs to file an answer to the petition for rehearing, which was filed by the plaintiffs on May 3, 2006. On July 10, 2006, the Seventh Circuit denied the petition for rehearing with a minor modification to its opinion, and remanded the case to the district court. On September 22, 2006, defendants filed a motion in the district court to dismiss some (but not all) of the remaining claims. On October 3, 2006, the defendants filed with the United States Supreme Court a petition for a writ of certiorari seeking to appeal the Seventh Circuit’s decision. On January 5, 2007, the defendants’ petition was granted. The United States Supreme Court heard oral arguments on March 28, 2007. On June 21, 2007, the United States Supreme Court vacated the Seventh Circuit’s judgment and remanded the case for further proceedings. On November 1, 2007, the Seventh Circuit heard oral arguments for the remanded case. On January 17, 2008, the Seventh Circuit issued an opinion adhering to its earlier opinion reversing in part the judgment of the district court, and remanded the case to the district court for further proceedings. On February 24, 2009, the district court granted plaintiffs’ motion for class certification. On August 13, 2010, the Court granted in large part Tellabs’ motion for summary judgment. Subsequently, the parties agreed to settle the lawsuit and on July 27, 2011, the Court granted the plaintiffs’ motion for final approval of class action settlement and dismissed the lawsuit without prejudice. The lawsuit was dismissed with prejudice on June 15, 2012. All settlement amounts were paid by Tellabs’ insurers.

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13. Stock Repurchase Programs

We repurchase outstanding common stock under two programs authorized by our Board of Directors, the Rule 10b5-1 program and a repurchase program of up to $600 million of outstanding common stock. In addition, we purchase shares to cover withholding taxes on shares issued under employee stock plans.

Under the 10b5-1 program, we intend to continue to use cash generated by employee stock option exercises (other than those of Company officers and board members) to repurchase stock. We purchased four thousand shares for $16 thousand in the second quarter of 2012, and eight thousand shares for $31 thousand in the first six months of 2012 under this program.

As of June 29, 2012, we purchased 56.6 million shares of our common stock under the $600 million repurchase program at a total cost of $375.4 million, leaving $224.6 million available to be purchased under this program. We did not purchase any shares under this program in the second quarter and first half of 2012. We may change our repurchase activity and we provide no assurance that we will continue our repurchase activity in the future.

In addition, we purchased 0.3 million shares for $1.2 million in the second quarter of 2012, and 0.8 million shares for $3.0 million in the first six months of 2012 to cover minimum withholding taxes on shares issued under employee stock plans.

We record repurchased shares as Treasury stock.

14. Net Loss Per Share

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

	Second Quarter						Six Months
	6/29/12			7/1/11			6/29/12			7/1/11
Numerator:
Net loss	$	(4.7	)	$	(29.3	)	$	(144.5	)	$	(53.4	)
Denominator:
Denominator for basic net loss per share – weighted average shares outstanding		367.1			364.6			366.4			363.8
Effect of dilutive securities:
Employee stock options and restricted and performance stock awards		—			—			—			—
Denominator for diluted net loss per share – adjusted weighted average shares outstanding and assumed conversions		367.1			364.6			366.4			363.8
Net loss per share, basic	$	(0.01	)	$	(0.08	)	$	(0.39	)	$	(0.15	)
Net loss per share, diluted1	$	(0.01	)	$	(0.08	)	$	(0.39	)	$	(0.15	)

¹ 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 the second quarter and first six months of 2012 and the second quarter and first six months of 2011 are the same. Diluted weighted average shares outstanding were 368.1 million in the second quarter of 2012, 368.2 million in the first six months of 2012, and 365.9 million in the second quarter and the first six months of 2011.

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Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

Introduction and Overview of Business

Tellabs designs, develops and supports telecommunications networking products. 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 solutions integrated under a common network management system. We also generate revenue by providing services to our customers.

Prior to the second quarter of 2012, Tellabs reported results of operations for three reporting segments: Broadband, Transport, and Services. As a result of strategy changes and internal reorganizations at the beginning of the second quarter of 2012, Tellabs is focusing on the growth markets of Packet Optical (primarily our optical portfolio) and Mobile Backhaul (primarily our data portfolio) in addition to the on-going Access and Services businesses. With these strategic adjustments, we changed our reporting segments accordingly. Therefore, beginning with the second quarter of 2012, we have reported in the following four segments: Optical, Data, Access and Services (the Services segment is unchanged).

Optical segment products are primarily used to manage large volumes of telecommunication traffic in metro areas. The Optical segment includes the Tellabs^® 7000 series of optical transport systems, as well as the Tellabs^® 5000 and 6300 series of transport systems equipped with optical interfaces.

Data segment products are primarily used in mobile backhaul applications, and for business services and various edge routing applications. The Data segment includes the packet-switched Tellabs^® 8600 Managed Edge System, the Tellabs^® 8800 Multiservice Router Series, and Tellabs^® 9200 Content-Aware Router Series, as well as the Tellabs^® 8100 Managed Access System.

Access segment products are primarily used to enable service providers to bundle Internet, video, and voice over high-speed fiber-based networks and in Optical LAN applications. The Access segment includes the Tellabs^® 1000 and 1100 Multi-service Access systems, and the Tellabs^® 1600 Optical Network Terminals.

The Services segment includes services that support all phases of the network: planning, building and operating. The Services segment includes deployment, support, training and professional services for customers of the Optical, Data and Access segments.

Tellabs operates in a dynamic industry. Customer consolidation has resulted in increased pricing pressure. In addition, customer spending is pressured and competition is heightened on a global basis. Some equipment suppliers have also consolidated. Heightened competition by these suppliers has 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’s strategy is to focus on a product portfolio that addresses the global markets. We expect that executing this strategy of directing resources to create innovative products and services will help customers succeed.

RESULTS OF OPERATIONS

Net loss in the second quarter of 2012 was $4.7 million or $0.01 per share (basic and diluted), compared with net loss of $29.3 million or $0.08 per share (basic and diluted) in the second quarter of 2011. For the first six months of 2012, net loss was $144.5 million or $0.39 per share (basic and diluted), compared with net loss of $53.4 million or $0.15 per share (basic and diluted) in the first six months of 2011. Lower operating expenses and increased gross profit margins reduced the net loss in the second quarter of 2012, compared with the year-ago period, despite lower overall revenue. The net loss in the first six months of 2012 was driven primarily by lower overall revenue and $106.9 million in restructuring and other charges incurred in the first six months of 2012.

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Revenue (in millions)

	Second Quarter							Six Months
	2012		2011		Change			2012		2011		Change
Products	$	237.4	$	259.5		(8.5	)%	$	447.1	$	531.9		(15.9	)%
Services		50.7		57.2		(11.4	)%		98.9		107.2		(7.7	)%
Total revenue	$	288.1	$	316.7		(9.0	)%	$	546.0	$	639.1		(14.6	)%

Second quarter 2012 compared with second quarter 2011

Total revenue was $288.1 million, compared with $316.7 million, as revenue declined in each operating segment. On a geographic basis, revenue from customers outside North America was $150.2 million (or 52% of total revenue), up 7.7% from $139.5 million (or 44% of total revenue), as revenue increased in all geographic regions outside North America. Revenue from customers in North America (United States and Canada) was $137.9 million (or 48% of total revenue), compared with $177.2 million (or 56% of total revenue).

First six months of 2012 compared with first six months of 2011

Total revenue was $546.0 million, compared with $639.1 million, as revenue declined in each operating segment. On a geographic basis, revenue from customers outside North America was $281.5 million (or 52% of total revenue) compared with $286.8 million (or 45% of total revenue) as increased revenue in the Latin America Caribbean (LAC) region was offset by lower revenue in the Europe, Middle East, Africa (EMEA) region and the Asia Pacific (APAC) region. Revenue from customers in North America was $264.5 million (or 48% of total revenue), compared with $352.3 million (or 55% of total revenue).

Gross Margin

	Second Quarter									Six Months
	2012			2011			% Point Change			2012			2011			% Point Change
Products		41.0	%		36.3	%		4.7			39.9	%		38.9	%		1.0
Services		33.1	%		36.7	%		(3.6	)		31.9	%		28.4	%		3.5
Consolidated		39.6	%		36.4	%		3.2			38.4	%		37.2	%		1.2

Product gross margins, driven by margin improvements within the Optical segment and lower overhead and support costs that were partially offset by lower overall revenue, improved in both periods of 2012. Services gross margins, driven by an adjustment for business taxes on sales transactions involving deployment services in a foreign jurisdiction, declined in the second quarter of 2012 compared with the year-ago period. Services gross margins, driven by lower costs, improved in the first six months of 2012 compared with the year-ago period.

Operating Expenses (in millions)

	Second Quarter							Percent of Revenue
	2012		2011		Change			2012			2011
Research and development	$	58.8	$	83.5	$	(24.7	)		20.4	%		26.4	%
Sales and marketing		32.2		40.8		(8.6	)		11.2	%		12.9	%
General and administrative		19.7		21.0		(1.3	)		6.8	%		6.6	%
Subtotal		110.7		145.3		(34.6	)		38.4	%		45.9	%
Intangible asset amortization		1.0		5.1		(4.1	)
Restructuring and other charges		0.9		—		0.9
Total operating expenses	$	112.6	$	150.4	$	(37.8	)

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	Six Months							Percent of Revenue
	2012		2011		Change			2012			2011
Research and development	$	125.7	$	163.8	$	(38.1	)		23.0	%		25.6	%
Sales and marketing		68.6		85.5		(16.9	)		12.6	%		13.4	%
General and administrative		40.8		44.7		(3.9	)		7.5	%		7.0	%
Subtotal		235.1		294.0		(58.9	)		43.1	%		46.0	%
Intangible asset amortization		3.2		10.3		(7.1	)
Restructuring and other charges		106.9		1.0		105.9
Total operating expenses	$	345.2	$	305.3	$	39.9

In the second quarter of 2012, operating expenses decreased, compared with the year-ago period, due primarily to lower research and development and sales and marketing expenses related to stopping new development of the Tellabs^® SMARTCORE 9100 series for mobile packet core.

For the first six months of 2012, lower research and development, sales and marketing and general and administrative expenses were offset primarily by $106.9 million in restructuring and other charges incurred in the first half of 2012. Restructuring and other charges in the second quarter of 2012 are due to facility- and asset-related charges ($2.9 million) offset by reductions for severance ($2.0 million). For the first six months of 2012, restructuring and other charges are due to facility- and asset-related charges ($37.1 million), severance ($22.1 million) and accelerated amortization for abandoned intangible assets ($47.7 million) related to the mobile packet-core technology.

Other Income (in millions)

	Second Quarter									Six Months
	2012			2011			Change			2012			2011			Change
Interest income, net	$	1.6		$	3.1		$	(1.5	)	$	3.4		$	6.4		$	(3.0	)
Other expense, net		(1.1	)		(1.1	)		—			(2.1	)		(1.7	)		(0.4	)
Total other income	$	0.5		$	2.0		$	(1.5	)	$	1.3		$	4.7		$	(3.4	)

Interest income was down in the second quarter and first half of 2012, compared with the year-ago periods, due to lower interest rates and lower investment balances.

Income Taxes

In the second quarter of 2012, we reported tax expense of $6.8 million, compared with a benefit of $3.9 million in the second quarter of 2011. For the first six months of 2012, we reported tax expense of $10.5 million, compared with a tax benefit of $9.7 million for the first six months of 2011. While we were able to partially recognize tax benefits on domestic losses in 2011, we established a valuation allowance in 2011 for the remaining domestic losses. We did not recognize tax benefits on domestic losses in 2012 as it is more likely than not that they will not be realized. As a result, tax expenses for the second quarter and the first six months of 2012 primarily reflect tax on income from foreign operations. Additionally, tax benefits of $2.8 million and $6.2 million were recognized in the second quarter and first six months of 2011, respectively, from the settlement of audits or expiration of statute of limitations that are not reflected in tax expense in 2012.

Segments

We operate in four business segments: Optical, Data, Access and Services.

Segment Revenue (in millions)

	Second Quarter							Six Months
	2012		2011		Change			2012		2011		Change
Optical	$	122.4	$	127.5		(4.0	)%	$	226.8	$	248.4		(8.7	)%
Data		77.7		92.2		(15.7	)%		147.1		203.6		(27.8	)%
Access		37.3		39.8		(6.3	)%		73.2		79.9		(8.4	)%
Services		50.7		57.2		(11.4	)%		98.9		107.2		(7.7	)%
Total revenue	$	288.1	$	316.7		(9.0	)%	$	546.0	$	639.1		(14.6	)%

26

Segment Profit (Loss)* (in millions)

	Second Quarter								Six Months
	2012		2011			Change			2012		2011			Change
Optical	$	29.0	$	21.1			37.4	%	$	43.8	$	46.5			(5.8	)%
Data		5.4		(15.0	)		N/M			0.4		(15.8	)		N/M
Access		6.0		8.3			(27.7	)%		12.4		19.4			(36.1	)%
Services		17.2		21.6			(20.4	)%		32.4		31.6			2.5	%
Total segment profit	$	57.6	$	36.0			60.0	%	$	89.0	$	81.7			8.9	%

* We define segment profit (loss) as gross profit less research and development expenses. Segment profit (loss) excludes sales and marketing expenses, general and administrative expenses, the amortization of intangibles, restructuring and other charges, and the impact of equity-based compensation.

Second quarter 2012 compared with second quarter 2011

Optical

Revenue from the Optical segment was $122.4 million, compared with $127.5 million. Within this segment, increased revenue from the Tellabs^® 7100 series optical transport series and the Tellabs^® 6300 managed transport systems was more than offset by lower revenue from the Tellabs^® 5000 digital cross-connect systems. Optical segment profit, driven primarily by increased profitability from the Tellabs 7100 optical networking systems and the Tellabs 6300 managed transport systems and lower costs, was $29.0 million, up 37.4% from $21.1 million.

Data

Revenue from the Data segment was $77.7 million, compared with $92.2 million, primarily on lower revenue from the Tellabs 8600 managed edge systems and the Tellabs^® 8800 multiservice router series. Data segment profit was $5.4 million, compared with a loss of $15.0 million. The return to segment profitability, despite the lower level of revenue, was driven primarily by lower research and development expenses related to stopping development of the Tellabs SMARTCORE 9100 series.

Access

Revenue from the Access segment was $37.3 million, compared with $39.8 million. Within this segment, increased revenue from the Tellabs^® 1600 single-family Optical Network Terminals (ONTs) was more than offset by lower revenue from the Tellabs^® 1000 and 1100 access systems. Access segment profit, driven primarily by lower revenue from the Tellabs 1000 and 1100 access systems, was $6.0 million, compared with $8.3 million.

Services

Revenue from the Services segment was $50.7 million, compared with $57.2 million. The decline in segment revenue was driven primarily by lower revenue from deployment services, including the adjustment for business taxes mentioned earlier, and lower revenue from support agreements. Services segment profit, driven primarily by the lower overall level of revenue, was $17.2 million, compared with $21.6 million.

First six months of 2012 compared with first six months of 2011

Optical

Revenue from the Optical segment was $226.8 million, compared with $248.4 million. Within this segment, increased revenue from the Tellabs 7100 optical transport systems and the Tellabs 6300 managed transport systems was more than offset by lower revenue from the Tellabs 5000 digital cross-connect systems. Optical segment profit was $43.8 million, compared with $46.5 million. The decline in segment profit was driven primarily by lower revenue from the Tellabs 5000 digital cross-connect systems, partially offset by improved profitability from the Tellabs 7100 optical transport systems.

Data

Revenue from the Data segment was $147.1 million, compared with $203.6 million, primarily on lower revenue from the Tellabs 8600 managed edge systems and the Tellabs 8800 multiservice router series. Data segment profit was $0.4 million, compared with a loss of $15.8 million. The return to segment profitability, despite the lower level of revenue, was driven primarily by lower research and development expenses related to stopping new development of the Tellabs SMARTCORE 9100 series.

27

Access

Revenue from the Access segment was $73.2 million, compared with $79.9 million. Within this segment, increased revenue from the Tellabs 1600 single-family ONTs was more than offset by lower revenue from the Tellabs 1000 and 1100 access systems. Access segment profit, driven primarily by the lower level of access-system revenue, was $12.4 million, compared with $19.4 million.

Services

Revenue from the Services segment, driven primarily by lower deployment services revenue, including adjustment mentioned earlier, was $98.9 million, compared with $107.2 million. Services segment profit was $32.4 million, up 2.5% from $31.6 million. The increase in segment profit was driven primarily by improved profitability from support agreements and professional services.

Financial Condition, Liquidity & Capital Resources

Our principal source of liquidity remained cash, cash equivalents and marketable securities of $937.7 million as of June 29, 2012, which decreased by $38.9 million since year-end 2011. Of the total cash, cash equivalents and marketable securities, as of June 29, 2012, $385.2 million was held in subsidiaries outside the United States and is deemed to be permanently reinvested. We do not currently foresee a need to repatriate funds from our non-U.S. subsidiaries. We could elect to repatriate funds held in one or more foreign jurisdictions. If applicable, withholding taxes could reduce the net amount repatriated. During the quarter, we generated $31.9 million in cash from operations, slightly increasing cash, cash equivalents and marketable securities. Cash used for operating activities during the first six months of 2012 amounted to $5.6 million.

During the second quarter of 2012, we distributed $7.3 million to our stockholders through our quarterly cash dividend. We also repurchased four thousand shares of common stock at a cost of $16 thousand under the 10b5-1 plan. During the first half of 2012, we distributed $14.6 million to our stockholders through a cash dividend. We also repurchased eight thousand shares of common stock at a cost of $31 thousand under the 10b5-1 plan.

We provide no assurance as to a future declaration or payment of a cash dividend nor do we provide future assurance of a repurchase of common stock.

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, liquidity and future income of investments.

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 our 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 and to pay a cash dividend.

GAAP Sequential Comparisons

We believe that comparing some quarterly Statement of Operations data on a sequential basis provides important supplemental information to management and investors regarding financial and business trends relating to our financial results. Commonly compared sequential comparisons of GAAP data include total revenue, geographic revenue split, and segment revenue and profit.

Second quarter 2012 compared with first quarter 2012

Total revenue, was $288.1 million, up 11.7% from $257.9 million as revenue increased in all four operating segments. Revenue from customers outside North America was $150.2 million (or 52% of total revenue), up 14.4% from $131.3 million (or 51% of total revenue) as increased revenue in the EMEA region and the APAC region more than offset lower revenue in the LAC region. Revenue from customers in North America was $137.9 million (or 48% of total revenue), up 8.9% from $126.6 million (or 49% of total revenue).

Optical

Revenue from the Optical segment was $122.4 million, up 17.2% from $104.4 million. Within this segment, increased revenue from the Tellabs 7100 series optical transport systems offset lower revenue from the Tellabs 6300 managed transport systems and the Tellabs 5000 digital cross-connect systems. Optical segment profit was $29.0 million, up 95.9% from $14.8 million. The increase in segment profit was driven primarily by increased profitability from the Tellabs 7100 series optical transport systems.

28

Data

Revenue from the Data segment was $77.7 million, up 12.0% from $69.4 million. Increased revenue from the Tellabs 8600 managed edge systems more than offset lower revenue from the Tellabs 8100 managed access systems and the Tellabs 8800 multiservice router series. Data segment profit was $5.4 million, compared with a loss of $5.0 million. The return to segment profit was driven primarily by lower research and development expenses related to stopping development of the Tellabs SMARTCORE 9100 series and increased revenue from the Tellabs 8600 series managed edge systems.

Access

Revenue from the Access segment was $37.3 million, up 3.9% from $35.9 million. Within this segment, increased revenue from the Tellabs 1000 and 1100 access systems more than offset lower revenue from the Tellabs 1600 single-family ONTs. Access segment profit was essentially flat at $6.0 million, compared with $6.4 million.

Services

Revenue from the Services segment was $50.7 million, up 5.2% from $48.2 million. The increase in segment revenue was driven primarily by increased revenue from support agreements. Services segment profit, driven primarily by the increased level of support agreement revenue, was $17.2 million, up 13.2% from $15.2 million.

Non-GAAP Financial Measures and Comparisons

We believe that comparing some quarterly non-GAAP financial measures on a sequential basis provides important supplemental information to management and investors regarding financial and business trends relating to our financial results. Commonly compared non-GAAP financial data includes gross profit as a percentage of revenue, operating expenses, operating earnings, net earnings and net earnings per share. A complete reconciliation between non-GAAP financial measures and the GAAP financial measures, along with an explanation of why we believe non-GAAP measures to be of value to management and investors, is contained in the Reconciliation of Non-GAAP Adjustments section of pages 30 through 33.

Second quarter 2012 compared with first quarter 2012

Non-GAAP gross profit margin increased to 39.9%, compared with 37.4%. The sequential increase was driven primarily by favorable product and customer mix shifts in the Optical segment and higher Data-segment revenue.

Non-GAAP operating expenses were $106.4 million, down from $119.7 million, on lower research and development, sales and marketing, and general and administrative expenses related to stopping development of the Tellabs SMARTCORE 9100 series.

Non-GAAP operating earnings, driven by lower operating expenses and improved gross profit margin, were $8.5 million, compared with a loss of $23.2 million.

Driven primarily by higher revenue, lower operating expenses and improved gross profit margin, non-GAAP net earnings were $6.2 million or $0.02 per share (basic and diluted), compared with a net loss of $15.3 million or $0.04 per share (basic and diluted).

29

TELLABS, INC.

RECONCILIATION OF NON-GAAP ADJUSTMENTS (1)

(Unaudited)

	Second Quarter 2012									Second Quarter 2011
In millions, except per-share data	As Reported			Adjustments			Non-GAAP			As Reported			Adjustments			Non-GAAP
Revenue
Products	$	237.4		$	—		$	237.4		$	259.5		$	—		$	259.5
Services		50.7			—			50.7			57.2			—			57.2
Total revenue		288.1			—			288.1			316.7			—			316.7
Cost of Revenue
Products (a)		140.0			(0.3	)		139.7			165.3			(0.5	)		164.8
Services (a)		33.9			(0.4	)		33.5			36.2			(0.6	)		35.6
Total cost of revenue		173.9			(0.7	)		173.2			201.5			(1.1	)		200.4
Gross Profit		114.2			0.7			114.9			115.2			1.1			116.3
Gross profit as a percentage of revenue		39.6	%		0.3	%		39.9	%		36.4	%		0.3	%		36.7	%
Gross profit as a percentage of revenue – products		41.0	%		0.2	%		41.2	%		36.3	%		0.2	%		36.5	%
Gross profit as a percentage of revenue – services		33.1	%		0.8	%		33.9	%		36.7	%		1.1	%		37.8	%
Operating Expenses
Research and development (a)		58.8			(1.5	)		57.3			83.5			(3.2	)		80.3
Sales and marketing (a)		32.2			(0.8	)		31.4			40.8			(1.3	)		39.5
General and administrative (a)		19.7			(2.0	)		17.7			21.0			(2.5	)		18.5
Intangible asset amortization (b)		1.0			(1.0	)		—			5.1			(5.1	)		—
Restructuring and other charges (c)		0.9			(0.9	)		—			—			—			—
Total operating expenses		112.6			(6.2	)		106.4			150.4			(12.1	)		138.3
Operating Earnings (Loss)		1.6			6.9			8.5			(35.2	)		13.2			(22.0	)
Operating earnings (loss) as a percentage of revenue		0.6	%		2.4	%		3.0	%		-11.1	%		4.2	%		-6.9	%
Other Income
Interest income, net		1.6			—			1.6			3.1			—			3.1
Other expense, net		(1.1	)		—			(1.1	)		(1.1	)		—			(1.1	)
Total other income		0.5			—			0.5			2.0			—			2.0
Earnings (Loss) Before Income Tax		2.1			6.9			9.0			(33.2	)		13.2			(20.0	)
Income tax (expense) benefit (e)		(6.8	)		4.0			(2.8	)		3.9			2.5			6.4
Net (Loss) Earnings	$	(4.7	)	$	10.9		$	6.2		$	(29.3	)	$	15.7		$	(13.6	)
Weighted Average Shares Outstanding
Basic		367.1						367.1			364.6						364.6
Diluted		367.1						368.1			364.6						364.6
Net (Loss) Earnings Per Share
Basic	$	(0.01	)	$	0.03		$	0.02		$	(0.08	)	$	0.04		$	(0.04	)
Diluted	$	(0.01	)	$	0.03		$	0.02		$	(0.08	)	$	0.04		$	(0.04	)

(1) Reconciliation of non-GAAP Adjustments

In addition to reporting financial results in accordance with U.S. generally accepted accounting principles (GAAP), Tellabs, Inc. has provided non-GAAP financial measures as additional information for its operating results. These measures have not been prepared in accordance with GAAP and may be different from measures used by other companies. Whenever we use non-GAAP financial measures, we designate these measures, which exclude the effect of certain charges, as “adjusted” and provide a reconciliation of non-GAAP financial measures to the most closely applicable GAAP financial measure. The non-GAAP financial measures eliminate certain items of expenses and losses from cost of revenue, operating expenses, other income and expenses, and income taxes. Management believes that this presentation allows investors to better evaluate the current operational and financial performance of our business and facilitate comparisons to historical results of operations. Management uses these measures for reviewing our financial results and for business planning and performance management. Management discloses this information publicly along with a reconciliation of the comparable GAAP amounts, to provide access to the detail and general nature of adjustments made to GAAP financial results. While some of these excluded items have been periodically reported in our statements of operations, including significant restructuring and other charges, their occurrence in future periods depends on future business and economic factors, among other evaluation criteria, and the occurrence of such events and factors may frequently be beyond the control of management.

30

TELLABS, INC.

RECONCILIATION OF NON-GAAP ADJUSTMENTS (1)

(Unaudited)

	Six Months 2012									Six Months 2011
In millions, except per-share data	As Reported			Adjustments			Non-GAAP			As Reported			Adjustments			Non-GAAP
Revenue
Products	$	447.1		$	—		$	447.1		$	531.9		$	—		$	531.9
Services		98.9			—			98.9			107.2			—			107.2
Total revenue		546.0			—			546.0			639.1			—			639.1
Cost of Revenue
Products (a)		268.7			(0.6	)		268.1			324.8			(1.0	)		323.8
Services (a)		67.4			(0.9	)		66.5			76.8			(1.2	)		75.6
Total cost of revenue		336.1			(1.5	)		334.6			401.6			(2.2	)		399.4
Gross Profit		209.9			1.5			211.4			237.5			2.2			239.7
Gross profit as a percentage of revenue		38.4	%		0.3	%		38.7	%		37.2	%		0.3	%		37.5	%
Gross profit as a percentage of revenue – products		39.9	%		0.1	%		40.0	%		38.9	%		0.2	%		39.1	%
Gross profit as a percentage of revenue – services		31.9	%		0.9	%		32.8	%		28.4	%		1.1	%		29.5	%
Operating Expenses
Research and development (a)		125.7			(3.3	)		122.4			163.8			(5.8	)		158.0
Sales and marketing (a)		68.6			(1.7	)		66.9			85.5			(2.6	)		82.9
General and administrative (a)		40.8			(4.0	)		36.8			44.7			(5.2	)		39.5
Intangible asset amortization (b)		3.2			(3.2	)		—			10.3			(10.3	)		—
Restructuring and other charges (c), (d)		106.9			(106.9	)		—			1.0			(1.0	)		—
Total operating expenses		345.2			(119.1	)		226.1			305.3			(24.9	)		280.4
Operating (Loss) Earnings		(135.3	)		120.6			(14.7	)		(67.8	)		27.1			(40.7	)
Operating (loss) earnings as a percentage of revenue		-24.8	%		22.1	%		-2.7	%		-10.6	%		4.2	%		-6.4	%
Other Income
Interest income, net		3.4			—			3.4			6.4			—			6.4
Other expense, net		(2.1	)		—			(2.1	)		(1.7	)		—			(1.7	)
Total other income		1.3			—			1.3			4.7			—			4.7
(Loss) Earnings Before Income Tax		(134.0	)		120.6			(13.4	)		(63.1	)		27.1			(36.0	)
Income tax (expense) benefit (e)		(10.5	)		14.8			4.3			9.7			1.8			11.5
Net (Loss) Earnings	$	(144.5	)	$	135.4		$	(9.1	)	$	(53.4	)	$	28.9		$	(24.5	)
Weighted Average Shares Outstanding
Basic		366.4						366.4			363.8						363.8
Diluted		366.4						366.4			363.8						363.8
Net (Loss) Earnings Per Share
Basic	$	(0.39	)	$	0.37		$	(0.02	)	$	(0.15	)	$	0.08		$	(0.07	)
Diluted	$	(0.39	)	$	0.37		$	(0.02	)	$	(0.15	)	$	0.08		$	(0.07	)

(1) Reconciliation of non-GAAP Adjustments

In addition to reporting financial results in accordance with U.S. generally accepted accounting principles (GAAP), Tellabs, Inc. has provided non-GAAP financial measures as additional information for its operating results. These measures have not been prepared in accordance with GAAP and may be different from measures used by other companies. Whenever we use non-GAAP financial measures, we designate these measures, which exclude the effect of certain charges, as “adjusted” and provide a reconciliation of non-GAAP financial measures to the most closely applicable GAAP financial measure. The non-GAAP financial measures eliminate certain items of expenses and losses from cost of revenue, operating expenses, other income and expenses, and income taxes. Management believes that this presentation allows investors to better evaluate the current operational and financial performance of our business and facilitate comparisons to historical results of operations. Management uses these measures for reviewing our financial results and for business planning and performance management. Management discloses this information publicly along with a reconciliation of the comparable GAAP amounts, to provide access to the detail and general nature of adjustments made to GAAP financial results. While some of these excluded items have been periodically reported in our statements of operations, including significant restructuring and other charges, their occurrence in future periods depends on future business and economic factors, among other evaluation criteria, and the occurrence of such events and factors may frequently be beyond the control of management.

31

TELLABS, INC.

RECONCILIATION OF NON-GAAP ADJUSTMENTS (1)

(Unaudited)

	Second Quarter 2012									First Quarter 2012
In millions, except per-share data	As Reported			Adjustments			Non-GAAP			As Reported			Adjustments			Non-GAAP
Revenue
Products	$	237.4		$	—		$	237.4		$	209.7		$	—		$	209.7
Services		50.7			—			50.7			48.2			—			48.2
Total revenue		288.1			—			288.1			257.9			—			257.9
Cost of Revenue
Products (a)		140.0			(0.3	)		139.7			128.7			(0.3	)		128.4
Services (a)		33.9			(0.4	)		33.5			33.5			(0.5	)		33.0
Total cost of revenue		173.9			(0.7	)		173.2			162.2			(0.8	)		161.4
Gross Profit		114.2			0.7			114.9			95.7			0.8			96.5
Gross profit as a percentage of revenue		39.6	%		0.3	%		39.9	%		37.1	%		0.3	%		37.4	%
Gross profit as a percentage of revenue – products		41.0	%		0.2	%		41.2	%		38.6	%		0.2	%		38.8	%
Gross profit as a percentage of revenue – services		33.1	%		0.8	%		33.9	%		30.5	%		1.0	%		31.5	%
Operating Expenses
Research and development (a)		58.8			(1.5	)		57.3			66.9			(1.8	)		65.1
Sales and marketing (a)		32.2			(0.8	)		31.4			36.4			(0.9	)		35.5
General and administrative (a)		19.7			(2.0	)		17.7			21.1			(2.0	)		19.1
Intangible asset amortization (b)		1.0			(1.0	)		—			2.2			(2.2	)		—
Restructuring and other charges (c), (d)		0.9			(0.9	)		—			106.0			(106.0	)		—
Total operating expenses		112.6			(6.2	)		106.4			232.6			(112.9	)		119.7
Operating Earnings (Loss)		1.6			6.9			8.5			(136.9	)		113.7			(23.2	)
Operating earnings (loss) as a percentage of revenue		0.6	%		2.4	%		3.0	%		-53.1	%		44.1	%		-9.0	%
Other Income
Interest income, net		1.6			—			1.6			1.8			—			1.8
Other expense, net		(1.1	)		—			(1.1	)		(1.0	)		—			(1.0	)
Total other income		0.5			—			0.5			0.8			—			0.8
Earnings (Loss) Before Income Tax		2.1			6.9			9.0			(136.1	)		113.7			(22.4	)
Income tax (expense) benefit (e)		(6.8	)		4.0			(2.8	)		(3.7	)		10.8			7.1
Net (Loss) Earnings	$	(4.7	)	$	10.9		$	6.2		$	(139.8	)	$	124.5		$	(15.3	)
Weighted Average Shares Outstanding
Basic		367.1						367.1			365.7						365.7
Diluted		367.1						368.1			365.7						365.7
Net (Loss) Earnings Per Share
Basic	$	(0.01	)	$	0.03		$	0.02		$	(0.38	)	$	0.34		$	(0.04	)
Diluted	$	(0.01	)	$	0.03		$	0.02		$	(0.38	)	$	0.34		$	(0.04	)

(1) Reconciliation of non-GAAP Adjustments

In addition to reporting financial results in accordance with U.S. generally accepted accounting principles (GAAP), Tellabs, Inc. has provided non-GAAP financial measures as additional information for its operating results. These measures have not been prepared in accordance with GAAP and may be different from measures used by other companies. Whenever we use non-GAAP financial measures, we designate these measures, which exclude the effect of certain charges, as “adjusted” and provide a reconciliation of non-GAAP financial measures to the most closely applicable GAAP financial measure. The non-GAAP financial measures eliminate certain items of expenses and losses from cost of revenue, operating expenses, other income and expenses, and income taxes. Management believes that this presentation allows investors to better evaluate the current operational and financial performance of our business and facilitate comparisons to historical results of operations. Management uses these measures for reviewing our financial results and for business planning and performance management. Management discloses this information publicly along with a reconciliation of the comparable GAAP amounts, to provide access to the detail and general nature of adjustments made to GAAP financial results. While some of these excluded items have been periodically reported in our statements of operations, including significant restructuring and other charges, their occurrence in future periods depends on future business and economic factors, among other evaluation criteria, and the occurrence of such events and factors may frequently be beyond the control of management.

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Footnotes to reconciliation of non-GAAP adjustments:

(a) The adjustments to cost of revenue, research and development, sales and marketing, and general and administrative expenses reflect equity-based compensation expense. We exclude these measures when reviewing financial results and for business planning and performance management. We believe that the exclusion of equity-based compensation expense allows for more accurate comparisons of operating results to our peer companies. In addition, we believe this non-cash GAAP measure is not indicative of our fundamental operating performance.

(b) We exclude amortization of intangible assets resulting from acquisitions to evaluate our continuing operational performance. The amortization of purchased intangible assets associated with acquisitions results in recording expense in our GAAP financial statements that were already expensed by the acquired company before the acquisition and for which we have not expended cash. We believe this non-cash GAAP measure is not indicative of our core operating performance. Accordingly, we analyze the performance of operations without regard to such expenses.

(c) We exclude restructuring and other charges because we believe that they occur outside of the ordinary course of and are not related directly to the underlying performance of our fundamental business operations. We exclude these measures when reviewing financial results and for business planning and performance management. Although these events are reflected in our GAAP financials, these transactions may limit the comparability of our fundamental operations with prior and future periods.

(d) In conjunction with the January 30, 2012 Restructuring Plan, we recorded $47.7 million of accelerated amortization for abandoned intangible assets in the first quarter of 2012 related to the mobile packet core technology. We believe this non-cash GAAP measure is not indicative of our core operating performance.

(e) We calculate a separate tax expense and effective tax rate for GAAP and for non-GAAP purposes. For non-GAAP purposes, we use a 32% effective tax rate which represents the projected, long term effective tax rate on non-GAAP pretax income.

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Off-Balance Sheet Arrangements

None.

Critical Accounting Policies

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

Outlook

We expect third-quarter 2012 revenue to be in a range between $260 million and $290 million. We expect non-GAAP gross margin to be 40%, plus or minus a point or two, depending on product mix. We expect third-quarter non-GAAP operating expense to be flat compared with the second quarter. While we are cautious concerning customer spending in North America and around the world, as well as the overall economic situation in Europe, we expect to remain profitable on a non-GAAP basis in the third quarter and generate positive cash from operations.

Forward-Looking Statements

This Management’s Discussion and Analysis and other sections of this Form 10-Q, including the statements under the caption “Outlook”, contain forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect management’s expectations, estimates and assumptions, based on 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: successful expansion into adjacent markets with new and existing products and platforms; new product acceptance and profitability; our ability to compete with larger suppliers that can provide end to end solutions; customer concentration;the impact of customer and vendor consolidation;overall negative economic conditions generally and disruptions in credit and capital markets, including specific impacts of these conditions on the telecommunications industry; foreign economic conditions, including currency rate fluctuations; financial condition of telecommunications service providers, equipment vendors and contract manufacturers, including the impact of any bankruptcies; availability of components and critical manufacturing equipment and capacity; 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; 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 included in our Annual Report on Form 10-K for the year ended December 30, 2011.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of June 29, 2012, there were no material changes to the market risks disclosure, Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended December 30, 2011.

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Item 4. Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of disclosure controls and procedures as of June 29, 2012. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. There were no changes during the period covered by this Form 10-Q in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth under Note 12, Contingencies – Legal Proceedings, to the condensed consolidated financial statements included in Part I, Item  1 of this report is incorporated herein by reference.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A., Risk Factors, in our Annual Report on Form 10-K for the year ended December 30, 2011. The risk factors described in our Annual Report could materially adversely affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently consider immaterial also may materially adversely affect our business, financial condition and/or operating results. There have been no other material changes to the risk factors included in our Annual Report for the year ended December 30, 2011.

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

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
3/31/12 through 5/4/12		1,646	$	3.99		1,646	$	224.6
5/5/12 through 6/1/12		55	$	3.62		55	$	224.6
6/2/12 through 6/29/12		2,442	$	3.60		2,442	$	224.6
Total		4,143	$	3.75		4,143

¹  The amounts in this column represent the remaining amounts under the current $600 million program described below. The Rule10b5-1 repurchase program described below does not have a repurchase amount limit; therefore, it is not included in the remaining value of shares.

We repurchase outstanding common stock under two programs authorized by our Board of Directors, the Rule 10b5-1 program and a repurchase program of up to $600 million of outstanding common stock. In addition, we purchase shares to cover withholding taxes on shares issued under employee stock plans.

Under the 10b5-1 program, we intend to continue to use cash generated by employee stock option exercises (other than those of Company officers and board members) to repurchase stock. We purchased four thousand shares for $16 thousand in the second quarter of 2012, and eight thousand shares for $31 thousand in the first six months of 2012 under this program.

As of June 29, 2012, we purchased 56.6 million shares of our common stock under the $600 million repurchase program at a total cost of $375.4 million, leaving $224.6 million available to be purchased under this program. We did not purchase any shares under this program in the second quarter and first half of 2012. We may change our repurchase activity and we provide no assurance that we will continue our repurchase activity in the future.

In addition, we purchased 0.3 million shares for $1.2 million in the second quarter of 2012, and 0.8 million shares for $3.0 million in the first six months of 2012 to cover minimum withholding taxes on shares issued under employee stock plans.

We record repurchased shares as Treasury stock.

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Item 6. Exhibits

(A) Exhibits

10.40	2012 Amendment to Tellabs, Inc. Executive Continuity and Protection Program
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
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

* Furnished and not filed

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SIGNATURE

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

TELLABS, INC.
(Registrant)
	/s/ Thomas P. Minichiello
	Thomas P. Minichiello
	Vice President of Finance and Chief Accounting Officer
	(Principal Accounting Officer and duly authorized officer)
	August 3, 2012
	(Date)

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