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. We operate in three business segments: Broadband, Transport and Services.

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

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

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

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

The Services segment includes deployment, support, training and professional services. Revenue from deployment, support and training services arises primarily from the sales of products and continues to represent the majority of Services revenue, while the balance comes from professional services offerings.

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 for mobile backhaul and packet optical solutions. We expect that executing this strategy of directing resources to create innovative products and services will help customers succeed.

Management continues to define and implement initiatives to improve overall performance. On January 30, 2012, management initiated a restructuring plan that aligns expenses with revenue. Tellabs is stopping new development on the Tellabs® SmartCore® 9100 product and consolidating research and development into fewer locations. This restructuring plan is intended to reduce our workforce by approximately 510 employees.

RESULTS OF OPERATIONS

Net loss in the first quarter of 2012 was $139.8 million or $0.38 per share (basic and diluted), compared with net loss of $24.1 million or $0.07 per share (basic and diluted) in the first quarter of 2011. Operating expenses during the first quarter of 2012 included $106.0 million of restructuring and other charges, related to the restructuring plan announced in January 2012. Excluding these charges and other non-GAAP items, net loss was $15.3 million or $0.04 per share (basic and diluted) in the first quarter of 2012.

Revenue (in millions)



                                             First Quarter
                                       2012        2011      Change
                    Products        $ 209.7     $ 272.4       (23.0 )%
                    Services           48.2        50.0        (3.6 )%

                    Total revenue   $ 257.9     $ 322.4       (20.0 )%

First quarter 2012 compared with first quarter 2011

On a geographic basis, revenue from customers outside North America was $131.3 million (or 51% of total revenue), compared with $147.3 million (or 46% of total revenue), as increased revenue in the Latin American Caribbean region was more than offset by lower revenue in the Europe Middle East and Africa region and the Asia Pacific region. Revenue from customers in North America (United States and Canada) was $126.6 million (or 49% of total revenue), compared with $175.1 million (or 54% of total revenue).

Revenue from our growth portfolio (the Tellabs ® 6300 Managed Transport System, the Tellabs® 7100 Optical Transport System, the Tellabs® 7300 Metro Ethernet Switching Series, the Tellabs® 8600 Managed Edge System, the Tellabs® 8800 Multiservice Router Series, the Tellabs SmartCore® 9100 Platform and professional services) was $147.0 million (or 57% of total revenue), compared with $194.4 million (or 60% of total revenue). Given the level of research and development expenses in early lifecycle products, this portfolio is not presently profitable.

Our core portfolio (the Tellabs® 5000 series of digital cross-connect systems, the Tellabs® 8100 Managed Access System, the Tellabs ® 3000 Series of voice-enhancement products, the Tellabs Access products and deployment, training and support services) accounted for $110.9 million (or 43% of total revenue), compared with $128.0 million (or 40% of total revenue).

Gross Margin



                                             First Quarter
                                                             % Point
                                     2012        2011         Change
                    Products         38.6 %      41.4 %         (2.8 )
                    Services         30.5 %      18.8 %         11.7
                    Consolidated     37.1 %      37.9 %         (0.8 )

In the first quarter of 2012, products gross margins declined, compared with the year-ago period, primarily as a result of lower overall revenue levels. Services gross margins increased in the first quarter of 2012, compared with the year-ago period. The increase was driven primarily by reduced services costs.

Operating Expenses (in millions)



                                            First Quarter                 Percent of Revenue
                                      2012        2011      Change           2012          2011
 Research and development          $  66.9     $  80.3     $ (13.4 )         25.9 %        24.9 %
 Sales and marketing                  36.4        44.7        (8.3 )         14.1 %        13.9 %
 General and administrative           21.1        23.7        (2.6 )          8.2 %         7.4 %

 Subtotal                            124.4       148.7       (24.3 )         48.2 %        46.1 %

 Intangible asset amortization         2.2         5.2        (3.0 )
 Restructuring and other charges     106.0         1.0       105.0

 Total operating expenses          $ 232.6     $ 154.9     $  77.7

Operating expenses increased in the first quarter of 2012, compared with the year ago period, primarily due to restructuring and other charges incurred during the first quarter of 2012. Excluding intangible asset amortization and restructuring and other charges, operating expenses in the first quarter of 2012 were $124.4 million, down $24.3 million from $148.7 million in the first quarter of 2011. Restructuring and other charges are due to severance ($24.1 million), facility-and asset-related charges ($34.2 million), and accelerated amortization for abandoned intangible assets ($47.7 million) related to the mobile packet-core technology.

Other Income (in millions)



                                                 First Quarter
                                          2012        2011       Change
                 Interest income, net   $  1.8      $  3.3      $  (1.5 )
                 Other expense, net       (1.0 )      (0.6 )       (0.4 )

                 Total other income     $  0.8      $  2.7      $  (1.9 )

Interest income was down in the first quarter of 2012, compared with the first quarter of 2011, due to lower interest rates and lower investment balances. Other expense, net, was higher in the first quarter of 2012, compared with the first quarter of 2011, due to lower foreign currency gains in the first quarter of 2012, compared with the first quarter of 2011.

Income Taxes

In the first quarter of 2012, we reported tax expense of $3.7 million, compared with a benefit of $5.8 million in the first quarter of 2011. While we were able to partially recognize tax benefits on losses in the first quarter of 2011, the establishment of a valuation allowance on domestic operations in 2011 did not allow us to recognize tax benefits in the first quarter of 2012. As a result, tax expense in the first quarter of 2012 reflects the tax provision on income from foreign operations.

Segments

We operate in three business segments: Broadband, Transport and Services. The Broadband segment includes three product categories: data, managed access and access products.

Segment Revenue (in millions)



                                             First Quarter
                                       2012        2011      Change
                    Broadband       $ 130.1     $ 173.0       (24.8 )%
                    Transport          79.6        99.4       (19.9 )%
                    Services           48.2        50.0        (3.6 )%

                    Total revenue   $ 257.9     $ 322.4       (20.0 )%



Segment Profit* (in millions)



                                                 First Quarter
                                           2012       2011      Change
                  Broadband              $  8.0     $ 19.7       (59.4 )%
                  Transport                 8.2       16.0       (48.8 )%
                  Services                 15.2       10.0        52.0 %

                  Total segment profit   $ 31.4     $ 45.7       (31.3 )%

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

First quarter 2012 compared with first quarter 2011

Broadband Segment

Revenue from the Broadband segment was $130.1 million, compared with $173.0 million. Within this segment, increased revenue from managed access products was offset by lower revenue from data and access products. Managed access revenue, driven by increased revenue for both SDH transport systems and managed access systems, was $39.1 million, up 48.1%, compared with $26.4 million. Data product revenue was $55.1 million, compared with $106.5 million, on lower revenue from managed edge systems and our multi-service router series. Access revenue was $35.9 million, compared with $40.1 million, as increased revenue from single-family optical network terminal (ONT) units was more than offset by lower revenue from access systems. Broadband segment profit was $8.0 million, compared with $19.7 million. The decline in segment profit was driven primarily by the lower overall level of Broadband segment revenue.

Transport Segment

Revenue from the Transport segment was $79.6 million, compared with $99.4 million. Within this segment, revenue from digital cross-connect systems and optical transport systems declined. Transport segment profit was $8.2 million, compared with $16.0 million. The decline in segment profit was driven primarily by the lower level of digital cross-connect system revenue.

Services Segment

Revenue from the Services segment was $48.2 million, compared with $50.0 million. The decline in segment revenue was driven primarily by lower deployment revenue, which more than offset higher professional services revenue. Services segment profit was $15.2 million, compared with $10.0 million. The increase in segment profit was driven primarily by the lower level of Services costs.

Financial Condition, Liquidity & Capital Resources

Our principal source of liquidity remained cash, cash equivalents and marketable securities of $934.0 million as of March 30, 2012, which decreased by $42.6 million since year-end 2011. Of the total cash, cash equivalents and marketable securities, as of March 30, 2012, $386.7 million was held in subsidiaries outside the United States. Cash used for operating activities during the quarter amounted to $37.5 million, of which $13.9 million was related to cash payments for restructuring.

During the first 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 $15 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, segment revenue and profit, geographic revenue split and the split between growth and core portfolios.

First quarter 2012 compared with fourth quarter 2011

Total revenue was $257.9 million, compared with $316.8 million, as revenue declined in each segment.

Total Broadband segment revenue was $130.1 million, compared with $166.3 million. Within this segment, revenue declined in each category. Managed access revenue was $39.1 million, compared with $46.7 million, as increased revenue from SDH transport systems was more than offset by lower revenue from managed access systems. Access revenue was $35.9 million, compared with $43.2 million, on lower revenue from single-family ONTs. Data revenue was $55.1 million, compared with $76.4 million on lower revenue from managed edge systems and our multi-service router series. Broadband segment profit, driven primarily by the lower level of Broadband segment revenue and partly offset by reduced costs and research and development expenses, was $8.0 million, compared with $15.9 million.

Transport segment revenue was $79.6 million, compared with $91.5 million, on lower revenue from digital cross-connect systems and optical transport systems. Transport segment profit, driven primarily by reduced margins on optical transport systems and the lower level of digital cross-connect system revenue, was $8.2 million, compared with $19.0 million.

Services segment revenue was $48.2 million, compared with $59.0 million, as revenue declined across each services offering. Services segment profit, driven primarily by the lower level of Services segment revenue, was $15.2 million, compared with $20.9 million.

Revenue from customers outside North America was $131.3 million (or 51% of total revenue), compared with $170.7 million (or 54% of total revenue). Revenue from customers in North America was $126.6 million (or 49% of total revenue), compared with $146.1 million (or 46% of total revenue).

Growth portfolio revenue was $147.0 million (or 57% of total revenue), compared with $170.9 million (or 54% of total revenue). Given the level of research and development expenses in early lifecycle products, this portfolio is not presently profitable. Core portfolio revenue was $110.9 million (or 43% of total revenue), compared with $145.9 million (or 46% of total revenue).

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 on pages 26 through 28.

First quarter 2012 compared with fourth quarter 2011

Non-GAAP gross profit margin was 37.4%, compared with 42.7%. This decline was driven primarily by reduced profitability of optical transport systems and the lower level of revenue from digital cross-connect systems, data and managed access products and Services.

Non-GAAP operating expenses were $119.7 million, down from $131.1 million, primarily as a result of reduced spending for research and development.

Non-GAAP operating loss, driven primarily by lower revenue and gross margin was $23.2 million, compared with operating income of $4.1 million.

Driven primarily by the lower level of revenue and gross margin non-GAAP net loss was $15.3 million or $0.04 per share (basic and diluted), compared with net earnings of $3.8 million or $0.01 per share (basic and diluted).

                                 TELLABS, INC.

                   RECONCILIATION OF NON-GAAP ADJUSTMENTS (1)

                                  (Unaudited)



                                                                First Quarter 2012                                    First Quarter 2011
In millions, except per-share data                 As Reported        Adjustments        Non-GAAP        As Reported        Adjustments        Non-GAAP

Revenue
Products                                         $       209.7      $          -       $    209.7      $       272.4      $          -       $    272.4
Services                                                  48.2                 -             48.2               50.0                 -             50.0

Total revenue                                            257.9                 -            257.9              322.4                 -            322.4


Cost of Revenue
Products (a)                                             128.7               (0.3 )         128.4              159.5               (0.5 )         159.0
Services (a)                                              33.5               (0.5 )          33.0               40.6               (0.6 )          40.0

Total cost of revenue                                    162.2               (0.8 )         161.4              200.1               (1.1 )         199.0


Gross Profit                                              95.7                0.8            96.5              122.3                1.1           123.4

Gross profit as a percentage of revenue                   37.1 %              0.3 %          37.4 %             37.9 %              0.4 %          38.3 %

Gross profit as a percentage of revenue -
products                                                  38.6 %              0.2 %          38.8 %             41.4 %              0.2 %          41.6 %
Gross profit as a percentage of revenue -
services                                                  30.5 %              1.0 %          31.5 %             18.8 %              1.2 %          20.0 %

Operating Expenses
Research and development (a)                              66.9               (1.8 )          65.1               80.3               (2.6 )          77.7
Sales and marketing (a)                                   36.4               (0.9 )          35.5               44.7               (1.3 )          43.4
General and administrative (a)                            21.1               (2.0 )          19.1               23.7               (2.7 )          21.0
Intangible asset amortization (b)                          2.2               (2.2 )            -                 5.2               (5.2 )            -
Restructuring and other charges (c), (d)                 106.0             (106.0 )            -                 1.0               (1.0 )            -

Total operating expenses                                 232.6             (112.9 )         119.7              154.9              (12.8 )         142.1


Operating (Loss) Earnings                               (136.9 )            113.7           (23.2 )            (32.6 )             13.9           (18.7 )

Operating (loss) earnings as a percentage of
revenue                                                  -53.1 %             44.1 %          -9.0 %            -10.1 %              4.3 %          -5.8 %

Other Income
Interest income, net                                       1.8                 -              1.8                3.3                 -              3.3
Other expense, net (e)                                    (1.0 )               -             (1.0 )             (0.6 )               -             (0.6 )

Total other income                                         0.8                 -              0.8                2.7                 -              2.7


(Loss) Earnings Before Income Tax                       (136.1 )            113.7           (22.4 )            (29.9 )             13.9           (16.0 )
Income tax (expense) benefit (f)                          (3.7 )             10.8             7.1                5.8               (0.7 )           5.1

Net (Loss) Earnings                              $      (139.8 )    $       124.5      $    (15.3 )    $       (24.1 )    $        13.2      $    (10.9 )


Weighted Average Shares Outstanding
Basic                                                    365.7                              365.7              363.0                              363.0

Diluted                                                  365.7                              365.7              363.0                              363.0

Net (Loss) Earnings Per Share
Basic                                            $       (0.38 )    $        0.34      $    (0.04 )    $       (0.07 )    $        0.04      $    (0.03 )

Diluted                                          $       (0.38 )    $        0.34      $    (0.04 )    $       (0.07 )    $        0.04      $    (0.03 )

(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.

                                 TELLABS, INC.

                   RECONCILIATION OF NON-GAAP ADJUSTMENTS (1)

                                  (Unaudited)



                                                                First Quarter 2012                                   Fourth Quarter 2011
In millions, except per-share data                As Reported        Adjustments        Non-GAAP        As Reported        Adjustments        Non-GAAP

Revenue
Products                                         $       209.7      $          -       $    209.7      $       257.8      $          -       $    257.8
Services                                                  48.2                 -             48.2               59.0                 -             59.0

Total revenue                                            257.9                 -            257.9              316.8                 -            316.8


Cost of Revenue
Products (a)                                             128.7               (0.3 )         128.4              143.8               (0.3 )         143.5
Services (a)                                              33.5               (0.5 )          33.0               38.5               (0.4 )          38.1

Total cost of revenue                                    162.2               (0.8 )         161.4              182.3               (0.7 )         181.6


Gross Profit                                              95.7                0.8            96.5              134.5                0.7           135.2

Gross profit as a percentage of revenue                   37.1 %              0.3 %          37.4 %             42.5 %              0.2 %          42.7 %

Gross profit as a percentage of revenue -
products                                                  38.6 %              0.2 %          38.8 %             44.2 %              0.1 %          44.3 %
Gross profit as a percentage of revenue -
services                                                  30.5 %              1.0 %          31.5 %             34.7 %              0.7 %          35.4 %

Operating Expenses
. . .