As discussed in the Explanatory Note and Note 1a - Restatement - we have restated our previously issued unaudited consolidated financial statements. This Management's Discussion and Analysis of Results of Operations and Financial Condition has been revised to reflect the effects of the restatement.

Introduction and Overview of Business

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

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

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

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

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

The 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 is evolving from a core product and services portfolio based primarily on the circuit-switched Time Division Multiplexing (TDM) technology used in our digital cross-connect and managed access products to a growth portfolio based on the packet-switching and Internet Protocol (IP) technology used in our data and optical networking products. Given the level of research and development expenses in early lifecycle products, this growth portfolio is not presently profitable.

Management continues to define and implement initiatives to improve overall performance. On July 25, 2011, management initiated a restructuring plan that will enable us to align our cost structure to current business conditions. This restructuring plan primarily implements workforce reductions of about 330 or 10% of employees. As a consequence of our increased focus on growth markets and growth products, we are still hiring people with different skill sets as needed around the world, therefore, we expect our net headcount to decline by about 150 people through the second quarter of 2012.

RESULTS OF OPERATIONS

Net loss in the third quarter of 2011 was $130.1 million or $0.36 per share (basic and diluted), compared with net earnings of $56.8 million or $0.15 per share (basic and diluted) in the third quarter of 2010. For the first nine months of 2011, net loss was $183.5 million or $0.50 per share (basic and diluted), compared with net earnings of $166.5 million or $0.44 per basic share and $0.43 per diluted share in the first nine months of 2010. The loss in both periods of 2011 was driven by lower revenue and gross profit margins and higher operating expenses (resulting from goodwill and in-process research and development (IPR&D) impairments, restructuring and other charges, and increased research and development expenses).

Revenue (in millions)



                               Third Quarter                           Nine Months
                         2011        2010      Change          2011          2010      Change
      Products        $ 272.7     $ 369.3       (26.2 )%    $ 804.6     $ 1,049.7       (23.3 )%
      Services           57.1        60.5        (5.6 )%      164.3         182.1        (9.8 )%

      Total revenue   $ 329.8     $ 429.8       (23.3 )%    $ 968.9     $ 1,231.8       (21.3 )%

Third quarter 2011 compared with third quarter 2010

On a geographic basis, revenue from customers outside North America grew to $178.8 million (or 54% of total revenue), up 35.7% from $131.8 million (or 31% of total revenue) as revenue increased in all geographic regions outside North America. Revenue from customers in North America (United States and Canada) was $151.0 million (or 46% of total revenue), compared with $298.0 million (or 69% of total revenue). Revenue declined across all three segments.

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 $202.6 million (or 61% of total revenue), compared with $224.4 million (or 52% 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® 8000 Intelligent Network Manager, the Tellabs® 3000 Series of voice-enhancement products, the Tellabs Access products and deployment, training and support services) accounted for $127.2 million (or 39% of total revenue), compared with $205.4 million (or 48% of total revenue).

Nine months 2011 compared with nine months 2010

On a geographic basis, revenue from customers outside North America grew to $465.6 million (or 48% of total revenue) up 41.3% from $329.6 million (or 27% of total revenue) as revenue increased in all geographic regions outside North America. Revenue from

Revenue from our growth portfolio was $582.3 million (or 60% of total revenue), compared with $682.9 million (or 55% of total revenue). Our core portfolio accounted for $386.6 million (or 40% of total revenue), compared with $548.9 million (or 45% of total revenue).

Gross Margin



                                Third Quarter                          Nine Months
                                                % Point                               % Point
                         2011        2010        Change        2011        2010        Change
        Products         41.8 %      52.5 %       (10.7 )      39.9 %      54.6 %       (14.7 )
        Services         39.1 %      36.4 %         2.7        32.1 %      33.5 %        (1.4 )
        Consolidated     41.3 %      50.2 %        (8.9 )      38.6 %      51.5 %       (12.9 )

Products gross margins decreased in both periods of 2011 compared with the year-ago periods, primarily as a result of lower revenue from digital cross-connect systems and data products in North America. Services gross margin increased in the third quarter of 2011, compared with the year-ago period, as higher professional and support services revenue was partially offset by lower revenue from deployment services. Services gross margin decreased in the first nine months of 2011, compared with the year-ago period, as higher professional and support services revenue was offset by lower deployment services revenue.

Operating Expenses (in millions)



                                            Third Quarter                 Percent of Revenue
                                      2011        2010      Change           2011          2010
 Research and development          $  80.8     $  76.3     $   4.5           25.7 %        17.8 %
 Sales and marketing                  41.4        43.6        (2.2 )         13.2 %        10.1 %
 General and administrative           18.6        24.0        (5.4 )          5.9 %         5.6 %

 Subtotal                            140.8       143.9        (3.1 )         44.9 %        33.5 %

 Intangible asset amortization         5.0         6.1        (1.1 )
 Restructuring and other charges      19.5          -         19.5
 Goodwill and IPR&D impairment       102.7          -        102.7

 Total operating expenses          $ 268.0     $ 150.0     $ 118.0

                                             Nine Months                  Percent of Revenue
                                      2011        2010      Change           2011          2010
 Research and development          $ 244.6     $ 216.8     $  27.8           25.2 %        17.6 %
 Sales and marketing                 126.9       132.5        (5.6 )         13.1 %        10.8 %
 General and administrative           63.3        73.7       (10.4 )          6.5 %         6.0 %

 Subtotal                            434.8       423.0        11.8           44.8 %        34.3 %

 Intangible asset amortization        15.3        20.9        (5.6 )
 Restructuring and other charges      20.5         9.5        11.0
 Goodwill and IPR&D impairment       102.7          -        102.7

 Total operating expenses          $ 573.3     $ 453.4     $ 119.9

Operating expenses increased in both periods of 2011, compared with the year-ago periods, primarily due to the goodwill and IPR&D impairments and restructuring and other charges incurred in the third quarter of 2011. Excluding these charges, operating expenses in the third quarter of 2011 were $135.3 million, down from $137.7 million in the third quarter of 2010. For the first nine months of 2011, operating expenses (excluding the charges incurred in the third quarter of 2011) were $415.7 million compared with $405.8 million in the comparable period of 2010 as increased research and development offset lower general and administrative and sales and marketing expenses. Restructuring and other charges in both periods of 2011 are primarily due to severance.

Other Income (in millions)



                                         Third Quarter                       Nine Months
                                   2011       2010      Change        2011        2010      Change
   Interest income, net          $  3.0      $ 2.3     $   0.7      $  9.4      $  9.2     $   0.2
   Other (expense) income, net     (0.9 )      4.9        (5.8 )      (2.6 )       9.7       (12.3 )

   Total other income            $  2.1      $ 7.2     $  (5.1 )    $  6.8      $ 18.9     $ (12.1 )

Interest income, net, increased during the third quarter of 2011 and for the first nine months of 2011 due to higher yields compared with the same periods in 2010. Other (expense) income, net, was lower in the third quarter and first nine months of 2011, compared with the same periods in 2010, primarily due to gains on sales of marketable securities in the third quarter and nine months of 2010. In addition, we recorded a $0.6 million write-down of long-term equity investments in the third quarter of 2011. Other (expense) income, net for the first nine months of 2011 includes a charge of $1.8 million for other-than-temporary impairments from investments in marketable securities and write-downs of long-term equity investments.

Income Taxes

In the third quarter of 2011, income tax expense was $0.5 million, compared with $16.1 million in the year-ago quarter. Tax expense decreased due to losses from domestic operations that were partially offset by increased income from foreign operations. Tax benefits associated with domestic losses and credits have been offset by the establishment of a valuation allowance against our domestic deferred tax assets.

For the first nine months of 2011, we reported a tax benefit of $9.2 million, compared with tax expense of $32.8 million in the comparable period of 2010. In the first nine months of 2011, a benefit of $6.2 million was recorded from the reversal of tax accruals no longer required due to settlement of tax audits and the expiration of a statute of limitations, compared with a similar benefit of $16.9 million in the first nine months of 2010. Excluding these benefits, tax expense declined due to losses from domestic operations that were partially offset by increased income from foreign operations. Tax benefits associated with domestic losses and credits have been substantially offset by a valuation allowance on domestic deferred tax assets.

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)



                               Third Quarter                           Nine Months
                         2011        2010      Change          2011          2010      Change
      Broadband       $ 182.3     $ 199.2        (8.5 )%    $ 504.3     $   619.0       (18.5 )%
      Transport          90.4       170.1       (46.9 )%      300.3         430.7       (30.3 )%
      Services           57.1        60.5        (5.6 )%      164.3         182.1        (9.8 )%

      Total revenue   $ 329.8     $ 429.8       (23.3 )%    $ 968.9     $ 1,231.8       (21.3 )%



Segment Profit* (in millions)



                                   Third Quarter                          Nine Months
                             2011        2010      Change          2011        2010      Change
    Broadband              $ 28.4     $  48.8       (41.8 )%    $  38.1     $ 195.7       (80.5 )%
    Transport                 7.4        71.6       (89.7 )%       47.8       168.3       (71.6 )%
    Services                 22.8        22.5         1.3 %        54.4        62.7       (13.2 )%

    Total segment profit   $ 58.6     $ 142.9       (59.0 )%    $ 140.3     $ 426.7       (67.1 )%

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

Third quarter 2011 compared with third quarter 2010

Broadband Segment

Revenue from the Broadband segment was $182.3 million, compared with $199.2 million. Within this segment, increased revenue from managed access products was offset by lower revenue from data and access products. Managed access revenue was $44.8 million, up 48.3% compared with $30.2 million. Most of this increase came from higher revenue from managed access systems. Data product revenue was $94.3 million, compared with $111.0 million as higher revenue from managed edge systems was offset by lower revenue from our multi-service router series. Access revenue was $43.2 million, compared with $58.0 million primarily as a result of

Transport

Revenue from the Transport segment was $90.4 million, compared with $170.1 million. Within this segment, revenue from digital cross-connect systems and optical transport systems declined. Transport segment profit was $7.4 million, compared with $71.6 million. The decline in segment profit was driven primarily by the lower level of digital cross-connect system revenue.

Services

Revenue from the Services segment was $57.1 million, compared with $60.5 million. The decline in segment revenue was driven primarily by lower deployment revenue, which was partially offset by higher professional and support revenue. Services segment profit was $22.8 million, compared with $22.5 million. The slight increase in segment profit was driven primarily by higher professional and support services revenue, which was partially offset by lower revenue from deployment services.

Nine months 2011 compared with nine months 2010

Broadband Segment

Revenue from the Broadband segment was $504.3 million, compared with $619.0 million. Within this segment, increased revenue from managed access products was offset by lower revenue from data and access products. Managed access revenue was $99.0 million, up 10.0% from $90.0 million. Within this category, increased revenue from managed access systems offset lower revenue from SDH transport systems. Data product revenue was $282.2 million, compared with $400.5 million as increased revenue from managed edge systems was offset by lower revenue from our multi-service router series. Access revenue was $123.1 million, compared with $128.5 million, as increased revenue from access systems was offset by lower revenue from single-family ONTs. Broadband segment profit was $38.1 million, compared with $195.7 million. The decline in segment profit was driven primarily by lower revenue from our multi-service router series and higher research and development expenses.

Transport Segment

Revenue from the Transport segment was $300.3 million, compared with $430.7 million. Within this segment, increased revenue from optical transport systems was offset by lower revenue from digital cross-connect systems. Transport segment profit was $47.8 million, compared with $168.3 million. The decline in segment profit was driven primarily by the lower level of digital cross-connect system revenue.

Services

Revenue from the Services segment was $164.3 million, compared with $182.1 million. The decline in segment revenue was driven primarily by lower deployment revenue, which was partially offset by higher support revenue. Services segment profit was $54.4 million, compared with $62.7 million. The decrease in segment profit was primarily due to higher professional and support services revenue, which was partially offset by lower revenue from deployment services.

Financial Condition, Liquidity & Capital Resources

Our principal source of liquidity remained cash, cash equivalents and marketable securities of $1,030.1 million as of September 30, 2011, which decreased by $104.4 million since year-end 2010. Of the total cash, cash equivalents and marketable securities, as of September 30, 2011, $391.6 million was held in subsidiaries outside the United States. Cash generated from operating activities in the third quarter of 2011 was $21.5 million. Cash used for operating activities during the nine months of 2011 was $31.8 million.

During the third quarter of 2011, we distributed $7.3 million to our stockholders through a quarterly cash dividend and repurchased 10,057 shares of common stock at a cost of $42,980 under the 10b5-1 plan. During the nine months of 2011, we distributed $21.8 million through our quarterly cash dividends and repurchased 0.1 million shares of common stock at a cost of $0.6 million under the 10b5-1 plan.

We provide no assurance as to a future declaration or payment of cash dividends nor do we provide future assurance of repurchases 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 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.

We review goodwill annually for impairment, unless potential interim indicators exist that could result in an impairment. Given that we have continued to experience a significant decline in business volumes from a major customer that has had an adverse impact on the results of the Broadband segment, which is not expected to reverse in the near-term, and since Tellabs' overall market capitalization continued to fall below book value, we completed an interim goodwill impairment review for the Broadband segment. Step one of this review involved determining the Broadband segment's fair value using the present value of future cash flows based on estimates, judgments and assumptions that management believes are appropriate for the circumstances (Level 3 fair value assumptions, see Note 5, Fair Value Measurements). We determined that the fair value of the Broadband segment was below its carrying value, which necessitated a step two review to determine whether or not to record a goodwill impairment charge.

The step two review involved determining the fair value of the identifiable net assets of the Broadband segment, excluding goodwill, and comparing this to the fair value from step one. We determined that the fair value of the identifiable net assets, excluding goodwill, was greater than the fair value of the segment, resulting in no value attributable to goodwill. Consequently, the financial results for the third quarter of 2011 include an impairment charge for the full amount of Broadband segment goodwill, amounting to $82.7 million.

The remaining goodwill balance of $122.3 million at September 30, 2011, relates entirely to the Services segment. Based on the step one review of the Services segment, we determined that the fair value of this segment was significantly greater than its carrying value, requiring no further review.

In conjunction with the interim goodwill impairment review, we assessed the valuation of our indefinite-lived intangible assets, which consists of in-process research and development (IPR&D). For IPR&D, the review involves determining the present value of future cash flows based on estimates, judgments, and assumptions that management believes are appropriate for the circumstances. Updated management projections related to the IPR&D from the WiChorus acquisition in 2009 resulted in an impairment charge in the third quarter of 2011 of $20.0 million.

We review intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. As a result of certain impairment indicators discussed above, we completed a test for recoverability of our amortizable intangible assets in the third quarter of 2011. This test involved comparing the carrying value of the assets to the net undiscounted cash flows expected to be generated from the assets. Based on this test, we determined that the assets are recoverable, requiring no further review.

The impairment charges for both goodwill and IPR&D, a combined $102.7 million, are included in the Consolidated Statements of Operations as Goodwill and IPR&D Impairment.

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.

Third quarter 2011 compared with second quarter 2011

Total revenue was $329.8 million, up 4.1% compared with $316.7 million. Increased Broadband segment revenue and essentially flat Services segment revenue were offset by lower Transport segment revenue.

Total Broadband segment revenue was $182.3 million, up 22.3% from $149.0 million. Within this segment, revenue increased accross all product categories. Managed access revenue was $44.8 million, up 61.2% from $27.8 million, as increased revenue from managed access systems offset lower revenue from SDH transport systems. Access revenue was $43.2 million, up 8.5% from $39.8 million, as increased revenue from single family ONT units was essentially offset by lower revenue from access systems. Data revenue was $94.3 million, up 15.8% compared with $81.4 million. Increased revenue from the multi-service edge router series offset lower revenue from managed edge systems. Broadband segment profit was $28.4 million, compared with loss of $10.0 million. The increase in segment profit was driven primarily by the higher level of managed access and data revenue.

Transport segment revenue was $90.4 million, compared with $110.5 million, as revenue from both digital cross-connect systems and optical transport systems declined. Transport segment profit, driven by lower digital cross-connect and optical transport system revenue, was $7.4 million compared with $24.4 million.

Services segment revenue was $57.1 million, compared with $57.2 million. Within this segment increased revenue from professional services was essentially offset by lower revenue from deployment and support services. Services segment profit, driven primarily by

Revenue from customers outside North America was $178.8 million (or 54% of total revenue) up 28.2% from $139.5 million (or 44% of total revenue). North American revenue was $151.0 million (or 46% of total revenue) compared with $177.2 million (or 56% of total revenue).

Growth portfolio revenue was $202.6 million (or 61% of total revenue), compared with $185.3 million (or 58% 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 $127.2 million (or 39% of total revenue), compared with $131.4 million (or 42% 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 . . .