UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

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

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

Commission file number 0-24612

ADTRAN, Inc.

(Exact name of registrant as specified in its charter)

Delaware		63-0918200
(State of Incorporation)		(I.R.S. Employer Identification Number)
901 Explorer Boulevard
Huntsville, Alabama 35806-2807		(256) 963-8000
(Address of principal executive offices, including zip code)		(Registrant’s telephone number, including area code)

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

Title of Each Class:		Name of Each Exchange on which Registered
Common Stock, par value $0.01 per share		NASDAQ Global Select Market

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

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

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

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 þ No o

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 Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for shorter period that the Registrant was required to submit and post such files). Yes o No o

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

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

Large Accelerated Filer þ		Accelerated Filer o		Non-accelerated Filer o		Smaller Reporting Company o

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

The aggregate market value of the registrant’s outstanding common stock held by non-affiliates of the registrant on June 30, 2009 was $1,339,329,066 based on a closing market price of $21.47 as quoted on the NASDAQ Global Select Market. There were 61,805,680 shares of common stock outstanding as of February 19, 2010.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 5, 2010 are incorporated herein by reference in Part III.

 

 

ADTRAN, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2009

Table of Contents

Item		Page
Number		Number
PART I
1. Business			1
1A. Risk Factors			11
1B. Unresolved Staff Comments			22
2. Properties			22
3. Legal Proceedings			22
4. Submission of Matters to a Vote of Security Holders			22
4A. Executive Officers of the Registrant			22
PART II
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			24
6. Selected Financial Data			25
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
7A. Quantitative and Qualitative Disclosures about Market Risk			39
8. Financial Statements and Supplementary Data			41
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			68
9A. Controls and Procedures			68
9B. Other Information			68
PART III
10. Directors, Executive Officers and Corporate Governance			68
11. Executive Compensation			68
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			68
13. Certain Relationships and Related Transactions and Director Independence			69
14. Principal Accountant Fees and Services			69
PART IV
15. Exhibits and Financial Statement Schedules			69
SIGNATURES			72
INDEX OF EXHIBITS			74
Exhibit 21
Exhibit 23
Exhibit 24
Exhibit 31
Exhibit 32

PART I

ITEM 1.		BUSINESS

Overview

ADTRAN, Inc. designs, manufactures, markets and services network access solutions for communications networks. Our solutions are widely deployed by providers of communications services (serviced by our Carrier Networks Division), and small and mid-sized businesses (SMBs) and enterprises (serviced by our Enterprise Networks Division), and enable voice, data, video and Internet communications across wireline and wireless networks. Many of these solutions are currently in use by every major United States and many global service providers, as well as by many public, private and governmental organizations worldwide.

We were incorporated under the laws of Delaware in November 1985, and commenced operations in January 1986. We are headquartered in Cummings Research Park in Huntsville, Alabama. The mailing address at our headquarters is 901 Explorer Boulevard, Huntsville, Alabama, 35806. The telephone number at that location is (256) 963-8000.

Products and Services

We maintain two operating divisions based on our product and service offerings: the Carrier Networks Division and the Enterprise Networks Division. These divisions serve two distinct markets and support sales globally, operating as two reportable segments. In 2009, sales of Carrier Networks products accounted for 76.7% of total revenue, while sales of Enterprise Networks products accounted for 23.3%. Sales to countries outside of the United States are included in these aggregate divisional figures, but when accounted for separately, comprise 5.7% of total revenue. For more financial information about these divisions and geographic areas, see Note 9 to the Consolidated Financial Statements included in this report.

Our Carrier Networks Division provides products used by service providers to deliver voice, data and video services from their equipment, whether it is located in a central office or remote terminal location, to a customer’s premises. Our Enterprise Networks Division provides products used by enterprise customers to construct voice, data and video networks within the customer’s site or among distributed sites. Our combined product portfolio for both divisions consists of approximately 1,700 high-speed network access and communication devices. In both service provider and enterprise networks, these products are used primarily, but not exclusively, in the “last mile,” or local loop, of a service provider’s network, and in local area networks on a customer’s premises. The last mile is the segment of the network that connects end-user subscribers to a service provider’s closest facility by either copper or fiber. Local area networks include connecting routers, switches, PCs, printers, phones, faxes, and other communications devices within a given building or campus. Our products typically connect two ends of a circuit and serve to transmit, route, and/or switch the data, voice, and/or video traffic traveling across that circuit. The bandwidth requirements of the circuit, along with the type of technology being used, determine the type of equipment needed.

Both of our divisions are positioned with product and service offerings that compete in many segments of the global telecommunications industry and, specifically, in the areas of Ethernet and Internet Protocol (IP) based networks. As networks migrate to IP-based architectures to deliver and utilize higher bandwidth services, ADTRAN^® has strengthened its technologies in its primary growth areas: Broadband Access, Optical Access and Internetworking.

For a discussion of risks associated with our products see “Risk Factors — We must continue to update and improve our products and develop new products in order to compete and to keep pace with improvements in telecommunications technology”, and “Risk Factors — If our products do not interoperate with our customers’ networks, installations may be delayed or cancelled, which could harm our business”, in Item 1A of this report.

Network Access Infrastructure for Advanced Services

Networks are continuing to undergo a fundamental shift from voice-centric technologies to data-centric technologies, and converged networks are being implemented to address both voice and data requirements in the business network. When voice was the dominant type of traffic in the network, networks were engineered to carry voice, integrating data into the architecture as necessary. Today, data is becoming the dominant traffic type, and networks are evolving to increase bandwidth and transport data, voice and video in an integrated architecture. As networks migrate toward integrated communications and entertainment services, carriers and businesses alike are transitioning their networks to packet-based technologies, such as Ethernet and IP. We are well positioned to support both existing services and newer advanced services.

We develop, market, and support high-speed network access solutions for use across IP, Asynchronous Transfer Mode (ATM), and Time Division Multiplexed (TDM) architectures in both wireline and wireless network applications. Our solutions are used to deploy new broadband networks and to upgrade slower, established networks using copper, fiber, and wireless technologies both in the United States and abroad.

Our three major product categories are Carrier Systems, Business Networking and Loop Access.

Carrier Systems products are used by communications service providers to provide last mile access in support of data, voice and video services to consumers and enterprises. The Carrier Systems category includes our broadband access products comprised of Total Access^® 5000 multi-service access and aggregation platform products, Total Access 1100/1200 Series Fiber-To-The-Node (FTTN) products, and Digital Subscriber Line Access Multiplexer (DSLAM) products. Our broadband access products are used by service providers to deliver high-speed Internet access, Voice over Internet Protocol (VoIP), IP Television (IPTV), and/or Ethernet services from the central office or remote terminal locations to customer premises. The Carrier Systems category also includes our optical access products. These products consist of optical access multiplexers including our family of OPTI products. Optical access products are used to deliver higher bandwidth services, or to aggregate large numbers of low bandwidth services for transportation across fiber optic infrastructure. Total Access 1500 products, 303 concentrator products, M13 multiplexer products, and mobile backhaul products are also included in the Carrier Systems product category.

Business Networking products provide access to telecommunication services, facilitating the delivery of converged services and Unified Communications to the SMB and Enterprise markets. The Business Networking category includes Internetworking products, Optical Network Terminals (ONTs), and Integrated Access Devices (IADs). Internetworking products consist of our Total Access IP Business Gateways and NetVanta product lines. NetVanta products include multi-service routers, managed Ethernet switches, IP Private Branch Exchange (PBX) products, IP phone products, Unified Communications solutions, and Carrier Ethernet Network Terminating Equipment.

Loop Access products are used by carrier and enterprise customers for access to copper-based telecommunications networks. The Loop Access category includes products such as: Digital Data Service (DDS) and Integrated Services Digital Network (Total Reach) products, High bit-rate Digital Subscriber Line (HDSL) products including Total Access 3000 HDSL and Time Division Multiplexed-Symmetrical HDSL (TDM-SHDSL) products, T1/E1/T3, Channel Service Units/Data Service Units, and TRACER fixed wireless products.

In addition, we identify sub-categories of product revenues, which we divide into growth products, representing our primary growth areas, and traditional products. Our growth products consist of Broadband Access and Optical Access products (included in Carrier Systems) and Internetworking products (included in Business Networking) and our traditional products include HDSL products (included in Loop Access) and other products.

Carrier Networks

Carrier services continue to evolve to next generation networks, and carrier service providers are generating additional revenue by connecting greater numbers of customers to their infrastructure by offering broadband digital services. Our Carrier Networks Division supplies the network access products that these service providers require to connect their customers to core transmission and switching networks. Specifically, we deliver fiber and copper-based solutions that enable these types of services. Our customer base includes all of the major United States Incumbent Local Exchange Carriers (ILECs), many independent operating companies, Competitive Local Exchange Carriers (CLECs), Utilities, Municipalities, Cable MSOs, major international carriers and wireless service providers. We have focused on opportunities in North America, with increasing emphasis on expanding into the Asia-Pacific region, Caribbean, Latin America, Europe, the Middle East and Africa.

Services enabled using our systems include traditional voice services, VoIP, IPTV, RF Video, high-speed Internet access and data services based upon Ethernet, frame relay, TDM, and ATM networks, connecting the network with user components such as switches, routers, gateways, IADs, PBX, and telephone key systems. ADTRAN devices, deployed at the business site, are enabling carriers to provide Ethernet services to SMBs and distributed enterprises. Our solutions provide a complete end-to-end solution for carriers by supporting both new fiber-based infrastructure and also allowing them to reuse their existing copper infrastructure, lowering their overall costs to deploy advanced Ethernet services to SMBs and distributed enterprises.

Service Provider Networks

Telecommunications networks are transitioning from traditional TDM and circuit-switched technology to IP and Ethernet-based packet networks that offer services such as high-speed Internet access, VoIP, and IPTV. We design solutions that allow service providers to leverage existing network assets, by providing a migration path to new broadband technologies and services.

Continued competition from cable and wireless providers is forcing traditional wireline service providers to react with price incentives, service bundling, and network investments and modifications. ADTRAN products enable wireline providers to offer higher Internet access speeds as well as VoIP and IPTV. Our multi-service access and aggregation platforms are used to provide multi-Gigabit Ethernet capability, increasing rates within the access network. Our optical technologies enable subscriber access solutions for Fiber-To-The-Premises and FTTN architectures. To offer higher speed DSL services in support of delivering Internet access and IPTV, carriers are “shortening” copper loop lengths in order to increase bandwidth and gain a competitive advantage. Our multi-service access and aggregation platform and the FTTN series of outside plant DSLAM products are used to shorten copper loop lengths so that wireline providers can deliver higher-speed network services.

Our products marketed under the Total Access^® brand fit the decentralized networking model that most carriers are using today both in the United States and abroad. Currently, these products comprise the flagship product line for the Carrier Networks Division and offer service providers a single platform that can accommodate demand for a variety of high-speed Internet, voice, data and video services from businesses and residential customers. These modular, scalable, and geographically distributed products offer advantages such as lower start-up costs, more flexible service deployment, greater network interface options, increased bandwidth, grow-as-you-go modularity, and centralized network management. We provide Total Access products that connect to fiber optic and copper network backbones, making them suitable for installation in many parts of the network and enabling deployment of a wide range of voice and data services around the world. The Total Access^® products and other ADTRAN products are accepted by the USDA Rural Utilities Service (RUS) as suitable for use in RUS-financed telecommunications systems. Deployed in central offices, remote terminals, or multi-tenant units, the system encompasses carrier-class solutions for fiber and copper broadband multi-service access, DSL access, Carrier Ethernet access, and narrowband multi-service access.

Advanced IP Services

For wireline service providers, our broadband access products provide the ability to increase bandwidth and improve the quality of services to customers. These products are used in high-density central office applications, along with lower density applications that include remote terminals and outside plant deployments. Also, these products are available in models that are temperature hardened for use in harsh, outside-plant environments and provide support for Ethernet delivery of advanced IP services over fiber or copper as well as legacy TDM and ATM networks.

High-speed Residential Services

Gigabit Passive Optical Network (GPON) technology has been added to the Total Access^® platform. Our GPON module provides 2.5 Gbps to each optical line terminal port, enabling the delivery of advanced, very high bandwidth services such as high definition television (HDTV). The multi-service capabilities of the Total Access^® 5000 allow for the support of native Ethernet services like GPON from the same platform used to support POTS, DSL, Bonded Copper, TDM, ATM, and legacy copper services. Service providers of all sizes are looking to fiber access technologies, like GPON, for ultra-bandwidth delivery to residential customers as well as to provide high-speed Ethernet and voice services to businesses. The ADTRAN optical network terminals work in conjunction with the Total Access^® 5000 to support a wide range of applications for both residential and business applications, ranging from POTS and DS1 to Gigabit Ethernet. The ADTRAN Total Access^® 5000 also provides fully integrated voice options, including support for both TDM trunk interfaces and VoIP.

Very-high-data-rate Digital Subscriber Line (VDSL2) has been added to our leading Total Access^® DSLAMS. These DSLAMs allow service providers to realize ultra-broadband speeds over their existing copper infrastructure, economically securing the broadband connection to the home and enabling the delivery of advanced communications and entertainment services. Total Access^® 1100 Series broadband access products provide an innovative approach to the successful deployment of FTTN architectures. Recognizing the technological and economic barriers of traditional cabinet-based DSL deployments, ADTRAN designed this product series to eliminate the need for expensive cabinet enclosures, heat exchangers and site construction, which account for a large portion of the total cost of deployment. In many cases, Total Access^® 1100 Series DSLAMs can deliver FTTN-based services for significantly less than traditional cabinet-based systems. This allows carriers to more economically utilize the capacity of the existing copper network over the last mile.

Metro Ethernet Services

Metro Ethernet is growing with the proliferation of packet-based infrastructure in both enterprise and carrier networks. The implementation of Ethernet throughout the communications network provides benefits in equipment and operational savings. Gigabit speeds are increasingly becoming available throughout the access network, but they are far from being widespread. Ethernet’s increasing presence throughout the network is driving costs down, further increasing availability to business customers. We provide Metro Ethernet Forum (MEF) compliant products that enable the delivery of these services.

As demand grows for mid-rate (2-40 Mbps) Ethernet services worldwide, the service providers have seen a need to deliver these Ethernet services over copper in addition to fiber. To enable this, enhancements in SHDSL technology (eSHDSL) have been developed to increase the rate delivered per copper pair to more than 5 Mbps and to bond pairs together (G.bond) to offer rates not attainable over a single pair. Ethernet over Copper (EoCu) technology uses eSHDSL and G.bond to deliver these mid-rate Ethernet services over several (typically one to eight) “bonded” pairs. ADTRAN has EoCu solutions that enable our carrier customers to deploy high-speed Ethernet services in places where fiber deployments are not currently available and new construction is not cost effective.

ADTRAN has also developed solutions that allow service providers to deliver Ethernet services over their existing TDM (EoTDM) infrastructure. ADTRAN’s dominant position in DS1 delivery technology (HDSL) allows us to have a unique advantage in our ability to integrate Ethernet over Fiber, Copper, and TDM into a comprehensive Ethernet access solution for service providers.

Optical Access

We also offer a set of solutions that provide transport over fiber facilities for mobile backhaul networks. These products are designed to optimize network performance and perform bandwidth management functions. Our OPTI^® product family includes a multi-service provisioning platform, the OPTI-6100^®, delivering high speed Ethernet (addressing DS1/E1, DS3/E3, OC-3/STM-1, OC-12/STM-4, OC-48, and 10/100/1000Mb) connectivity and transport to cellular sites using a variety of fiber optic ring architectures. Our OPTI-3^® fiber multiplexer provides OC-3 capacity in terminal mode and DS3 range extension applications. The OPTI-6100^® MX (medium) chassis consolidates discrete optical and multiplexer network elements into one, small chassis that addresses DS1/E1, DS3/E3, STS-1, OC-3/STM-1 bandwidths, and Ethernet services delivery to the subscriber. Our OPTI-6100^® LMX (large) chassis provides high density termination options and utilizes many common modules from the other OPTI^® chassis. The OPTI-6100^® SMX (small) chassis provides a very compact chassis for low-density applications, with a variety of mounting options to meet unique customer requirements. Our solutions provide for optical transport in very compact enclosures for cell site traffic backhaul and feature single fiber operation for maximum facility utilization and integration with the ADTRAN Total Access^® family of products and associated multiplexers.

All of these products enable wireless and wireline service providers to more efficiently handle network traffic by consolidating multiple circuits into a single facility, to upgrade their networks to support next-generation services, and to improve backhaul efficiency. These devices provide a migration path from TDM systems to Ethernet/IP networks and also support techniques for ‘bonding’ multiple physical circuits into a single virtual circuit.

Business-class Services

HDSL is a common technique for delivering bandwidth at rates of 1.544 Mbps (known as the DS1 or T1 rate) for infrastructure support, business customer services, and wireless network mobile backhaul services. The T1 interface is universally accepted throughout the United States, and HDSL is the most common method of delivering the T1 interface in nearly every application. ADTRAN HDSL products are manufactured in a variety of configurations for use in every major DS1 deployment platform for voice and data services.

SHDSL products were developed to provide symmetrical solutions for the transport of high-speed business-class services. The International Telecommunications Union (ITU), Alliance for Telecommunications Industry Solutions (ATIS), and the European Telecommunications Standards Institute (ETSI) have established standards for 2-wire and 4-wire SHDSL solutions.

We contributed significantly to ITU, ATIS, and ETSI SHDSL standards. Because of this involvement, we delivered the industry’s first SHDSL customer device. Our SHDSL products, like many of our products, are standards-based, which ensures interoperability with other standards-based products.

Network Management

As networks become more complex, the need for carrier-class management systems becomes apparent to ensure operational efficiencies. We develop and support systems to centralize the configuration, provisioning, and management of our network access products. These systems are used to configure, monitor, and control ADTRAN equipment installed on local loop circuits. The systems ensure communication with the service provider’s central management system to reduce technician dispatches and operating costs. Our Total Access^® Element Management System is an all-Java application that provides configuration, performance, network assurance, and provisioning functions for ADTRAN Total Access^® products.

Enterprise Networks

Our Enterprise Networks Division encompasses a comprehensive internetworking solutions portfolio that delivers converged services and Unified Communications to the SMB and Enterprise. SMB and geographically dispersed enterprises use these products for their voice and data service requirements. Our carrier customers bundle our solutions into their service offerings for their SMB and enterprise customers. These products are typically installed in equipment rooms and wiring closets, to connect headquarters, branch offices, and telecommuters to the corporate voice and data infrastructure. A small to medium business generally refers to an organization with fewer than 500 employees. These businesses can be a single location or geographically dispersed with many locations, including home offices. These businesses and service providers use our internetworking products to implement a high performance, reliable network for converged services and Unified Communications.

Marketed under the brand names Total Access^® and NetVanta^®, our solutions are known for their high performance, reliability and high availability making them the preferred solutions for the delivery of converged IP services. The solutions portfolio includes multi-service routers, managed Layer 2/3 switches, IP Business Gateways, FTTx ONTs, Wireless Access Points, IP PBXs, IP phones and Unified Communications solutions. The Enterprise Network solutions portfolio provides the infrastructure required for a SMB or Enterprise to utilize converged IP services and Unified Communications. Further, our solutions enable the SMB and Enterprise end user to migrate their existing infrastructure — thus preserving their investment; or to replace their legacy system with an IP-based solution.

We view the development and continued evolution of our operating system as critical to our success in bringing to market feature rich, highly reliable, high performance solutions. As such, the ADTRAN Operating System (AOS) is common across our internetworking products, optimizing our product development resources and minimizing time to market for new products and features. It also ensures common configuration practices, policies, protection schemes, and management interfaces for our carrier customers providing a Total Cost of Ownership (TCO) advantage.

Our solutions and their roadmaps are closely aligned with our customer’s strategic service offerings. Our solutions enable our customers to offer high performance, feature rich managed and unmanaged converged IP services (data, voice, and unified communications) to the SMB and Enterprise. Our solutions offer a wide range of LAN and WAN connectivity options, ranging from analog to fiber, supporting different geographic locations in their enterprise and wide area networks, as well as their local area networks requiring switching, routing and voice capabilities. Many of the products available from the Enterprise Networks Division reach the SMB and Enterprise end user through their service provider as these products are typically installed by the service provider at the customer premises as part of a bundled service package.

Data Solutions

ADTRAN multi-service routers move data between networked computers over public or private IP, Frame Relay, MultiProtocol Label Switching leased-line infrastructures or carrier supplied Ethernet services. These devices include features to route traffic between multiple destinations, secure the network against cyber attacks, ensure the privacy of data as it is transported across the Internet, and restore communications in the event of equipment or network failure. ADTRAN multi-service routers provide Internet access and interconnect corporate locations and when deployed in the workgroup environment with our managed layer 2 and layer 3 (L2/L3) Ethernet switches provide connectivity from the WAN to the end user’s desktop computer and IP Phone. ADTRAN’s managed L2/L3 switches range in speeds up to multi-Gigabit and include Power over Ethernet options.

Our NetVanta multi-service router products include both modular and fixed-configuration solutions. The NetVanta router portfolio offers a wide range of business class features including: Quality of Service (QoS), Firewall, VPN, Network Performance Monitoring, Cable Diagnostics and Voice Quality Monitoring. These features enable carriers to offer the highest quality of service with a TCO advantage.

The ADTRAN NetVanta portfolio also includes wireless solutions for the SMB and Enterprise. With 802.11WiFi capabilities, the NetVanta 1335 multi-service access router with integrated WiFi and NetVanta 150 wireless access device address the increasing demands for wireless solutions and allow businesses to streamline and improve operational efficiencies, expand customer service offerings, and increase flexibility for employees.

The NetVanta router portfolio supports 3G data services. The NetVanta 3G Network Interface Module (NIM) provides a wireless WAN capability for our NetVanta line of multi-service routers and provides a rapid, secure and cost-effective connectivity option when used in conjunction with one of our modular routers. A 3G data service allows customers to take advantage of flexible deployment options at broadband speeds from a single platform. The solution is ideal for a number of applications including use as a primary data service and/or a network failover option for SMBs and Enterprises.

Voice Solutions

The network infrastructure for voice services, in recent years, has undergone a rapid evolution to an IP-based infrastructure, including the accelerated adoption of SIP trunking. As a result, VoIP as a part of a converged services offering represents an important revenue opportunity for service providers seeking to add new features, such as cloud applications and unified communications in order to retain and expand their subscriber base. ADTRAN Total Access and NetVanta IP Business Gateways (IPBG) support this strategic direction, and are deployed by the service provider at the demarcation point on the customer premises. An ADTRAN IPBG combines the functionality of a voice gateway with a multi-service router and security features. Our products offer a highly integrated, cost-effective platform for delivering converged services to the SMB and Enterprise customer.

Our Enterprise solutions are widely regarded for their innovation, most notably our ability to integrate the functionality of multiple network elements into a single platform. This “all-in-one” strategy for the delivery of converged voice and data services enables a service provider to offer a SMB or Enterprise customer converged services without the expense of replacing their current infrastructure, enabling the customer to migrate to a Hosted PBX service based on their timeline for investment. Supporting a SMB or Enterprise’s migration with a single platform provides the service provider with operational efficiencies, such as network management, and a TCO advantage.

The Enterprise Division portfolio of voice products provides an industry-leading TCO advantage. Our voice products combine the highest level of feature integration, with performance and reliability. This level of product innovation combined with our industry leading warranty and product support enables the service provider an extended life cycle for our platforms in their customer’s network.

Unified Communications and IP Telephony

Unified Communications (UC) solutions were added to the portfolio of ADTRAN Enterprise solutions in 2009, with the acquisition of Objectworld Communications Corporation, a Canadian-based company. Marketed under the name NetVanta Unified Communications, these solutions enable businesses with 75 to 2,000 employees to realize the benefits of UC. ADTRAN’s NetVanta UC products deliver end-to-end unified communications that bridge the gap between telephony, desktop communications productivity and business processes. Referred to as Communications-Enabled Business Processes (CEBP), the ADTRAN NetVanta UC solutions enable businesses with Microsoft Windows platforms to drive workforce productivity and improve customer service. ADTRAN’s award-winning NetVanta UC Server enables CEBP while providing simplicity and value to businesses that want to make a smooth transition from simple telephony to a unified communications solution without sacrificing their PBX and Microsoft business systems investments. There are four platforms in the NetVanta UC solutions portfolio: NetVanta UC Server, NetVanta Business Application Server, NetVanta Enterprise Communications Server, and NetVanta Business Communications System.

The addition of UC solutions is a logical extension of our Enterprise portfolio enabling our customers to continue to look to ADTRAN as a total solution provider. Additionally, the NetVanta UC solutions provide the flexibility to be customized and optimized to address the unique CEBP and customer service needs of a range of vertical markets such as banking, hospitality, education, healthcare, retail, and real estate.

ADTRAN’s NetVanta 7000 Series is an innovative IP PBX solution with integration that results in a single box solution for small business communications needs. Scaling up to 100 users the 7000 Series combines the features of an IP PBX with the functionality of an Ethernet switch, a multi-service router, security features and WAN connectivity.

Configuration and Network Management

We develop and support network productivity tools and systems to centralize the configuration and management of our internetworking products. These tools aid in the management of networks powered by ADTRAN internetworking products and includes the nCommand MSP (Managed Service Provider) management platform. nCommand MSP streamlines a service provider’s product life cycle management efforts including remote monitoring and management of ADTRAN NetVanta or Total Access solutions. A web-based platform, nCommand MSP simplifies new device deployment and enables Managed Service Providers, service providers and enterprise IT organizations to deliver on Service Level Agreements, improve customer service response times, reduce network downtimes and proactively monitor and report network performance, all while reducing operational costs.

Service and Support

In addition to our product portfolio, we offer technical support services to help ensure that we are responsive to our customers who have deployed networking and infrastructure solutions. We provide pre- and post-sales technical support and a variety of training options. We offer installation and maintenance services designed to protect customers’ networks from unnecessary downtime. ADTRAN professional services, “ADTRAN Custom Extended Services”, branded as “ACES”, guarantees priority access to technical support engineers and on-site product replacement on a four-hour or next business day basis, depending on the service plan selected. Our service and support offerings are available to customers in both our Carrier Networks Division and Enterprise Networks Division.

Customers

We have a diverse customer base, which we segment based on the markets served, and typically within each of our two distinct divisions.

Customers of our Carrier Networks Division in the United States include all of the major ILECs, large and small independent telephone companies, competitive service providers, Internet service providers, Utilities, Municipalities, Cable MSOs, and wireless service providers. Internationally, this division also serves incumbent carriers and competitive service providers in selected regions.

ILECs and most other service providers require product approval prior to adopting a vendor’s products for use in their networks. We are involved in a constant process of submitting new and succeeding generations of products for approval and ADTRAN products are widely deployed in these service provider networks. However, we cannot be certain that we will obtain these approvals in the future, or that sales of these products will continue to occur. Further, any attempt by an ILEC or other service provider to seek out additional or alternative suppliers, or to undertake, as permitted under applicable regulations, the production of these products internally, could have a material adverse effect on our operating results.

Customers of our Enterprise Networks Division solutions in the United States include all of the major ILECs, large and small independent telephone companies and competitive service providers. Additionally SMB and enterprise organizations purchase our solutions through a two-tier distribution channel. The two-tier distribution channel is comprised of several large distributor partners and an extensive network of value-added resellers (VARs) as described in “Distribution, Sales and Marketing” below. Additionally, ADTRAN Enterprise solutions are deployed globally in the EMEA, APAC and the Americas regions. Vertical markets where our solutions are used include retail, food service, healthcare, finance, government, education, manufacturing, military, transportation, hospitality, and energy/utility.

Our major customers include the following:

AT&T Inc.		Qwest Communications International, Inc.
CenturyLink, Inc.		Verizon Communications, Inc.
Ingram Micro, Inc.		Walker and Associates, Inc.
KGP Logistics		Windstream Corporation

Single customers comprising more than 10% of our revenue in 2009 include AT&T Inc. at 22%, Qwest Communications International, Inc. at 19%, and Verizon Communications, Inc. at 11%. The revenues from all of these customers are reported in both the Carrier Networks and Enterprise Networks segments. No other customer accounted for 10% or more of our sales in 2009.

For a discussion of risks associated with customers, service providers and approval processes, see “Risk Factors — We depend heavily on sales to certain customers; the loss of any of these customers would significantly reduce our revenues and net income”, “Risk Factors — Consolidation and deterioration in the competitive service provider market could result in a significant decrease in our revenue”, and “Risk Factors — The lengthy approval process required by ILECs and other service providers for new products could result in fluctuations in our revenue”, in Item 1A of this report.

Distribution, Sales and Marketing

We sell our Carrier Networks products in the United States through a combination of a direct sales organization and a distribution network. Our direct sales organization supports major accounts and has offices located throughout the United States. Sales to most competitive service providers and independent telephone companies are fulfilled through a combination of direct sales and major technology distribution companies such as KGP Logistics, Walker and Associates, and Power & Tel.

Prior to placing any orders, service providers require lengthy product qualification and standardization processes that can extend for several months or years. Orders, if any, are typically placed under single or multi-year supply agreements that are generally not subject to minimum volume commitments. Service providers generally prefer having two or more suppliers for most products, so individual orders are usually subject to competition based on some combination of total value, service, price, delivery, and other terms.

The majority of Enterprise Networks products are sold in the United States through a non-exclusive distribution network that consists, at the top level, of several major technology distributors, such as Walker and Associates, TechData, Ingram Micro, Jenne Distributors, Synnex Corporation, Interlink Communications Systems and Catalyst Telecom. These organizations then distribute products to an extensive network of Value-Added Resellers (VARs), system integrators, and service providers.

VARs and system integrators may be affiliated with ADTRAN as channel partners, or they may purchase from a distributor in an unaffiliated fashion. Affiliated partners participate with us at various program levels based on sales volume and other factors to receive benefits such as product discounts, co-op advertising funds, technical support, and training. We maintain field offices nationwide to support distributors, VARs and system integrators. The Enterprise Networks Division maintains a channel-based sales organization to manage our partners.

A growing portion of our Enterprise Networks products are being sold to service providers for provisioning of hosted VoIP service offerings for SMB and enterprise branch office end users.

Outside of the United States, both Carrier and Enterprise products are sold through distribution arrangements customized for each region. Each region is supported by an ADTRAN field office that offers sales and support functions, and in some cases, warehousing and manufacturing support. In some regions, Carrier products are sold to carriers through our direct sales organization.

Our field sales organizations, distributors, and service provider customers receive support from headquarters-based marketing, sales, and customer support groups. Under certain circumstances, other headquarters personnel may become involved in sales and other activities.

Research and Development

Rapidly changing technologies, evolving industry standards, changing customer requirements, and continuing developments in communications service offerings characterize the markets for our products. Our continuing ability to adapt to these changes and to develop new and enhanced products that meet or anticipate market demand is a significant factor influencing our competitive position and our prospects for growth.

During 2009, 2008, and 2007, product development expenditures totaled $83.3 million, $81.8 million, and $75.4 million, respectively. Our product development activities are an important part of our strategy. Because of rapidly changing technology and evolving industry standards, we expect to sustain, and possibly increase, product development levels each year.

We strive to deliver innovative network access solutions that lower the total cost of deploying services, increase the level of performance achievable with established infrastructures, reduce operating and capital expense for our customers, increase network bandwidth and functionality, and extend network reach. Our development process is conducted in accordance with ISO 9001, TL 9000, and ISO 14001, which are international standards for quality and environmental management systems.

We develop most of our products internally, although we sometimes license intellectual property rights for use in certain products. Internal development gives us more control over design and manufacturing issues related to our products and closer control over product costs. Our ability to continually reduce product costs is an important part of our overall business strategy. Our product development efforts are often centered on entering a market with improved technology, allowing us to offer products at a price point lower than established market prices. We then compete for market share. We continually re-engineer successive generations of the product to improve our gross margin.

Product development activities focus on products to support both existing and emerging technologies in the telecommunications industry in segments of our markets that we consider viable revenue opportunities. We are actively engaged in developing and refining technologies to support data, voice, and video transport primarily over IP/Ethernet network architectures. Our work involves Ethernet transport, fiber optic transport, DSL transport (VDSL2, ADSL2+, ADSL, SHDSL, and HDSLx), access routing, Ethernet switching, integrated access, converged services, VoIP, network management, and professional services.

A centralized research function supports product development efforts company-wide. This group provides guidance to our various product design and engineering teams in digital signal processing technologies, computer simulation and modeling, CAD/CAM tool sets, custom semiconductor design, industry standards, and technological forecasting.

Many telecommunications issues, processes, and technologies are governed by Standards Development Organizations (SDOs). These SDOs consist of representatives from various manufacturers, service providers, and testing laboratories working to establish specifications and compliance guidelines for emerging telecommunications technologies. We are an active participant in several SDOs, and have assisted with the development of worldwide standards in many technologies.

We continue to be involved in the evolution of Ethernet technology by participating in the Institute of Electrical and Electronics Engineers 802 LAN/MAN standards committee, the ITU-T and the MEF, which are standardizing technologies such as Carrier Ethernet traffic management, Ethernet Ring Protection Switching (ERPS), provider networking, Ethernet Operations, Administration and Management (OAM), and Connectivity Fault Management. In the past year, we have worked in the SDOs to bring more interoperability between GPON equipment. These efforts have included helping ATIS establish a new subcommittee focusing on optical access networks (NIPP-OAN) and increasing our participation in GPON work in the Broadband Forum.

We are also involved in other standards development efforts related to maximizing the bandwidth potential of the copper pair to enable new applications. We contributed to the development of the VDSL2 ITU-Telecommunications (ITU-T) standard. Upon completion of the various wireline telecommunications standards, the industry-wide interoperability and performance testing requirements become the responsibility of the Broadband Forum (formerly DSL Forum). We have continued our contributions toward VDSL2 and ADSL2+ development through our work in the Broadband Forum.

For a discussion of risks associated with our research and development activities, see “Risk Factors — We must continue to update and improve our products and develop new products in order to compete and to keep pace with improvements in telecommunications technology” and “Risk Factors — We engage in research and development activities to improve the application of developed technologies, and as a consequence may miss certain market opportunities enjoyed by larger companies with substantially greater research and development efforts who may focus on more leading edge development”, in Item 1A of this report.

Manufacturing and Operations

The principal steps in our manufacturing process include the purchase and management of materials, assembly, testing, final inspection, packing, and shipping. We purchase parts and components for the assembly of some products from a large number of suppliers through a worldwide sourcing program. In addition, we manage a process that identifies the components that are best purchased directly by contract manufacturers for use in the assembly of our products to achieve manufacturing efficiency, quality, and cost objectives. Certain key components used in our products are currently available from a single source, and other key components are available from only a limited number of sources. In the past, we have experienced delays in the receipt of certain key components, which has resulted in delays in related product deliveries. We attempt to manage these risks through developing alternative sources, by staging inventories at strategic locations, through engineering efforts designed to obviate the necessity of certain components, and by maintaining close contact and building long-term relationships with our suppliers.

We rely on subcontractors in Asia for assembly and testing of certain printed circuit board assemblies, sub-assemblies, chassis, enclosures and equipment shelves, and to purchase some of the raw materials used in such assemblies. We typically manufacture our low-volume, high-mix, or complex product assemblies at our manufacturing site in Huntsville, Alabama. We continue to build and test all new product prototypes and initial production units for our products in Huntsville, and later transfer the production of high-volume, low-mix assemblies to our subcontractors. Subcontract assembly operations can lengthen fulfillment cycle times, but we believe we can respond more rapidly to uncertainties in incoming order rates by selecting assembly subcontractors having significant reserve capacity and flexibility. We have consolidated our production to two subcontractors who have proven to be flexible and able to meet our quality requirements. We conduct the majority of all transactions with our foreign suppliers in United States currency.

Most shipments of products to customers occur from our facilities in Huntsville, Alabama. Our facilities are certified pursuant to the most current releases of ISO9001, TL9000, ISO14001, and are Customs-Trade Partnership Against Terrorism certified. Our products are also certified to certain other telephone company standards, including those relating to emission of electromagnetic energy and safety specifications.

For a discussion of risks associated with manufacturing activities, see “Risk Factors — Our strategy of outsourcing a portion of our manufacturing requirements to subcontractors located in Asia may result in us not meeting our cost, quality or performance standards” and “Risk Factors — Our dependence on a limited number of suppliers may prevent us from delivering our products on a timely basis, which could have a material adverse effect on customer relations and operating results”, in Item 1A of this report.

Competition

We compete in markets for networking and communications equipment for service providers and businesses, government agencies, and other organizations worldwide. Our products and services support the transfer of data, voice and video across service providers’ fiber, copper, and wireless infrastructures, and across wide area networks, local area networks, and the Internet.

The markets for our products are intensely competitive. Numerous competitors exist in each of our product segments. Intense competitive conditions and recent declines in economic activity have resulted in competitor consolidations, bankruptcies and liquidations. Consumer acceptance of alternative communications technologies such as coaxial cable and cellular-based services that compete with our products has grown in recent years. Competition might further increase if new technologies emerge, new companies enter the market, or existing competitors expand their product lines.

For our Carrier Networks Division, factors influencing the markets in which we currently compete or may compete in the future include the ability to:

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Help the customer solve networking problems within the confines of restrained capital budgets;

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Offer globally competitive solutions against a different set of competitors than in the United States;

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Deliver solutions that fit the distributed networking model being deployed by most service providers;

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Deliver solutions for service provider networks as they increasingly focus on network transformation, convergence, and integration of services;

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Deliver solutions at attractive price points;

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Deliver reliability and redundancy, especially for higher bandwidth products;

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Adapt to new network technologies as they evolve;

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Compete effectively against large firms with greater resources;

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Deliver products when needed by the customer;

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Deliver responsive customer service, technical support, and training; and

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Assist customers requiring pre-assembled, turnkey systems.

Competitors of our Carrier Networks Division include large, established firms such as Alcatel-Lucent, Cisco Systems, Fujitsu Limited, Huawei, Ericsson, Tellabs, and Siemens. There are also a number of smaller, specialized firms with which we compete, such as ADC Telecommunications, Zhone Technologies, Occam Networks, Calix Networks, and other privately held firms.

For our Enterprise Networks Division, factors influencing the markets in which we currently compete or may compete in the future include the ability to:

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Satisfy the customer’s need for a cost-efficient alternative to established internetworking suppliers;

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Satisfy the customer’s need to utilize the most cost-effective combination of transmission technologies to connect geographically dispersed locations;

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Increase network performance and lower the customer’s cost for communications services and equipment;

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Add capacity and migrate to new or different technologies without a major system upgrade;

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Continue to develop and support established platforms;

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Offer products to address new networking technologies in a timely manner;

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Deliver reliability and system backup, especially for higher bandwidth products;

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Adapt to new network technologies as they evolve;

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Deliver products when needed by the customer;

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Deliver responsive customer service, technical support, and training; and

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Assist customers requiring hands-on installation and maintenance.

Competitors of our Enterprise Networks Division include Cisco Systems, Juniper Networks, Avaya, Hewlett Packard, Enterasys Networks, Extreme Networks, Allied Telesyn, and other smaller companies. Some of these companies compete in a single product segment, while others compete across multiple product lines.

For further discussion of risks associated with our competition, see “Risk Factors — We must continue to update and improve our products and develop new products in order to compete and to keep pace with improvements in telecommunications technology” and “Risk Factors — We compete in markets that have become increasingly competitive, which may result in reduced gross profit margins and market share”, in Item 1A of this report.

Backlog and Inventory

A substantial portion of our shipments in any fiscal period relate to orders received and shipped in that fiscal period for customers under agreements containing non-binding purchase commitments. Further, a significant percentage of orders require delivery within a few days. These factors result in very little order backlog or order flow visibility. We believe that because we fill a substantial portion of customer orders within the fiscal quarter of receipt, backlog is not a meaningful indicator of actual sales for any succeeding period.

To meet this type of demand, we have implemented advanced supply chain management systems to manage the production process. We maintain a substantial finished goods inventory. Our practice of maintaining sufficient inventory levels to assure prompt delivery of our products increases the amount of inventory that may become obsolete. The obsolescence of this inventory may require us to write down the value of the obsolete inventory, which may have an adverse effect on our operating results.

Government Regulation

In the United States, our products must comply with various regulations and standards defined by the Federal Communications Commission and Underwriters Laboratories. Products sold internationally may be required to comply with regulations or standards established by telecommunications authorities in various countries, as well as those of certain international bodies. For instance, environmental legislation within the European Union (EU) may increase our cost of doing business internationally as we amend our products to comply with these requirements. The EU issued a Directive on the restriction of certain hazardous substances in electronic and electrical equipment (RoHS), enacted the Waste Electrical and Electronic Equipment (WEEE) Directive to mandate the funding, collection, treatment, recycling and recovery of WEEE by producers of electrical or electronic equipment into Europe, and enacted a regulation concerning the Registration, Evaluation, Authorization and Restriction of Chemicals (REACH). We continue to implement measures to comply with the RoHS Directive, the WEEE Directive and the REACH Regulation as individual countries issue their implementation guidance.

For further discussion of risks associated with government regulation, see “Risk Factors — Our products may not continue to comply with the regulations governing their sale, which may harm our business” and “Risk Factors — Regulatory and potential physical impacts of climate change may affect our customers and our production operations, resulting in adverse affects on our operating results”, in Item 1A of this report.

Employees

As of December 31, 2009, we had 1,571 full-time employees in the United States and 53 full-time employees in our international subsidiaries, located in Canada, Mexico, the Asia-Pacific region and Europe. Of our total employees, 282 were in sales, marketing and service; 482 were in research and development; 738 were in manufacturing operations and quality assurance; and 122 were in administration. None of our employees are represented by a collective bargaining agreement, nor have we ever experienced any work stoppage. We believe that our relationship with our employees is good.

Intellectual Property

The ADTRAN corporate logo is a registered trademark of ADTRAN. The name “ADTRAN” is a registered trademark of ADTRAN. A number of our product identifiers and names also are registered. We also claim rights to a number of unregistered trademarks.

We have ownership of at least 252 patents related to our products and have approximately 88 additional patent applications pending, of which at least 5 have been approved and are in the process of being issued by the U.S. Patent and Trademark Office. The average remaining duration of our patents as of December 31, 2009 was approximately 11 years. We will continue to seek additional patents from time to time related to our research and development activities. We do not derive any material amount of revenue from the licensing of our patents.

We protect our intellectual property and proprietary rights in accordance with good legal and business practices. We believe, however, that our competitive success will not depend on the ownership of intellectual property, but instead will depend primarily on the innovative skills, technical competence, and marketing abilities of our personnel.

The communications industry is characterized by the existence of an ever-increasing volume of patent litigation and licensing activities. From time to time we receive and may continue to receive notices of claims alleging that we are infringing upon patents or other intellectual property. We cannot predict whether we will prevail in any claims or litigation over alleged infringements, or whether we will be able to license any valid and infringed patents, or other intellectual property, on commercially reasonable terms. It is possible that litigation may result in significant legal costs and judgments. Any intellectual property infringement claims, or related litigation against or by us, could have a material adverse effect on our business and operating results.

For a discussion of risks associated with our intellectual and proprietary rights, see “Risk Factors — Our failure to maintain rights to intellectual property used in our business could adversely affect the development, functionality, and commercial value of our products”, in Item 1A of this report.

Available Information

A copy of this Annual Report on Form 10-K, as well as our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports, are available free of charge on the Internet at our web site, www.adtran.com, as soon as reasonably practicable (generally, within one day) after we electronically file these reports with, or furnish these reports to, the Securities and Exchange Commission (SEC). The reference to our web site address does not constitute incorporation by reference of the information contained on the web site, which information should not be considered part of this document. You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (www.sec.gov) that contains our reports, proxy and information statements, and other information that we have filed electronically with the SEC.

ITEM 1A.		RISK FACTORS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of ADTRAN. ADTRAN and its representatives may from time to time make written or oral forward-looking statements, including statements contained in this report and our other filings with the SEC and other communications with our stockholders. Generally, the words, “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “may,” “could” and similar expressions identify forward-looking statements. We caution you that any forward-looking statements made by or on our behalf are subject to uncertainties and other factors that could cause these statements to be wrong. Some of these uncertainties and other factors are listed below. Though we have attempted to list comprehensively these important factors, we caution investors that other factors may prove to be important in the future in affecting our operating results. New factors emerge from time to time, and it is not possible for us to predict all of these factors, nor can we assess the impact each factor or combination of factors may have on our business.

You are further cautioned not to place undue reliance on those forward-looking statements because they speak only of our views as of the date the statements were made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

The following are some of the risks that could affect our financial performance or could cause actual results to differ materially from those expressed or implied in our forward-looking statements:

Our operating results may fluctuate in future periods, which may adversely affect our stock price.

Our operating results have been and will continue to be subject to quarterly and annual fluctuations as a result of numerous factors. These factors include, but are not limited to:

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Fluctuations in demand for our products and services, especially with respect to significant network expansion projects undertaken by telecommunications service providers;

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Continued growth of communications network traffic and the adoption of communication services and applications by enterprise and consumer end users;

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Changes in sales and implementation cycles for our products and reduced visibility into our customers’ spending plans and associated revenue;

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Reductions in demand for our traditional products as new technologies gain acceptance;

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Our ability to maintain appropriate inventory levels and purchase commitments;

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Price and product competition in the communications and networking industries, which can change rapidly due to technological innovation;

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The overall movement toward industry consolidation among both our competitors and our customers;

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Our dependence on sales of our products by channel partners, the timing of their replenishment orders, the potential for conflicts and competition involving our channel partners and large end use customers and the potential for consolidation among our channel partners;

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Variations in sales channels, product cost or mix of products sold;

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Delays in receiving product acceptance from certain customers as defined under contract, for shipments near the end of a reporting period;

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Our ability to maintain high levels of product support;

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Manufacturing and customer order lead times;

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Fluctuations in our gross margin, and the factors that contribute to this as described below;

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Our ability to achieve cost reductions;

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The ability of our customers, channel partners, and suppliers to obtain financing or to fund capital expenditures;

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Our ability to execute on our strategy and operating plans;

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Benefits anticipated from our investments in engineering, sales and marketing activities;

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The effects of climate change; and

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The effects of political or economic conditions, terrorist attacks, acts of war, or other unrest in certain international markets.

As a result, operating results for a particular future period are difficult to predict, and prior results are not necessarily indicative of results to be expected in future periods. Any of the above mentioned factors, or other factors discussed elsewhere in this document, could have a material adverse effect on our business, results of operations and financial condition that could adversely affect our stock price.

Our revenue for a particular period can be difficult to predict, and a shortfall in revenue may harm our operating results.

As a result of the many factors discussed in this report, our revenue for a particular quarter is difficult to predict and will fluctuate from quarter to quarter. Our typical pattern of customer orders requests product delivery within a short period following receipt of an order. Consequently, we do not carry a significant order backlog, and are dependent upon obtaining orders and completing delivery in accordance with shipping terms within each quarter to achieve our targeted revenues. Our net sales may grow at a slower rate than in previous quarters or may decline. Our ability to meet financial expectations could also be affected if the variable sales patterns seen in prior quarters recur in future quarters. We have experienced periods of time during which manufacturing issues have delayed shipments, leading to variable shipping patterns. In addition, to the extent that manufacturing issues and any related component shortages result in delayed shipments in the future, and particularly in quarters in which we and our subcontractors are operating at higher levels of capacity, it is possible that revenue for a quarter could be adversely affected, and we may not be able to remediate the conditions within the same quarter.

In the past, long manufacturing lead times have caused our customers to place the same order multiple times. This multiple ordering, along with other factors, may cause difficulty in predicting our sales and, as a result, could impair our ability to manage parts inventory effectively.

We plan our operating expense levels based primarily on forecasted revenue levels. These expenses and the impact of long-term commitments are relatively fixed in the short term. A shortfall in revenue could lead to operating results being below expectations because we may not be able to quickly reduce these fixed expenses in response to short-term business changes.

General economic conditions may reduce our revenues and harm our operating results.

Economic conditions in the latter part of 2008 and much of 2009 contributed to a slowdown in telecommunications industry spending, including specific market segments in which we operate. The potential reoccurrence of these trends and their duration and depth are difficult to predict. Capital spending for network infrastructure projects of our largest customers could be delayed or cancelled in response to reduced consumer spending, tight capital markets or declining liquidity trends. Sustained trends of this nature could have a material adverse affect on our revenues, results of operations and financial condition.

Our exposure to the credit risks of our customers and distributors may make it difficult to collect accounts receivable and could adversely affect our operating results and financial condition.

Most of our sales are on an open credit basis, frequently with payment terms of 30 to 45 days in the United States and typically longer in many geographic markets outside the United States. As our business in international regions expands, ADTRAN’s total accounts receivable balance will likely increase. Our days sales outstanding could also increase as a result of greater mix of international sales. Additionally, international laws may not provide the same degree of protection against defaults on accounts receivable as provided under United States laws governing domestic transactions; therefore, as our international business grows, we may be subject to higher bad debt expense compared to historical trends. Overall, we monitor individual customer payment capability in granting such open credit arrangements, seek to limit such open credit to amounts we believe the customers can pay, and maintain reserves we believe are adequate to cover exposure for doubtful accounts. In the course of our sales to customers, we may encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible accounts receivable. We may be exposed to similar credit risks relating to collections from distributors of our products, and we apply similar processes to monitor and reserve for any exposures. The recent turmoil in the financial markets could impact certain of our customers’ ability to maintain adequate credit facilities with financial institutions, thereby potentially impacting their ability to pay their debts. While we attempt to monitor these situations carefully and attempt to take appropriate measures to collect accounts receivable balances, there are no assurances we can avoid accounts receivable write downs or write off of doubtful accounts. Such write-downs or write-offs could negatively affect our operating results for the period in which they occur, and could potentially have a material adverse effect on our results of operations and financial condition.

We expect gross margin to vary over time, and our level of product gross margin may not be sustainable.

Our level of product gross margins may not be sustainable and may continue to be adversely affected by numerous factors, including:

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Changes in customer, geographic, or product mix, including the mix of configurations within each product group;

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Introduction of new products by competitors, including products with price-performance advantages;

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Our ability to reduce product cost;

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Increases in material or labor cost;

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Expediting costs incurred to meet customer delivery requirements;

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Excess inventory and inventory holding charges;

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Obsolescence charges;

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Changes in shipment volume;

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Loss of cost savings due to changes in component pricing or charges incurred due to inventory holding periods if parts ordering does not correctly anticipate product demand;

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Lower than expected benefits from value engineering;

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Increased price competition, including competitors from Asia, especially China;

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Changes in distribution channels;

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Increased warranty cost;

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Liquidated damages costs relating to customer contractual terms; and

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Our ability to manage the impact of foreign currency exchange rate fluctuations relating to pricing to our international customers.

We must continue to update and improve our products and develop new products in order to compete and to keep pace with improvements in telecommunications technology.

The markets for our products are characterized by rapidly changing technology, evolving industry standards, and continuing improvements in the telecommunications service offerings of common service providers. If technologies or standards applicable to our products, or common service provider offerings based on our products, become obsolete or fail to gain widespread commercial acceptance, our existing products or products under development may become obsolete or unmarketable.

Moreover, the introduction of products embodying new technologies, the emergence of new industry standards, or changes in common service provider offerings could adversely affect our ability to sell our products. For instance, we offer a large number of products that apply primarily to the delivery of high-speed digital communications over the local loop utilizing copper wire. We compete favorably with our competitors by developing a high-performance line of these products. We market products that apply to fiber optic transport in the local loop. We expect, however, that use of coaxial cable and mobile wireless access in place of local loop access will increase. Also, non-traditional providers, such as cable television companies, are increasing their presence in the local loop. To meet the requirements of these new delivery systems and to maintain our market position, we may have to develop new products or modify existing products.

Our sales and profitability in the past have, to a significant extent, resulted from our ability to anticipate changes in technology, industry standards and common service provider offerings, and to develop and introduce new and enhanced products. Our continued ability to adapt will be a significant factor in maintaining or improving our competitive position and our prospects for growth. We cannot assure that we will be able to respond effectively to changes in technology, industry standards, common service provider offerings or new product announcements by our competitors. We also cannot assure that we will be able to successfully develop and market new products or product enhancements, or that these products or enhancements will achieve market acceptance. Should the rate of decline in sales of certain traditional TDM based products exceed the rate of market acceptance and growth in sales of our newer IP-based products, our revenues may be adversely affected. Any failure by us to continue to anticipate or respond in a cost-effective and timely manner to changes in technology, industry standards, common service provider offerings, or new product announcements by our competitors, or any significant delays in product development or introduction, could have a material adverse effect on our ability to competitively market our products and on our revenues, results of operations and financial condition.

Our products may not continue to comply with the regulations governing their sale, which may harm our business.

As discussed above under “Business — Government Regulation”, in the United States, our products must comply with various regulations and standards defined by the Federal Communications Commission and Underwriters Laboratories. Products sold internationally may be required to comply with regulations or standards established by telecommunications authorities in various countries, as well as those of certain international bodies. Although we believe our products are currently in compliance with domestic and international standards and regulations in countries in which we currently sell, there can be no assurance that we will be able to design our products to comply with evolving standards and regulations in the future. Further, the cost of complying with the evolving standards and regulations, or the failure to obtain timely domestic or foreign regulatory approvals or certification such that we may not be able to sell our products where these standards or regulations apply, may adversely affect our results of operations and financial condition.

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

The manufacture, assembly and testing of our products may require the use of hazardous materials that are subject to environmental, health and safety regulations. Our failure or the failure of our contract manufacturers to comply with any of these applicable requirements could result in regulatory penalties, legal claims or disruption of production. In addition, our failure or the failure of our contract manufacturers to properly manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials could subject us to increased costs or liabilities. Existing and future environmental regulations may restrict our use of certain materials to manufacture, assemble and test products. Any of these consequences could adversely impact our results of operations by increasing our expenses and/or requiring us to alter our manufacturing processes.

If our products do not interoperate with our customers’ networks, installations may be delayed or cancelled, which could harm our business.

Our products must interface with existing networks, each of which may have different specifications, utilize multiple protocol standards and incorporate products from other vendors. Many of our customers’ networks contain multiple generations of products that have been added over time as these networks have grown and evolved. Our products may be required to interoperate with many or all of the products within these networks as well as future products in order to meet our customers’ requirements. If we find errors in the existing software or defects in the hardware used in our customers’ networks, we may have to modify our software or hardware to fix or overcome these errors so that our products will interoperate with the existing software and hardware. Such issues may affect our ability to obtain product acceptance from other customers. Implementation of product corrections involving interoperability issues could increase our costs and adversely affect our results of operations.

The lengthy approval process required by ILECs and other service providers for new products could result in fluctuations in our revenue.

In the industry in which we compete, a supplier must first obtain product approval from an ILEC or other service provider to sell its products to them. This process can last from six to 18 months, or longer, depending on the technology, the service provider, and the demand for the product from the service provider’s subscribers. Consequently, we are involved in a constant process of submitting for approval succeeding generations of products, as well as products that deploy new technology or respond to new technology demands from an ILEC or other service provider. We have been successful in the past in obtaining these approvals. However, we cannot be certain that we will obtain these approvals in the future or that sales of these products will continue to occur. Furthermore, the delay in sales until the completion of the approval process, the length of which is difficult to predict, could result in fluctuations of revenue and uneven operating results from quarter to quarter or year to year.

We engage in research and development activities to improve the application of developed technologies, and as a consequence may miss certain market opportunities enjoyed by larger companies with substantially greater research and development efforts who may focus on more leading edge development.

A portion of our research and development activities are focused on the refinement and redefinition of access technologies that are currently accepted and commonly practiced, which may include emerging technologies not yet widely distributed across all networks. These research and development efforts result in improved applications of technologies for which demand already exists or is latent. We rarely engage in research projects that represent a vast departure from the current business practices of our key customers. This includes pioneering new services and participating in leading edge field trials or demonstration projects for new technologies. While we believe our strategy provides a higher likelihood of producing nearer term revenue streams, this strategy could reduce our ability to influence industry standards and share in the establishment of intellectual property rights associated with new technologies, and could result in lost revenue opportunities should a new technology achieve rapid and widespread market acceptance.

We depend heavily on sales to certain customers; the loss of any of these customers would significantly reduce our revenues and net income.

Historically, a large percentage of our sales have been made to ILECs and major independent telecommunications companies. In 2009, these customers continued to comprise over half of our revenue. As long as the ILECs and other service providers represent such a substantial percentage of our total sales, our future success will significantly depend upon certain factors which are not within our control, including:

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the timing and size of future purchase orders, if any, from these customers;

•

the product requirements of these customers;

•

the financial and operational success of these customers;

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the impact of legislative and regulatory changes on these customers;

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the success of these customers’ services deployed using our products; and

•

the impact of work stoppages at these customers.

Sales to our large customers have, in the past, fluctuated and may fluctuate significantly from quarter to quarter and year to year. The loss of, or a significant reduction or delay in, sales to any such customer or the occurrence of sales fluctuations could have a material adverse effect on our business and results of operations. Further, any attempt by an ILEC or other service provider to seek out additional or alternative suppliers or to undertake, as permitted under applicable regulations, the production of these products internally, could have a material adverse effect on our operating results.

There has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as companies attempt to strengthen or hold their market positions and as companies are acquired or are unable to continue operations. This could lead to variability in our operating results and could have a material adverse effect on our business, operating results, and financial condition. In addition, particularly in the service provider market, rapid consolidation will lead to fewer customers, with the effect that a loss of a major customer could have a material impact on our results that we would not have anticipated in a marketplace composed of more numerous participants.

Our strategy of outsourcing a portion of our manufacturing requirements to subcontractors located in Asia may result in us not meeting our cost, quality or performance standards.

We are heavily dependent on two subcontractors for the assembly and testing of certain printed circuit board assemblies, subassemblies, chassis, enclosures and equipment shelves, and the purchase of raw materials used in such assemblies. This reliance involves several risks, including the unavailability of, or interruptions in, access to certain process technologies and reduced control over product quality, delivery schedules, transportation, manufacturing yields and costs. We may not be able to provide product volumes to our subcontractors that are high enough to achieve sufficient cost savings. If shipments fall below forecasted levels, we may incur increased costs or be required to take ownership of excess inventory. In addition, a significant component of maintaining cost competitiveness is the ability of our subcontractors to adjust their own costs to compensate for possible adverse exchange rate movements. To the extent that the subcontractors are unable to do so, and we are unable to procure alternative product supplies, then our own competitiveness and results of operations could be adversely impaired. These risks may be exacerbated by economic or political uncertainties, terrorist actions, the effects of climate change, natural disasters or pandemics in the foreign countries in which our subcontractors are located.

To date, we believe that we have successfully managed the risks of our dependence on these subcontractors through a variety of efforts, which include seeking and developing alternative subcontractors while maintaining existing relationships; however, we cannot assure you that delays in product deliveries will not occur in the future because of shortages resulting from this limited number of subcontractors or from the financial or other difficulties of these parties. Our inability to develop alternative subcontractors if and as required in the future, or the need to undertake required retraining and other activities related to establishing and developing a new subcontractor relationship, could result in delays or reductions in product shipments which, in turn, could have a negative effect on our customer relationships and operating results.

Our dependence on a limited number of suppliers may prevent us from delivering our products on a timely basis, which could have a material adverse effect on customer relations and operating results.

Certain raw materials and key components used in our products are currently available from only one source, and others are available from only a limited number of sources. The availability of these raw materials and supplies is subject to market forces beyond our control. From time to time, there may not be sufficient quantities of raw materials and supplies in the marketplace to meet customer demand. Many companies utilize the same raw materials and supplies that we do in the production of their products. Companies with more resources than our own may have a competitive advantage in obtaining raw materials and supplies due to greater buying power. These factors can result in reduced supply, higher prices of raw materials, and delays in the receipt of certain of our key components, which in turn may generate increased costs, lower margins, and delays in product delivery, with a corresponding adverse effect on sales, customer relationships, and revenue. Furthermore, due to general economic conditions in the United States and globally, our suppliers may experience financial difficulties, which could result in increased delays, additional costs, or loss of a supplier. We attempt to manage these risks through developing alternative sources, by staging inventories at strategic locations, through engineering efforts designed to obviate the necessity of certain components, and by building long-term relationships and close contact with each of our suppliers; however, we cannot assure you that delays in or failures of deliveries of key components, either to us or to our contract manufacturers, and consequent delays in product deliveries, will not occur in the future.

We compete in markets that have become increasingly competitive, which may result in reduced gross profit margins and market share.

The markets for our products are intensely competitive. Additional manufacturers have entered the markets in recent years to offer products in competition with us. Additionally, certain companies have, in recent years, developed the ability to deliver coaxial cable and cellular transmission, especially in high-density metropolitan areas. Competition would further increase if new companies enter the market or existing competitors expand their product lines. Some of these potential competitors may have greater financial, technological, manufacturing, sales and marketing, and personnel resources than we have. As a result, these competitors may be able to respond more rapidly or effectively to new or emerging technologies and changes in customer requirements, withstand significant price decreases, or devote greater resources to the development, promotion, and sale of their products than we can.

In addition, our present and future competitors may be able to enter our existing or future markets with products or technologies comparable or superior to those that we offer. An increase in competition could cause us to reduce prices, decrease our market share, require increased spending by us on product development and sales and marketing, or cause delays or cancellations in customer orders, any one of which could reduce our gross profit margins and adversely affect our business and results of operations.

Our estimates regarding future warranty obligations may change due to product failure rates, shipment volumes, field service obligations and other rework costs incurred in correcting product failures. If our estimates change, the liability for warranty obligations may be increased or decreased, impacting future cost of goods sold.

Our products are highly complex, and we cannot assure you that our extensive product development, manufacturing and integration testing will be adequate to detect all defects, errors, failures and quality issues. Quality or performance problems for products covered under warranty could adversely impact our reputation and negatively affect our operating results and financial position. The development and production of new products with high complexity often involves problems with software, components and manufacturing methods. If significant warranty obligations arise due to reliability or quality issues arising from defects in software, faulty components, or manufacturing methods, our operating results and financial position could be negatively impacted by:

•

costs associated with fixing software or hardware defects;

•

high service and warranty expenses;

•

high inventory obsolescence expense;

•

delays in collecting accounts receivable;

•

payment of liquidated damages for performance failures; and

•

a decline in sales to existing customers.

Managing our inventory is complex and may include write-downs of excess or obsolete inventory.

Managing our inventory of components and finished products is complicated by a number of factors, including the need to maintain a significant inventory of certain components that are in short supply, that must be purchased in bulk to obtain favorable pricing or that require long lead times. These issues may result in our purchasing and maintaining significant amounts of inventory, which if not used or expected to be used based on anticipated production requirements, may become excess or obsolete. Any excess or obsolete inventory could also result in sales price reductions and/or inventory write-downs, which could adversely affect our business and results of operations.

We may pursue acquisitions, which may expose us to a number of risks. If we are unable to mitigate these risks, our business may be negatively impacted.

We may acquire or invest in other businesses or enter into joint ventures to expand our product portfolio, acquire intellectual property, or extend our presence in certain markets. Any such acquisition may require the use of cash, the issue or assumption of debt, or the issue of equity, and may result in significantly increased financing costs or result in the dilution of existing shareholder interests. The acquisition process and subsequent integration of new investments may divert management’s attention from normal daily operations of the business and cause harm to our existing operations. These investments may result in impairment charges and other cost amortizations. We cannot assure that revenues from acquired investments will offset additional costs incurred. If we are unable to successfully address the potential risks associated with these transactions, they may result in a negative impact on our business, results of operations and financial condition.

Increased sales volume in international markets could result in increased costs or loss of revenue due to factors inherent in these markets.

We are in the process of expanding into international markets, which represented 5.7% of our net sales for 2009, and we anticipate increased sales from these markets. We currently maintain regional sales offices in each of the following locations: Melbourne and Sydney, Australia; Montreal, Ottawa, and Toronto, Canada; Mexico, D.F., Mexico; Hong Kong and Beijing, China; Singapore; and Bramley, United Kingdom. A number of factors inherent to these markets expose us to significantly more risk than domestic business, including:

•

local economic and market conditions;

•

exposure to unknown customs and practices;

•

potential economic or political unrest, terrorist actions, the effects of climate change, natural disasters or pandemics;

•

foreign currency exchange rate exposure;

•

unexpected changes in, or impositions of, legislative or regulatory requirements;

•

less regulation of patents or other safeguards of intellectual property; and

•

difficulties in collecting accounts receivable and local government’s inability to enforce lawful business practices.

Any of these factors, or others of which we are not currently aware, could result in increased costs of operation or loss of revenue.

We may be adversely affected by fluctuations in currency exchange rates.

Historically our sales to international customers and purchases from international suppliers have been transacted in United States currency; therefore, we have not entered into foreign currency forward contracts or other hedging instruments. As our international sales increase or as utilization of international suppliers expands, we may transact additional business in currencies other than United States currency. As a result, we will be subject to the possibility of greater effects of foreign currency exchange translation on our financial statements. Sales contract commitments and accounts receivable balances based on foreign currency expose us to potential risk of loss as the value of the United States dollar fluctuates over time. In addition, for those countries outside the United States where we have significant sales or significant purchases of supplies, devaluation in the local currency could make our products more expensive for customers to purchase or increase our operating costs, thereby adversely affecting our competitiveness. In the future, we may enter into foreign currency forward contracts or other hedging instruments to protect against reductions in value and the volatility of future cash flows caused by changes in foreign currency exchange rates. If used, the contracts and other hedging instruments will be intended to reduce, but not eliminate, the impact of foreign currency exchange rate movements; therefore, we generally would not anticipate hedging all outstanding foreign currency risk. There can be no assurance that exchange rate fluctuations in the future will not have a material adverse effect on our revenue from international sales, manufacturing costs, results of operations and financial condition.

Our success depends on our ability to reduce the selling prices of succeeding generations of our products.

Our strategy is to attempt to increase unit sales volumes and market share each year by introducing succeeding generations of products having lower selling prices and increased functionality as compared to prior generations of products. To maintain or increase our revenues and margins while continuing this strategy, we must continue, in some combination, to increase sales volumes of existing products, introduce and sell new products, or reduce our per unit costs at rates sufficient to compensate for the reduced revenue effect of continuing reductions in the average sales prices of our products. We cannot assure you that we will be able to maintain or increase revenues or margins by increasing unit sales volumes of our products, introducing and selling new products, or reducing unit costs of our products.

Our failure to maintain rights to intellectual property used in our business could adversely affect the development, functionality, and commercial value of our products.

Our future success depends in part upon our proprietary technology. Although we attempt to protect our proprietary technology by contract, trademark, copyright and patent registration, and internal security, these protections may not be adequate. Furthermore, our competitors can develop similar technology independently without violating our proprietary rights. From time to time we receive and may continue to receive notices of claims alleging that we are infringing upon patents or other intellectual property. Any of these claims, whether with or without merit, could result in significant legal fees; divert our management’s time, attention and resources; delay our product shipments; or require us to enter into royalty or licensing agreements. We cannot predict whether we will prevail in any claims or litigation over alleged infringements, or whether we will be able to license any valid and infringed patents, or other intellectual property, on commercially reasonable terms. If a claim of intellectual property infringement against us is successful and we fail to obtain a license or develop or license non-infringing technology, our business, financial condition, and operating results could be affected adversely.

Software under license from third parties for use in certain of our products may not continue to be available to us on commercially reasonable terms.

We integrate third-party software into certain of our products. Licenses for this technology may not be available or continue to be available to us on commercially reasonable terms. Difficulties with third party technology licensors could result in termination of such licenses, which may result in increased costs or require us to purchase or develop a substitute technology. Difficulty obtaining and maintaining third-party technology licenses may disrupt development of our products and increase our costs, which could harm our business.

We may incur liabilities or become subject to litigation that would have a material effect on our business.

In the ordinary course of business, we accept purchase orders, and enter into sales and other related contracts, for the marketing, sale, manufacture, distribution, or use of our products and services. We may incur liabilities relating to our performance under such agreements, or which result from damage claims arising from certain events as outlined within the particular contract. While we attempt to structure all agreements to include normal protection clauses, such agreements may not always contain, or be subject to, maximum loss clauses, and liabilities arising from them may result in significant adverse changes to our results of operations and financial condition.

In the ordinary course of business, we may be subject to various legal proceedings and claims, including employment disputes, patent claims, disputes over contract agreements and other commercial disputes. In some cases, claimants seek damages, or other relief, such as royalty payments related to patents, which, if granted, could require significant expenditures. Any such disputes may be resolved before trial, or if litigated, may be resolved in our favor; however, the cost of claims sustained in litigation, and costs associated with the litigation process, may not be covered by our insurance. Such costs, and the demands on management time during such an event, could harm our business and have a material adverse effect on our liquidity, results of operations and financial condition.

Consolidation and deterioration in the competitive service provider market could result in a significant decrease in our revenue.

We sell a moderate volume of products directly or indirectly to competitive service providers who compete with the established ILECs. The competitive service provider market is experiencing a process of consolidation. Many of our competitive service provider customers do not have a strong financial position and have limited ability to access the public financial markets for additional funding for growth and operations. If one or more of these competitive service providers fail, we could face a loss in revenue and an increased bad debt expense, due to their inability to pay outstanding invoices, as well as the corresponding decrease in customer base and future revenue. Furthermore, significant portions of our sales to competitive service providers are made through independent distributors. The failure of one or more competitive service providers could also negatively affect the financial position of a distributor to the point that the distributor could also experience business failure and/or default on payments to us.

We depend on distributors who maintain inventories of our products. If the distributors reduce their inventories of these products, our sales could be adversely affected.

We work closely with our distributors to monitor channel inventory levels and ensure that appropriate levels of product are available to resellers and end users. If our distributors reduce their levels of inventory of our products, our sales would be negatively impacted during the period of change.

If we are unable to successfully develop relationships with system integrators, service providers, and enterprise value added resellers, our sales may be negatively affected.

As part of our sales strategy, we are targeting system integrators (SIs), service providers (SPs), and enterprise value added resellers (VARs). In addition to specialized technical expertise, SIs, SPs and VARs typically offer sophisticated service capabilities that are frequently desired by enterprise customers. In order to expand our distribution channel to include resellers with such capabilities, we must be able to provide effective support to these resellers. If our sales, marketing or service capabilities are not sufficient to provide effective support to such SIs, SPs and VARs, our sales may be negatively affected, and current SI, SP and VAR partners may terminate their relationships with us, which would adversely impact our sales and overall results of operations.

If we fail to manage our exposure to worldwide financial and securities markets successfully, our operating results and financial statements could be materially impacted.

We are exposed to financial market risks, including changes in interest rates and prices of marketable equity and fixed-income securities. The primary objective of the large majority of our investment activities is to preserve principal while at the same time achieving appropriate yields without significantly increasing risk. To achieve this objective, a majority of our marketable securities are investment grade municipal fixed-rate bonds, municipal variable rate demand notes and municipal money market instruments denominated in United States dollars. We have held no municipal auction rate securities since February 7, 2008.

We have significant investments in municipal fixed-rate bonds and municipal variable rate demand notes. Through December 31, 2009, we have not been required to impair any of these investments; however, we may experience a reduction in value or loss of liquidity in these investments, which may have an adverse effect on our results of operations, liquidity and financial condition. Fixed rate interest securities may have their fair value adversely impacted due to a rise in interest rates, while variable rate securities may produce less income than expected if interest rates fall. Our investments are subject to general credit, liquidity, market, and interest rate risks, which may be exacerbated by conditions in the financial markets and related credit liquidity issues. Consequently, our future investment income may fall short of expectation due to changes in interest rates, or we may suffer losses in principal if we are forced to sell securities that decline in fair value due to changes in interest rates.

Our long-term investments include $33.5 million of marketable equity securities. Because of the strained credit markets and deteriorating equity market conditions that continued during the first quarter of 2009, we recorded other than temporary impairment charges of $2.0 million related to our marketable equity securities, $0.4 million related to the fixed income bond fund, and $0.5 million related to the deferred compensation plan assets during the year ended December 31, 2009. At December 31, 2009, our total marketable equity securities, which included more than 375 individual securities, had net unrealized gains of $23.7 million, which includes an unrealized gain of $21.7 million related to a single security. If market conditions deteriorate in 2010, we may be required to record additional impairment charges related to our marketable equity securities.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources” in Item 7, Part II of this report and “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A, Part II of this report for more information about our investments.

Changes in our effective tax rate or assessments arising from tax audits may have an adverse impact on our results.

We are subject to taxation in various jurisdictions, both domestically and internationally, in which we conduct business. Significant judgment is required in the determination of our provision for income taxes and this determination requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. Our effective tax rate may be adversely impacted by changes in the mix of earnings between jurisdictions with different statutory tax rates, in the valuation of our deferred tax assets, and by changes in tax rules and regulations. For instance, the availability and timing of lapses in the United States research and development tax credit, tax implications of the Stock Compensation Topic of the Financial Accounting Standards Board Accounting Standards Codification (FASB ASC), the accounting of uncertain tax positions and the amount of our estimated tax deduction for manufacturer’s domestic production activities under Internal Revenue Code Section 199 may add more variability to our future effective tax rates. We currently receive corporate income tax credits under a

program administered by the Alabama State Industrial Development Authority in connection with revenue bonds issued to provide funding for expansion of our corporate facilities. We cannot be certain that the state of Alabama will continue to make these corporate income tax credits available; therefore, we may not realize the full benefit of these incentives, which would increase our effective tax rate. In addition, we are subject to examination of our income tax returns by the Internal Revenue Service and various other jurisdictions in which we conduct business. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse affect on our results of operations and financial condition.

Our success depends on attracting and retaining key personnel.

Our business has grown significantly since its inception. Our success is dependent in large part on the continued employment of our executive officers, including Thomas R. Stanton, our Chief Executive Officer, and other key management personnel. The unplanned departure of one or more of these individuals could adversely affect our business. In addition, for ADTRAN to continue as a successful entity we must also be able to attract and retain key engineers and technicians whose expertise helps us maintain competitive advantages. We do not have employment contracts or non-compete agreements with any of our employees. We believe that our future success will depend, in large part, upon our ability to continue to attract, retain, train, and motivate highly-skilled employees who are in great demand. Stock option grants are designed to reward employees for their long-term contributions and to provide incentives for them to remain with us. The provisions of the Stock Compensation Topic of the FASB ASC require us to record significantly increased compensation costs as compared to prior accounting rules, which may cause us to restrict the availability and amount of equity incentives provided to employees. Changes to our overall compensation program, including our stock option incentive program, may also adversely affect our ability to retain key employees. Properly managing our continued growth, avoiding the problems often resulting from such growth and expansion, and continuing to operate in the manner which has proven successful to us to date will be critical to the future success of our business.

Regulatory and potential physical impacts of climate change may affect our customers and our production operations, resulting in adverse affects on our operating results.

There is a growing political and scientific consensus that emissions of greenhouse gases continue to alter the composition of the atmosphere, affecting large-scale weather patterns and the global climate. It appears that some form of U.S. federal regulation related to greenhouse gas emissions may occur, and any such regulation could result in the creation of additional costs in the form of taxes or emission allowances. The impact of any future legislation, regulations or product specification requirements on our products and business operations is dependent on the design of the final mandate or standard, so we are unable to predict its significance at this time.

The potential physical impacts of climate change on our customers, suppliers, and on our operations are highly uncertain, and will be particular to the circumstances developing in various geographical regions. These may include changes in weather patterns (including drought and rainfall levels), water availability, storm patterns and intensities, ocean levels and temperature levels. These potential physical effects may adversely affect our revenues, costs, production and delivery schedules, and cause harm to our results of operations and financial condition.

While we believe our internal control over financial reporting is adequate, a failure to maintain effective internal control over financial reporting as our business expands could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we assess the effectiveness of our internal control over financial reporting as of the end of our fiscal year, and issue a report that states whether or not such internal control is effective. Compliance with these requirements requires significant cost and the commitment of time and staff resources. Expansion of our business, particularly in international geographies, will necessitate ongoing changes to our internal control systems, processes and information systems. We cannot be certain that as this expansion occurs, our current design for internal control over financial reporting will be sufficient to enable management or our independent registered public accounting firm to determine that our internal control is effective for any period, or on an ongoing basis. If we or our independent registered public accounting firm are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial statements, which could have an adverse effect on our stock price.

The price of our common stock has been volatile and may continue to fluctuate significantly.

Our common stock is traded on the NASDAQ Global Select Market under the symbol ADTN. Since our initial public offering in August 1994, there has been, and may continue to be, significant volatility in the market for our common stock, based on a variety of factors, including factors listed in this section, some of which are beyond our control.

ITEM 1B.		UNRESOLVED STAFF COMMENTS

None.

ITEM 2.		PROPERTIES

Our headquarters and principal administrative, engineering and manufacturing facilities are located on an 80-acre campus in Cummings Research Park in Huntsville, Alabama. Two office buildings contain 440,000 and 600,000 square feet, respectively, and serve both our Carrier Networks and Enterprise Networks Divisions. These facilities can accommodate up to 3,000 employees. We lease a 17,800 square foot engineering facility in Phoenix, Arizona and a 13,400 square foot engineering facility in Mountain View, California that are used to develop products sold by our Carrier Networks Division.

In addition to our facilities listed above, we lease additional office space in the United States and abroad, providing sales and service support for both of our divisions. The leased offices in the United States are located in Chesterfield, MO; Kansas City, MO; Littleton, CO; and Milford, MI. We also lease one office in each of the following locations: Melbourne and Sydney, Australia; Montreal, Ottawa, and Toronto, Canada; Mexico, D.F., Mexico; Hong Kong and Beijing, China; Singapore; and Bramley, United Kingdom. These cancelable and non-cancelable leases expire at various times through 2013. For more information, see Note 10 of the Notes to Consolidated Financial Statements included in this report.

We also have numerous sales and support staff operating from home-based offices serving both our Carrier Networks and Enterprise Networks Divisions, which are located within the United States and abroad.

ITEM 3.		LEGAL PROCEEDINGS

We have been involved from time to time in litigation in the normal course of our business. We are not aware of any pending or threatened litigation matters that could have a material adverse effect on us.

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

No matter was submitted by ADTRAN to a vote of security holders during the fiscal quarter ended December 31, 2009.

ITEM 4A.		EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below, in accordance with General Instruction G (3) of Form 10-K and Instruction 3 of Item 401(b) of Regulation S-K, is certain information regarding the executive officers of ADTRAN. Unless otherwise indicated, the information set forth is as of December 31, 2009.

Thomas R. Stanton		Age 45
2007 to present		Chief Executive Officer and Chairman of the Board
2005 – 2007		Chief Executive Officer and Director
2001 – 2005		Senior Vice President and General Manager, Carrier Networks
1999 – 2001		Vice President and General Manager, Carrier Networks
1995 – 1999		Vice President, Carrier Networks Marketing
1995		Vice President, Marketing & Engineering — Transcrypt International, Inc.
1994 – 1995		Senior Director, Marketing — E.F. Johnson Company
1993 – 1994		Director, Marketing — E.F. Johnson Company
James E. Matthews		Age 53
2007 to present		Senior Vice President — Finance, Chief Financial Officer, Treasurer, Secretary and Director
2001 – 2007		Senior Vice President — Finance, Chief Financial Officer and Treasurer
1999 – 2001		Chief Financial Officer — Home Wireless Networks, Inc.
1998 – 1999		Chief Executive Officer — Miltope Group, Inc.
1995 – 1998		Vice President, Finance and Chief Financial Officer — Miltope Group, Inc.
1992 – 1995		Controller — Hughes Training, Inc.

Michael K. Foliano		Age 49
2006 to present		Senior Vice President — Global Operations
2005 – 2006		Senior Vice President, Sales, Services and Supply Chain — Somera Communications Inc.
2004 – 2005		Senior Vice President, Global Operations — Somera Communications, Inc.
2002 – 2004		Senior Director, Global Logistics and Customer Operations — Lucent Technologies
2001 – 2002		Executive General Manager, Mobility Supply Chain — Lucent Technologies
2000 – 2001		Stanford University Sloan Fellow — Lucent Technologies
1997 – 2000		Vice President, Global Provisioning Center — Lucent Technologies
1995 – 1997		Manufacturing Operations Plant Manager — Lucent Technologies/AT&T Network Systems
Raymond R. Schansman		Age 53
2006 to present		Senior Vice President and General Manager, Enterprise Networks
2001 – 2006		Vice President, Carrier Networks Engineering
1998 – 2001		Engineering Director, Carrier Networks Systems
1996 – 1998		Engineering Manager, Enterprise Networks Systems
1989 – 1996		Program Manager — SCI Systems, Inc.
1986 – 1989		Vice President, System and Product Engineering — General Digital Industries
1983 – 1986		Senior Design Engineer — General Digital Industries
James D. Wilson, Jr.		Age 39
2006 to present		Senior Vice President and General Manager, Carrier Networks
2005 – 2006		Vice President, Product Marketing, Carrier Networks
2002 – 2005		Director, Product Management, Carrier Networks
1998 – 2002		Director, Product Management, Loop Technologies, Carrier Networks
1996 – 1998		Manager, Engineering Operations — Wyle Laboratories, Inc.
1992 – 1996		Manager, Program Development — Wyle Laboratories, Inc.
Robert A. Fredrickson		Age 59
1996 to present		Vice President — Carrier Networks Sales
1996		Vice President, Broadband Business Development — DSC Communications Corporation
1991 – 1996		Senior Director, Access Products — DSC Communications Corporation
P. Steven Locke		Age 61
2005 to present		Vice President — Service Provider Sales
2000 – 2005		Vice President, Marketing, Carrier Networks
1999 – 2000		Vice President — Sprint Local Division Sales for Lucent Technologies
1997 – 1999		Senior Director of Sales — ADTRAN, Inc.
1993 – 1997		Vice President and General Manager, Business Network Group, Sprint North Supply
Kevin W. Schneider		Age 46
2003 to present		Vice President — Chief Technology Officer
1999 – 2003		Vice President — Technology
1996 – 1999		Chief Scientist
1992 – 1996		Staff Scientist

There are no family relationships among our directors or executive officers. All officers are elected annually by, and serve at the discretion of, the Board of Directors of ADTRAN.

PART II

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

ADTRAN’s common stock is traded on the NASDAQ Global Select Market under the symbol ADTN. As of February 5, 2010, ADTRAN had 273 stockholders of record and approximately 32,348 beneficial owners of shares held in street name. The following table shows the high and low closing prices per share for our common stock as reported by NASDAQ for the periods indicated.

Common Stock Prices

		High				Low
2009
First Quarter		$	16.71			$	13.84
Second Quarter		$	21.49			$	16.70
Third Quarter		$	25.04			$	20.74
Fourth Quarter		$	25.71			$	20.44
2008
First Quarter		$	21.17			$	17.32
Second Quarter		$	25.68			$	18.86
Third Quarter		$	26.06			$	19.04
Fourth Quarter		$	19.58			$	12.31

The following table shows the dividends paid in each quarter of 2009 and 2008. The Board of Directors presently anticipates that it will declare a regular quarterly dividend so long as the present tax treatment of dividends exists and adequate levels of liquidity are maintained.

Dividends per Common Share

		2009				2008
First Quarter		$	0.09			$	0.09
Second Quarter		$	0.09			$	0.09
Third Quarter		$	0.09			$	0.09
Fourth Quarter		$	0.09			$	0.09

Stock Repurchases

The following table sets forth ADTRAN’s repurchases of its common stock for the months indicated.

										Total Number of				Maximum Number
		Total								Shares Purchased as				of Shares that May
		Number of								Part of Publicly				Yet Be Purchased
		Shares				Average Price Paid				Announced Plans or				Under the Plans or
Period		Purchased				per Share				Programs (1)				Programs
October 1, 2009 – October 31, 2009			—				—				—				3,294,691
November 1, 2009 – November 30, 2009			596,115			$	22.00				596,115				2,698,576
December 1, 2009 – December 31, 2009			—				—				—				2,698,576
Total			596,115			$	22.00				596,115

ITEM 6.		SELECTED FINANCIAL DATA

Income Statement Data (1)
(In thousands, except per share amounts)
Year Ended December 31,		2009				2008				2007				2006				2005
Sales
Carrier Networks Division		$	371,349			$	392,219			$	358,023			$	356,606			$	386,051
Enterprise Networks Division			112,836				108,457				118,755				116,102				127,164
Total sales			484,185				500,676				476,778				472,708				513,215
Cost of sales			197,223				201,771				193,792				193,747				209,895
Gross profit			286,962				298,905				282,986				278,961				303,320
Selling, general, and administrative expenses			99,446				103,286				103,329				102,646				96,411
Research and development expenses			83,285				81,819				75,367				70,700				62,654
Operating income			104,231				113,800				104,290				105,615				144,255
Interest and dividend income			6,933				8,708				11,521				13,493				10,001
Interest expense			(2,430	)			(2,514	)			(2,502	)			(2,532	)			(2,535	)
Net realized investment gain (loss)			(1,297	)			(2,409	)			498				1,379				1,712
Other income (expense), net			131				688				764				570				(59	)
Life insurance proceeds			—				—				1,000				—				—
Income before provision for income taxes			107,568				118,273				115,571				118,525				153,374
Provision for income taxes			33,347				39,692				39,236				40,192				52,224
Net income		$	74,221			$	78,581			$	76,335			$	78,333			$	101,150
Year Ended December 31,		2009				2008				2007				2006				2005
Weighted average shares outstanding — basic			62,459				63,549				67,848				73,451				75,775
Weighted average shares outstanding — assuming dilution (2)			63,356				64,408				69,212				75,197				77,966
Earnings per common share — basic		$	1.19			$	1.24			$	1.13			$	1.07			$	1.33
Earnings per common share — assuming dilution (2)		$	1.17			$	1.22			$	1.10			$	1.04			$	1.30
Dividends declared and paid per common share		$	0.36			$	0.36			$	0.36			$	0.36			$	0.34
Balance Sheet Data (In thousands)
At December 31,		2009				2008				2007				2006				2005
Working capital (3)		$	278,044			$	212,740			$	251,261			$	219,636			$	344,305
Total assets		$	564,463			$	473,615			$	479,220			$	539,658			$	651,720
Total debt		$	48,250			$	48,750			$	49,000			$	49,500			$	50,000
Stockholders’ equity		$	452,515			$	375,819			$	378,431			$	435,956			$	542,171

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

Overview

ADTRAN, Inc. designs, manufactures, markets and services network access solutions for communications networks. Our solutions are widely deployed by providers of telecommunications services (serviced by our Carrier Networks Division), and small and mid-sized businesses (SMBs) and enterprises (serviced by our Enterprise Networks Division), and enable voice, data, video and Internet communications across wireline and wireless networks. Many of these solutions are currently in use by every major United States service provider and many global ones, as well as by many public, private and governmental organizations worldwide.

Our success depends upon our ability to increase unit volume and market share through the introduction of new products and succeeding generations of products having lower selling prices and increased functionality as compared to both the prior generation of a product and to the products of competitors. An important part of our strategy is to reduce the cost of each succeeding product generation and then lower the product’s selling price based on the cost savings achieved in order to gain market share and/or improve gross margins. As a part of this strategy, we seek in most instances to be a high-quality, low-cost provider of products in our markets. Our success to date is attributable in large measure to our ability to design our products initially with a view to their subsequent redesign, allowing both increased functionality and reduced manufacturing costs in each succeeding product generation. This strategy enables us to sell succeeding generations of products to existing customers, while increasing our market share by selling these enhanced products to new customers.

Our three major product categories are Carrier Systems, Business Networking and Loop Access.

Carrier Systems products are used by communications service providers to provide last mile access in support of data, voice and video services to consumers and enterprises. The Carrier Systems category includes our broadband access products comprised of Total Access^® 5000 multi-service access and aggregation platform products, Total Access 1100/1200 Series Fiber-To-The-Node (FTTN) products, and Digital Subscriber Line Access Multiplexer (DSLAM) products. Our broadband access products are used by service providers to deliver high-speed Internet access, Voice over Internet Protocol (VoIP), IP Television (IPTV), and/or Ethernet services from the central office or remote terminal locations to customer premises. The Carrier Systems category also includes our optical access products. These products consist of optical access multiplexers including our family of OPTI products. Optical access products are used to deliver higher bandwidth services, or to aggregate large numbers of low bandwidth services for transportation across fiber optic infrastructure. Total Access 1500 products, 303 concentrator products, M13 multiplexer products, and mobile backhaul products are also included in the Carrier Systems product category.

Business Networking products provide access to telecommunication services, facilitating the delivery of converged services and Unified Communications to the SMB and Enterprise markets. The Business Networking category includes Internetworking products, Optical Network Terminals (ONTs), and Integrated Access Devices (IADs). Internetworking products consist of our Total Access IP Business Gateways and NetVanta product lines. NetVanta products include multi-service routers, managed Ethernet switches, IP Private Branch Exchange (PBX) products, IP phone products, Unified Communications solutions, and Carrier Ethernet Network Terminating Equipment.

Loop Access products are used by carrier and enterprise customers for access to copper-based telecommunications networks. The Loop Access category includes products such as: Digital Data Service (DDS) and Integrated Services Digital Network (Total Reach) products, High bit-rate Digital Subscriber Line (HDSL) products including Total Access 3000 HDSL and Time Division Multiplexed-Symmetrical HDSL (TDM-SHDSL) products, T1/E1/T3, Channel Service Units/Data Service Units, and TRACER fixed wireless products.

In addition, we identify sub-categories of product revenues, which we divide into growth products, representing our primary growth areas, and traditional products. Our growth products consist of Broadband Access and Optical Access products (included in Carrier Systems) and Internetworking products (included in Business Networking) and our traditional products include HDSL products (included in Loop Access) and other products. Many of our customers are migrating their networks to deliver higher bandwidth services by utilizing newer technologies. We believe that products in our primary growth areas position us well for this migration. We anticipate that revenues of many of our traditional products, including HDSL, although declining, may continue for years because of the time required for our customers to transition to newer technologies.

Sales were $484.2 million in 2009 compared to $500.7 million in 2008 and $476.8 million in 2007. Sales increased in each of our primary growth areas, Broadband Access, Optical Access and Internetworking. Total sales of products in these three growth areas increased 13.5% in 2009 compared to 2008 and 23.0% in 2008 compared to 2007. Our gross profit margin decreased in 2009 to 59.3% from 59.7% in 2008 and 59.4% in 2007, and our operating income margin decreased to 21.5% in 2009 compared to 22.7% in 2008 and 21.9% in 2007. Net income was $74.2 million in 2009 compared to $78.6 million in 2008 and $76.3 million in 2007. Earnings per share, assuming dilution, were $1.17 in 2009 compared to $1.22 in 2008 and $1.10 in 2007. Earnings per share in 2009, 2008 and 2007 reflect the repurchase of 0.8 million, 3.1 million and 5.8 million shares of our stock, respectively.

Our operating results have fluctuated on a quarterly basis in the past, and may vary significantly in future periods due to a number of factors. We normally operate with very little order backlog. A majority of our sales in each quarter result from customer orders received in that quarter under agreements containing non-binding purchase commitments. Many of our customers require prompt delivery of products. This results in a limited backlog of orders and requires us to maintain sufficient inventory levels to satisfy anticipated customer demand. If near-term demand for our products declines, or if potential sales in any quarter do not occur as anticipated, our financial results could be adversely affected. Operating expenses are relatively fixed in the short term; therefore, a shortfall in quarterly revenues could significantly impact our financial results in a given quarter.

Our operating results may also fluctuate as a result of a number of other factors, including a decline in general economic and market conditions, increased competition, customer order patterns, changes in product mix, timing differences between price decreases and product cost reductions, product warranty returns, expediting costs and announcements of new products by us or our competitors. Additionally, maintaining sufficient inventory levels to assure prompt delivery of our products increases the amount of inventory that may become obsolete and increases the risk that the obsolescence of this inventory may have an adverse effect on our business and operating results. Also, not maintaining sufficient inventory levels to assure prompt delivery of our products may cause us to incur expediting costs to meet customer delivery requirements, which may negatively impact our operating results in a given quarter.

Accordingly, our historical financial performance is not necessarily a meaningful indicator of future results, and, in general, management expects that our financial results may vary from period to period. See Note 12 of Notes to Consolidated Financial Statements. For a discussion of risks associated with our operating results, see Item 1A of this report.

Critical Accounting Policies and Estimates

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the accounting estimate that are reasonably likely to occur could materially impact the results of financial operations. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. These policies have been consistently applied across our two reportable segments: (1) Carrier Networks Division and (2) Enterprise Networks Division.

•

We review customer contracts to determine if all of the requirements for revenue recognition have been met prior to recording revenues from sales transactions. We generally record sales revenue upon shipment of our products, net of any rebates or discounts, since: (i) we generally do not have significant post-delivery obligations, (ii) the product price is fixed or determinable, (iii) collection of the resulting receivable is probable, and (iv) product returns are reasonably estimable. We generally ship products upon receipt of a purchase order from a customer. We evaluate shipping terms and we record revenue on products shipped in accordance with the terms of each respective contract where applicable, or under our standard shipping terms for purchase orders accepted without a contract, generally FOB shipping point. In the case of consigned inventory, revenue is recognized when the customer assumes ownership of the product. When contracts contain multiple elements, contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element contract should be treated as separate units of accounting for revenue recognition purposes, and, if so, how the price should be allocated among the elements and when to recognize revenue for each element. We record revenue associated with installation services when the installation and all contractual obligations are complete. When contracts include both installation and product sales, the installation is considered as a separate deliverable item. Either the purchaser, ADTRAN, or a third party can perform installation of our products. Revenues related to maintenance services are recognized on a straight line basis over the contract term.

•

Sales returns are accrued based on historical sales return experience, which we believe provides a reasonable estimate of future returns. A significant portion of Enterprise Networks products are sold in the United States through a non-exclusive distribution network of major technology distributors. These organizations then distribute to an extensive network of value-added resellers and system integrators. Value-added resellers and system integrators may be affiliated with us as a channel partner, or they may purchase from the distributor on an unaffiliated basis. Additionally, with certain limitations, our distributors may return unused and unopened product for stock-balancing purposes when these returns are accompanied by offsetting orders for products of equal or greater value.

We participate in cooperative advertising and market development programs with certain customers. We use these programs to reimburse customers for certain forms of advertising, and in general, to allow our customers credits up to a specified percentage of their net purchases. Our costs associated with these programs are estimated and accrued at the time of sale and are included in selling, general and administrative expenses in our consolidated statements of income. We also participate in rebate programs to provide sales incentives for certain products. Our costs associated with these programs are estimated and accrued at the time of sale and are recorded as a reduction of sales in our consolidated statements of income.

Prior to issuing payment terms to a new customer, we perform a detailed credit review of the customer. Credit limits and payment terms are established for each new customer based on the results of this credit review. Collection experience is reviewed periodically in order to determine if the customer’s payment terms and credit limits need to be revised. We maintain allowances for doubtful accounts for losses resulting from the inability of our customers to make required payments. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, we may be required to make additional allowances. If circumstances change with regard to individual receivable balances that have previously been determined to be uncollectible (and for which a specific reserve has been established), a reduction in our allowance for doubtful accounts may be required. Our allowance for doubtful accounts was $0.1 million at December 31, 2009 and $38 thousand at December 31, 2008.

•

We carry our inventory at the lower of cost or market, with cost being determined using the first-in, first-out method. We use standard costs for material, labor, and manufacturing overhead to value our inventory. Our standard costs are updated on at least a quarterly basis and any variances are expensed in the current period; therefore, our inventory costs approximate actual costs at the end of each reporting period. We write down our inventory for estimated obsolescence or unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated fair value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, we may be required to make additional inventory write-downs. Our reserve for excess and obsolete inventory was $7.8 million and $7.7 million at December 31, 2009 and 2008, respectively. Inventory write-downs charged to the reserve were $1.7 million, $1.0 million and $1.6 million for the years ended December 31, 2009, 2008 and 2007, respectively.

	•		The objective of our short-term investment policy is to preserve principal and maintain adequate liquidity with appropriate diversification, while emphasizing market returns. The objective of our long-term investment policy is principal preservation and total return; that is, the aggregate return from capital appreciation, dividend income, and interest income. These objectives are achieved through investments with appropriate diversification in fixed and variable rate income securities, public equity, and private equity portfolios. We have experienced significant volatility in the market prices of our publicly traded equity investments. These investments are recorded on the consolidated balance sheets at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income, net of tax. The ultimate realized value on these equity investments is subject to market price volatility.
			In accordance with the Fair Value Measurements and Disclosures Topic of the FASB ASC, we have categorized our cash equivalents held in money market funds and our investments held at fair value into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique for the cash equivalents and investments as follows: Level 1 — Values based on unadjusted quoted prices for identical assets or liabilities in an active market; Level 2 — Values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability; Level 3 — Values based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs include information supplied by investees. At December 31, 2009, we categorized $246.1 million and $38.1 million of our available-for-sale investments as Level 2 and Level 1, respectively, and $18.4 million of our cash equivalents as Level 1.
			We review our investment portfolio for potential “other-than-temporary” declines in value on an individual investment basis. We assess, on a quarterly basis, significant declines in value which may be considered other-than-temporary and, if necessary, recognize and record the appropriate charge to write-down the carrying value of such investments. In making this assessment, we take into consideration qualitative and quantitative information, including but not limited to the following: the magnitude and duration of historical declines in market prices, credit rating activity, assessments of liquidity, public filings, and statements made by the issuer. We generally begin our identification of potential other-than-temporary impairments by reviewing any security with a fair value that has declined from its original or adjusted cost basis by 25% or more for six or more consecutive months. We then evaluate the individual security based on the previously identified factors to determine the amount of the write-down, if any. As a result of our review, we did not record any other-than-temporary impairment charge during the fourth quarter of 2009. For the years ended December 31, 2009, 2008 and 2007, we recorded charges of $2.9 million, $2.4 million and $0.1 million, respectively, related to the other-than-temporary impairment of certain publicly traded equity securities, a fixed income bond fund, and deferred compensation assets. Actual losses, if any, could ultimately differ from these estimates. Future adverse changes in market conditions or poor operating results of underlying investments could result in additional losses that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future. See Note 3 of Notes to the Consolidated Financial Statements in this report for more information about our investments.

			We also invest in privately held entities and private equity funds and record these investments at cost. We review these investments periodically in order to determine if circumstances (both financial and non-financial) exist that indicate that we will not recover our initial investment. Impairment charges are recorded on investments having a cost basis that is greater than the value that we would reasonably expect to receive in an arm’s length sale of the investment. We have not been required to record any impairment losses relating to these investments in 2009, 2008 or 2007.
	•		For purposes of determining the estimated fair value of our stock option awards on the date of grant under the Stock Compensation Topic of the FASB ASC, we use the Black-Scholes Model. This model requires the input of certain assumptions that require subjective judgment. These assumptions include, but are not limited to, expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Because our stock option awards have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing model may not provide a reliable single measure of the fair value of our stock option awards. For purposes of determining the estimated fair value of our performance-based restricted stock unit awards on the date of grant, we use the Monte Carlo Simulation valuation method. The restricted stock units are subject to a market condition based on the relative total shareholder return of ADTRAN against a peer group of companies and vest at the end of a three-year performance period. Management will continue to assess the assumptions and methodologies used to calculate the estimated fair value of stock-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies and thereby materially impact our fair value determination. If factors change and we use different assumptions in the application of the Stock Compensation Topic of the FASB ASC in future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period.
	•		We estimate our income tax provision or benefit in each of the jurisdictions in which we operate, including estimating exposures related to examinations by taxing authorities. We also make judgments regarding the realization of deferred tax assets, and establish reserves where we believe it is more likely than not that future taxable income in certain jurisdictions will be insufficient to realize these deferred tax assets in accordance with the Income Taxes Topic of the FASB ASC. Our estimates regarding future taxable income and income tax provision or benefit may vary due to changes in market conditions, changes in tax laws, or other factors. If our assumptions, and consequently our estimates, change in the future, the valuation allowances we have established may be increased or decreased, impacting future income tax expense. For 2009 and 2008 respectively, the valuation allowance was $5.3 million and $1.6 million. As of December 31, 2009, we have state research tax credit carry-forwards of $1.8 million, which will expire between 2015 and 2024. These carry-forwards were caused by tax credits in excess of our annual tax liabilities to an individual state where we no longer generate sufficient state income. In addition, as of December 31, 2009, we have net operating loss carry-forwards of $3.8 million which will expire between 2014 and 2029. These carry-forwards are the result of a foreign acquisition in 2009. The acquired net operating losses are in excess of the amount of estimated earnings. In accordance with the Income Taxes Topic of the FASB ASC, we believe it is more likely than not that we will not realize the benefits of our deferred tax asset arising from these credits and net operating losses, and accordingly, have provided a valuation allowance against them. This valuation allowance is included in non-current deferred tax liabilities in the accompanying balance sheets.
	•		Our products generally include warranties of one to ten years for product defects. We accrue for warranty returns at the time revenue is recognized based on our estimate of the cost to repair or replace the defective products. We engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers. Our products continue to become more complex in both size and functionality as many of our product offerings migrate from line card applications to systems products. The increasing complexity of our products will cause warranty incidences, when they arise, to be more costly. Our estimates regarding future warranty obligations may change due to product failure rates, material usage, and other rework costs incurred in correcting a product failure. In addition, from time to time, specific warranty accruals may be recorded if unforeseen problems arise. Should our actual experience relative to these factors be worse than our estimates, we will be required to record additional warranty expense. Alternatively, if we provide for more reserves than we require, we will reverse a portion of such provisions in future periods. The liability for warranty returns totaled $2.8 million at December 31, 2009 and 2008, respectively. These liabilities are included in accrued expenses in the accompanying consolidated balance sheets.

Results of Operations

The following table presents selected financial information derived from our consolidated statements of income expressed as a percentage of sales for the years indicated.

Year Ended December 31,		2009				2008				2007
Sales
Carrier Networks Division			76.7	%			78.3	%			75.1	%
Enterprise Networks Division			23.3				21.7				24.9
Total sales			100.0	%			100.0	%			100.0	%
Cost of sales			40.7				40.3				40.6
Gross profit			59.3				59.7				59.4
Selling, general and administrative expenses			20.5				20.6				21.7
Research and development expenses			17.2				16.4				15.8
Operating income			21.6				22.7				21.9
Interest and dividend income			1.4				1.7				2.4
Interest expense			(0.5	)			(0.5	)			(0.5	)
Net realized investment gain (loss)			(0.3	)			(0.5	)			0.1
Other income, net			—				0.2				0.1
Life insurance proceeds			—				—				0.2
Income before provision for income taxes			22.2				23.6				24.2
Provision for income taxes			6.9				7.9				8.2
Net income			15.3	%			15.7	%			16.0	%

2009 Compared to 2008

Sales

ADTRAN’s sales decreased 3.3% from $500.7 million in 2008 to $484.2 million in 2009. This decrease in sales is primarily attributable to a $46.6 million decrease in sales of HDSL and other traditional products, partially offset by a $9.1 million increase in sales of our Broadband Access products, a $6.8 million increase in sales of our Optical Access products, and a $14.2 million increase in sales of our Internetworking products.

Carrier Networks sales decreased 5.3% from $392.2 million in 2008 to $371.3 million in 2009. The decrease is primarily attributable to decreases in HDSL, DDS, and other traditional TDM products sales, partially offset by an increase in Broadband Access and Optical Access product sales.

Enterprise Networks sales increased 4.0% from $108.5 million in 2008 to $112.8 million in 2009. The increase is primarily attributable to an increase in sales of Internetworking products, partially offset by declines in sales of traditional IAD products, and Enterprise T1 products. Internetworking product sales were 67.4% of Enterprise Network sales in 2009 compared with 58.3% in 2008. Traditional products primarily comprise the remainder of Enterprise Networks sales. Enterprise Networks sales as a percentage of total sales increased from 21.7% in 2008 to 23.3% in 2009.

International sales, which are included in the Carrier Networks and Enterprise Networks amounts discussed above, decreased 7.7% from $30.1 million in 2008 to $27.8 million in 2009. International sales, as a percentage of total sales, decreased from 6.0% in 2008 to 5.7% in 2009. International sales in 2009 decreased primarily due to a decline in macroeconomic conditions.

Carrier Systems product sales increased $9.5 million in 2009 compared to 2008 primarily due to a $9.1 million increase in Broadband Access product sales and a $6.8 million increase in Optical Access product sales. These increases were primarily attributable to increased shipments of our Total Access^® 5000 products, our OPTI family of products and continuing deployments of FTTN products, resulting from market share gains across all major market segments. Partially offsetting these increases were decreases in TDM and other traditional product sales as customers shifted emphasis to newer technologies. Many of these newer technologies are integral to our Broadband Access and Optical Access product areas.

Business Networking product sales increased $10.9 million in 2009 compared to 2008 due to a $14.2 million increase in Internetworking product sales, primarily as a result of market share gains in SMB and distributed enterprise applications. Partially offsetting this increase in Internetworking product sales was a decline in sales of traditional IAD products as customers shifted emphasis to newer technologies. Many of these newer technologies are integral to our Internetworking product area.

Loop Access product sales decreased $36.9 million in 2009 compared to 2008 primarily due to declines in HDSL, Enterprise T1, and DDS product sales.

Cost of Sales

Cost of sales increased from 40.3% of sales in 2008 to 40.7% of sales in 2009. The increase in cost of sales as a percentage of sales is primarily related to costs incurred to expedite delivery of materials and costs related to a new product release, which were partially offset by cost reductions generated through improved manufacturing efficiencies.

Carrier Networks cost of sales increased from 39.8% of sales in 2008 to 40.8% of sales in 2009. The increase was primarily related to costs incurred to expedite delivery of materials and costs related to a new product release.

Enterprise Networks cost of sales decreased from 42.2% of sales in 2008 to 40.4% of sales in 2009. The decrease was primarily related to lower freight costs and other cost reductions generated through improved manufacturing efficiencies.

An important part of our strategy is to reduce the product cost of each succeeding product generation and then to lower the product’s price based on the cost savings achieved. This may cause variations in our gross profit percentage due to timing differences between the recognition of cost reductions and the lowering of product selling prices.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses decreased 3.7% from $103.3 million, or 20.6% of sales in 2008, to $99.4 million, or 20.5% of sales in 2009. Selling, general, and administrative expenses include personnel costs for administration, finance, information systems, human resources, sales and marketing, and general management, as well as rent, utilities, legal and accounting expenses, bad debt expense, advertising, promotional material, trade show expenses, and related travel costs. The decrease in selling, general, and administrative expenses was primarily related to a reduction in discretionary expenditures including temporary labor, travel, and various promotional expenses.

Selling, general and administrative expenses as a percent of sales will generally fluctuate whenever there is significant fluctuation in revenues for the periods being compared.

Research and Development Expenses

Research and development expenses increased 1.8% from $81.8 million, or 16.3% of sales, in 2008 to $83.3 million, or 17.2% of sales, in 2009. The increase in research and development expenses was a result of increased staffing, engineering and testing expense primarily related to customer specific product development activities as well as costs related to product approvals, primarily for one or more of the top three U.S. carriers. Research and development expenses as a percentage of sales will fluctuate whenever there are incremental product development activities or a significant fluctuation in revenues for the periods being compared.

ADTRAN expects to continue to incur research and development expenses in connection with its new and existing products and its expansion into international markets. ADTRAN continually evaluates new product opportunities and engages in intensive research and product development efforts which provides for new product development, enhancement of existing products and product cost reductions. ADTRAN may incur significant research and development expenses prior to the receipt of revenues from a major new product group or market expansion.

Interest and Dividend Income

Interest and dividend income decreased 20.4% from $8.7 million in 2008 to $6.9 million in 2009. This decrease was the result of a 39.6% reduction in the average rate of return on our investments due to lower interest rates.

Interest Expense

Interest expense decreased from $2.5 million in 2008 to $2.4 million in 2009. The decrease was due to a lower principal balance in 2009 as compared to 2008. See “Liquidity and Capital Resources” below for additional information.

Net Realized Investment Gain (Loss)

Net realized investment gain (loss) changed from a $2.4 million loss in 2008 to a $1.3 million loss in 2009. The change is a result of fewer other-than-temporary impairments of certain securities in our equity portfolio during 2009 as compared to 2008 and the sales of certain securities for a gain. See “Investing Activities” in “Liquidity and Capital Resources” below for additional information.

Other Income, net

Other income, net, comprised primarily of miscellaneous income, gains and losses on foreign currency transactions, investment account management fees, and gains or losses on the disposal of property, plant, and equipment occurring in the normal course of business, decreased from $0.7 million in 2008 to $0.1 million in 2009.

Income Taxes

Our effective tax rate decreased from 33.6% in 2008 to 31.0% in 2009, primarily due to increased benefits relating to the deduction for manufacturer’s domestic production activities under Internal Revenue Code Section 199 and an increase in our federal research and development credits, partially offset by an increase in state income tax expense.

Net Income

As a result of the above factors, net income decreased from $78.6 million in 2008 to $74.2 million in 2009. As a percentage of sales, net income decreased from 15.7% in 2008 to 15.3% in 2009.

2008 Compared to 2007

Sales

ADTRAN’s sales increased 5.0% from $476.8 million in 2007 to $500.7 million in 2008. This increase in sales is primarily attributable to an $18.4 million increase in sales of our Broadband Access products, a $10.7 million increase in sales of our Optical Access products and a $12.4 million increase in sales of our Internetworking products. HDSL product revenues increased 3.6% or $6.3 million and other traditional product revenues decreased 19.5% or $23.9 million.

Carrier Networks sales increased 9.6% from $358.0 million in 2007 to $392.2 million in 2008. The increase is primarily attributable to increases in Broadband Access and Optical Access products sales, and to a lesser extent an increase in HDSL product sales.

Enterprise Networks sales decreased 8.7% from $118.8 million in 2007 to $108.5 million in 2008. The decrease is primarily attributable to declines in sales of traditional IAD products, Enterprise T1 products and DDS products, partially offset by an increase in sales of Internetworking products. Internetworking product sales were 58.3% of Enterprise Network sales in 2008 compared with 44.5% in 2007. Traditional products primarily comprise the remainder of Enterprise Networks sales. Enterprise Networks sales as a percentage of total sales decreased from 24.9% in 2007 to 21.7% in 2008.

International sales, which are included in the Carrier Networks and Enterprise Networks amounts discussed above, decreased 24.0% from $39.6 million in 2007 to $30.1 million in 2008. International sales, as a percentage of total sales, decreased from 8.3% in 2007 to 6.0% in 2008. International sales in 2007 reflected increased activity relating to an initial deployment of our products by a large Latin American carrier. International sales in 2008 decreased primarily due to a decline in sales to this Latin American carrier as well as a decline in sales in other regions.

Carrier Systems product sales increased $26.5 million in 2008 compared to 2007 primarily due to an $18.4 million increase in Broadband Access product sales, primarily attributable to increased shipments of our 1100 series fiber-to-the-node products and our Total Access^® 5000 products, and a $10.7 million increase in Optical Access product sales, resulting from continuing market share gains across numerous customers including the top three U.S. carriers. Partially offsetting these increases in Carrier System product sales were decreases in TDM and other traditional product sales as customers shifted emphasis to newer technologies. Many of these newer technologies are integral to our Broadband Access and Optical Access product areas.

Business Networking product sales increased $1.2 million in 2008 compared to 2007 due to a $12.4 million increase in Internetworking product sales, primarily as a result of market share gains due to our efforts to improve our focus on addressing traditional enterprise channels and leveraging our carrier distribution channels. Largely offsetting this increase in Internetworking product sales was a decline in sales of traditional IAD products as customers shifted emphasis to newer technologies. Many of these newer technologies are integral to our Internetworking product area.

Loop Access product sales decreased $3.8 million in 2008 compared to 2007 primarily due to declines in Enterprise T1 product sales and DDS product sales, partially offset by a 3.6% or $6.3 million increase in HDSL product revenues.

Cost of Sales

As a percentage of sales, cost of sales decreased from 40.6% in 2007 to 40.3% in 2008. The decrease in cost of sales as a percentage of sales is primarily related to lower product costs.

Carrier Networks cost of sales, as a percent of division sales, decreased from 40.6% in 2007 to 39.8% in 2008. The decrease was primarily related to lower product costs noted above, and the impact of higher sales volume on allocated cost of sales elements to the division. Enterprise Networks cost of sales, as a percent of division sales, increased from 40.9% in 2007 to 42.2% in 2008. The increase was primarily related to a higher cost product mix plus the impact of allocated manufacturing costs to the division.

An important part of our strategy is to reduce the product cost of each succeeding product generation and then to lower the product’s price based on the cost savings achieved. This strategy sometimes results in variations in our gross profit margin due to timing differences between the recognition of cost reductions and the lowering of product selling prices. In view of the rapid pace of new product introductions by our company, this strategy may result in variations in gross profit margins that, for any particular financial period, can be difficult to predict.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $103.3 million in 2008 and 2007, and represented 20.6% of sales for 2008 and 21.7% of sales for 2007. Selling, general and administrative expenses include personnel costs for administration, finance, information systems, human resources, sales and marketing, and general management, as well as rent, utilities, legal and accounting expenses, bad debt expense, advertising, promotional material, trade show expenses, and related travel costs.

Selling, general and administrative expenses as a percent of sales will generally fluctuate whenever there is significant fluctuation in revenues for the periods being compared.

Research and Development Expenses

Research and development expenses increased 8.5% from $75.4 million, or 15.8% as a percentage of sales, in 2007 to $81.8 million, or 16.3% as a percentage of sales, in 2008. The increase in research and development expenses primarily reflects increased staffing expense related to customer specific product development activities, as well as costs related to product approvals, primarily for one or more of the top three U.S. carriers. Research and development expenses as a percentage of sales will fluctuate whenever there is a significant fluctuation in revenues for the periods being compared.

ADTRAN expects to continue to incur research and development expenses in connection with its new and existing products and its expansion into international markets. ADTRAN continually evaluates new product opportunities and engages in intensive research and product development efforts which provides for new product development, enhancement of existing products and product cost reductions. ADTRAN may incur significant research and development expenses prior to the receipt of revenues from a major new product group or market expansion.

Interest and Dividend Income

Interest and dividend income decreased 24.3% from $11.5 million in 2007 to $8.7 million in 2008. This decrease is due to a 14% reduction in our average investment balances in 2008 as compared to 2007, primarily as a result of our share repurchase activity, and a 25% reduction in the average rate of return on these investments, due to lower interest rates.

Interest Expense

Interest expense remained constant at $2.5 million in 2008 and 2007, as we had no substantial change in our fixed rate borrowing. See “Liquidity and Capital Resources” below for additional information.

Net Realized Investment Gain (Loss)

Net realized investment gain (loss) decreased from a $0.5 million gain in 2007 to a $2.4 million loss in 2008. The change is primarily a result of the other-than-temporary impairment of certain securities in our equity portfolio. See “Investing Activities” in “Liquidity and Capital Resources” below for additional information.

Other Income, net

Other income, net, comprised primarily of miscellaneous income, gains and losses on foreign currency transactions, investment account management fees, gains or losses on the disposal of property, plant, and equipment occurring in the normal course of business, decreased from $0.8 million in 2007 to $0.7 million in 2008.

Life Insurance Proceeds

We realized a gain on life insurance proceeds of $1.0 million during the first quarter of 2007 as a result of the death of our co-founder and then Chairman of the Board, Mark Smith.

Income Taxes

Our effective tax rate decreased from 34.0% in 2007 to 33.6% in 2008, primarily due to increased benefits relating to the deduction for manufacturer’s domestic production activities under Internal Revenue Code Section 199 and an increase in our federal research and development credits.

Net Income

As a result of the above factors, net income increased from $76.3 million in 2007 to $78.6 million in 2008. As a percentage of sales, net income decreased from 16.0% in 2007 to 15.7% in 2008.

Liquidity and Capital Resources

Liquidity

At December 31, 2009, cash on hand was $24.1 million and short-term investments were $172.5 million, which placed our short-term liquidity at $196.6 million. At December 31, 2008, our cash on hand of $41.9 million and short-term investments of $96.3 million placed our short-term liquidity at $138.2 million. The increase in liquidity from 2008 to 2009 is primarily the result of positive cash flow generated from operating activities and the purchase of fewer shares of our common stock in the first three quarters of 2009 due to the uncertainty in the economy during that period. Purchases of our common stock totaled $15.9 million in 2009 compared to $63.6 million in 2008.

Operating Activities

Our working capital, which consists of current assets less current liabilities, increased 30.7% from $212.7 million as of December 31, 2008 to $278.0 million as of December 31, 2009. The quick ratio, defined as cash, cash equivalents, short-term investments, and net accounts receivable, divided by current liabilities, increased from 4.76 as of December 31, 2008 to 5.54 as of December 31, 2009. The current ratio, defined as current assets divided by current liabilities, increased from 6.30 as of December 31, 2008 to 6.82 as of December 31, 2009. Our working capital, the quick ratio, and the current ratio increased from 2008 to 2009 mainly due to a $76.2 million increase in short-term investments as we generated positive cash flow from operations while purchasing fewer shares of our common stock in 2009.

Net accounts receivable increased 29.0% from $52.7 million at December 31, 2008 to $68.0 million at December 31, 2009. Our allowance for doubtful accounts increased from $38 thousand at December 31, 2008 to $0.1 million at December 31, 2009. Quarterly accounts receivable days sales outstanding (DSO) increased from 43 days as of December 31, 2008 to 50 days as of December 31, 2009. Net accounts receivable and DSO increased for the year ended December 31, 2009 primarily due to the timing of shipments during the fourth quarter of 2009.

Quarterly inventory turnover increased from 3.8 turns as of December 31, 2008 to 4.5 turns as of December 31, 2009. Inventory decreased 3.7% from December 31, 2008 to December 31, 2009. We expect inventory levels to fluctuate as we attempt to maintain sufficient inventory to ensure competitive lead times while managing the risk of inventory obsolescence that may occur due to rapidly changing technology and customer demand.

Accounts payable increased 26.9% from $20.3 million at December 31, 2008 to $25.8 million at December 31, 2009. Generally, the change in accounts payable is due to variations in the timing of the receipt of supplies, inventory and services and our subsequent payments for these purchases.

Investing Activities

Capital expenditures totaled approximately $8.7 million, $9.5 million and $6.5 million for the years ended December 31, 2009, 2008 and 2007, respectively. These expenditures were primarily used to purchase computer hardware, software and manufacturing and test equipment.

Our combined short-term and long-term investments increased $97.1 million from $237.5 million at December 31, 2008 to $334.6 million at December 31, 2009. This increase reflects the impact of net funds available for investment provided by our operating activities, reduced by our cash needs for equipment acquisitions, stock repurchases and dividends, as well as net realized and unrealized losses and amortization of net premiums on our combined investments.

We invest all available cash not required for immediate use in operations primarily in securities that we believe bear minimal risk of loss. At December 31, 2009, these investments included municipal variable rate demand notes of $84.4 million, municipal fixed-rate bonds of $141.3 million and corporate bonds guaranteed by the FDIC of $20.4 million. At December 31, 2008, these investments included municipal variable rate demand notes of $52.6 million, municipal fixed-rate bonds of $116.9 million and a government agency security of $2.0 million.

Our municipal variable rate demand notes are classified as available-for-sale short-term investments. At December 31, 2009, 98% had a credit rating of VMIG-1 or A-1+ with the remaining 2% rated A-1 and all contained put options of seven days. Thus, despite the long-term nature of their stated contractual maturities, we believe that we have the ability to quickly liquidate these securities. Our investments in these securities are recorded at fair value, and the interest rates reset every seven days. We have the ability to sell our variable rate demand notes to the remarketing agent, tender agent, or issuer at par value plus accrued interest in the event we decide to liquidate our investment in a particular variable rate demand note. Approximately 22% of our variable rate demand notes are supported by letters of credit from banks that we believe to be in good financial condition. The remaining 78% of our variable rate demand notes are supported by standby purchase agreements. As a result of all of these factors, we had no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from these investments at December 31, 2009. All income generated from these investments was recorded as interest income. We have not been required to record any losses relating to municipal variable rate demand notes or auction rate securities, and we have held no auction rate securities since February 7, 2008.

At December 31, 2009, approximately 49% of our municipal fixed-rate bond portfolio had a credit rating of AAA, 45% had a credit rating of AA, and the remaining 6% had a credit rating of A. These bonds are classified as available-for-sale investments and had an average duration of 1.04 years at December 31, 2009. Because our bond portfolio has a high quality rating and contractual maturities of a short duration, we are able to obtain prices for these bonds derived from observable market inputs, or for similar securities traded in an active market, on a daily basis.

Our long-term investments increased 15% from $141.2 million at December 31, 2008 to $162.2 million at December 31, 2009. Municipal fixed-rate bonds classified as long-term investments decreased $22.1 million from $75.3 million at December 31, 2008 to $53.2 million at December 31, 2009. The primary reason for the decrease in our long-term municipal fixed rate bonds was the investment in corporate bonds to increase the yield of our long-term portfolio. Long-term investments at December 31, 2009 and 2008 include an investment in a certificate of deposit of $48.3 million and $48.8 million, respectively, which serves as collateral for our revenue bonds, as discussed below. Long-term investments at December 31, 2009 also include $20.4 million of FDIC guaranteed corporate bonds. All of our corporate bond investments had a credit rating of AAA at December 31, 2009. We have various equity investments included in long-term investments at a cost of $9.8 million and $12.0 million, and with a fair value of $33.5 million and $11.6 million, at December 31, 2009 and 2008, respectively. Included in our marketable equity securities is a single equity security, of which we held 2.1 million shares and 2.5 million shares, carried at $22.4 million and $2.5 million of fair value, at December 31, 2009 and 2008, respectively. The single security traded approximately 395 thousand shares per day in 2009, in an active market on a European stock exchange. This single security carried $21.7 million and $1.6 million of the gross unrealized gains included in the fair value of our marketable securities at December 31, 2009 and 2008, respectively. The remaining $2.2 million of gross unrealized gains and $0.2 million in gross unrealized losses at December 31, 2009 were spread amongst more than 375 equity securities. Long-term investments at December 31, 2009 and 2008 also included $3.4 million and $2.5 million, respectively, related to our deferred compensation plan; $2.2 million of other investments carried at cost, consisting of interests in two private equity funds and an investment in a privately held telecommunications equipment manufacturer; and $1.2 million and $0.9 million, respectively, of a fixed income bond fund. This bond fund had unrealized gains of $0.3 million and unrealized losses $0.4 million at December 31, 2009 and 2008, respectively.

We review our investment portfolio for potential “other-than-temporary” declines in value on an individual investment basis. We assess, on a quarterly basis, significant declines in value which may be considered other-than-temporary and, if necessary, recognize and record the appropriate charge to write-down the carrying value of such investments. In making this assessment, we take into consideration qualitative and quantitative information, including but not limited to the following: the magnitude and duration of historical declines in market prices, credit rating activity, assessments of liquidity, public filings, and statements made by the issuer. We generally begin our identification of potential other-than-temporary impairments by reviewing any security with a fair value that has declined from its original or adjusted cost basis by 25% or more for six or more consecutive months. We then evaluate the individual security based on the previously identified factors to determine the amount of the write-down, if any. As a result of our review, we did not record any other-than-temporary impairment charge during the fourth quarter of December 31, 2009. For the years ended December 31, 2009, 2008 and 2007 we recorded charges of $2.9 million, $2.4 million and $0.1 million, respectively, related to the other-than-temporary impairment of certain publicly traded equity securities, a fixed income bond fund, and deferred compensation assets.

On September 15, 2009, we acquired all of the outstanding stock of Objectworld Communications Corporation (Objectworld), a provider of unified communication solutions. The purpose of this acquisition was to acquire unified communications technologies. These technologies have been integrated into our NetVanta^® product line. The purchase price was approximately $1.5 million in cash subject to certain post closing adjustments, and was allocated to the individual assets and liabilities acquired. There was no goodwill determined in the final purchase price allocation. Objectworld’s financial statements have been included in our consolidated statements of income and cash flows from the date of the acquisition to December 31, 2009 and our consolidated balance sheet dated December 31, 2009.

Financing Activities

Fifty million dollars of the expansion of Phase III of our corporate headquarters was approved for participation in an incentive program offered by the Alabama State Industrial Development Authority (the Authority). Pursuant to the program, on January 13, 1995, the Authority issued $20.0 million of its taxable revenue bonds and loaned the proceeds from the sale of the bonds to ADTRAN. The bonds were originally purchased by AmSouth Bank of Alabama, Birmingham, Alabama (the Bank). Wachovia Bank, N.A., Nashville, Tennessee (formerly First Union National Bank of Tennessee, Nashville, Tennessee) (the Bondholder), which was acquired by Wells Fargo & Company on December 31, 2008, purchased the original bonds from the Bank and made further advances to the Authority, bringing the total amount outstanding to $50.0 million. The incentive program enables participating companies to generate Alabama corporate income tax credits that can be used to reduce the amount of Alabama corporate income taxes that would otherwise be payable, in exchange for investing capital and creating jobs in Alabama. We cannot be certain that the state of Alabama will continue to make these corporate income tax credits available; therefore, we may not realize the full benefit of these incentives. Through December 31, 2009, the Authority had issued $50.0 million of its taxable revenue bonds pursuant to the incentive program and loaned the proceeds from the sale of the bonds to ADTRAN. We are required to make payments to the Authority in the amounts necessary to pay the principal of, and interest on, the Authority’s Taxable Revenue Bond, Series 1995, as amended, currently outstanding in the aggregate principal amount of $48.3 million. The bond matures on January 1, 2020, and bears interest at the rate of 5% per annum. Included in long-term investments at December 31, 2009 is $48.3 million of restricted funds, which is a collateral deposit against the principal amount of this bond. We have the right to set-off the balance of the Bond with the collateral deposit in order to reduce the balance of the indebtedness. In conjunction with this program, we are eligible to receive certain economic incentives from the state of Alabama that reduce the amount of payroll withholdings that we are required to remit to the state for those employment positions that qualify under the program.

Due to continued positive cash flow from operating activities, we made a business decision to begin an early partial redemption of the Bond. It is our intent to make annual principal payments in addition to the interest amounts that are due. In connection with this decision, $0.5 million of the bond debt has been reclassified to a current liability in the Consolidated Balance Sheets at December 31, 2009 and 2008.

The following table shows dividends paid in each quarter of 2009, 2008 and 2007. During 2009, 2008 and 2007, ADTRAN paid dividends totaling $22.5 million, $22.9 million and $24.6 million, respectively. The Board of Directors presently anticipates that it will declare a regular quarterly dividend so long as the present tax treatment of dividends exists and adequate levels of liquidity are maintained.

Dividends per Common Share

		2009				2008				2007
First Quarter		$	0.09			$	0.09			$	0.09
Second Quarter		$	0.09			$	0.09			$	0.09
Third Quarter		$	0.09			$	0.09			$	0.09
Fourth Quarter		$	0.09			$	0.09			$	0.09

Stock Repurchase Program

Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase transactions. As of December 31, 2009, the Board of Directors has authorized cumulative repurchases of up to 30 million shares of our common stock. We currently have the authority to purchase an additional 2.7 million shares of our common stock under the plan approved by the Board of Directors on April 14, 2008. For the years 2009, 2008 and 2007, we repurchased 0.8 million shares, 3.1 million shares and 5.8 million shares, respectively, for a cost of $15.9 million, $63.6 million and $138.6 million, respectively, at an average price of $21.05, $20.65 and $24.08 per share, respectively.

To accommodate employee stock option exercises, we issued 0.9 million shares of treasury stock for $13.5 million during the year ended December 31, 2009, 0.3 million shares of treasury stock for $3.7 million during the year ended December 31, 2008, and 1.2 million shares of treasury stock for $15.3 million during the year ended December 31, 2007.

Off-Balance Sheet Arrangements and Contractual Obligations

We have various contractual obligations and commercial commitments. The following table sets forth, in millions, the annual payments we are required to make under contractual cash obligations and other commercial commitments at December 31, 2009.

Contractual Obligations

(In millions)		Total				2010				2011				2012				2013				After 2013
Long-term debt		$	48.3			$	—			$	—			$	—			$	—			$	48.3
Interest on long-term debt			24.1				2.4				2.4				2.4				2.4				14.5
Investment commitments			0.5				0.2				—				0.3				—				—
Operating lease obligations			2.3				1.3				0.7				0.3				—				—
Purchase obligations			44.1				43.0				0.9				0.2				—				—
Totals		$	119.3			$	46.9			$	4.0			$	3.2			$	2.4			$	62.8

We are required to make payments necessary to pay the interest on the Taxable Revenue Bond, Series 1995, as amended, currently outstanding in the aggregate principal amount of $48.3 million. The bond matures on January 1, 2020, and bears interest at the rate of 5% per annum. Included in long-term investments are $48.3 million of restricted funds, which is a collateral deposit against the principal amount of this bond.

We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we have contributed $7.9 million as of December 31, 2009, of which $7.4 million has been applied to these commitments. See Note 3 of Notes to Consolidated Financial Statements for additional information.

We also have obligations related to uncertain income tax positions that have not been included in the table above due to the uncertainty of when the related expense will be recognized. See Note 7 of Notes to Consolidated Financial Statements for additional information.

We do not have off-balance sheet financing arrangements and have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of or requirements for capital resources. See Notes 6 and 10 of Notes to Consolidated Financial Statements for additional information on our revenue bond and operating lease obligations, respectively.

We intend to finance our operations with cash flow from operations. We have used, and expect to continue to use, the cash generated from operations for working capital, purchases of treasury stock, dividend payments, and other general corporate purposes, including (i) product development activities to enhance our existing products and develop new products and (ii) expansion of sales and marketing activities. We believe our cash and cash equivalents, investments and cash generated from operations to be adequate to meet our operating and capital needs.

Effect of Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued Update No. 2010-06, which amends the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification (Codification). The amendments in this update require new disclosures about transfers in and out of Levels 1 and 2 fair value measurements and the activity in Level 3 fair value measurements and, in addition, clarify existing disclosures required for levels of disaggregation and inputs and valuation techniques. These amendments will be effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about activity in Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We plan to adopt this amendment and provide any additional disclosures required for the period ending March 31, 2010.

In October 2009, the FASB issued Update No. 2009-13, which amends the Revenue Recognition topic of the Codification. This update provides amendments to the criteria in Subtopic 605-25 of the Codification for separating consideration in multiple-deliverable arrangements. As a result of those amendments, multiple-deliverable arrangements will be separated in more circumstances than under existing U.S. GAAP. The amendments establish a selling price hierarchy for determining the selling price of a deliverable and will replace the term fair value in the revenue allocation guidance with selling price to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. The amendments will also eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and will require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. These amendments will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We do not expect the adoption of this amendment will have a material impact on our consolidated results of operations or financial condition.

In October 2009, the FASB issued Update No. 2009-14, which amends the Software topic of the Codification. The amendments in this update change the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality is no longer within the scope of the software revenue guidance in Subtopic 985-605 of the Codification. In addition, the amendments in this update require that hardware components of a tangible product containing software components always be excluded from the software revenue guidance. In that regard, the amendments provide additional guidance on how to determine which software, if any, relating to the tangible product also would be excluded from the scope of the software revenue guidance. The amendments also provide guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software. The amendments also provide further guidance on how to allocate arrangement consideration when an arrangement includes deliverables both included and excluded from the scope of the software revenue guidance. These amendments will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We do not expect the adoption of this amendment will have a material impact on our consolidated results of operations or financial condition.

During 2009, we adopted the following accounting guidance, none of which had a material effect on our consolidated results of operations or financial condition:

In December 2007, the FASB revised the authoritative guidance for business combinations, which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree in a business combination. The guidance establishes principles stipulating how goodwill acquired in a business combination or a gain from a bargain purchase should be recognized and measured. The guidance also expands the disclosure requirements related to the nature and financial impact of business combinations. We adopted this guidance as of January 1, 2009. We have applied this guidance to the business combination that occurred in the third quarter of 2009.

In June 2009, the FASB established the FASB Codification as the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification supersedes all the existing non-SEC accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. This guidance is effective for interim periods ending after September 15, 2009. We adopted this guidance for the period ended September 30, 2009, with no effect on our consolidated results of operations and financial condition for the three and twelve months ended December 31, 2009.

In December 2007, the FASB revised the authoritative guidance for consolidation, which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The guidance also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. It also provides guidance when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners of a subsidiary. We adopted this guidance as of January 1, 2009. The adoption of this guidance had no effect on our consolidated results of operations and financial condition for the three and twelve months ended December 31, 2009.

In June 2008, the FASB revised the authoritative guidance for earnings per share, which establishes that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. In contrast, the right to receive dividends or dividend equivalents that the holder will forfeit if the award does not vest does not constitute a participation right and such an award does not meet the definition of a participating security in its current form (that is, prior to the requisite service having been rendered for the award). We adopted this guidance as of January 1, 2009. The adoption of this guidance had no effect on our consolidated results of operations and financial condition for the three and twelve months ended December 31, 2009.

In April 2009, the FASB revised the authoritative guidance for financial instruments. The guidance requires disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. This guidance is effective for interim periods ending after June 15, 2009. We adopted this guidance in the second quarter of 2009, and have provided the disclosures required for the period ending December 31, 2009.

In April 2009, the FASB revised the authoritative guidance for fair value measurements and disclosures to provide additional guidance in determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurement purposes. This guidance is effective for interim periods ending after June 15, 2009. We adopted this guidance for the period ending June 30, 2009. The adoption of this guidance had no effect on our consolidated results of operations and financial condition for the three and twelve months ended December 31, 2009.

In April 2009, the FASB revised the authoritative guidance for investments in debt and equity securities to provide guidance in determining whether impairments in debt securities are other-than-temporary, and modifies the presentation and disclosures surrounding such instruments. This guidance is effective for interim periods ending after June 15, 2009. We adopted the provisions of this guidance for the period ending June 30, 2009. The adoption of this guidance had no effect on our consolidated results of operations and financial condition for the three and twelve months ended December 31, 2009.

In May 2009, the FASB revised the authoritative guidance for subsequent events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance is effective for financial statements issued for interim and annual reporting periods ending after June 15, 2009. We adopted this guidance for the period ended June 30, 2009, and have provided the disclosures required for the period ending December 31, 2009.

Subsequent Events

On January 19, 2010, the Board declared a quarterly cash dividend of $0.09 per common share to be paid to stockholders of record at the close of business on February 4, 2010. The quarterly dividend payment was $5.6 million and was paid on February 18, 2010.

During the first quarter of 2010 and as of February 26, 2010, ADTRAN repurchased 0.5 million shares of its common stock through open market purchases at an average cost of $21.62 per share and has the authority to repurchase an additional 2.2 million shares under the plan approved by the Board of Directors on April 14, 2008.

We have evaluated all subsequent events through February 26, 2010, the date the financial statements were issued.

ITEM 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Details regarding the fair value of our available-for-sale investments as of December 31, 2009 are discussed in Note 3 of Notes to Consolidated Financial Statements included in this report.

We are exposed to financial market risks, including changes in interest rates and prices of marketable equity and fixed-income securities. The primary objective of our investment activities is to preserve principal while at the same time achieving appropriate yields without significantly increasing risk. To achieve this objective, a majority of our marketable securities are investment grade, municipal fixed-rate bonds, municipal variable rate demand notes and municipal money market instruments denominated in United States dollars. At December 31, 2009, 98% of our municipal variable rate demand notes had a credit rating of VMIG-1 or A-1+ while the remaining 2% had a rating of A-1. Approximately 49% of our municipal fixed-rate bonds had a credit rating of AAA, 45% had a credit rating of AA, and the remaining 6% had a credit rating of A. We also held $20.4 million of corporate bonds that are guaranteed by the Federal Deposit Insurance Corporation (FDIC) and issued by various banks. At December 31, 2009, all of our corporate bonds had a credit rating of AAA.

We maintain depository investments with certain financial institutions. Although these depository investments may exceed government insured depository limits, we have evaluated the credit worthiness of these applicable financial institutions, and determined the risk of material financial loss due to exposure of such credit risk to be minimal. As of December 31, 2009, $23.1 million of our cash and cash equivalents, primarily certain domestic money market funds and foreign depository accounts, were in excess of government provided insured depository limits. The Temporary Liquidity Guarantee Program adopted during 2008 by the FDIC provided full coverage of our domestic depository accounts through December 2009. Although this program was extended through June 30, 2010, the banks where we maintain our depository accounts opted out of participation in this program after December 31, 2009.

As of December 31, 2009, approximately $264.1 million of our cash and investments may be directly affected by changes in interest rates. We have performed a hypothetical sensitivity analysis assuming market interest rates increase or decrease by 50 basis points (bps), 100 bps and 150 bps for the entire year, while all other variables remain constant. At December 31, 2009, we held $110.3 million of money market instruments and municipal variable rate demand notes. Hypothetical 50 bps, 100 bps and 150 bps declines in interest rates as of December 31, 2009 would reduce annualized interest income on our money market instruments and municipal variable rate demand notes by approximately $0.6 million, $1.1 million and $1.7 million, respectively. In addition, we held a combined $153.8 million of fixed-rate municipal bonds and corporate bonds guaranteed by the FDIC whose fair value may be directly affected by a change in interest rates. Hypothetical 50 bps, 100 bps and 150 bps increases in interest rates as of December 31, 2009 would reduce the fair value of our bonds by approximately $0.8 million, $1.6 million and $2.3 million, respectively.

As of December 31, 2008, interest income on approximately $208.2 million of our cash and investments was subject to being directly affected by changes in interest rates. We performed a hypothetical sensitivity analysis assuming market interest rates increase or decrease by 50 bps, 100 bps and 150 bps for the entire year, while all other variables remain constant. Hypothetical 50 bps, 100 bps and 150 bps declines in interest rates as of December 31, 2008 would have reduced annualized interest income on our money market instruments, municipal variable rate demand notes and municipal auction rate securities by approximately $0.4 million, $0.9 million and $1.3 million, respectively. In addition, hypothetical 50 bps, 100 bps and 150 bps increases in interest rates as of December 31, 2008 would have reduced the fair value of our municipal fixed-rate bonds by approximately $0.6 million, $1.1 million and $1.7 million, respectively.

We are directly exposed to changes in foreign currency exchange rates to the extent that such changes affect our revenue derived from international customers, expenses related to our foreign sales offices, and our foreign assets and liabilities. We attempt to manage these risks by primarily denominating contractual and other foreign arrangements in U.S. dollars. Our primary exposure in regard to our foreign assets and liabilities is with our Australian subsidiary whose functional currency is the Australian dollar. We are indirectly exposed to changes in foreign currency exchange rates to the extent of our use of foreign contract manufacturers and foreign raw material suppliers whom we pay in U.S. dollars. As a result, changes in the local currency rates of these vendors in relation to the U.S. dollar could cause an increase in the price of products that we purchase.

ITEM 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements are contained in this report.

		Page
Management’s Report on Internal Control Over Financial Reporting			42
Report of Independent Registered Public Accounting Firm			43
Financial Statements
Consolidated Balance Sheets, As of December 31, 2009 and 2008			44
Consolidated Statements of Income, Years Ended December 31, 2009, 2008 and 2007			45
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income, Years Ended December 31, 2009, 2008 and 2007			46
Consolidated Statements of Cash Flows, Years Ended December 31, 2009, 2008 and 2007			47
Schedule II — Valuation and Qualifying Accounts			73

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of ADTRAN, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. ADTRAN’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. ADTRAN’s internal control over financial reporting includes those policies and procedures that:

	•		pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADTRAN;
	•		provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of ADTRAN are being made only in accordance with authorizations of management and directors of ADTRAN; and
	•		provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of ADTRAN’s assets that could have a material effect on the financial statements.

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

Management assessed the effectiveness of ADTRAN’s internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on our assessment and those criteria, management has concluded that ADTRAN maintained effective internal control over financial reporting as of December 31, 2009.

The effectiveness of our internal control over financial reporting has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Report of Independent Registered Public Accounting Firm

To Board of Directors and Stockholders of ADTRAN, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of ADTRAN, Inc. and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report On Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 7 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in fiscal 2007.

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

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

/s/ PricewaterhouseCoopers LLP
Birmingham, Alabama
February 26, 2010

Financial Statements

ADTRAN, INC.

Consolidated Balance Sheets (In thousands, except per share amounts)

December 31, 2009 and 2008

		2009				2008
ASSETS
Current assets
Cash and cash equivalents		$	24,135			$	41,909
Short-term investments			172,469				96,277
Accounts receivable, less allowance for doubtful accounts of $138 and $38 at December 31, 2009 and 2008, respectively			68,044				52,749
Other receivables			4,097				2,896
Inventory			45,674				47,406
Prepaid expenses			2,795				2,974
Deferred tax assets, net			8,603				8,653
Total current assets			325,817				252,864
Property, plant, and equipment, net			74,309				75,487
Deferred tax assets, net			—				3,920
Other assets			2,168				103
Long-term investments			162,169				141,241
Total assets		$	564,463			$	473,615
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	25,782			$	20,313
Unearned revenue			7,138				6,141
Accrued expenses			4,202				3,536
Accrued wages and benefits			7,634				9,868
Income tax payable, net			3,017				266
Total current liabilities			47,773				40,124
Deferred tax liabilities, net			5,035				—
Other non-current liabilities			11,390				9,422
Bonds payable			47,750				48,250
Total liabilities			111,948				97,796
Commitments and contingencies (see Note 10)
Stockholders’ equity
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 issued in 2009 and 2008			797				797
Additional paid-in capital			181,240				172,704
Accumulated other comprehensive income (loss)			17,853				(1,009	)
Retained earnings			649,256				603,600
Less treasury stock at cost: 17,392 shares at December 31, 2009 and 17,493 shares at December 31, 2008			(396,631	)			(400,273	)
Total stockholders’ equity			452,515				375,819
Total liabilities and stockholders’ equity		$	564,463			$	473,615

The accompanying notes are an integral part of these consolidated financial statements.

ADTRAN, INC.

Consolidated Statements of Income (In thousands, except per share amounts)
Years ended December 31, 2009, 2008 and 2007

		2009				2008				2007
Sales		$	484,185			$	500,676			$	476,778
Cost of sales			197,223				201,771				193,792
Gross profit			286,962				298,905				282,986
Selling, general, and administrative expenses			99,446				103,286				103,329
Research and development expenses			83,285				81,819				75,367
Operating income			104,231				113,800				104,290
Interest and dividend income			6,933				8,708				11,521
Interest expense			(2,430	)			(2,514	)			(2,502	)
Net realized investment gain (loss)			(1,297	)			(2,409	)			498
Other income, net			131				688				764
Life insurance proceeds			—				—				1,000
Income before provision for income taxes			107,568				118,273				115,571
Provision for income taxes			33,347				39,692				39,236
Net income		$	74,221			$	78,581			$	76,335
Weighted average shares outstanding — basic			62,459				63,549				67,848
Weighted average shares outstanding — diluted (1)			63,356				64,408				69,212
Earnings per common share — basic		$	1.19			$	1.24			$	1.13
Earnings per common share — diluted (1)		$	1.17			$	1.22			$	1.10

The accompanying notes are an integral part of these consolidated financial statements.

ADTRAN, INC.

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income
(In thousands)
Years ended December 31, 2009, 2008 and 2007

																						Accumulated
										Additional												Other				Total
		Common				Common				Paid-In				Retained				Treasury				Comprehensive				Stockholders’
		Shares				Stock				Capital				Earnings				Stock				Income (Loss)				Equity
Balance, December 31, 2006			79,652			$	797			$	152,162			$	513,515			$	(233,214	)		$	2,696			$	435,956
Net income															76,335												76,335
Net change in unrealized gains/losses related to:
Marketable securities (net of deferred tax of $1,409)																							2,375				2,375
Impaired marketable securities (net of deferred tax of $31)																							52				52
Foreign currency translation adjustment																							581				581
Comprehensive income																											79,343
Dividend payments															(24,600	)											(24,600	)
Adoption of FIN 48															(1,190	)											(1,190	)
Stock options exercised: Various prices per share															(12,296	)			27,584								15,288
Purchase of treasury stock: 5,756 shares																			(138,589	)							(138,589	)
Income tax benefit from exercise of stock options											4,408																4,408
Stock-based compensation expense											7,815																7,815
Balance, December 31, 2007			79,652			$	797			$	164,385			$	551,764			$	(344,219	)		$	5,704			$	378,431
Net income															78,581												78,581
Net change in unrealized gains/losses related to:
Marketable securities (net of deferred tax of $3,638)																							(6,127	)			(6,127	)
Impaired marketable securities (net of deferred tax of $740)																							1,238				1,238
Foreign currency translation adjustment																							(1,824	)			(1,824	)
Comprehensive income																											71,868
Dividend payments															(22,919	)											(22,919	)
Dividends accrued for unvested restricted stock units															(2	)											(2	)
Stock options exercised: Various prices per share															(3,824	)			7,515								3,691
Purchase of treasury stock: 3,078 shares																			(63,569	)							(63,569	)
Income tax benefit from exercise of stock options											981																981
Stock-based compensation expense											7,338																7,338
Balance, December 31, 2008			79,652			$	797			$	172,704			$	603,600			$	(400,273	)		$	(1,009	)		$	375,819
Net income															74,221												74,221
Net change in unrealized gains/losses related to:
Marketable securities (net of deferred tax of $9,218)																							15,384				15,384
Impaired marketable securities (net of deferred tax of $617)																							1,010				1,010
Foreign currency translation adjustment																							2,468				2,468
Comprehensive income																											93,083
Dividend payments															(22,486	)											(22,486	)
Dividends accrued for unvested restricted stock units															(12	)											(12	)
Stock options exercised: Various prices per share															(6,067	)			19,538								13,471
Purchase of treasury stock: 755 shares																			(15,896	)							(15,896	)
Income tax benefit from exercise of stock options											1,549																1,549
Stock-based compensation expense											6,987																6,987
Balance, December 31, 2009			79,652			$	797			$	181,240			$	649,256			$	(396,631	)		$	17,853			$	452,515