10-K

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

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

For the Fiscal Year Ended December 31, 2011

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

For the Transition Period from                     to                     

Commission file number 0-24612

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  x    No  ¨

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

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of 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  x    No  ¨

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.    ¨

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	x	Accelerated Filer	¨
Non-accelerated Filer	¨	Smaller Reporting Company	¨

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

The aggregate market value of the registrant’s outstanding common stock held by non-affiliates of the registrant on June 30, 2011 was $2,497,687,885 based on a closing market price of $38.71 as quoted on the NASDAQ Global Select Market. There were 63,822,229 shares of common stock outstanding as of February 14, 2012.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 9, 2012 are incorporated herein by reference in Part III.

ADTRAN, Inc.

Annual Report on Form 10-K

For the Fiscal Year Ended December 31, 2011

Table of Contents

Item Number		Page Number
	PART I
1.	Business		1
1A.	Risk Factors		11
1B.	Unresolved Staff Comments		23
2.	Properties		23
3.	Legal Proceedings		23
4.	Mine Safety Disclosures		23
4A.	Executive Officers of the Registrant		23
	PART II
5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		25
6.	Selected Financial Data		26
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
7A.	Quantitative and Qualitative Disclosures about Market Risk		42
8.	Financial Statements and Supplementary Data		43
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		72
9A.	Controls and Procedures		72
9B.	Other Information		72
	PART III
10.	Directors, Executive Officers and Corporate Governance		72
11.	Executive Compensation		73
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		73
13.	Certain Relationships and Related Transactions and Director Independence		73
14.	Principal Accountant Fees and Services		73
	PART IV
15.	Exhibits and Financial Statement Schedules		73
	SIGNATURES		77
	INDEX OF EXHIBITS		79

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PART I

ITEM 1. BUSINESS

Overview

ADTRAN, Inc. designs, manufactures and markets solutions and provides services and support for communications networks. Our solutions are widely deployed by providers of communications services (serviced by our Carrier Networks Division), and small and mid-sized enterprises (SMEs) (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 2011, sales of Carrier Networks products accounted for 79.4% of total revenue, while sales of Enterprise Networks products accounted for 20.6%. Sales to countries outside of the United States are included in these aggregate divisional figures, but when accounted for separately, comprise 11.8% of total revenue. For more financial information about these divisions and geographic areas, see Note 11 to the Consolidated Financial Statements included in this report.

Our Carrier Networks Division provides products and services used by service providers to deliver voice, data and video services to their customers’ premises and to mobile network cell sites. These products are located in central exchange offices or remote terminals, serving area interconnect locations and cell site locations for mobile networks. Our Enterprise Networks Division provides products and services 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 1,800 high-speed network access and communication devices. 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 core product 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 circuit-based technologies to packet-based technologies, and converged networks are being implemented to address voice, video and data requirements in an effort to become more efficient. 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 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, service providers and businesses alike are transitioning their networks to packet-based technologies, such as Ethernet and IP. We believe we are well positioned to support both existing services and newer advanced Ethernet and IP 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, including services and support, 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.

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Carrier Systems products are used by communications service providers to provide 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, Ultra Broadband Ethernet (UBE) 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 and transceivers including those used in our Optical Networking Edge (ONE) products, NetVanta 8000 series products, and our family of OPTI products. Optical access products are used to deliver higher bandwidth services, aggregate large numbers of low bandwidth services, or transport wavelength services across a fiber optic infrastructure. Total Access 1500 products, 303 concentrator products, M13 multiplexer products, and a number of 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 small and mid-sized enterprises (SME) market. The Business Networking category includes Internetworking products and Integrated Access Devices (IADs). Internetworking products consist of our Total Access IP Business Gateways, Optical Network Terminals (ONTs), Virtual Wireless LAN products 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, Unified Threat Management (UTM) solutions, and Carrier Ethernet Network Terminating Equipment (NTE). IAD products consist of our Total Access 600 Series and the Total Access 850.

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 subcategories of product revenues, which we divide into core products and legacy products. Our core products consist of Broadband Access and Optical Access products (included in Carrier Systems) and Internetworking products (included in Business Networking) and our legacy products include HDSL products (included in Loop Access) and other products not included in the aforementioned core 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, services and support 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 Service Providers (which includes United States Incumbent Local Exchange Carriers (ILECs), Competitive Local Exchange Carriers (CLECs), and Cable MSOs), many independent operating companies, utilities, municipalities, 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, PBXs, wireless LAN products and telephone key systems. ADTRAN devices, deployed at the business site, are enabling carriers to provide Ethernet services to SMEs 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 SMEs 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, services and support 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 (FTTP) 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 with the FTTN series of outside plant DSLAM products and our UBE products are used to shorten copper loop lengths so that wireline providers can deliver higher-speed network services.

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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, video 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

Designed with fiber deployment in mind, the ADTRAN Total Access 5000 provides high-capacity switching and bandwidth for ultra-broadband services. Optical Line Terminals (OLTs) provide either a full 2.5 Gbps of dedicated bandwidth per Passive Optical Network (PON) or up to 1 Gbps per end user, enabling the delivery of advanced solutions like IPTV across an all-Ethernet architecture. ADTRAN’s Total Access 300 series family of Optical Network Terminals (ONTs) provides carriers with different delivery options for residential, business and mobile backhaul opportunities. The Total Access 5000 offers the industry’s most comprehensive set of broadband solutions from an all-Ethernet platform.

Our leading Total Access^® 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. Capabilities like UBE are actively being developed to help Service Providers overcome the challenge of using their existing copper facilities to compete with service offerings of 100Mbps and higher without the need to invest in or overcome the obstacles associated with FTTP architectures.

The 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.

Business Ethernet Services

Business 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.

ADTRAN has a complete portfolio of solutions for Business Ethernet services utilizing Fiber (EoF), Copper (EoCu) and TDM (EoTDM). These solutions enable cost-effective business Ethernet service delivery across all kinds of network infrastructure. The ADTRAN Total Access 5000 supports standards-based copper pair bonding of xDSL loops for direct Ethernet service delivery. Leveraging a complete end-to-end solution with the NetVanta 800 and NetVanta 8000 Series of network termination equipment, the Total Access 5000 also offers an innovative approach to delivering Ethernet services by aggregating bonded copper, bonded circuits, and fiber while supporting multi-megabit rates for MEF certified carrier Ethernet circuits. This combination allows carriers to ubiquitously offer Ethernet services across the entire network, enabling new revenue-generating services for businesses.

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Packet Optical Networking and Optical Access

Mobile networks that were originally built for voice communications are now being optimized for data applications. This is putting a strain on the mobile backhaul network. With the introduction of carrier-class Ethernet technologies, now operators can take advantage of fiber facilities to achieve the highest traffic carrying capacity utilization of their embedded investment and provide a network migration path toward an all-packet network. With the integration of EoF in the Total Access 5000 and NetVanta^® 8000 platforms, ADTRAN offers a scalable solution that supports service migration as providers continue to examine the customer demand for greater bandwidth. As wireless needs continue to grow, EoF is an ideal transport method for mobile backhaul networks, as well as enabling long-haul reach to residential and business networks.

Optical Networking Edge (ONE) has been added to our product portfolio to enable high performance packet optical services at the edge of the network and integrated optical transport solutions. The ADTRAN ONE solutions combine right sized core packet optical networking like miniature Reconfigurable Optical Add Drop Multiplexer (mini-ROADM), Wave Division Multiplexing (WDM), Scalable Carrier Ethernet, Optical Transport Network (OTN), and SONET/SDH with high-speed access services under the Total Access^® 5000 multi-service access and aggregation platform. ONE modules fit into the installed base or new deployment of the Total Access^® 5000 platform to deliver integrated access, aggregation and transport, which enables service providers to simplify service delivery and network operations to improve profitability. ONE allows service providers the ability to deliver, aggregate, and transport carrier grade services up to 10Gbps and beyond. The ONE portfolio supports agile photonics and tunable pluggable optics. These advancements provide operators with a flexible, efficient and scalable network architecture, improving their market responsiveness and the transition from circuit to packet optical services.

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^® chassis is available in small (SMX), medium (MX) and large (LMX) options providing a range of low-density to high-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.

Service and Support

In addition to our product portfolio and standard pre- and post-sales technical support, the CN division offers a variety of “professional services” to provide customers with deployment, maintenance and management services. Deployment service offerings include engineering, installation, configuration, turn-up and test, training, and project management services, as well as pre-assembled and wired rack and cabinet assemblies. Maintenance services are designed to protect customers’ networks from unnecessary downtime such as managed spares, extended warranty, and remote or on-site technical support beyond standard warranty coverage. Management services facilitate remote management and monitoring of the service providers’ networks.

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Network Management

As communications solutions and networks become more complex, the need for carrier-class management systems becomes vital to ensure operational efficiencies. A system level view is necessary and service awareness is increasingly important. 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 in the network. The systems ensure communication with the service provider’s central management system to reduce technician dispatches and operating costs.

We have added the Advanced Operational Environment (AOE) set of products to provide integrated end-to-end service aware network management tools that enhance network planning, service activation, service assurance, and decision support tools for our customers’ operations. 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

With the increased speed, capacity and availability of broadband services to businesses and the proliferation of mobile broadband devices such as smartphones and tablets, both service providers and enterprises are rapidly migrating to cloud-based services and mobility for their communications and networking needs. Businesses of all sizes are increasingly utilizing the cloud for voice, data, video, computing, storage and applications. As business workers adopt mobile devices both inside and outside of the physical office, convergence with fixed voice over Internet Protocol (VoIP) and unified communications solutions (UC) are emerging. Voice capable wireless networks in the enterprise are beginning to converge with wired networks. Wireless-wireline convergence, along with the convergence of voice, data, and messaging from any location or device results in increased employee efficiency and productivity. At ADTRAN, our Enterprise Networks Division is addressing these major market shifts by focusing on solutions in three key areas: Cloud Connectivity, Enterprise Communications and Virtual Mobility.

Cloud Connectivity

Our Cloud Connectivity solutions enable service providers to deliver hosted and bundled services offerings that enable businesses to connect to the public or private cloud. These service provider bundled services include: Hosted Voice and Unified Communications, Hosted Wireless Local Area Networking (WLAN), Business Internet Access, Business Ethernet, Private Network, Session Initiation Protocol (SIP) Trunking, Managed Security, Managed Unified Communications and SIP Trunking with Private Branch eXchange (PBX) bundles. ADTRAN Enterprise solutions offered as a key element of these business bundles include: IP Business Gateways, Access Routers, Ethernet Switches, hosted Unified Communications Solutions and Unified Threat Management.

ADTRAN Total Access and NetVanta IP Business Gateways (IPBGs) are deployed by the service provider at the demarcation point on the customer premises. An ADTRAN IPBG combines the functionality of a voice gateway, multi-service router and firewall into a single device. Our products offer a highly integrated, cost-effective platform for delivering cloud services to the enterprise customer.

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. Our 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. Our managed L2/L3 switches range in speeds up to multi-Gigabit and include Power over Ethernet (PoE) options.

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

Enterprise Communications

ADTRAN Enterprise Communications solutions are premises-based solutions that enable businesses to become more productive and more capable through efficient communications and communication enabled business processes. ADTRAN provides enterprises with solutions from the network edge to the desktop that creates business efficiency and capability, while driving employee productivity. ADTRAN Enterprise Communications solutions simplify network support and ensure ease of scalability, all while lowering the total cost of ownership. ADTRAN Enterprise Communications solutions include unified communications, IP communications solutions, and wireless and wireline LAN (Local Area Networking) infrastructure solutions.

ADTRAN Unified Communications solutions enable businesses with 25 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), ADTRAN NetVanta UC solutions enable businesses 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 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.

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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, 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 innovative IP Communications solution delivers a highly integrated single box solution for small business communications needs. Scaling up to 100 users the NetVanta IP Communications solution combines the features of an IP PBX with the functionality of an Ethernet switch, a multi-service router, security features and WAN connectivity.

Virtual Mobility

ADTRAN Virtual Mobility solutions deliver complete end-point freedom across the enterprise by utilizing virtualized, cloud-based solutions for connectivity, communications and collaboration. With the proliferation of smart phones, tablets and wireless devices, end-users are now dictating which devices should be supported across the enterprise. Wireless connectivity is no longer limited to conference rooms and building lobbies. Users now expect to be able to roam seamlessly across the enterprise campus while maintaining a persistent IP session to support voice, video and other wireless applications without interruption. ADTRAN Virtual Mobility solutions empower users to access enterprise resources anytime, anywhere on any device and deliver a unified service experience. These solutions leverage the scalability, reliability, and cost benefits of virtualization and are cloud-ready for easy deployment and management. The ADTRAN virtual mobility solutions include virtual wireless LAN (vWLAN) solutions acquired by ADTRAN in August 2011 as part of the Bluesocket acquisition and build on ADTRAN’s broad portfolio of internetworking solutions.

Marketed under the brand names Total Access^®, NetVanta^® and Bluesocket^® our solutions are known for high performance, reliability and high availability. These attributes make them the preferred solutions for the delivery of service provider bundled business services for Cloud Connectivity, Enterprise Communications and Virtual Mobility.

ADTRAN views the continued development and 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 many of 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 an advantage from a TCO perspective.

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, ADTRAN offers technical support services to ensure that we are responsive to customers who have deployed our 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 Custom Extended Services (ACES) guarantees priority access to technical support engineers and offers five different maintenance programs ranging from five days-a-week, eight hours-a-day and next business day equipment replacement to seven days-a-week, twenty-four hours-a-day and equipment replacement within four hours of notification. Our service and support offerings are available to all ADTRAN customers.

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 Major Service Providers, independent telephone companies, competitive service providers, Internet service providers, utilities, municipalities, and wireless service providers.

The Carrier Networks Division also serves incumbent carriers and competitive service providers internationally in various regions.

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Major Service Providers and many smaller 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.

Customers of our Enterprise Networks Division in the United States include Major Service Providers, independent telephone companies and competitive service providers. Additionally, SME 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. Furthermore, ADTRAN Enterprise solutions are deployed internationally in various regions. Vertical markets where our solutions are used include retail, food service, healthcare, finance, government, education, manufacturing, military, transportation, hospitality, and energy/utility.

Single customers comprising more than 10% of our revenue in 2011 include AT&T Inc. and CenturyLink, Inc. The revenues from both 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 2011.

For a discussion of risks associated with customers, service providers and approval processes, see “Risk Factors – The lengthy approval process required by major and other service providers for new products could result in fluctuations in our revenue”, “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”, and “Risk Factors – Consolidation and deterioration in the competitive service provider market could result in a significant decrease 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, Inc., Walker and Associates, Inc., and Power & Telephone Supply Company.

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, Inc., Ingram Micro, Inc., Jenne Distributors, Inc., Synnex Corporation and ScanSource, Inc. d/b/a 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 converged voice and data service offerings for SME branch office end users. Similar to Carrier Networks products, these Enterprise Networks products sold to service providers are fulfilled through a combination of direct sales and major technology distribution companies such as KGP Logistics, Inc., Walker and Associates, Inc., and Power & Telephone Supply Company

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.

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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 2011, 2010, and 2009, product development expenditures totaled $100.3 million, $90.3 million, and $83.3 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 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, wireless local area networks, 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-Telecommunications sector (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. We continue to work in the SDOs on optical access, participating in activities in the ITU-T and Broadband Forum on next generation PON technologies.

We are also involved in other standards development efforts related to maximizing the bandwidth potential of the copper pair to enable new applications. We participate in the ITU-T, where VDSL2 and its short-range successor, G.fast are being developed. We continue to be involved with the industry-wide interoperability and performance testing work related to those standards 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.

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We rely on subcontractors 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 lower-volume, higher-mix 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 activities mainly at 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.

The majority of shipments of products to our customers occur from our facilities in Huntsville, Alabama, although we do fulfill customer orders from other locations near our customers’ sites. Our facilities are certified pursuant to the most current releases of ISO 9001, TL 9000, ISO 14001, 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 or other international regions 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, 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. Intensely 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:

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

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

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

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

• Deliver solutions at attractive price points;

• Deliver reliability and redundancy, especially for higher bandwidth products;

• Adapt to new network technologies as they evolve;

• Compete effectively against large firms with greater resources;

• Deliver products when needed by the customer;

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

• Assist customers requiring pre-assembled, turnkey systems and professional services.

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Competitors of our Carrier Networks Division include large, established firms such as Alcatel-Lucent, Fujitsu, Ciena, Huawei, ZTE, Ericsson, Tellabs, and Nokia Siemens Networks. There are also a number of smaller, specialized firms with which we compete, such as Actelis, Zhone Technologies, Calix Networks, Overture 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:

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

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

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

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

• Continue to develop and support established platforms;

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

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

• Adapt to new network technologies as they evolve;

• Deliver products when needed by the customer;

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

• 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, Aruba Networks, ShoreTel, 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 normally result in very little order backlog or order flow visibility. Additionally, backlog levels may vary because of seasonal trends, the timing of customer projects and other factors that affect customer order lead times. 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 also maintain a substantial finished goods inventory. Our practice of maintaining sufficient inventory levels to assure prompt delivery of our products and services 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.

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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 and other natural events may affect our customers and our production operations, resulting in adverse effects on our operating results”, in Item 1A of this report.

Employees

As of December 31, 2011, we had 1,737 full-time employees in the United States and in our international subsidiaries located in Canada, Mexico, the Asia-Pacific region, Europe and the Middle East region. 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.

We also utilize significant numbers of contractors and temporary employees in various manufacturing, engineering and sales capacities, domestically and internationally, as needed.

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 290 patents related to our products and have approximately 111 additional patent applications pending, of which at least 3 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, 2011 was approximately 9.6 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 property 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.

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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:

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

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

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

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

• Our ability to maintain appropriate inventory levels and purchase commitments;

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

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

• 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;

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

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

• Our ability to maintain high levels of product support and professional services;

• Manufacturing and customer order lead times;

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

• Our ability to achieve cost reductions;

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

• Our ability to execute on our strategy and operating plans;

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

• The effects of climate change and other natural events; and

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

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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 typically carry a significant order backlog, and are dependent upon obtaining orders and completing delivery in accordance with shipping terms that are predominantly 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.

The failure to complete the acquisition of the Nokia Siemens Networks fixed line Broadband Access business or the inability to complete the resulting integration as soon as we expect or the failure to realize benefits from this acquisition as significant as we expect may affect our future results of operations and financial condition, and could affect our stock price.

On December 12, 2011, ADTRAN announced the planned acquisition of the Nokia Siemens Networks fixed line Broadband Access business (BBA). The successful integration of BBA will require integrating supply chains and personnel into our existing infrastructure. If there are delays in our efforts to integrate the BBA business, the anticipated benefits of the transaction may not be realized or may take longer to realize than expected. Unanticipated expenses could occur in the integration of the BBA business, which could reduce the anticipated benefits of the acquisition. The future revenues of the BBA business may be materially different from those shown in the 8-K, press release and analysts’ call announcing the planned acquisition transaction, which could reduce the anticipated benefits of the acquisition. We may also experience negative reactions from present BBA customers, employees and dealers. A combination of these factors may extend the time required for us to attain the anticipated benefits. If the acquisition transaction is not completed, we will not realize any anticipated benefits from increased international revenues. In addition, we may experience negative reactions from the financial markets, which may cause a decrease in the market price of our stock. Any or all of these events may have an adverse effect on our business.

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

Economic conditions may contribute 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 effect 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. 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.

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

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

• Changes in customer, geographic, or product mix, including the mix of configurations and professional services revenue within each product group;

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

• Our ability to reduce product cost;

• Increases in material or labor cost;

• Expediting costs incurred to meet customer delivery requirements;

• Excess inventory and inventory holding charges;

• Obsolescence charges;

• Changes in shipment volume;

• 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;

• Lower than expected benefits from value engineering;

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

• Changes in distribution channels;

• Increased warranty cost;

• Liquidated damages costs relating to customer contractual terms; and

• 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.

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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 major 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 a major 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 a major 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. Any attempt by a major 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. 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.

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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 major service providers and larger independent telecommunications companies. In 2011, these customers continued to comprise over half of our revenue. As long as the major and larger independent telecommunications companies 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:

• 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;

• the impact of legislative and regulatory changes on these customers;

• 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 a major 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 or other international regions 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. Changes in international tariff structures could adversely impact our product costs. 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.

16

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 be assured 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.

The Security and Exchange Commission has proposed disclosure requirements regarding the use of “conflict minerals” mined from the Democratic Republic of Congo and adjoining countries and procedures regarding a manufacturer’s efforts to prevent the sourcing of such minerals and metals produced from those minerals. The implementation of these requirements could affect the sourcing and availability of metals used in the manufacture of a limited number of raw material parts contained in our products. This may reduce the number of suppliers who provide conflict free metals, and may affect our ability to obtain products in sufficient quantities or at competitive prices. Our material sourcing is broad based and multi-tiered, and we may not be able to conclusively verify the origins for all metals used in our products.

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 competing products using 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.

17

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, have been discontinued by the component manufacturer, 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.

18

The anticipated growth of our international operations could expose us to additional risks, increase our costs and adversely affect our operating results and financial condition.

We are in the process of expanding into international markets, which represented 11.8% of our net sales for 2011, and as a result, we anticipate increased sales and operating costs in these markets. In addition, our planned acquisition of the Nokia Siemens Networks fixed line Broadband Access business will significantly increase our exposure to international markets. This international expansion may increase our operational risks and impact our results of operations, including:

• Foreign currency exchange rate exposure;

• Exposure to unfavorable commercial terms in certain countries;

• The time and cost to staff and manage foreign operations;

• The time and cost to ensure adequate business interruption controls, processes and facilities;

• The time and cost to manage and evolve financial reporting systems, maintain effective financial disclosure controls and procedures, and comply with corporate governance requirements in multiple jurisdictions;

• The cost to collect accounts receivable and extension of collection periods;

• The cost and potential disruption of facilities transitions required in some business acquisitions;

• Less regulation of patents or other safeguards of intellectual property in certain countries;

• Potential impact of adverse tax, customs regulations and transfer-pricing issues;

• Exposure to global social, political and economic instability, and changes in economic conditions;

• Potential exposure to liability or damage of reputation resulting from a higher incidence of corruption or unethical business practices in some countries;

• Potential trade protection measures, export compliance issues, domestic preference procurement requirements, qualification to transact business and additional regulatory requirements;

• Potential exposure to natural disasters, epidemics and acts of war or terrorism.

The planned acquisition of Nokia Siemens Networks fixed line Broadband Access business and subsequent integration of this business may reduce the level of management’s attention to our existing operations and cause harm to our existing operations. The planned acquisition may result in subsequent impairment charges and other cost amortizations and we cannot assure that revenues from the planned acquisition will offset additional costs incurred. If we are unable to successfully address the potential risks associated with our overall international expansion, our operating results and financial condition may be negatively impacted.

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.

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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.

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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 corporate and municipal fixed-rate bonds, municipal variable rate demand notes and municipal money market instruments denominated in United States dollars. Our investment policy provides limitations for issuer concentration, which limits, at the time of purchase, the concentration in any one issuer to 5% of the market value of our total investment portfolio.

We have significant investments in corporate and municipal fixed-rate bonds and municipal variable rate demand notes. Through December 31, 2011, 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 increase because of conditions in the financial markets and related credit liquidity issues. Consequently, our future investment income may fall short of expectations 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 $31.3 million of marketable equity securities. At December 31, 2011, our total marketable equity securities, which included more than 400 individual securities, had net unrealized gains of $18.5 million, which includes an unrealized gain of $16.9 million related to a single security. If market conditions deteriorate in 2012, we may be required to record 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 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 effect on our results of operations and financial condition.

21

We are required to periodically evaluate the value of our long-lived assets, including the value of intangibles acquired and goodwill resulting from business acquisitions. Any future impairment charges required may adversely affect our operating results.

Valuation of our long-lived assets requires us to make assumptions about future sales prices and sales volumes for our products. These assumptions are used to forecast future, undiscounted cash flows. Forecasting future business trends is difficult and subject to modification. Should actual market conditions differ or our forecasts change, we may be required to reassess long-lived assets and could record an impairment charge. Any impairment charge relating to long-lived assets would have the effect of decreasing our earnings or increasing our losses in such period.

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 and other natural events may affect our customers and our production operations, resulting in adverse effects 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 and other natural events on our customers, suppliers, and on our operations are highly uncertain, and will be particular to the circumstances developing in various geographical regions. These events may include changes in weather patterns (including drought and rainfall levels), water availability, storm patterns and intensities, ocean levels, temperature levels, earthquakes and tsunamis. 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.

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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 Littleton, CO, Burlington, MA and Kansas City, MO. We also lease at least 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; Theale, Reading, United Kingdom; and Abu Dhabi, United Arab Emirates. These cancelable and non-cancelable leases expire at various times through 2016. For more information, see Note 12 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. MINE SAFETY DISCLOSURES

Not applicable.

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, 2011.

Thomas R. Stanton	Age 47
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

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James E. Matthews	Age 55
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 51
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 55
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 41
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 61
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
Kevin W. Schneider	Age 48
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.

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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 2, 2012, ADTRAN had 243 stockholders of record and approximately 16,400 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

		September 30,		September 30,
	High		Low
2011
First Quarter	$	47.24	$	36.28
Second Quarter	$	43.20	$	37.31
Third Quarter	$	42.55	$	26.46
Fourth Quarter	$	34.30	$	25.99
2010
First Quarter	$	26.95	$	20.96
Second Quarter	$	29.60	$	25.35
Third Quarter	$	35.30	$	27.04
Fourth Quarter	$	36.38	$	30.96

The following table shows the dividends paid in each quarter of 2011and 2010. 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

		September 30,		September 30,
	2011		2010
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 repurchases of our common stock for the months indicated.

		September 30,		September 30,		September 30,		September 30,
Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of  Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 1, 2011 – October 31, 2011		—		—		—		5,869,425
November 1, 2011 – November 30, 2011		12,463	$	31.02		12,463		5,856,962
December 1, 2011 – December 31, 2011		—		—		—		5,856,962
Total		12,463				12,463

(1) On April 14, 2008, ADTRAN’s Board of Directors approved the repurchase of up to 5,000,000 shares of its common stock. This plan is being implemented through open market purchases from time to time as conditions warrant.On October 11, 2011, our Board of Directors approved additional repurchases of up to 5,000,000 shares of our common stock. Upon completion of the current plan, this plan will be implemented through open market purchases from time to time as conditions warrant.

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ITEM 6. SELECTED FINANCIAL DATA

Income Statement Data ⁽¹⁾

(In thousands, except per share amounts)

		September 30,			September 30,			September 30,			September 30,			September 30,
Year Ended December 31,	2011			2010			2009			2008			2007
Sales
Carrier Networks Division	$	569,579		$	476,030		$	371,349		$	392,219		$	358,023
Enterprise Networks Division		147,650			129,644			112,836			108,457			118,755
Total sales		717,229			605,674			484,185			500,676			476,778
Cost of sales		302,911			246,811			197,223			201,771			193,792
Gross profit		414,318			358,863			286,962			298,905			282,986
Selling, general and administrative expenses		124,879			114,699			99,446			103,286			103,329
Research and development expenses		100,301			90,300			83,285			81,819			75,367
Operating income		189,138			153,864			104,231			113,800			104,290
Interest and dividend income		7,642			6,557			6,933			8,708			11,521
Interest expense		(2,398	)		(2,436	)		(2,430	)		(2,514	)		(2,502	)
Net realized investment gain (loss)		12,454			11,008			(1,297	)		(2,409	)		498
Other income (expense), net		(694	)		(804	)		131			688			764
Life insurance proceeds		—			—			—			—			1,000
Income before provision for income taxes		206,142			168,189			107,568			118,273			115,571
Provision for income taxes		(67,565	)		(54,200	)		(33,347	)		(39,692	)		(39,236	)
Net income	$	138,577		$	113,989		$	74,221		$	78,581		$	76,335

		September 30,		September 30,		September 30,		September 30,		September 30,
Year Ended December 31,	2011		2010		2009		2008		2007
Weighted average shares outstanding – basic		64,145		62,490		62,459		63,549		67,848
Weighted average shares outstanding – assuming dilution (2 )		65,416		63,879		63,356		64,408		69,212
Earnings per common share – basic	$	2.16	$	1.82	$	1.19	$	1.24	$	1.13
Earnings per common share – assuming dilution (2 )	$	2.12	$	1.78	$	1.17	$	1.22	$	1.10
Dividends declared and paid per common share	$	0.36	$	0.36	$	0.36	$	0.36	$	0.36

		September 30,		September 30,		September 30,		September 30,		September 30,
Balance Sheet Data (In thousands)
At December 31,	2011		2010		2009		2008		2007
Working capital (3)	$	329,311	$	304,952	$	278,044	$	212,740	$	251,261
Total assets	$	817,514	$	691,974	$	564,463	$	473,615	$	479,220
Total debt	$	47,000	$	48,000	$	48,250	$	48,750	$	49,000
Stockholders’ equity	$	692,131	$	572,322	$	452,515	$	375,819	$	378,431

(1) Net income for 2011, 2010, 2009, 2008 and 2007 includes stock-based compensation expense under the Stock Compensation Topic of the Financial Accounting Standards Board Accounting Standards Codification of $7.8 million, $7.1 million, $6.4 million, $6.7 million and $7.1 million, respectively, net of tax, related to stock option awards. See Note 3 of Notes to the Consolidated Financial Statements.

(2) Assumes exercise of dilutive stock options calculated under the treasury method. See Notes 1 and 13 of Notes to Consolidated Financial Statements.

(3) Working capital consists of current assets less current liabilities.

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

Overview

ADTRAN, Inc. designs, manufactures and markets solutions and provides services and support for communications networks. Our solutions are widely deployed by providers of communications services (serviced by our Carrier Networks Division), and small and mid-sized enterprises (SMEs) (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.

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 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, Ultra Broadband Ethernet (UBE) 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 and transceivers including those used in our Optical Networking Edge (ONE) products, NetVanta 8000 series products, and our family of OPTI products. Optical access products are used to deliver higher bandwidth services, aggregate large numbers of low bandwidth services, or transport wavelength services across a fiber optic infrastructure. Total Access 1500 products, 303 concentrator products, M13 multiplexer products, and a number of 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 small and mid-sized enterprises (SME) market. The Business Networking category includes Internetworking products and Integrated Access Devices (IADs). Internetworking products consist of our Total Access IP Business Gateways, Optical Network Terminals (ONTs), Virtual Wireless LAN products 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, Unified Threat Management (UTM) solutions, and Carrier Ethernet Network Terminating Equipment (NTE). IAD products consist of our Total Access 600 Series and the Total Access 850.

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 subcategories of product revenues, which we divide into our core products and legacy products. Our core products consist of Broadband Access and Optical Access products (included in Carrier Systems) and Internetworking products (included in Business Networking) and our legacy products include HDSL products (included in Loop Access) and other products not included in the aforementioned core products. Many of our customers are migrating their networks to deliver higher bandwidth services by utilizing newer technologies. We believe that products and services offered in our core product areas position us well for this migration. Despite occasional increases, we anticipate that revenues of many of our legacy products, including HDSL, will decline over time; however, revenues from these products may continue for years because of the time required for our customers to transition to newer technologies.

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Sales were $717.2 million in 2011 compared to $605.7 million in 2010 and $484.2 million in 2009. Sales increased in each of our core areas, Broadband Access, Optical Access and Internetworking. Total sales of products in these three core areas increased 48.2% in 2011 compared to 2010 and 40.2% in 2010 compared to 2009. Our gross profit margin for the Company decreased to 57.8% in 2011 from 59.3% in 2010 and 2009. Our operating income margin increased to 26.4% in 2011 compared to 25.4% in 2010 and 21.5% in 2009. Net income was $138.6 million in 2011 compared to $114.0 million in 2010 and $74.2 million in 2009. Earnings per share, assuming dilution, were $2.12 in 2011 compared to $1.78 in 2010 and $1.17 in 2009. Earnings per share in 2011, 2010 and 2009 include the effect of the repurchase of 1.1 million, 0.7 million and 0.8 million shares of our stock in those years, 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, including customer order activity and backlog. Backlog levels vary because of seasonal trends, the timing of customer projects and other factors that affect customer order lead times. Many of our customers require prompt delivery of products. This 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 and services 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 14 of Notes to Consolidated Financial Statements for additional information. 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. Contracts that contain multiple deliverables are evaluated to determine the units of accounting, and the revenue from the arrangement is allocated to each item requiring separate revenue recognition based on the relative selling price and corresponding terms of the contract. We strive to use vendor-specific objective evidence of selling price. When this evidence is not available, we are generally not able to determine third-party evidence of selling price because of the extent of customization among competing products or services from other companies. We record revenue associated with installation services when all contractual obligations are complete. Contracts that include both installation services and product sales are evaluated for revenue recognition in accordance with contract terms. As a result, depending on contract terms, installation services may be considered as a separate deliverable item or may be considered an element of the delivered product. 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-

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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 $8 thousand at December 31, 2011 and $0.2 million at December 31, 2010.

• 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 $9.4 million and $8.9 million at December 31, 2011 and 2010, respectively. Inventory write-downs charged to the reserve were $0.7 million, $0.8 million and $1.7 million for the years ended December 31, 2011, 2010 and 2009, respectively.

• The objective of our short-term investment policy is to preserve principal and maintain adequate liquidity with appropriate diversification, while achieving 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. Our investment policy provides limitations for issuer concentration, which limits, at the time of purchase, the concentration in any one issuer to 5% of the market value of our total investment portfolio. 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, 2011, we categorized $39.7 million and $401.2 million of our available-for-sale investments as Level 1 and Level 2, respectively, and $13.7 million of our cash equivalents as Level 1. At December 31, 2010, we categorized $53.0 million and $315.3 million of our available-for-sale investments as Level 1 and Level 2, respectively, and $14.5 million of our cash equivalents as Level 1.

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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 recorded an other-than-temporary impairment charge of $36 thousand during the fourth quarter of 2011. For the years ended December 31, 2011, 2010 and 2009, we recorded charges of $68 thousand, $43 thousand and $2.9 million, respectively, related to the other-than-temporary impairment of certain publicly traded equity securities, a fixed income bond fund, and deferred compensation plan 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 4 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 2011, 2010 or 2009.

• 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 a 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 (2009 grant) or against all companies in the NASDAQ Telecommunications Index (2010 and 2011 grants) and vest at the end of a three-year performance period. The fair value of restricted stock issued to our Directors in 2011 is equal to the closing price of our stock on the date of grant. 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. At December 31, 2011 and 2010 respectively, the valuation allowance was $7.6 million and $5.6 million. As of December 31, 2011, we have state research tax credit carry-forwards of $2.7 million, which will expire between 2015 and 2026. 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, 2011, we have a deferred tax asset of $5.2 million relating to net operating loss carry-forwards which will expire between 2012 and 2030. These carry-forwards are the result of an acquisition in 2009 and another in 2011. 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 full 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.

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• 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 $4.1 million and $3.3 million at December 31, 2011 and 2010, respectively. These liabilities are included in accrued expenses in the accompanying consolidated balance sheets.

• We use the acquisition method to account for business combinations. Under the acquisition method of accounting, we recognize the assets acquired and liabilities assumed at their fair value on the acquisition date. Goodwill is measured as the excess of the consideration transferred over the net assets acquired. The acquisition method of accounting requires us to exercise judgment and make significant estimates and assumptions regarding the fair value of the assets acquired and liabilities assumed, including the fair values of inventory, deferred revenue, identifiable intangible assets and deferred tax asset valuation allowances. This method also requires us to refine these estimates over a one-year measurement period to reflect information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the asset and liabilities recorded on that date, which could affect our net income.

• We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. When evaluating whether goodwill is impaired, we first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If we determine that the two-step quantitative test is necessary, then we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, then the amount of the impairment loss is measured. There were no impairment losses during 2011.

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.

		September 30,			September 30,			September 30,
Year Ended December 31,	2011			2010			2009
Sales
Carrier Networks Division		79.4	%		78.6	%		76.7	%
Enterprise Networks Division		20.6			21.4			23.3
Total sales		100.0	%		100.0	%		100.0	%
Cost of sales		42.2			40.7			40.7
Gross profit		57.8			59.3			59.3
Selling, general and administrative expenses		17.4			19.0			20.5
Research and development expenses		14.0			14.9			17.2
Operating income		26.4			25.4			21.6
Interest and dividend income		1.1			1.1			1.4
Interest expense		(0.3	)		(0.4	)		(0.5	)
Net realized investment gain (loss)		1.7			1.8			(0.3	)
Other income (expense), net		(0.1	)		(0.1	)		—
Income before provision for income taxes		28.7			27.8			22.2
Provision for income taxes		(9.4	)		(9.0	)		(6.9	)
Net income		19.3	%		18.8	%		15.3	%

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Acquisition Expenses

On August 4, 2011, we closed on the acquisition of Bluesocket, Inc. and on December 12, 2011, we announced the planned acquisition of the Nokia Siemens Networks Broadband Access business. Acquisition related expenses, amortizations and adjustments for the twelve months ended December 31, 2011 for both transactions are as follows:

		September 30,
(In Thousands)	2011
Bluesocket, Inc. acquisition
Acquisition related professional fees and travel expenses	$	730
Amortization of acquired intangible assets		495
Amortization and adjustments of other acquisition related non-cash items		521
Subtotal	$	1,746
Planned NSN BBA acquisition
Acquisition related professional fees, travel and other expenses		2,027
Total acquisition related expenses, amortizations and adjustments	$	3,773
Tax effect		(1,434	)
Total acquisition related expenses, amortizations and adjustments, net of tax	$	2,339

The acquisition related expenses, amortizations and adjustments above were recorded in the following Consolidated Statements of Income categories for the twelve months ended December 31, 2011:

		September 30,
(In Thousands)	2011
Revenue (adjustments to deferred revenue recognized in the period)	$	362
Cost of goods sold		165
Subtotal	$	527
Selling, general and administrative expenses		2,557
Research and development expenses		689
Subtotal	$	3,246
Total acquisition related expenses, amortizations and adjustments	$	3,773
Tax effect		(1,434	)
Total acquisition related expenses, amortizations and adjustments, net of tax	$	2,339

2011 Compared to 2010

Sales

ADTRAN’s sales increased 18.4% from $605.7 million in 2010 to $717.2 million in 2011. This increase in sales is primarily attributable to a $113.7 million increase in sales of our Broadband Access products, a $40.4 million increase in sales of our Internetworking products, a $16.3 million increase in sales of our Optical Access products, partially offset by a $58.8 million decrease in sales of our HDSL and other legacy products.

Carrier Networks sales increased 19.7% from $476.0 million in 2010 to $569.6 million in 2011. The increase is primarily attributable to increases in Broadband Access, Optical Access and Internetworking NTE product sales, partially offset by a decrease in HDSL and other legacy product sales.

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Enterprise Networks sales increased 13.9% from $129.6 million in 2010 to $147.7 million in 2011. The increase is primarily attributable to an increase in sales of Internetworking products, partially offset by decreases in sales of legacy products. Internetworking product sales attributable to Enterprise Networks were 87.4% of the division’s sales in 2011 compared with 77.3% in 2010. Legacy products primarily comprise the remainder of Enterprise Networks sales. Enterprise Networks sales as a percentage of total sales decreased from 21.4% in 2010 to 20.6% in 2011.

International sales, which are included in the Carrier Networks and Enterprise Networks amounts discussed above, increased 165.3% from $31.8 million in 2010 to $84.4 million in 2011. International sales, as a percentage of total sales, increased from 5.3% in 2010 to 11.8% in 2011. The increase in international sales in 2011 was primarily due to an increase in sales to Latin America, Asia-Pacific and Europe regions.

Carrier Systems product sales increased $131.0 million in 2011 compared to 2010 primarily due to a $113.7 million increase in Broadband Access product sales and a $16.3 million increase in Optical Access product sales. The increase in Broadband Access product sales was primarily attributable to continued growth in deployments of our Total Access 5000 and Fiber-to-the-Node platforms.

Business Networking product sales increased $35.0 million in 2011 compared to 2010 primarily due to a $40.4 million increase in Internetworking product sales across both divisions, partially offset by a $5.8 million decrease in legacy product sales. The decrease in sales of legacy products is a result of customers shifting to newer technologies. Many of these newer technologies are integral to our Internetworking product area.

Loop Access product sales decreased $54.4 million in 2011 compared to 2010 primarily due to a $50.3 million decrease in HDSL product sales.

Cost of Sales

As a percentage of sales, cost of sales increased from 40.7% in 2010 to 42.2% in 2011. The increase was primarily the result of higher services related revenue including cabinet shipments, and specific customer price movements related to market share expansion. These effects were partially offset by cost absorption and manufacturing efficiencies achieved at the higher production volumes.

Carrier Networks cost of sales increased from 40.5% of sales in 2010 to 42.4% of sales in 2011. The increase in Carrier Networks cost of sales as a percentage of sales was primarily attributable to higher services related revenue including cabinet shipments, and specific customer price movements related to market share expansion.

Enterprise Networks cost of sales decreased from 41.7% of sales in 2010 to 41.4% of sales in 2011. The decrease in Enterprise Networks cost of sales as a percentage of sales was primarily attributable to cost absorption and manufacturing efficiencies achieved at higher production volumes.

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 increased 8.9% from $114.7 million in 2010 to $124.9 million in 2011. 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 increase in selling, general and administrative expenses is primarily related to increases in staffing and fringe benefit costs due to increased headcount, contract services, professional services, recruiting expenses and travel expenses. These increases included expenses related to Bluesocket, Inc., which was acquired on August 4, 2011, and the announced planned acquisition of Nokia Siemens Networks Broadband Access business.

Selling, general and administrative expenses as a percentage of sales decreased from 18.9% for the year ended December 31, 2010 to 17.4% for the year ended December 31, 2011. Selling, general and administrative expenses as a percent of sales will generally fluctuate whenever there is a significant fluctuation in revenues for the periods being compared.

Research and Development Expenses

Research and development expenses increased 11.1% from $90.3 million in 2010 to $100.3 million in 2011. The increase in research and development expense is primarily related to increases in staffing and fringe benefit costs due to increased headcount. These increases included research and development expenses related to Bluesocket, Inc., and amortization of intangible assets related to the acquisition of Bluesocket, Inc.

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Research and development expenses as a percentage of sales decreased from 14.9% for the year ended December 31, 2010 to 14.0% for the year ended December 31, 2011. 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.

We expect to continue to incur research and development expenses in connection with our new and existing products and our expansion into international markets. We continually evaluate new product opportunities and engage in intensive research and product development efforts which provide for new product development, enhancement of existing products and product cost reductions. We may incur significant research and development expenses prior to the receipt of revenues from a major new product group.

Interest and Dividend Income

Interest and dividend income increased 16.5% from $6.6 million in 2010 to $7.6 million in 2011. This increase was primarily attributable to a 19.9% increase in our average investment balances, partially offset by a 22.6% reduction in the average rate of return on our investments as a result of lower interest rates.

Interest Expense

Interest expense remained consistent at $2.4 million in 2011 and 2010, 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) increased from an $11.0 million gain in 2010 to a $12.5 million gain in 2011. This change is related to a $0.7 million increase related to sales of marketable equity securities and an increase of $0.8 million related to distributions from two private equity funds. See “Investing Activities” in “Liquidity and Capital Resources” below for additional information.

Other Income (Expense), net

Other income (expense), 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 $0.8 million of expense in 2010 to $0.7 million of expense in 2011.

Income Taxes

Our effective tax rate increased from 32.2% in 2010 to 32.8% in 2011. This increase is primarily due to the reduced impact of available statutory tax benefits applied to the increased level of pretax income in 2011. The statutory benefits include the research tax credit, deduction for domestic manufacturing under Internal Revenue Code Section 199 and stock option related tax benefits.

Net Income

As a result of the above factors, net income increased from $114.0 million in 2010 to $138.6 million in 2011. As a percentage of sales, net income increased from 18.8% in 2010 to 19.3% in 2011.

2010 Compared to 2009

Sales

ADTRAN’s sales increased 25.1% from $484.2 million in 2009 to $605.7 million in 2010. This increase in sales is primarily attributable to a $64.6 million increase in sales of our Broadband Access products, a $31.1 million increase in sales of our Internetworking products, a $27.0 million increase in sales of our HDSL products, and a $5.6 million increase in our Optical Access products, partially offset by a $4.2 million decrease in traditional IAD products and a $2.6 million decrease in enterprise T1 products.

Carrier Networks sales increased 28.2% from $371.3 million in 2009 to $476.0 million in 2010. The increase is primarily attributable to increases in Broadband Access, Optical Access, TDM, HDSL and Internetworking NTE product sales, partially offset by a decrease in other traditional products.

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Enterprise Networks sales increased 14.9% from $112.8 million in 2009 to $129.6 million in 2010. The increase is primarily attributable to an increase in Enterprise Networks related Internetworking product sales, partially offset by decreases in IAD and enterprise T1 product sales. Internetworking product sales were 77.3% of Enterprise Network sales in 2010 compared with 67.4% in 2009. Traditional products primarily comprise the remainder of Enterprise Networks sales. Enterprise Networks sales as a percentage of total sales decreased from 23.3% in 2009 to 21.4% in 2010.

International sales, which are included in the Carrier Networks and Enterprise Networks amounts discussed above, increased 14.6% from $27.8 million in 2009 to $31.8 million in 2010. International sales, as a percentage of total sales, decreased from 5.7% in 2009 to 5.3% in 2010. The increase in international sales in 2010 was primarily attributable to an increase in sales in Australia, Mexico and Europe, partially offset by a decrease in sales in Canada.

Carrier Systems product sales increased $73.6 million in 2010 compared to 2009 primarily due to a $64.6 million increase in Broadband Access product sales and a $5.6 million increase in Optical Access product sales. The increase in Broadband Access product sales was primarily attributable to continued growth in deployments of our TA 5000 platform and Fiber to the Node products resulting from market share gains across all major market segments.

Business Networking product sales increased $26.8 million in 2010 compared to 2009 primarily due to an increase in Internetworking product sales. Growth in Internetworking product sales occurred across all areas, including routers, Ethernet switches, IP gateways, access termination products and our IP PBX segment as a result of market share gains in SME and distributed enterprise applications. This increase was partially offset by a decrease in traditional IAD product sales as customers shifted emphasis to newer technologies. Many of these newer technologies are integral to our Internetworking product area.

Loop Access product sales increased $21.1 million in 2010 compared to 2009 primarily due to a $27.0 million increase in HDSL product sales, partially offset by decreases in other traditional product sales. The increase in HDSL product sales is primarily attributable to carriers increasing investment to cost effectively and quickly add capacity to mobility networks.

Cost of Sales

Cost of sales remained consistent in 2010 and 2009 at 40.7% of sales. Gross margins benefited from improved product mix, cost absorption and manufacturing efficiencies achieved at the higher production volumes, offset by higher warranty expense and an increase in lower gross margin installation services related revenue. However, installation services related revenue was accretive to operating income margins in 2010.

Carrier Networks cost of sales decreased from 40.8% of sales in 2009 to 40.5% of sales in 2010. The decrease was primarily related to improved cost absorption and manufacturing efficiencies achieved at the higher production volumes, which was partially offset by an increase in lower margin installation services revenue.

Enterprise Networks cost of sales increased from 40.4% of sales in 2009 to 41.7% of sales in 2010. The increase was primarily related to a higher cost product mix and the impact of cost allocations between divisions.

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 increased 15.3% from $99.4 million in 2009 to $114.7 million in 2010. 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 increase in selling, general and administrative expenses was primarily related to an increase in staffing costs and fringe benefits due to increased headcount, and increases in incentive compensation, contract services and travel expenses.

Selling, general and administrative expenses as a percentage of sales decreased from 20.5% for the year ended December 31, 2009 to 18.9% for the year ended December 31, 2010. Selling, general and administrative expenses as a percent of sales will generally fluctuate whenever there is a significant fluctuation in revenues for the periods being compared.

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Research and Development Expenses

Research and development expenses increased 8.4% from $83.3 million in 2009 to $90.3 million in 2010. The increase in research and development expenses was a result of increased staffing costs and fringe benefits, 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 decreased from 17.2% for the year ended December 31, 2009 to 14.9% for the year ended December 31, 2010. 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.

We expect to continue to incur research and development expenses in connection with our new and existing products and our expansion into international markets. We continually evaluate new product opportunities and engage in intensive research and product development efforts which provides for new product development, enhancement of existing products and product cost reductions. We may incur significant research and development expenses prior to the receipt of revenues from a major new product group.

Interest and Dividend Income

Interest and dividend income decreased 5.4% from $6.9 million in 2009 to $6.6 million in 2010. This decrease was primarily attributable to a 22.2% reduction in the average rate of return on our investments as a result of lower interest rates, partially offset by a 23.7% increase in our average investment balances.

Interest Expense

Interest expense remained consistent at $2.4 million in 2010 and 2009, 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) changed from a $1.3 million loss in 2009 to an $11.0 million gain in 2010. This change is primarily a result of the other-than-temporary impairments of $2.0 million related to our marketable equity securities, $0.4 million related to our investment in a fixed income bond fund, and $0.5 million related to our deferred compensation plan assets in 2009 and the realized gains of $8.1 million on the sale of one security and $1.6 million from the sale of previously impaired marketable equity securities in 2010. See “Investing Activities” in “Liquidity and Capital Resources” below for additional information.

Other Income (Expense), net

Other income (expense), 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, changed from $0.1 million of income in 2009 to $0.8 million of expense in 2010.

Income Taxes

Our effective tax rate increased from 31.0% in 2009 to 32.2% in 2010. This increase is primarily due to the reduced impact of available statutory tax benefits applied to the increased level of pretax income in 2010. The statutory benefits include the research and development tax credit, deduction for domestic manufacturing under Internal Revenue Code Section 199 and stock option related tax benefits.

Net Income

As a result of the above factors, net income increased from $74.2 million in 2009 to $114.0 million in 2010. As a percentage of sales, net income increased from 15.3% in 2009 to 18.8% in 2010.

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Liquidity and Capital Resources

Liquidity

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 for the foreseeable future.

At December 31, 2011, cash on hand was $43.0 million and short-term investments were $159.3 million, which placed our short-term liquidity at $202.3 million. At December 31, 2010, our cash on hand of $31.7 million and short-term investments of $157.5 million placed our short-term liquidity at $189.2 million. The increase in liquidity from 2010 to 2011 relates to additional funds provided by our operating activities and proceeds from stock option exercises by our employees, reduced by our cash needs for equipment acquisitions, business acquisition, stock repurchases and dividends.

Operating Activities

Our working capital, which consists of current assets less current liabilities, increased 8.0% from $305.0 million as of December 31, 2010 to $329.3 million as of December 31, 2011, primarily due to an increase in cash of $11.3 million, an increase in inventory of $13.5 million, an increase in accounts receivable of $5.2 million, and an increase in other receivables of $5.8 million, partially offset by an increase in accounts payable of $6.6 million. Generally, the change in net accounts receivable is due to the timing of sales and collections during the quarter. Inventory increased during 2011 to support increasing customer demand, increases in inventories related to an increase in installation services activities, and to mitigate component supply constraints broadly affecting the industry. Generally, the change in other receivables is due to the timing of shipments and collections for materials supplied to our contract manufacturers during the quarter. 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. The quick ratio, defined as cash, cash equivalents, short-term investments, and net accounts receivable, divided by current liabilities, decreased from 5.21 as of December 31, 2010 to 4.50 as of December 31, 2011. The current ratio, defined as current assets divided by current liabilities, decreased from 7.10 as of December 31, 2010 to 6.32 as of December 31, 2011. The quick ratio and the current ratio decreases were primarily due to the working capital changes described above.

Net accounts receivable increased 7.4% from $70.9 million at December 31, 2010 to $76.1 million at December 31, 2011. Our allowance for doubtful accounts decreased from $0.2 million at December 31, 2010 to $8 thousand at December 31, 2011. Quarterly accounts receivable days sales outstanding (DSO) increased from 39 days as of December 31, 2010 to 40 days as of December 31, 2011. Generally, the change in net accounts receivable and DSO is due to the timing of sales and collections during the quarter. Other receivables increased from $4.0 million at December 31, 2010 to $9.7 million at December 31, 2011. Other receivables may fluctuate due to the timing of shipments and collections for materials supplied to our contract manufacturers during the quarter.

Quarterly inventory turnover decreased from 3.8 turns as of December 31, 2010 to 3.5 turns as of December 31, 2011. Inventory increased 18.2% from December 31, 2010 to December 31, 2011. Our investment in inventory increased during 2011 to support increasing customer demand, increases in inventories related to an increase in installation services activities, and to mitigate component supply constraints broadly affecting the industry. We expect inventory levels to fluctuate as we attempt to maintain sufficient inventory in response to seasonal cycles of our business; ensuring competitive lead times while managing the risk of inventory obsolescence that may occur due to rapidly changing technology and customer demand.

Accounts payable increased 29.0% from $22.8 million at December 31, 2010 to $29.4 million at December 31, 2011. 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 $11.9 million, $9.9 million and $8.7 million for the years ended December 31, 2011, 2010 and 2009, 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 $72.7 million from $418.6 million at December 31, 2010 to $491.4 million at December 31, 2011. This increase reflects the impact of additional funds available for investment provided by our operating activities and proceeds from stock option exercises by our employees, reduced by our cash needs for equipment acquisitions, business acquisition, stock repurchases and dividends, as well as net realized and unrealized losses and amortization of net premiums on our combined investments.

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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, 2011, these investments included municipal variable rate demand notes of $69.7 million, municipal fixed-rate bonds of $174.8 million and corporate bonds of $156.8 million. At December 31, 2010, these investments included municipal variable rate demand notes of $116.7 million, municipal fixed-rate bonds of $71.5 million and corporate bonds of $127.1 million.

At December 31, 2011, we held $69.7 million of municipal variable rate demand notes, all of which were classified as available-for-sale. At December 31, 2011, 18% of our municipal variable rate demand notes had a credit rating of AAA, 58% had a credit rating of AA, 24% had a credit rating of A, and all contained put options of seven days. Despite the long-term nature of their stated contractual maturities, we routinely buy and sell these securities and we believe that we have the ability to quickly liquidate them. Our investments in these securities are recorded at fair value, and the interest rates reset every seven days. We believe 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. At December 31, 2011, approximately 34% of our variable rate demand notes were supported by letters of credit from banks that we believe to be in good financial condition. The remaining 66% of our variable rate demand notes were supported by standby purchase agreements. As a result of these factors, we had no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from these investments. All income generated from these investments was recorded as interest income. We have not recorded any losses relating to municipal variable rate demand notes.

At December 31, 2011, we held $174.8 million of municipal fixed-rate bonds. These bonds are classified as available-for-sale and had an average duration of 1.3 years at December 31, 2011. At December 31, 2011, approximately 19% of our municipal fixed-rate bond portfolio had a credit rating of AAA, 64% had a credit rating of AA, 15% had a credit rating of A, and 2% had a credit rating of BBB. 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.

At December 31, 2011, we held $156.8 million of corporate bonds. These bonds are classified as available-for-sale and had an average duration of 0.8 years. At December 31, 2011, approximately 1% of our corporate bond portfolio had a credit rating of AAA, 11% had a credit rating of AA, 50% had a credit rating of A, and 38% had a credit rating of BBB. 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 27.1% from $261.2 million at December 31, 2010 to $332.0 million at December 31, 2011. The primary reasons for the increase in our long-term investments were cash generated from operations and proceeds from stock option exercises by our employees. Long-term investments at December 31, 2011 and December 31, 2010 included an investment in a certificate of deposit of $48.3 million, which serves as collateral for our revenue bonds, as discussed below. We have various equity investments included in long-term investments at a cost of $12.8 million and $11.5 million, and with a fair value of $31.3 million and $48.0 million, at December 31, 2011 and December 31, 2010, respectively, including a single equity security, of which we held 1.1 million shares and 1.5 million shares, carried at $17.3 million and $34.2 million of fair value at December 31, 2011 and December 31, 2010, respectively. The single security traded approximately 0.8 million shares per day in 2011 in an active market on a European stock exchange. Of the gross unrealized gains included in the fair value of our marketable securities at December 31, 2011 and 2010, this single security comprised $16.9 million and $33.7 million, respectively, of the unrealized gain. The remaining $2.2 million of gross unrealized gains and $0.6 million in gross unrealized losses at December 31, 2011 were spread amongst more than 400 marketable equity securities. Long-term investments at December 31, 2011 and 2010 also included $7.7 million and $4.2 million, respectively, related to our deferred compensation plan; $2.1 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 $0.7 million of a fixed income bond fund. This bond fund had unrealized gains of $0.2 million at December 31, 2011 and 2010.

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 recorded an other-than-temporary impairment charge of $36 thousand during the fourth quarter of 2011. For the years ended December 31, 2011, 2010 and 2009 we recorded charges of $68 thousand, $43 thousand and $2.9 million, respectively, related to the other-than-temporary impairment of certain publicly traded equity securities, a fixed income bond fund, and deferred compensation plan assets.

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On August 4, 2011, we acquired all of the outstanding stock of Bluesocket, Inc., a provider of wireless network solutions with virtual control, for $23.7 million in cash. The acquisition provides us with IEEE802.11N enterprise class wireless LAN expertise, technology, and products to address the growing transition within small-medium enterprises and large enterprises to wireless networks and mobile devices. We have included the financial results of Bluesocket in our consolidated financial statements since the date of acquisition.

Financing Activities

In conjunction with an expansion of our Huntsville, Alabama, facility, we were approved for participation in an incentive program offered by the State of Alabama 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) (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. An Amended and Restated Taxable Revenue Bond (“Amended and Restated Bond”) was issued and the original financing agreement was amended. The Amended and Restated Bond bears interest, payable monthly. The interest rate is 5% per annum. The Amended and Restated Bond matures on January 1, 2020. The estimated fair value of the bond at December 31, 2011 was approximately $46.9 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of A+. We are required to make payments to the Authority in amounts necessary to pay the principal of and interest on the Amended and Restated Bond. Included in long-term investments at December 31, 2011 is $48.3 million which is invested in a restricted certificate of deposit. These funds serve as a collateral deposit against the principal of this bond, and 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. For the years ended December 31, 2011, 2010 and 2009, we realized economic incentives related to payroll withholdings totaling $1.9 million, $1.5 million and $1.5 million, respectively.

Due to continued positive cash flow from operating activities, we made a business decision in 2006 to begin an early partial redemption of the Bond. We made principal payments of $1.0 million and $0.3 million for the years ended December 31, 2011 and 2010, respectively. 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 accounts payable in the Consolidated Balance Sheets at December 31, 2011 and 2010.

The following table shows dividends paid in each quarter of 2011, 2010 and 2009. During 2011, 2010 and 2009, we paid dividends totaling $23.1 million, $22.5 million and $22.5 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

		September 30,		September 30,		September 30,
	2011		2010		2009
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 of up to 35 million shares of our common stock. We currently have the authority to purchase an additional 5.9 million shares of our common stock under the plans approved by the Board of Directors on April 14, 2008 and October 11, 2011. For the years 2011, 2010 and 2009, we repurchased 1.1 million shares, 0.7 million shares and 0.8 million shares, respectively, for a cost of $35.6 million, $18.3 million and $15.9 million, respectively, at an average price of $31.97, $25.12 and $21.05 per share, respectively.

To accommodate employee stock option exercises, we issued 1.8 million shares of treasury stock for $34.1 million during the year ended December 31, 2011, 1.5 million shares of treasury stock for $24.9 million during the year ended December 31, 2010, and 0.9 million shares of treasury stock for $13.5 million during the year ended December 31, 2009.

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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, 2011.

Contractual Obligations

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
(In millions)	Total		2012		2013		2014		2015		After 2015
Long-term debt	$	47.0	$	—	$	—	$	—	$	—	$	47.0
Interest on long-term debt		18.8		2.4		2.4		2.4		2.4		9.2
Purchase obligations		69.6		67.5		1.5		0.6		—		—
Operating lease obligations		5.0		2.0		1.2		1.0		0.7		0.1
Investment commitments		0.2		0.1		0.1		—		—		—
Totals	$	140.6	$	72.0	$	5.2	$	4.0	$	3.1	$	56.3

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 $47.0 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 $8.4 million as of December 31, 2011, of which $7.7 million has been applied to these commitments. See Note 4 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 9 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 8 and 12 of Notes to Consolidated Financial Statements for additional information on our revenue bond and operating lease obligations, respectively.

Effect of Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. While ASU 2011-05 changes the presentation of comprehensive income, it does not change the components that are recognized in net income or comprehensive income under current accounting guidance. This update is effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with early adoption permitted. We plan to adopt this amendment during the first quarter of 2012. Since ASU 2011-05 affects presentation only, it will have no effect on our consolidated results of operations or financial condition.

In December 2011, the FASB issued Accounting Standards Update No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12). ASU 2011-12 defers the effective date for certain presentation requirements that relate to reclassification adjustments and the effect of those reclassification adjustments on the financial statements. This update is effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with early adoption permitted. We plan to adopt this amendment during the first quarter of 2012. Since ASU 2011-12 affects presentation only, it will have no effect on our consolidated results of operations or financial condition.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The amendments are of two types: (i) those that clarify the Board’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This update is effective for annual periods beginning after December 15, 2011. We do not expect the adoption of this amendment will have a material impact on our consolidated results of operations or financial condition.

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During 2011, we adopted the following accounting standards, which had no material effect on our consolidated results of operations or financial condition:

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 provides amendments to the criteria in Subtopic 605-25 of the ASC for separating consideration in multiple-deliverable arrangements. As a result of those amendments, multiple-deliverable arrangements are separated in more circumstances than under previously existing U.S. GAAP. ASU 2009-13 established a selling price hierarchy for determining the selling price of a deliverable and replaced 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. ASU 2009 -13 also eliminated the residual method of allocation and required that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and required 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.

We generally sell our products and services separately, but in some circumstances products and services may be sold in bundles that contain multiple deliverables. A sale that includes multiple deliverables is evaluated to determine the units of accounting, and the revenue from the arrangement is allocated to each item requiring separate revenue recognition based on the relative selling price and corresponding terms of the contract. We strive to use vendor-specific objective evidence of selling price. When this evidence is not available, we are generally not able to determine third-party evidence of selling price because of the extent of customization among competing products or services from other companies. In these cases, estimated selling price is determined based on the particular circumstances of the arrangement and is used to allocate revenues to each unit of accounting. Revenue is recognized incrementally as the necessary criteria for each item are met.

We adopted this amendment during the first quarter of 2011. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the year ended December 31, 2011.

In October 2009, the FASB issued Accounting Standards Update No. 2009-14, Certain Revenue Arrangements that Include Software Arrangements. ASU 2009-14 changed 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 are no longer within the scope of the software revenue guidance in Subtopic 985-605 of the ASC. In addition, ASU 2009-14 requires that hardware components of a tangible product containing software components always be excluded from the software revenue guidance. In that regard, ASU 2009-14 provides 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. ASU 2009-14 also provides guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software. ASU 2009-14 also provides 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. We adopted this amendment during the first quarter of 2011. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the year ended December 31, 2011.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Testing Goodwill for Impairment (ASU 2011-08). Existing accounting guidance requires that an entity perform a test for goodwill impairment, on at least an annual basis, by first comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test is to be performed to measure the amount of impairment loss, if any. ASU 2011-08 will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We adopted this amendment during the fourth quarter of 2011. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the year ended December 31, 2011.

Subsequent Events

On January 17, 2012, 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 2, 2012. The quarterly dividend payment was $5.7 million and was paid on February 16, 2012.

41

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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. Our investment policy provides limitations for issuer concentration, which limits, at the time of purchase, the concentration in any one issuer to 5% of the market value of our total investment portfolio. At December 31, 2011, 18% of our municipal variable rate demand notes had a credit rating of AAA, 58% had a rating of AA, and 24% had a credit rating of A, and all contained put options of seven days. At December 31, 2011, approximately 19% of our municipal fixed-rate bonds had a credit rating of AAA, 64% had a credit rating of AA, 15% had a credit rating of A, and the remaining 2% had a credit rating of BBB. At December 31, 2011, approximately 1% of our corporate bond portfolio had a credit rating of AAA, 11% had a credit rating of AA, 50% had a credit rating of A, and 38% had a credit rating of BBB.

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 financial institutions, and determined the risk of material financial loss due to exposure of such credit risk to be minimal. As of December 31, 2011, $23.4 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.

As of December 31, 2011, approximately $417.4 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) for an entire year, while all other variables remain constant. At December 31, 2011, we held $180.7 million of cash, money market instruments, floating rate corporate bonds and municipal variable rate demand notes where a change in interest rates would impact our interest income. A hypothetical 50 bps decline in interest rates as of December 31, 2011 would reduce annualized interest income on our cash, money market instruments, floating rate corporate bonds and municipal variable rate demand notes by approximately $0.7 million. In addition, we held $322.4 million of municipal and corporate bonds whose fair values may be directly affected by a change in interest rates. A hypothetical 50 bps increase in interest rates as of December 31, 2011 would reduce the fair value of our municipal and corporate bonds by approximately $1.7 million.

As of December 31, 2010, interest income on approximately $333.3 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 for an entire year, while all other variables remain constant. A hypothetical 50 bps decline in interest rates as of December 31, 2010 would have reduced annualized interest income on our money market instruments and municipal variable rate demand notes by approximately $0.5 million. In addition, a hypothetical 50 bps increase in interest rates as of December 31, 2010 would have reduced the fair value of our municipal fixed-rate bonds and corporate bonds by approximately $1.7 million.

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.

42

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		44
Report of Independent Registered Public Accounting Firm		45
Financial Statements
Consolidated Balance Sheets, As of December 31, 2011 and 2010		46
Consolidated Statements of Income, Years Ended December 31, 2011, 2010 and 2009		47
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income, Years Ended December 31, 2011, 2010 and 2009		48
Consolidated Statements of Cash Flows, Years Ended December 31, 2011, 2010 and 2009		49
Schedule II - Valuation and Qualifying Accounts		78

43

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, 2011. 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, 2011.

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.

44

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, 2011 and December 31, 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 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, 2011, 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.

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 29, 2012

45

Financial Statements

ADTRAN, INC.

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

December 31, 2011 and 2010

		September 30,			September 30,
	2011			2010
ASSETS
Current Assets
Cash and cash equivalents	$	42,979		$	31,677
Short-term investments		159,347			157,479
Accounts receivable, less allowance for doubtful accounts of $8 and $162 at December 31, 2011 and 2010, respectively		76,130			70,893
Other receivables		9,743			3,962
Income tax receivable, net		—			2,741
Inventory		87,800			74,274
Prepaid expenses		3,119			3,270
Deferred tax assets, net		12,125			10,617
Total Current Assets		391,243			354,913
Property, plant and equipment, net		75,295			73,986
Deferred tax assets, net		8,345			—
Goodwill		3,492			—
Other assets		7,131			1,915
Long-term investments		332,008			261,160
Total Assets	$	817,514		$	691,974
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	29,404		$	22,785
Unearned revenue		9,965			10,138
Accrued expenses		5,876			4,913
Accrued wages and benefits		13,518			12,125
Income tax payable, net		3,169			—
Total Current Liabilities		61,932			49,961
Deferred tax liabilities, net		—			10,350
Other non-current liabilities		16,951			11,841
Bonds payable		46,500			47,500
Total Liabilities		125,383			119,652
Commitments and contingencies (see Note 12)
Stockholders’ Equity
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 63,703 shares outstanding at December 31, 2011 and 79,652 shares issued and 63,010 shares outstanding at December 31, 2010		797			797
Additional paid-in capital		213,560			193,866
Accumulated other comprehensive income		13,102			26,948
Retained earnings		840,206			731,962
Less treasury stock at cost: 15,949 and 16,642 shares at December 31, 2011 and 2010, respectively		(375,534	)		(381,251	)
Total Stockholders’ Equity		692,131			572,322
Total Liabilities and Stockholders’ Equity	$	817,514		$	691,974

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

46

ADTRAN, INC.

Consolidated Statements of Income (In thousands, except per share amounts)

Years ended December 31, 2011, 2010 and 2009

		September 30,			September 30,			September 30,
	2011			2010			2009
Sales	$	717,229		$	605,674		$	484,185
Cost of sales		302,911			246,811			197,223
Gross Profit		414,318			358,863			286,962
Selling, general and administrative expenses		124,879			114,699			99,446
Research and development expenses		100,301			90,300			83,285
Operating Income		189,138			153,864			104,231
Interest and dividend income		7,642			6,557			6,933
Interest expense		(2,398	)		(2,436	)		(2,430	)
Net realized investment gain (loss)		12,454			11,008			(1,297	)
Other income (expense), net		(694	)		(804	)		131
Income before provision for income taxes		206,142			168,189			107,568
Provision for income taxes		(67,565	)		(54,200	)		(33,347	)
Net Income	$	138,577		$	113,989		$	74,221
Weighted average shares outstanding – basic		64,145			62,490			62,459
Weighted average shares outstanding – diluted (1)		65,416			63,879			63,356
Earnings per common share – basic	$	2.16		$	1.82		$	1.19
Earnings per common share – diluted (1)	$	2.12		$	1.78		$	1.17

(1) Assumes exercise of dilutive stock options calculated under the treasury method. See Notes 1 and 13 of the Notes to Consolidated Financial Statements

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

47

ADTRAN, INC.

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income

(In thousands)

Years ended December 31, 2011, 2010 and 2009

		September 30,		September 30,		September 30,		September 30,			September 30,			September 30,			September 30,
	Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
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 expense of $9,218														15,384			15,384
Reclassification adjustment for amounts included in net income, net of deferred tax expense 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
Net income								113,989									113,989
Net change in unrealized gains (losses) related to marketable securities, net of deferred tax expense of $5,223														8,700			8,700
Reclassification adjustment for amounts included in net income, net of deferred tax benefit of $598														(999	)		(999	)
Foreign currency translation adjustment														1,394			1,394
Comprehensive income																	123,084
Dividend payments								(22,502	)								(22,502	)
Dividends accrued for unvested restricted stock units								(27	)								(27	)
Stock options exercised: Various prices per share								(8,754	)		33,696						24,942
Purchase of treasury stock: 729 shares											(18,316	)					(18,316	)
Income tax benefit from exercise of stock options						4,909											4,909
Stock-based compensation expense						7,717											7,717
Balance, December 31, 2010		79,652	$	797	$	193,866	$	731,962		$	(381,251	)	$	26,948		$	572,322
Net income								138,577									138,577
Net change in unrealized gains (losses) related to marketable securities, net of deferred tax benefit of $7,427														(13,004	)		(13,004	)
Reclassification adjustment for amounts included in net income, net of deferred tax benefit of $389														(688	)		(688	)
Foreign currency translation adjustment														(154	)		(154	)
Comprehensive income																	124,731
Dividend payments								(23,124	)								(23,124	)
Dividends accrued for unvested restricted stock units								(52	)								(52	)
Stock options exercised: Various prices per share								(6,345	)		40,470						34,125
Restricted stock units vested								(812	)		812						—
Purchase of treasury stock: 1,112 shares											(35,565	)					(35,565	)
Income tax benefit from exercise of stock options						10,525											10,525
Stock-based compensation expense						9,169											9,169
Balance, December 31, 2011		79,652	$	797	$	213,560	$	840,206		$	(375,534	)	$	13,102		$	692,131

ADTRAN issued 1,813 shares, 1,483 shares and 856 shares of treasury stock to accommodate employee stock option exercises and vesting of restricted stock units during 2011, 2010 and 2009, respectively. During 2011 and 2010, ADTRAN received 7 shares and 4 shares, respectively, previously held by employees for at least six months as payment of the exercise price for employee stock options. None of the transactions with respect to these shares were made in the open market. The average price paid per share with respect to these transactions was based on the closing price of the common stock on the NASDAQ Global Select Market on the date of the transaction. There were no such transactions during 2009.

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

48

ADTRAN, INC.

Consolidated Statements of Cash Flows (In thousands)

Years ended December 31, 2011, 2010 and 2009

		September 30,			September 30,			September 30,
	2011			2010			2009
Cash flows from operating activities
Net income	$	138,577		$	113,989		$	74,221
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,499			10,545			10,084
Amortization of net premium on available-for-sale investments		6,617			4,380			3,686
Net realized (gain) loss on long-term investments		(12,454	)		(11,008	)		1,297
Net (gain) loss on disposal of property, plant and equipment		6			2			(31	)
Stock-based compensation expense		9,169			7,717			6,987
Deferred income taxes		575			(1,324	)		(1,024	)
Tax benefit from stock option exercises		10,525			4,909			1,549
Excess tax benefits from stock-based compensation arrangements		(9,373	)		(4,404	)		(998	)
Change in operating assets and liabilities:
Accounts receivable, net		(4,939	)		(2,849	)		(15,143	)
Other receivables		(5,781	)		135			(1,195	)
Income tax receivable, net		2,741			(2,741	)		—
Inventory		(12,734	)		(28,600	)		1,732
Prepaid expenses and other assets		522			(574	)		(489	)
Accounts payable		6,178			(2,997	)		5,442
Accrued expenses and other liabilities		6,309			8,626			1,010
Income taxes payable, net		3,169			(3,017	)		3,027
Net cash provided by operating activities		150,606			92,789			90,155
Cash flows from investing activities
Purchases of property, plant and equipment		(11,912	)		(9,872	)		(8,740	)
Proceeds from sales and maturities of available-for-sale investments		466,243			275,442			186,193
Purchases of available-for-sale investments		(554,629	)		(340,489	)		(262,067	)
Acquisition of business, net of cash acquired		(22,661	)		—			(1,370	)
Net cash used in investing activities		(122,959	)		(74,919	)		(85,984	)
Cash flows from financing activities
Proceeds from stock option exercises		34,125			24,942			13,471
Purchases of treasury stock		(35,565	)		(18,316	)		(15,896	)
Dividend payments		(23,124	)		(22,502	)		(22,486	)
Payments on long-term debt		(1,000	)		(250	)		(500	)
Excess tax benefits from stock-based compensation arrangements		9,373			4,404			998
Net cash used in financing activities		(16,191	)		(11,722	)		(24,413	)
Net increase (decrease) in cash and cash equivalents		11,456			6,148			(20,242	)
Effect of exchange rate changes		(154	)		1,394			2,468
Cash and cash equivalents, beginning of year		31,677			24,135			41,909
Cash and cash equivalents, end of year	$	42,979		$	31,677		$	24,135
Supplemental disclosure of cash flow information
Cash paid during the year for interest	$	2,396		$	2,411		$	2,435
Cash paid during the year for income taxes	$	51,402		$	57,662		$	30,869

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

49

Notes to Consolidated Financial Statements

Note 1 – Nature of Business and Summary of Significant Accounting Policies

ADTRAN, Inc. designs, manufactures and markets solutions and provides services and support for communications networks. Our solutions are widely deployed by providers of communications services (serviced by our Carrier Networks Division), and small and mid-sized enterprises (SMEs) (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.

Principles of Consolidation

Our consolidated financial statements include ADTRAN and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

Cash and cash equivalents represent demand deposits, money market funds, and short-term investments classified as available-for-sale with original maturities of three months or less. 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 the exposure of such credit risk to be minimal. As of December 31, 2011, $23.4 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.

Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the immediate or short-term maturity of these financial instruments. The carrying amount reported for bonds payable was $47.0 million compared to an estimated fair value of $46.9 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of A+.

Investments with maturities beyond one year, such as our municipal variable rate demand notes, may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. At December 31, 2011, 18% of our municipal variable rate demand notes had a credit rating of AAA, 58% had a credit rating of AA, 24% had a credit rating of A, and all contained put options of seven days. Despite the long-term nature of their stated contractual maturities, we routinely buy and sell these securities and we believe that we have the ability to quickly liquidate them. Our investments in these securities are recorded at fair value, and the interest rates reset every seven days. We believe 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. At December 31, 2011, approximately 34% of our variable rate demand notes were supported by letters of credit from banks that we believe to be in good financial condition. The remaining 66% of our variable rate demand notes were supported by standby purchase agreements. As a result of these factors, we had no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from these investments at December 31, 2011. 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.

Long-term investments represent a restricted certificate of deposit, municipal fixed-rate bonds, corporate bonds, a fixed income bond fund, marketable equity securities, and other equity investments. Marketable equity securities are reported at fair value as determined by the most recently traded price of the securities at the balance sheet date, although the securities may not be readily marketable due to the size of the available market. Unrealized gains and losses, net of tax, are reported as a separate component of stockholders’ equity. Realized gains and losses on sales of securities are computed under the specific identification method and are included in current income. We periodically review our investment portfolio for investments considered to have sustained an other-than-temporary decline in value. Impairment charges for other-than-temporary declines in value are recorded as realized losses in the accompanying consolidated statements of income. All of our investments at December 31, 2011 and 2010 are classified as available-for-sale securities (see Note 4).

50

Accounts Receivable

We record accounts receivable at net realizable value. Prior to issuing payment terms to a new customer, we perform a detailed credit review of the customer. Credit limits are established for each new customer based on the results of this credit review. Payment terms are established for each new customer, and collection experience is reviewed periodically in order to determine if the customer’s payment terms and credit limits need to be revised. At December 31, 2011, three customers, each of which accounted for more than 10% of our accounts receivable, accounted for 57.3% of our total accounts receivable in the aggregate. At December 31, 2010, three customers, each of which accounted for more than 10% of our accounts receivable, accounted for 54.7% of our total accounts receivable in the aggregate.

We maintain an allowance for doubtful accounts for losses resulting from the inability of our customers to make required payments. We regularly review the allowance for doubtful accounts and consider factors such as the age of accounts receivable balances, the current economic conditions that may affect a customer’s ability to pay, significant one-time events and our historical experience. If the financial condition of a customer 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 $8 thousand at December 31, 2011 and $162 thousand at December 31, 2010.

Other Receivables

Other receivables are comprised primarily of amounts due from subcontract manufacturers for product component transfers, accrued interest on investments and on a restricted certificate of deposit and amounts due from employee stock option exercises.

Inventory

Inventory is carried at the lower of cost or market, with cost being determined using the first-in, first-out method. Standard costs for material, labor and manufacturing overhead are used to value inventory. Standard costs are updated at least quarterly; therefore, inventory costs approximate actual costs at the end of each reporting period. We establish reserves for estimated excess, obsolete or unmarketable inventory equal to the difference between the cost of the inventory and the estimated fair value of the inventory based upon assumptions about future demand and market conditions. When we dispose of excess and obsolete inventories, the related write-downs are charged against the inventory reserve. See Note 5 of Notes to Consolidated Financial Statements for additional information.

Property, Plant and Equipment

Property, plant and equipment, which is stated at cost, is depreciated using the straight-line method over the estimated useful lives of the assets. We depreciate building and land improvements from five to 39 years, office machinery and equipment from three to seven years, engineering machinery and equipment from three to seven years and computer software from three to five years. Expenditures for repairs and maintenance are charged to expense as incurred. Betterments that materially prolong the lives of the assets are capitalized. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are removed from the accounts, and the gain or loss on such disposition is included in other income (expense), net in the accompanying consolidated statements of income. See Note 6 of Notes to Consolidated Financial Statements for additional information.

Liability for Warranty

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 obligations totaled $4.1 million and $3.3 million at December 31, 2011 and 2010, respectively. These liabilities are included in accrued expenses in the accompanying consolidated balance sheets.

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A summary of warranty expense and write-off activity for the years ended December 31, 2011 and 2010 is as follows:

		September 30,			September 30,
Year Ended December 31,	2011			2010
(In thousands)
Balance at beginning of period	$	3,304		$	2,833
Plus: amounts acquired or charged to cost and expenses		2,893			5,309
Less: deductions		(2,079	)		(4,838	)
Balance at end of period	$	4,118		$	3,304

Stock-Based Compensation

We have two Board and stockholder approved stock option plans from which stock options and other awards are available for grant to employees and directors. All employee and director stock options granted under our stock option plans have an exercise price equal to the fair market value of the award, as defined in the plan, of the underlying common stock on the grant date. There are currently no vesting provisions tied to performance or market conditions for any option awards; vesting for all outstanding option grants is based only on continued service as an employee or director of ADTRAN. All of our outstanding stock option awards are classified as equity awards.

Under the provisions of our approved plans, we made grants of performance-based restricted stock units to five of our executive officers in 2011, 2010 and 2009. 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 (2009 grant) or against all the companies in the NASDAQ Telecommunications Index (2010 and 2011 grant) and vest at the end of a three-year performance period. The restricted stock units are converted into shares of common stock upon vesting. Depending on the relative total shareholder return over the performance period, the executive officers may earn from 0% to 150% of the number of restricted stock units granted. The fair value of the award is based on the market price of our common stock on the date of grant, adjusted for the expected outcome of the impact of market conditions using a Monte Carlo Simulation valuation method. The recipients of the restricted stock units also earn dividend credits during the performance period, which will be paid in cash upon the issuance of common stock for the restricted stock units.

Stock-based compensation expense recognized under the Stock Compensation Topic of the Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) in 2011, 2010 and 2009 was approximately $9.2 million, $7.7 million and $7.0 million, respectively. As of December 31, 2011, total compensation cost related to non-vested stock options, restricted stock units and restricted stock not yet recognized was approximately $21.9 million, which is expected to be recognized over an average remaining recognition period of 2.9 years. See Note 3 of Notes to Consolidated Financial Statements for additional information.

Impairment of Long-Lived Assets

We review long-lived assets used in operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by the asset are less than the asset’s carrying value. An impairment loss would be recognized in the amount by which the recorded value of the asset exceeds the fair value of the asset, measured by the quoted market price of an asset or an estimate based on the best information available in the circumstances. There were no such impairment losses recognized during 2011, 2010 or 2009.

Goodwill and Purchased Intangible Assets

We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. When evaluating whether goodwill is impaired, we first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If we determine that the two-step quantitative test is necessary, then we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, then the amount of the impairment loss is measured. There were no impairment losses during 2011. Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, which is 2.5 to seven years.

Research and Development Costs

Research and development costs include compensation for engineers and support personnel, outside contracted services, depreciation and material costs associated with new product development, the enhancement of current products, and product cost reductions. We continually evaluate new product opportunities and engage in intensive research and product development efforts. Research and development costs totaled $100.3 million, $90.3 million and $83.3 million for the years ended December 31, 2011, 2010 and 2009, respectively.

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Comprehensive Income

Comprehensive income consists of all changes in equity (net assets) during a period from non-owner sources. Items included in comprehensive income include net income, changes in unrealized gains and losses on marketable securities, and foreign currency translation adjustments. Comprehensive income is presented in the Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income. The components of accumulated comprehensive income (loss) are as follows:

		September 30,			September 30,			September 30,
(In thousands)	Change in Unrealized Gains and (Losses) on Marketable Securities, Net of Tax			Foreign Currency Translation Adjustment			Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2008	$	(243	)	$	(766	)	$	(1,009	)
Activity in 2009		15,384			2,468			17,852
Reclassification adjustment for amounts included in net income		1,010			—			1,010
Balance at December 31, 2009		16,151			1,702			17,853
Activity in 2010		8,700			1,394			10,094
Reclassification adjustment for amounts included in net income		(999	)		—			(999	)
Balance at December 31, 2010		23,852			3,096			26,948
Activity in 2011		(13,004	)		(154	)		(13,158	)
Reclassification adjustment for amounts included in net income		(688	)		—			(688	)
Balance at December 31, 2011	$	10,160		$	2,942		$	13,102

Income Taxes

The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from the difference between financial and tax bases of our assets and liabilities and are adjusted for changes in tax rates and tax laws when such changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

Foreign Currency

We record transactions denominated in foreign currencies on a monthly basis using exchange rates from throughout the year. Assets and liabilities denominated in foreign currencies are translated at the balance sheet dates using the closing rates of exchange between those foreign currencies and the U.S. dollar with any transaction gains or losses reported in income. Adjustments from translating financial statements of international subsidiaries are recorded as a component of accumulated other comprehensive income (loss).

Revenue Recognition

Revenue is generally recognized upon shipment of the product to our customer in accordance with the title transfer terms of the sales agreement, generally FOB shipping point. In the case of consigned inventory, revenue is recognized when the end customer assumes ownership of the product. Contracts that contain multiple deliverables are evaluated to determine the units of accounting, and the revenue from the arrangement is allocated to each item requiring separate revenue recognition based on the relative selling price and corresponding terms of the contract. We strive to use vendor-specific objective evidence of selling price. When this evidence is not available, we are generally not able to determine third-party evidence of selling price because of the extent of customization among competing products or services from other companies. We record revenue associated with installation services when all contractual obligations are complete. Contracts that include both installation services and product sales are evaluated for revenue recognition in accordance with contract terms. As a result, depending on contract terms, installation services may be considered as a separate deliverable item or may be considered an element of the delivered product. Either the purchaser, ADTRAN, or a third party can perform the installation of our products. Shipping fees are recorded as revenue and the related cost is included in cost of sales. Revenue is recorded net of discounts. Also, revenue is recorded when the product price is fixed or determinable, collection of the resulting receivable is probable, and product returns are reasonably estimable. Sales returns are accrued based on historical sales return experience, which we believe provides a reasonable estimate of future returns.

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A portion of Enterprise Networks products are sold to a non-exclusive distribution network of major technology distributors in the United States. These large 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 in an unaffiliated fashion. Additionally, with certain limitations our distributors may return unused and unopened product for stock-balancing purposes when such 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 included in marketing 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.

Unearned Revenue

Unearned revenue primarily represents customer billings on our maintenance service programs and deferred revenues relating to multiple element contracts where we still have contractual obligations to our customers. We currently offer maintenance contracts ranging from one to five years, primarily on Enterprise Networks Division products sold through distribution channels. Revenue attributable to maintenance contracts is recognized on a straight-line basis over the related contract term. In addition, we provide software maintenance and a variety of hardware maintenance services to Carrier Network Division customers under contracts with terms up to ten years. Non-current unearned revenue is included in other non-current liabilities in the accompanying consolidated balance sheets. At December 31, 2011 and 2010, unearned revenue was as follows:

		September 30,		September 30,
(In thousands)	2011		2010
Current unearned revenue	$	9,965	$	10,138
Non-current unearned revenue		4,874		3,801
Total	$	14,839	$	13,939

Other Income (Expense), Net

Other income (expense), net, is comprised primarily of miscellaneous income and expense, 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.

Earnings per Share

Earnings per common share, and earnings per common share assuming dilution, are based on the weighted average number of common shares and, when dilutive, common equivalent shares outstanding during the year (see Note 13).

Dividends

The Board of Directors presently anticipates that it will declare a regular quarterly dividend as long as the current tax treatment of dividends exists and adequate levels of liquidity are maintained. During the years ended December 31, 2011, 2010 and 2009, we paid $23.1 million, $22.5 million and $22.5 million, respectively, in dividend payments. On January 17, 2012, the Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to holders of record at the close of business on February 2, 2012. The ex-dividend date was January 31, 2012 and the payment date was February 16, 2012. The quarterly dividend payment was $5.7 million.

Business Combinations

We use the acquisition method to account for business combinations. Under the acquisition method of accounting, we recognize the assets acquired and liabilities assumed at their fair value on the acquisition date. Goodwill is measured as the excess of the consideration transferred over the net assets acquired. Costs incurred to complete the business combination, such as legal, accounting or other professional fees, are charged to general and administrative expenses as they are incurred.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Our more significant estimates include the allowance for doubtful accounts, obsolete and excess inventory reserves, warranty reserves, customer rebates, allowance for sales returns, determination of the deferred revenue components of multiple element sales agreements, estimated income tax contingencies, the fair value of stock-based compensation, impairment of goodwill, and the evaluation of other-than-temporary declines in the value of investments. Actual amounts could differ significantly from these estimates.

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Recently Issued Accounting Standards

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. While ASU 2011-05 changes the presentation of comprehensive income, it does not change the components that are recognized in net income or comprehensive income under current accounting guidance. This update is effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with early adoption permitted. We plan to adopt this amendment during the first quarter of 2012. Since ASU 2011-05 affects presentation only, it will have no effect on our consolidated results of operations or financial condition.

In December 2011, the FASB issued Accounting Standards Update No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12). ASU 2011-12 defers the effective date for certain presentation requirements that relate to reclassification adjustments and the effect of those reclassification adjustments on the financial statements. This update is effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with early adoption permitted. We plan to adopt this amendment during the first quarter of 2012. Since ASU 2011-12 affects presentation only, it will have no effect on our consolidated results of operations or financial condition.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The amendments are of two types: (i) those that clarify the Board’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This update is effective for annual periods beginning after December 15, 2011. We do not expect the adoption of this amendment will have a material impact on our consolidated results of operations or financial condition.

During 2011, we adopted the following accounting standards, which had no material effect on our consolidated results of operations or financial condition:

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 provides amendments to the criteria in Subtopic 605-25 of the ASC for separating consideration in multiple-deliverable arrangements. As a result of those amendments, multiple-deliverable arrangements are separated in more circumstances than under previously existing U.S. GAAP. ASU 2009-13 established a selling price hierarchy for determining the selling price of a deliverable and replaced 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. ASU 2009 -13 also eliminated the residual method of allocation and required that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and required 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.

We generally sell our products and services separately, but in some circumstances products and services may be sold in bundles that contain multiple deliverables. A sale that includes multiple deliverables is evaluated to determine the units of accounting, and the revenue from the arrangement is allocated to each item requiring separate revenue recognition based on the relative selling price and corresponding terms of the contract. We strive to use vendor-specific objective evidence of selling price. When this evidence is not available, we are generally not able to determine third-party evidence of selling price because of the extent of customization among competing products or services from other companies. In these cases, estimated selling price is determined based on the particular circumstances of the arrangement and is used to allocate revenues to each unit of accounting. Revenue is recognized incrementally as the necessary criteria for each item are met.

We adopted this amendment during the first quarter of 2011. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the year ended December 31, 2011.

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In October 2009, the FASB issued Accounting Standards Update No. 2009-14, Certain Revenue Arrangements that Include Software Arrangements. ASU 2009-14 changed 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 are no longer within the scope of the software revenue guidance in Subtopic 985-605 of the ASC. In addition, ASU 2009-14 requires that hardware components of a tangible product containing software components always be excluded from the software revenue guidance. In that regard, ASU 2009-14 provides 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. ASU 2009-14 also provides guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software. ASU 2009-14 also provides 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. We adopted this amendment during the first quarter of 2011. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the year ended December 31, 2011.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Testing Goodwill for Impairment (ASU 2011-08). Existing accounting guidance requires that an entity perform a test for goodwill impairment, on at least an annual basis, by first comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test is to be performed to measure the amount of impairment loss, if any. ASU 2011-08 will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We adopted this amendment during the fourth quarter of 2011. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the year ended December 31, 2011.

Note 2 – Business Combinations

On August 4, 2011, we acquired all of the outstanding stock of Bluesocket, Inc., a provider of wireless network solutions with virtual control, for $23.7 million in cash. The acquisition provides us with IEEE802.11N enterprise class wireless LAN expertise, technology, and products to address the growing transition within small-medium enterprises and large enterprises to wireless networks and mobile devices. We have included the financial results of Bluesocket in our consolidated financial statements since the date of acquisition. Pro forma results of operations prior to the closing date for the acquisition have not been presented because the effect of the acquisition was not material to our financial results. The allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date is as follows:

		September 30,
(In Thousands)
Cash	$	1,027
Accounts receivable		298
Inventory		792
Prepaid expenses		357
Property, plant and equipment		173
Deferred tax assets, net		12,962
Accounts payable		(441	)
Unearned revenue		(600	)
Accrued expenses		(332	)
Net assets acquired		14,236
Customer relationships		1,530
Developed technology		3,230
Intellectual property		930
Trade names		270
Goodwill		3,492
Total purchase price	$	23,688

During the fourth quarter of 2011, the purchase price and purchase price allocation were adjusted for our final valuations. The adjustments resulted in a decrease to the goodwill recognized in the transaction.

The net deferred tax assets acquired are primarily related to net operating losses and previously capitalized and unamortized research and development expense for tax deduction purposes.

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The fair value of the customer relationships, developed technology and intellectual property acquired was calculated using an income approach (excess earnings method) and is being amortized using the straight-line method. The customer relationships and intellectual property are being amortized over an estimated useful life of 7 years and the developed technology is being amortized over an average estimated useful life of 4.5 years.

The fair value of the trade names acquired was calculated using an income approach (relief from royalty method) and is being amortized using the straight-line method over the estimate useful life of 4.5 years.

The goodwill of $3.5 million generated from this acquisition is primarily related to expected synergies and was assigned to our Enterprise Networks division. The goodwill will not be deductible for U.S. federal income tax purposes.

For the year ended December 31, 2011, we incurred acquisition related expenses and amortization of acquired intangibles of $1.7 million related to this acquisition.

Note 3 – Stock Incentive Plans

Stock Incentive Program Descriptions

Our Board of Directors adopted the 1996 Employee Incentive Stock Option Plan (1996 Plan) effective February 14, 1996, as amended, under which 17.0 million shares of common stock were authorized for issuance to certain employees and officers through incentive stock options and non-qualified stock options. Options granted under the 1996 Plan typically become exercisable beginning after one year of continued employment, normally pursuant to a four or five-year vesting schedule beginning on the first anniversary of the grant date, and have a ten-year contractual term. The 1996 Plan expired February 14, 2006, and expiration dates of options outstanding at December 31, 2011 under the 1996 Plan range from 2012 to 2015.

On January 23, 2006, the Board of Directors adopted the 2006 Employee Stock Incentive Plan (2006 Plan), which authorizes 13.0 million shares of common stock for issuance to certain employees and officers through incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units. The 2006 Plan was adopted by stockholder approval at our annual meeting of stockholders held on May 9, 2006. Options granted under the 2006 Plan typically become exercisable beginning after one year of continued employment, normally pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date, and have a ten-year contractual term. Expiration dates of options outstanding at December 31, 2011 under the 2006 Plan range from 2016 to 2021.

Our stockholders approved the 2010 Directors Stock Plan (2010 Directors Plan) on May 5, 2010, under which 0.5 million shares of common stock have been reserved. This plan replaces the 2005 Directors Stock Option Plan. The 2010 Directors Plan provides that the Company may issue stock options, restricted stock and restricted stock units to our non-employee directors. Stock awards issued under the 2010 Directors Plan normally become vested in full on the first anniversary of the grant date. Options issued under the 2010 Directors Plan have a ten-year contractual term. We currently also have options outstanding under the 1995 Directors Plan, as amended, and the 2005 Directors Plan. Expiration dates of options outstanding under both plans at December 31, 2011 range from 2012 to 2020.

The following table is a summary of our stock options outstanding as of December 31, 2010 and 2011 and the changes that occurred during 2011:

		September 30,			September 30,		September 30,		September 30,
(In thousands, except per share amounts)	Number of Options			Weighted Average Exercise Price		Weighted Avg. Remaining Contractual Life in Years		Aggregate Intrinsic Value
Options outstanding, December 31, 2010		6,234		$	23.09		6.21	$	81,561
Options granted		1,031		$	30.42
Options cancelled/forfeited		(87	)	$	26.32
Options exercised		(1,778	)	$	19.36
Options outstanding, December 31, 2011		5,400		$	25.66		6.78	$	27,270
Options exercisable, December 31, 2011		3,054		$	23.49		5.20	$	21,042

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The following table further describes our stock options outstanding as of December 31, 2011:

		September 30,		September 30,		September 30,		September 30,		September 30,
	Options Outstanding						Options Exercisable
Range of Exercise Prices	Options Outstanding  at 12/31/11 (In thousands)		Weighted Avg. Remaining Contractual Life in Years		Weighted Average Exercise Price		Options Exercisable  at 12/31/10 (In thousands)		Weighted Average Exercise Price
$ 8.70 - $23.46		2,806		5.98	$	20.30		2,135	$	20.16
$23.47 - $30.04		473		4.66	$	29.13		421	$	29.29
$30.05 - $33.33		1,262		7.96	$	30.77		279	$	32.18
$33.34 - $41.92		859		8.81	$	33.79		219	$	33.80
		5,400						3,054

All of the options above were issued at exercise prices that approximate fair market value at the date of grant. At December 31, 2011, 8.0 million options were available for grant under the shareholder approved plans.

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between ADTRAN’s closing stock price on the last trading day of 2011 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2011. The amount of aggregate intrinsic value will change based on the fair market value of ADTRAN’s stock.

The total pre-tax intrinsic value of options exercised during 2011, 2010 and 2009 was $39.8 million, $20.3 million and $5.3 million, respectively. The fair value of options fully vesting during 2011, 2010 and 2009 was $7.3 million, $6.9 million and $7.1 million, respectively.

Restricted Stock Program Description

On November 6, 2008, the Compensation Committee of the Board of Directors approved the Performance Shares Agreement under the 2006 Plan which sets forth the terms and conditions of awards of performance-based restricted stock units (RSUs). Of the 13.0 million shares of common stock authorized for issuance under the 2006 Plan, we may grant up to 5.0 million shares of common stock for issuance to certain employees and officers for awards other than stock options, which would include RSUs. Under a proposal that was approved by the Board of Directors and shareholders at the 2010 annual meeting, the number of shares available for awards other than stock options under all stock plans was reduced to 3.3 million. The number of shares of common stock earned by a recipient pursuant to the RSUs is subject to a market condition based on ADTRAN’s relative total shareholder return against a peer group (2009 grant) or against all companies in the NASDAQ Telecommunications Index (2010 and 2011 grant) at the end of a three-year performance period. Depending on the relative total shareholder return over the performance period, the recipient may earn from 0% to 150% of the shares underlying the RSUs, with the shares earned distributed upon the vesting of the RSUs at the end of the three-year performance period. The fair value of the award is based on the market price of our common stock on the date of grant, adjusted for the expected outcome of the impact of market conditions using a Monte Carlo Simulation valuation method. A portion of the granted RSUs also vest and the underlying shares become deliverable upon the death or disability of the recipient or upon a change of control of ADTRAN, as defined by the 2006 Plan. The recipients of the RSUs receive dividend credits based on the shares of common stock underlying the RSUs. The dividend credits are vested and earned in the same manner as the RSUs and will be paid in cash upon the issuance of common stock for the RSUs.

The following table is a summary of our RSUs and restricted stock outstanding as of December 31, 2010 and 2011 and the changes that occurred during 2011:

		September 30,			September 30,
(In thousands, except per share amounts)	Number of shares			Weighted Average Grant Date Fair Value
Unvested RSUs and restricted stock outstanding, December 31, 2010		87		$	28.46
RSUs and restricted stock granted		39		$	36.09
RSUs and restricted stock vested		(49	)	$	22.36
RSUs and restricted stock cancelled/forfeited		—		$	—
Adjustments to shares granted due to shares earned at vesting		13		$	17.05
Unvested RSUs and restricted stock outstanding, December 31, 2011		90		$	34.21

As of December 31, 2011, there was approximately $2.2 million of total unamortized compensation cost related to the non-vested portion of RSUs and restricted stock granted, which will be recognized on a straight-line basis over the remainder of the three-year performance period for RSUs and over the remainder of the one-year vesting period for restricted stock.

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Valuation and Expense Information

We use the Black-Scholes option pricing model (Black-Scholes Model) for the purpose of determining the estimated fair value of stock option awards on the date of grant. The Black-Scholes Model requires the input of certain assumptions that involve judgment. Because our stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, existing models may not provide reliable measures of fair value of our stock options. We use a Monte Carlo Simulation valuation method to value our performance-based RSUs. The fair value of restricted stock issued is equal to the closing price of our stock on the date of grant. We will continue to assess the assumptions and methodologies used to calculate the estimated fair value of stock-based compensation. If circumstances change, and additional data becomes available over time, we may change our assumptions and methodologies, which may materially impact our fair value determination.

The following table summarizes stock-based compensation expense related to stock options, RSUs and restricted stock under the Stock Compensation Topic of the FASB ASC for the years ended December 31, 2011, 2010 and 2009, which was recognized as follows:

		September 30,			September 30,			September 30,
(In thousands)	2011			2010			2009
Stock-based compensation expense included in cost of sales	$	412		$	317		$	268
Selling, general and administrative expense		4,316			3,575			3,039
Research and development expense		4,441			3,825			3,680
Stock-based compensation expense included in operating expenses		8,757			7,400			6,719
Total stock-based compensation expense		9,169			7,717			6,987
Tax benefit for expense associated with non-qualified options		(1,321	)		(650	)		(634	)
Total stock-based compensation expense, net of tax	$	7,848		$	7,067		$	6,353

At December 31, 2011, total compensation cost related to non-vested stock options, RSUs and restricted stock not yet recognized was approximately $21.9 million, which is expected to be recognized over an average remaining recognition period of 2.9 years.

The stock option pricing model requires the use of several significant assumptions that impact the fair value estimate. These variables include, but are not limited to, the volatility of our stock price and employee exercise behaviors. The assumptions and variables used for the current period grants were developed based on guidance in the Stock Compensation Topic of the FASB ASC. There were no material changes made during 2011 to the methodology used to determine our assumptions.

The weighted-average estimated fair value of stock options granted to employees and directors during the twelve months ended December 31, 2011, 2010 and 2009 was $9.53 per share, $11.69 per share and $8.11 per share, respectively, with the following weighted-average assumptions:

		September 30,			September 30,			September 30,
	2011			2010			2009
Expected volatility		38.32	%		39.57	%		41.86	%
Risk-free interest rate		1.01	%		1.35	%		2.29	%
Expected dividend yield		1.19	%		1.08	%		1.55	%
Expected life (in years)		5.15			5.78			5.10

We based our estimate of expected volatility for the 12 months ended December 31, 2011, 2010 and 2009 on the sequential historical daily trading data of our common stock for a period equal to the expected life of the options granted. The selection of the historical volatility method was based on available data indicating our historical volatility is as equally representative of our future stock price trends as is our implied volatility. We have no reason to believe the future volatility of our stock price is likely to differ from its past volatility.

The risk-free interest rate assumption is based upon implied yields of U.S. Treasury zero-coupon bonds on the date of grant having a remaining term equal to the expected life of the options granted. The dividend yield is based on our historical and expected dividend payouts.

The expected life of our stock options is based upon historical exercise and cancellation activity of our previous stock-based grants with a ten-year contractual term.

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The RSU pricing model also requires the use of several significant assumptions that impact the fair value estimate. The estimated fair value of the RSUs granted to employees in 2011, 2010 and 2009 was $38.73 per share, $39.21 per share and $26.65 per share, respectively, with the following assumptions:

		September 30,			September 30,			September 30,
	2011			2010			2009
Expected volatility		39.32	%		40.82	%		41.41	%
Risk-free interest rate		0.37	%		0.51	%		1.40	%
Expected dividend yield		1.08	%		1.07	%		1.53	%

Stock-based compensation expense recognized in our Consolidated Statements of Income for the 12 months ended December 31, 2011, 2010 and 2009 is based on RSUs and options ultimately expected to vest, and has been reduced for estimated forfeitures. Estimates for forfeiture rates are based upon historical experience and are evaluated quarterly. We expect our forfeiture rate for stock option awards to be approximately 1.6% annually. We estimated a 0% forfeiture rate for our RSUs and restricted stock due to the limited number of recipients and historical experience for these awards.

Note 4 – Investments

We classify our investments as available-for-sale. At December 31, 2011, we held the following securities and investments, recorded at either fair value or cost.

		September 30,		September 30,		September 30,			September 30,
	Amortized		Gross Unrealized					Fair Value / Carrying
(In thousands)	Cost		Gains		Losses			Value
Deferred compensation plan assets	$	7,994	$	119	$	(401	)	$	7,712
Corporate bonds		159,077		181		(2,505	)		156,753
Municipal fixed-rate bonds		174,300		579		(53	)		174,826
Municipal variable rate demand notes		69,660		—		—			69,660
Fixed income bond fund		527		194		—			721
Marketable equity securities		12,771		19,098		(559	)		31,310
Available-for-sale securities held at fair value	$	424,329	$	20,171	$	(3,518	)	$	440,982
Restricted investment held at cost									48,250
Other investments held at cost									2,123
Total carrying value of available-for-sale investments								$	491,355

At December 31, 2010, we held the following securities and investments, recorded at either fair value or cost.

		September 30,		September 30,		September 30,			September 30,
	Amortized		Gross Unrealized					Fair Value / Carrying
(In thousands)	Cost		Gains		Losses			Value
Deferred compensation plan assets	$	3,483	$	770	$	(7	)	$	4,246
Corporate bonds		126,671		630		(229	)		127,072
Municipal fixed-rate bonds		71,212		268		(13	)		71,467
Municipal variable rate demand notes		116,745		—		—			116,745
Fixed income bond fund		526		220		—			746
Marketable equity securities		11,486		36,657		(133	)		48,010
Available-for-sale securities held at fair value	$	330,123	$	38,545	$	(382	)	$	368,286
Restricted investment held at cost									48,250
Other investments held at cost									2,103
Total carrying value of available-for-sale investments								$	418,639

At December 31, 2011 and 2010, we held $7.7 million and $4.2 million, respectively, of deferred compensation plan assets, carried at fair value.

At December 31, 2011 and 2010, we held $156.8 million and $127.1 million, respectively, of corporate bonds. These bonds are classified as available-for-sale and had an average duration of 0.8 years at December 31, 2011. At December 31, 2011, approximately 1% of our corporate bond portfolio had a credit rating of AAA, 11% had a credit rating of AA, 50% had a credit rating of A, and 38% had a credit rating of BBB.

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At December 31, 2011 and 2010, we held $174.8 million and $71.5 million, respectively, of municipal fixed-rate bonds. These bonds are classified as available-for-sale investments and had an average duration of 1.3 years at December 31, 2011. At December 31, 2011, approximately 19% of our municipal fixed-rate bond portfolio had a credit rating of AAA, 64% had a credit rating of AA, 15% had a credit rating of A, and 2% had a credit rating of BBB. 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.

As of December 31, 2011, corporate and municipal fixed-rate bonds had the following contractual maturities:

		September 30,		September 30,
(In thousands)	Corporate bonds		Municipal fixed-rate bonds
Less than one year	$	10,093	$	79,592
One to two years		54,245		64,001
Two to three years		92,415		18,990
Three to five years		—		12,243
Total	$	156,753	$	174,826

At December 31, 2011 and 2010, we held $69.7 million and $116.7 million, respectively, of municipal variable rate demand notes, all of which were classified as available-for-sale short-term investments. At December 31, 2011, 18% of our municipal variable rate demand notes had a credit rating of AAA, 58% had a credit rating of AA, 24% had a credit rating of A, and all contained put options of seven days. Despite the long-term nature of their stated contractual maturities, we routinely buy and sell these securities and we believe that we have the ability to quickly liquidate them. Our investments in these securities are recorded at fair value, and the interest rates reset every seven days. We believe 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. At December 31, 2011, approximately 34% of our variable rate demand notes were supported by letters of credit from banks that we believe to be in good financial condition. The remaining 66% of our variable rate demand notes were supported by standby purchase agreements. As a result of these factors, we had no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from these investments. 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.

At December 31, 2011 and 2010, we held $0.7 million of a fixed income bond fund. This bond fund had unrealized gains of $0.2 million at December 31, 2011 and 2010.

At December 31, 2011, we held $31.3 million of marketable equity securities, including a single security, of which we held 1.1 million shares, carried at a fair value of $17.3 million. We sold 0.5 million shares of this security during the 12 months ended December 31, 2011. The sales resulted in proceeds of $9.2 million and a realized gain of $9.1 million. This single security traded approximately 0.8 million shares per day in 2011, in an active market on a European stock exchange. This single security comprises $16.9 million of the gross unrealized gains included in the fair value of our marketable equity securities at December 31, 2011. The remaining $2.2 million of gross unrealized gains and $0.6 million of gross unrealized losses at December 31, 2011 were spread amongst more than 400 equity securities. At December 31, 2010, we held $48.0 million of marketable equity securities, including the single security mentioned above, of which we held 1.5 million shares, carried at a fair value of $34.2 million. This single security comprised $33.7 million of the gross unrealized gains included in the fair value of our marketable equity securities at December 31, 2010. The remaining $3.0 million of unrealized gains and $0.1 million of gross unrealized losses at December 31, 2010 were spread amongst more than 415 equity securities.

At December 31, 2011 and 2010, we held a $48.3 million restricted certificate of deposit, which is carried at cost. This investment serves as a collateral deposit against the principal amount outstanding under loans made to ADTRAN pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond). At December 31, 2011, the estimated fair value of the Bond was approximately $46.9 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of A+. 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. For more information on the Bond, see Note 8 of Notes to Consolidated Financial Statements.

At December 31, 2011 and 2010, we held $2.1 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. The fair value of these investments was estimated to be approximately $10.0 million at December 31, 2011, based on unobservable inputs including information supplied by the company and the fund managers. We have committed to invest up to an aggregate of $7.9 million in the two private equity funds, and we have contributed $8.4 million as of December 31, 2011, of which $7.7 million has been applied toward these commitments. As of December 31, 2011 we have received distributions related to these two private equity funds of $8.8 million, of which $2.2 million was recorded as investment income. These investments are carried at cost, net of distributions, with distributions in excess of our investment recorded as investment income. The duration of each of these commitments is ten years with $0.1 million expiring in 2013 and $0.1 million expiring in 2012. We have not been required to record any impairment losses related to these investments during the years ended December 31, 2011, 2010 or 2009.

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Our investment policy provides limitations for issuer concentration, which limits, at the time of purchase, the concentration in any one issuer to 5% of the market value of our total investment portfolio.

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 recorded an other-than-temporary impairment charge of $36 thousand during the fourth quarter of 2011. For each of the years ended December 31, 2011, 2010 and 2009 we recorded a charge of $68 thousand, $43 thousand and $2.9 million, respectively, related to the other-than-temporary impairment of certain marketable equity securities, a fixed income bond fund and deferred compensation plan assets.

Realized gains and losses on sales of securities are computed under the specific identification method. The following table presents gross realized gains and losses related to our investments.

		September 30,			September 30,			September 30,
Year Ended December 31, (In thousands)	2011			2010			2009
Gross realized gains	$	13,641		$	12,191		$	1,978
Gross realized losses	$	(1,187	)	$	(1,183	)	$	(3,275	)

The following table presents the breakdown of investments with unrealized losses at December 31, 2011.

		September 30,		September 30,			September 30,		September 30,			September 30,		September 30,
	Continuous Unrealized Loss Position for Less than 12 Months					Continuous Unrealized Loss Position for 12 Months or Greater					Total
(In thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Deferred compensation plan assets	$	5,655	$	(401	)	$	—	$	—		$	5,655	$	(401	)
Corporate bonds		112,345		(2,505	)		—		—			112,345		(2,505	)
Municipal fixed-rate bonds		20,076		(53	)		—		—			20,076		(53	)
Marketable equity securities		4,418		(543	)		48		(16	)		4,466		(559	)
Total	$	142,494	$	(3,502	)	$	48	$	(16	)	$	142,542	$	(3,518	)

The following table presents the breakdown of investments with unrealized losses at December 31, 2010.

		September 30,		September 30,			September 30,		September 30,			September 30,		September 30,
	Continuous Unrealized Loss Position for Less than 12 Months					Continuous Unrealized Loss Position for 12 Months or Greater					Total
(In thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Deferred compensation plan assets	$	338	$	(7	)	$	—	$	—		$	338	$	(7	)
Corporate bonds		32,326		(229	)		—		—			32,326		(229	)
Municipal fixed-rate bonds		5,869		(13	)		—		—			5,869		(13	)
Marketable equity securities		2,021		(107	)		176		(26	)		2,197		(133	)
Total	$	40,554	$	(356	)	$	176	$	(26	)	$	40,730	$	(382	)

The increase in unrealized losses during 2011, as reflected in the table above, is primarily due to credit yield spreads widening during the second half of 2011 primarily impacting our corporate bonds. At December 31, 2011, a total of 128 of our marketable equity securities were in an unrealized loss position.

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; 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.

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		September 30,		September 30,		September 30,		September 30,
	Fair Value Measurements at December 31, 2011 Using
(In thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents
Money market funds	$	13,696	$	13,696	$	—	$	—
Available-for-sale securities
Deferred compensation plan assets		7,712		7,712		—		—
Available-for-sale debt securities
Corporate bonds		156,753		—		156,753		—
Municipal fixed-rate bonds		174,826		—		174,826		—
Municipal variable rate demand notes		69,660		—		69,660		—
Fixed income bond fund		721		721		—		—
Available-for-sale marketable equity securities
Marketable equity securities – technology industry		18,743		18,743		—		—
Marketable equity securities – other		12,567		12,567		—		—
Available-for-sale securities		440,982		39,743		401,239		—
Total	$	454,678	$	53,439	$	401,239	$	—
	Fair Value Measurements at December 31, 2010 Using
(In thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents
Money market funds	$	14,532	$	14,532	$	—	$	—
Available-for-sale securities
Deferred compensation plan assets		4,246		4,246		—		—
Available-for-sale debt securities
Corporate bonds		127,072		—		127,072		—
Municipal fixed-rate bonds		71,467		—		71,467		—
Municipal variable rate demand notes		116,745		—		116,745		—
Fixed income bond fund		746		746		—		—
Available-for-sale marketable equity securities
Marketable equity securities – technology industry		35,596		35,596		—		—
Marketable equity securities – other		12,414		12,414		—		—
Available-for-sale securities		368,286		53,002		315,284		—
Total	$	382,818	$	67,534	$	315,284	$	—

As of December 31, 2011 and 2010, the fair value of the investments in available-for-sale Level 2 corporate bonds and municipal fixed-rate bonds was $331.6 million and $198.5 million, respectively. The fair value of these securities is calculated using a weighted average market price for each security. Market prices are obtained from a variety of industry standard data providers, security master files from large financial institutions, and other third-party sources. These multiple market prices are used as inputs into a distribution-curve-based algorithm to determine the daily market value of each security.

As of December 31, 2011 and 2010, the fair value of the investments in available-for-sale Level 2 municipal variable rate demand notes was $69.7 million and $116.7 million, respectively. These securities have a structure that implies a standard expected market price. The frequent interest rate resets make it reasonable to expect the price to stay at par. These securities are priced at the expected market price.

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Note 5 – Inventory

At December 31, 2011 and 2010, inventory was comprised of the following:

		September 30,		September 30,
(In thousands)	2011		2010
Raw materials	$	44,588	$	43,897
Work in process		3,954		2,871
Finished goods		39,258		27,506
Total	$	87,800	$	74,274

We establish reserves for estimated excess, obsolete, or unmarketable inventory equal to the difference between the cost of the inventory and the estimated fair value of the inventory based upon assumptions about future demand and market conditions. At December 31, 2011 and 2010, raw materials reserves totaled $7.9 million and $7.3 million, respectively, and finished goods inventory reserves totaled $1.5 million and $1.6 million, respectively.

Note 6 – Property, Plant and Equipment

At December 31, 2011 and 2010, property, plant and equipment were comprised of the following:

		September 30,			September 30,
(In thousands)	2011			2010
Land	$	4,263		$	4,263
Building and land improvements		16,857			15,507
Building		68,479			68,479
Furniture and fixtures		16,433			16,130
Computer hardware and software		64,053			61,898
Engineering and other equipment		91,232			83,946
Total Property, Plant and Equipment		261,317			250,223
Less accumulated depreciation		(186,022	)		(176,237	)
Total Property, Plant and Equipment (net)	$	75,295		$	73,986

Depreciation expense was $10.8 million, $10.2 million and $10.0 million in 2011, 2010 and 2009, respectively.

Note 7 – Goodwill and Intangible Assets

The changes in the carrying value of goodwill, all of which is included in our Enterprise Networks division, for the year ended December 31, 2011 are as follows:

		September 30,
(In thousands)
Balance, December 31, 2010	$	—
Acquisitions		3,492
Impairment losses		—
Balance, December 31, 2011	$	3,492
Balance as of December 31, 2011:
Goodwill	$	3,492
Accumulated impairment losses		—
Total goodwill	$	3,492

We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. When evaluating whether goodwill is impaired, we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, then the amount of the impairment loss is measured. There were no impairment losses during 2011.

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The following table presents our intangible assets as of December 31, 2011 and 2010. Intangible assets are included in other assets in the accompanying Consolidated Balance Sheets and include intangible assets acquired with our acquisitions of Objectworld Communications Corporation on September 15, 2009 and Bluesocket, Inc. on August 4, 2011.

		September 30,		September 30,			September 30,		September 30,		September 30,			September 30,
	December 31, 2011							December 31, 2010
(In thousands)	Gross Value		Accumulated Amortization			Net Value		Gross Value		Accumulated Amortization			Net Value
Customer relationships	$	1,623	$	(194	)	$	1,429	$	93	$	(60	)	$	33
Developed technology		3,230		(303	)		2,927		—		—			—
Intellectual property		2,340		(525	)		1,815		1,410		(260	)		1,150
Trade names		270		(28	)		242		—		—			—
Total	$	7,463	$	(1,050	)	$	6,413	$	1,503	$	(320	)	$	1,183

Amortization expense was $0.7 million, $0.4 million and $0.1 million in 2011, 2010 and 2009, respectively.

As of December 31, 2011, the estimated future amortization expense of intangible assets is as follows:

		September 30,
(In thousands)	Amount
2012	$	1,221
2013		1,271
2014		1,120
2015		1,018
2016		781
Thereafter		1,002
Total	$	6,413

Note 8 – Alabama State Industrial Development Authority Financing and Economic Incentives

In conjunction with an expansion of our Huntsville, Alabama, facility, we were approved for participation in an incentive program offered by the State of Alabama 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) (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. An Amended and Restated Taxable Revenue Bond (“Amended and Restated Bond”) was issued and the original financing agreement was amended. The Amended and Restated Bond bears interest, payable monthly. The interest rate is 5% per annum. The Amended and Restated Bond matures on January 1, 2020. The estimated fair value of the bond at December 31, 2011 was approximately $46.9 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of A+. We are required to make payments to the Authority in amounts necessary to pay the principal of and interest on the Amended and Restated Bond. Included in long-term investments at December 31, 2011 is $48.3 million which is invested in a restricted certificate of deposit. These funds serve as a collateral deposit against the principal of this bond, and 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. For the years ended December 31, 2011, 2010 and 2009, we realized economic incentives related to payroll withholdings totaling $1.9 million, $1.5 million and $1.5 million, respectively.

Due to continued positive cash flow from operating activities, we made a business decision in 2006 to begin an early partial redemption of the Bond. We made principal payments of $1.0 million and $0.3 million for the years ended December 31, 2011 and 2010, respectively. 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 accounts payable in the Consolidated Balance Sheets at December 31, 2011 and 2010.

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Note 9 – Income Taxes

A summary of the components of the provision for income taxes as of December 31, 2011, 2010 and 2009 is as follows:

		September 30,		September 30,			September 30,
(In thousands)	2011		2010			2009
Current
Federal	$	59,813	$	49,144		$	30,756
State		7,177		6,380			3,615
Total Current		66,990		55,524			34,371
Deferred tax expense (benefit)		575		(1,324	)		(1,024	)
Total Provision for Income Taxes	$	67,565	$	54,200		$	33,347

The effective income tax rate differs from the federal statutory rate due to the following:

		September 30,			September 30,			September 30,
	2011			2010			2009
Tax provision computed at the federal statutory rate		35.00	%		35.00	%		35.00	%
State income tax provision, net of federal benefit		3.19			3.33			3.68
Federal research credits		(2.50	)		(2.90	)		(3.37	)
Tax-exempt income		(0.27	)		(0.46	)		(1.05	)
State tax incentives		(0.90	)		(0.86	)		(1.36	)
Stock-based compensation		0.03			0.34			1.64
Domestic production activity deduction		(1.84	)		(2.37	)		(3.33	)
Other, net		0.07			0.15			(0.21	)
Effective Tax Rate		32.78	%		32.23	%		31.00	%

Deferred income taxes on the balance sheet result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The principal components of our current and non-current deferred taxes are as follows:

		September 30,			September 30,
(In thousands)	2011			2010
Current deferred tax assets
Accounts receivable	$	4		$	61
Inventory		6,709			6,032
Accrued expenses		5,412			4,524
Total Current Deferred Tax Assets		12,125			10,617
Non-current deferred tax assets
Accrued expenses		113			102
Deferred compensation		3,177			1,539
Stock-based compensation		3,808			3,542
State tax and interest expense		947			861
Foreign loss and state credit carry-forwards		7,891			5,988
Federal loss and research carry-forwards		14,778			—
Valuation allowance		(7,585	)		(5,627	)
Total Non-current Deferred Tax Assets		23,129			6,405
Total Deferred Tax Assets	$	35,254		$	17,022
Non-current deferred tax liabilities
Accumulated depreciation	$	(7,081	)	$	(4,782	)
Intellectual property		(2,594	)		—
Investments		(5,109	)		(11,973	)
Total Non-current Deferred Tax Liabilities	$	(14,784	)	$	(16,755	)
Net Deferred Tax Assets	$	20,470		$	267

At December 31, 2011 and 2010, non-current deferred tax liabilities and non-current deferred tax assets, respectively, related to investments reflect deferred taxes on unrealized gains and losses on available-for-sale investments. The net change in non-current deferred taxes associated with these investments, a deferred tax benefit of $7.8 million in 2011 and a deferred tax provision of $4.6 million in 2010, is recorded as an adjustment to other comprehensive income, presented in the Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income.

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We have deferred tax assets for both foreign and domestic loss, unamortized research and development cost and state credit carry-forwards of $22.7 million which will expire between 2012 and 2030. 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, net operating loss carry-forwards acquired through the acquisition of a foreign entity and net operating losses and research and development cost acquired through the acquisition of a domestic entity. 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 full benefits of the deferred tax asset arising from these losses and credits, and accordingly, have provided a valuation allowance against these assets. We do not provide for U.S. income tax on undistributed earnings of our foreign operations, whose earnings are intended to be permanently reinvested. For years ended December 31, 2011, 2010 and 2009, foreign profits before income taxes were not material.

During 2011, 2010 and 2009, we recorded an income tax benefit of $10.5 million, $4.9 million and $1.5 million, respectively, as an adjustment to equity in accordance with the Stock Compensation Topic of the FASB ASC. This deduction is calculated on the difference between the exercise price of stock option exercises and the market price of the underlying common stock upon exercise.

The change in the unrecognized income tax benefits for 2011, 2010 and 2009 is reconciled below:

		September 30,			September 30,			September 30,
(In thousands)	2011			2010			2009
Balance at beginning of period	$	2,593		$	2,919		$	2,775
Increases for tax position related to:
Prior years		—			197			390
Current year		840			818			610
Decreases for tax positions related to:
Prior years		(92	)		(16	)		(1	)
Settlements with taxing authorities		(354	)		(630	)		(413	)
Expiration of applicable statute of limitations		(17	)		(695	)		(442	)
Balance at end of period	$	2,970		$	2,593		$	2,919

As of December 31, 2011, 2010, and 2009, our total liability for unrecognized tax benefits was $3.0 million, $2.6 million, and $2.9 million, respectively, of which $2.4 million, $2.0 million, and $2.3 million, respectively, would reduce our effective tax rate if we were successful in upholding all of the uncertain positions and recognized the amounts recorded. We classify interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense. As of December 31, 2011, 2010 and 2009, the balances of accrued interest and penalties were $1.2 million, $1.0 million and $1.2 million, respectively.

We do not anticipate a single tax position generating a significant increase or decrease in our liability for unrecognized tax benefits within 12 months of this reporting date. We file income tax returns in the U.S. federal and various state jurisdictions and several foreign jurisdictions. We have been audited by the Internal Revenue Service and the state of Alabama through the 2007 tax year. Generally, we are not subject to changes in income taxes by any taxing jurisdiction for the years prior to 2008.

Note 10 – Employee Benefit Plans

401(k) Savings Plan

We maintain the ADTRAN, Inc. 401(k) Retirement Plan (Savings Plan) for the benefit of our eligible employees. The Savings Plan is intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (Code), and is intended to be a “safe harbor” 401(k) plan under Code Section 401(k)(12). The Savings Plan allows employees to save for retirement by contributing part of their compensation to the plan on a tax-deferred basis. The Savings Plan also requires us to contribute a “safe harbor” amount each year. We match up to 4% of employee contributions (100% of an employee’s first 3% of contributions and 50% of their next 2% of contributions), beginning on the employee’s one year anniversary date. In calculating our matching contribution, we only use compensation up to the statutory maximum under the Code ($245 thousand for 2011). All contributions under the Savings Plan are 100% vested. Expenses recorded for employer contributions and plan administration costs for the Savings Plan amounted to approximately $4.3 million, $4.6 million and $4.2 million in 2011, 2010 and 2009, respectively.

Deferred Compensation Plans

We maintain the ADTRAN, Inc. Deferred Compensation Plan (Deferred Compensation Plan). This plan is offered as a supplement to our tax-qualified 401(k) plan and is available to certain executive management employees who have been designated by our Board of Directors. The deferred compensation plan allows participants to defer all or a portion of certain specified bonuses and up to 25% of remaining cash compensation, and permits us to make matching contributions on a discretionary basis, without the limitations that apply to the 401(k) plan. To date, we have not made any matching contributions under this plan.

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We also maintain the ADTRAN, Inc. Equity Deferral Program for Employees for the purpose of providing deferred compensation for certain executive management employees. Participants may elect to defer all or a portion of their vested Performance Share awards to the Plan. Such deferrals shall continue to be held and deemed to be invested in shares of ADTRAN stock unless and until the amounts are distributed or such deferrals are moved to another deemed investment pursuant to an election made by the Participant.

We have set aside the plan assets for both plans in a rabbi trust (Trust) and all contributions are credited to bookkeeping accounts for the participants. The Trust assets are subject to the claims of our creditors in the event of bankruptcy or insolvency. The assets of the Trust are deemed to be invested in pre-approved mutual funds as directed by each participant, and the participant’s bookkeeping account is credited with the earnings and losses attributable to those investments. Benefits are scheduled to be distributed six months after termination of employment in a single lump sum payment or annual installments paid over a three or ten year term. Distributions will be made on a pro rata basis from each of the hypothetical investments of the Participant’s account in cash. Any whole shares of ADTRAN, Inc. common stock that are distributed will be distributed in-kind.

Assets of the Trust are deemed invested in mutual funds that cover an investment spectrum ranging from equities to money market instruments. These mutual funds are publicly quoted and reported at fair value. The fair value of the assets held by the Trust and the amounts payable to the plan participants are as follows:

		September 30,		September 30,
(In thousands)	2011		2010
Fair Value of Plan Assets
Long-term Investments	$	7,710	$	4,246
Total Fair Value of Plan Assets	$	7,710	$	4,246
Amounts Payable to Plan Participants
Non-current Liabilities	$	7,710	$	4,246
Total Amounts Payable to Plan Participants	$	7,710	$	4,246

Interest and dividend income of the Trust have been included in interest and dividend income in the accompanying 2011, 2010 and 2009 Consolidated Statements of Income. Changes in the fair value of the plan assets held by the Trust have been included in accumulated other comprehensive income in the accompanying 2011 and 2010 Consolidated Balance Sheets. Changes in the fair value of the deferred compensation liability are included as selling, general and administrative expense in the accompanying 2011, 2010 and 2009 Consolidated Statements of Income. Based on the changes in the total fair value of the Trust’s assets, we recorded deferred compensation adjustments in 2011, 2010 and 2009 of $(0.2) million, $0.4 million and $0.6 million, respectively.

Retiree Medical Coverage

We provide medical, dental and prescription drug coverage to one retired former officer and his spouse, for his life, on the same terms as provided to our active officers, and to the spouse of a former deceased officer for up to 30 years. At December 31, 2011 and 2010, this liability totaled $0.2 million.

Note 11 – Segment Information and Major Customers

We operate in two reportable segments: (1) the Carrier Networks Division and (2) the Enterprise Networks Division. The accounting policies of the segments are the same as those described in the “Nature of Business and Summary of Significant Accounting Policies” (see Note 1) to the extent that such policies affect the reported segment information. We evaluate the performance of our segments based on gross profit; therefore, selling, general and administrative expense, research and development expenses, interest income and dividend income, interest expense, net realized investment gain/loss, other income/expense and provision for taxes are reported on an entity-wide basis only. There are no inter-segment revenues.

The following table presents information about the reported sales and gross profit of our reportable segments for each of the years ended December 31, 2011, 2010 and 2009. Asset information by reportable segment is not reported, since we do not produce such information internally.

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
Sales and Gross Profit by Market Segment	2011				2010				2009
(In thousands)	Sales		Gross Profit		Sales		Gross Profit		Sales		Gross Profit
Carrier Networks	$	569,579	$	327,813	$	476,030	$	283,310	$	371,349	$	219,681
Enterprise Networks		147,650		86,505		129,644		75,553		112,836		67,281
	$	717,229	$	414,318	$	605,674	$	358,863	$	484,185	$	286,962

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Sales by Product

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

Carrier Systems products are used by communications service providers to provide 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, Ultra Broadband Ethernet (UBE) 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 and transceivers including those used in our Optical Networking Edge (ONE) products, NetVanta 8000 series products, and our family of OPTI products. Optical access products are used to deliver higher bandwidth services, aggregate large numbers of low bandwidth services, or transport wavelength services across a fiber optic infrastructure. Total Access 1500 products, 303 concentrator products, M13 multiplexer products, and a number of 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 small and mid-sized enterprises (SME) market. The Business Networking category includes Internetworking products and Integrated Access Devices (IADs). Internetworking products consist of our Total Access IP Business Gateways, Optical Network Terminals (ONTs), Virtual Wireless LAN products 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, Unified Threat Management (UTM) solutions, and Carrier Ethernet Network Terminating Equipment (NTE). IAD products consist of our Total Access 600 Series and the Total Access 850.

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.

The table below presents sales information by product category for the years ended December 31, 2011, 2010 and 2009:

		September 30,		September 30,		September 30,
(In thousands)	2011		2010		2009
Carrier Systems	$	420,289	$	289,314	$	215,715
Business Networking		162,186		127,233		100,451
Loop Access		134,754		189,127		168,019
Total	$	717,229	$	605,674	$	484,185

In addition, we identify subcategories of product revenues, which we divide into our core products and legacy products. Our core products consist of Broadband Access and Optical Access products (included in Carrier Systems) and Internetworking products (included in Business Networking) and our legacy products include HDSL products (included in Loop Access) and other products not included in the aforementioned core products.

The table below presents subcategory revenues for the years ended December 31, 2011, 2010 and 2009:

		September 30,		September 30,		September 30,
(In thousands)	2011		2010		2009
Core Products
Broadband Access (included in Carrier Systems)	$	289,776	$	176,116	$	111,470
Optical Access (included in Carrier Systems)		82,535		66,206		60,596
Internetworking (NetVanta® & Multi-service Access Gateways) (included in Business Networking)		151,536		111,123		79,979
Total	$	523,847	$	353,445	$	252,045
Legacy Products
HDSL (does not include T1) (included in Loop Access)		126,976		177,249		150,276
Other products (excluding HDSL)		66,406		74,980		81,864
Total	$	193,382	$	252,229	$	232,140
Total	$	717,229	$	605,674	$	484,185

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Sales by Geographic Region

The following table presents sales information by geographic area for the years ended December 31, 2011, 2010 and 2009. International sales correlate to shipments with a non-U.S. destination.

		September 30,		September 30,		September 30,
(In thousands)	2011		2010		2009
United States	$	632,795	$	573,845	$	456,402
International		84,434		31,829		27,783
Total	$	717,229	$	605,674	$	484,185

Single customers comprising more than 10% of our revenue in 2011 included two customers at 25% and 10%, respectively. Single customers comprising more than 10% of our revenue in 2010 included three customers at 20%, 18%, and 11%, respectively. Single customers comprising more than 10% of our revenue in 2009 included three customers at 22%, 19%, and 11%, respectively. No other customer accounted for 10% or more of our sales in 2011, 2010 or 2009.

Sales to Major Service Providers amounted to approximately 72%, 72% and 69% of total sales during the years ended December 31, 2011, 2010 and 2009, respectively. In addition, a significant portion of our products are sold directly to distributors and certain value-added resellers, which accounted for approximately 26%, 26% and 28% of our revenue for each of the years ended December 31, 2011, 2010 and 2009, respectively.

As of December 31, 2011, long-lived assets, net totaled $75.3 million, which includes $73.9 million held in the United States and $1.4 million held outside the United States. As of December 31, 2010, long-lived assets, net totaled $74.0 million, which includes $73.0 million held in the United States and $1.0 million held outside the United States.

Note 12 – Commitments and Contingencies

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. Although the outcome of any claim or litigation can never be certain, it is our opinion that the outcome of all contingencies of which we are currently aware will not materially affect our business, operations, financial condition or cash flows.

We lease office space and equipment under operating leases which expire at various dates through 2016. As of December 31, 2011, future minimum rental payments under non-cancelable operating leases with original maturities of greater than 12 months are approximately as follows:

		September 30,
(In thousands)
2012	$	2,007
2013		1,207
2014		967
2015		710
2016		89
Total	$	4,980

Rental expense was approximately $2.4 million, $1.8 million and $1.5 million for the years ended December 31, 2011, 2010 and 2009, respectively.

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Note 13 – Earnings per Share

A summary of the calculation of basic and diluted earnings per share (EPS) for the years ended December 31, 2011, 2010 and 2009 is as follows:

		September 30,		September 30,		September 30,
	Year Ended
(In thousands, except for per share amounts)	2011		2010		2009
Numerator
Net Income	$	138,577	$	113,989	$	74,221
Denominator
Weighted average number of shares – basic		64,145		62,490		62,459
Effect of dilutive securities:
Stock options		1,236		1,355		887
Restricted stock and restricted stock units		35		34		10
Weighted average number of shares – diluted		65,416		63,879		63,356
Net income per share – basic	$	2.16	$	1.82	$	1.19
Net income per share – diluted	$	2.12	$	1.78	$	1.17

For each of the years ended December 31, 2011, 2010 and 2009, 1.2 million, 2.0 million and 3.5 million stock options were outstanding but were not included in the computation of that year’s diluted EPS because the options’ exercise prices were greater than the average market price of the common shares, therefore making them anti-dilutive under the treasury stock method.

Note 14 – Summarized Quarterly Financial Data (Unaudited)

The following table presents unaudited quarterly operating results for each of our last eight fiscal quarters. This information has been prepared on a basis consistent with our audited financial statements and includes all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the data.

Unaudited Quarterly Operating Results

(In thousands, except for per share amounts)

		September 30,		September 30,		September 30,		September 30,
Three Months Ended	March 31, 2011		June 30, 2011		September 30, 2011		December 31, 2011
Net sales	$	165,522	$	184,227	$	192,194	$	175,286
Gross profit	$	98,795	$	106,827	$	109,476	$	99,220
Operating income	$	45,606	$	51,310	$	51,107	$	41,115
Net income	$	34,258	$	36,943	$	36,213	$	31,163
Earnings per common share	$	0.53	$	0.57	$	0.57	$	0.49
Earnings per common share assuming dilution (1)	$	0.52	$	0.56	$	0.56	$	0.48

		September 30,		September 30,		September 30,		September 30,
Three Months Ended	March 31, 2010		June 30, 2010		September 30, 2010		December 31, 2010
Net sales	$	127,027	$	150,361	$	162,957	$	165,329
Gross profit	$	75,328	$	89,329	$	97,299	$	96,907
Operating income	$	25,345	$	38,617	$	45,045	$	44,857
Net income	$	18,194	$	27,751	$	32,084	$	35,960
Earnings per common share	$	0.29	$	0.45	$	0.51	$	0.57
Earnings per common share assuming dilution (1)	$	0.29	$	0.44	$	0.50	$	0.56

⁽¹⁾  Assumes exercise of dilutive stock options calculated under the treasury stock method.

Note 15 – Related Party Transactions

We employ the law firm of our director emeritus for legal services. All bills for services rendered by this firm are reviewed and approved by our Chief Financial Officer. We believe that the fees for such services are comparable to those charged by other firms for services rendered to us. For the years ended 2011, 2010 and 2009, we incurred fees of $10 thousand per month for these legal services.

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Note 16 – Subsequent Events

On January 17, 2012, 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 2, 2012. The quarterly dividend payment was $5.7 million and was paid on February 16, 2012. In July 2003, our Board of Directors elected to begin declaring quarterly dividends on our common stock considering the tax treatment of dividends and adequate levels of Company liquidity.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Internal control over financial reporting. Section 404 of the Sarbanes-Oxley Act of 2002 requires management to include in this Annual Report on Form 10-K a report on management’s assessment of the effectiveness of our internal control over financial reporting, as well as a report from our independent registered public accounting firm on the effectiveness of internal control over financial reporting. Management’s report on internal control over financial reporting and the related report from our independent registered public accounting firm are located in Item 8. “Financial Statements and Supplementary Data” of this report.

(b) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) for the company. Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report, have concluded that our disclosure controls and procedures are effective.

(c) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information relating to nominees for director of ADTRAN and compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth under the captions “Proposal 1–Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance,” respectively, in the Proxy Statement for the Annual Meeting of Stockholders to be held on May 9, 2012. Such information is incorporated herein by reference. The definitive Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2011. Information relating to the executive officers of ADTRAN, pursuant to Instruction 3 of Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10-K, is set forth at Part I, Item 4A of this report under the caption “Executive Officers of the Registrant.” This information is incorporated herein by reference.

Code of Ethics

We have adopted the ADTRAN, Inc. Code of Business Conduct and Ethics, which applies to all employees, officers and directors of ADTRAN. The Code of Business Conduct and Ethics meets the requirements of a “code of ethics” as defined by Item 406 of Regulation S-K, and applies to our Chief Executive Officer, Chief Financial Officer (who is both our principal financial and principal accounting officer), as well as all other employees, as indicated above. The Code of Business Conduct and Ethics also meets the requirements of a code of conduct under NASDAQ listing standards. The Code of Business Conduct and Ethics is posted on our website at www.adtran.com under the links “Investor Relations – Corporate Governance – ADTRAN Code of Business Conduct and Ethics.” We intend to disclose any amendments to the Code of Business Conduct and Ethics, as well as any waivers for executive officers or directors, on our website at www.adtran.com.

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ITEM 11. EXECUTIVE COMPENSATION

Information required by this Item 11 relating to executive compensation and other matters is set forth under the captions “Executive Compensation,” “Director Compensation” and “Corporate Governance” in the Proxy Statement referred to in Item 10. This information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information relating to ownership of common stock of ADTRAN by certain persons is set forth under the caption “Share Ownership of Principal Stockholders and Management” in the Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference. Information regarding securities authorized for issuance under equity compensation plans of ADTRAN is set forth under the caption “Equity Compensation Plan Information” in the Proxy Statement referred to in Item 10. This information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Information relating to existing or proposed relationships or transactions between ADTRAN and any affiliate of ADTRAN is set forth under the captions “Certain Relationships and Related Transactions” and “Corporate Governance” in the Proxy Statement referred to in Item 10. This information is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information relating to ADTRAN’s principal accountant’s fees and services is set forth under the caption “Principal Accountant Fees and Services” in the Proxy Statement referred to in Item 10. This information is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Documents Filed as Part of This Report.

1. Consolidated Financial Statements

The consolidated financial statements of ADTRAN and the report of independent registered public accounting firm thereon are set forth under Part II, Item 8 of this report.

Consolidated Balance Sheets as of December 31, 2011 and 2010

Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009

Consolidated Statements of Changes in Stockholders’ Equity and Other Comprehensive Income for the years ended December 31, 2011, 2010 and 2009

Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009

Notes to Consolidated Financial Statements

2. Consolidated Financial Statement Schedule

Schedule II—Valuation and Qualifying Accounts

3. Exhibits

The following exhibits are filed with or incorporated by reference in this report. Where such filing is made by incorporation by reference to a previously filed registration statement or report, such registration statement or report is identified in parentheses. We will furnish any exhibit upon request to: ADTRAN, Inc., Attn: Investor Relations, P.O. Box 140000, 901 Explorer Boulevard, Huntsville, Alabama 35806. There is a charge of $0.50 per page to cover expenses for copying and mailing.

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Exhibit Number	Description
2.1*	Asset Sale and Purchase Agreement dated 11 December 2011 Regarding the Sale and Purchase of the NSN DSLAM, GPON and ACI Products and the Related Services Businesses.
3.1	Certificate of Incorporation, as amended (Exhibit 3.1 to ADTRAN’s Registration Statement on Form S-1, No. 33-81062 (the “Form S-1 Registration Statement”)).
3.2	Bylaws, as amended (Exhibit 3.1 to ADTRAN’s Current Report on Form 8-K filed October 16, 2007).
10.1	Documents relative to the $50,000,000 Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project) issued by the Alabama State Industrial Development Authority, consisting of the following: (a)    First Amended and Restated Financing Agreement dated April 25, 1997, among the State Industrial Development Authority, a public corporation organized under the laws of the State of Alabama (the “Authority”), ADTRAN and First Union National Bank of Tennessee, a national banking corporation (the “Bondholder”) (Exhibit 10.1(a) to ADTRAN’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (the “1997 Form 10-Q”)). (b)    First Amended and Restated Loan Agreement dated April 25, 1997, between the Authority and ADTRAN (Exhibit 10.1(b) to the 1997 Form 10-Q). (c)    First Amended and Restated Specimen Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project) (Exhibit 10.1(c) to the 1997 Form 10-Q). (d)    First Amended and Restated Specimen Note from ADTRAN to the Bondholder, dated April 25, 1997 (Exhibit 10.1(d) to the 1997 Form 10-Q). (e)    Amended and Restated Investment Agreement dated January 3, 2002 between ADTRAN and First Union National Bank (successor-in-interest to First Union National Bank of Tennessee (the “Successor Bondholder”)) (Exhibit 10.1(e) to ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2002 (the “2002 Form 10-K”)). (f)     Resolution of the Authority authorizing the amendment of certain documents, dated April 25, 1997, relating to the $50,000,000 Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project) (Exhibit 10.1(f) to the 1997 Form 10-Q). (g)    Resolution of ADTRAN authorizing the First Amended and Restated Financing Agreement, the First Amended and Restated Loan Agreement, the First Amended and Restated Note, and the Investment Agreement (Exhibit 10.1(g) to the 1997 Form 10-Q). (h)    Amendment to First Amended and Restated Financing Agreement and First Amended and Restated Loan Agreement dated January 3, 2002 between ADTRAN and the Successor Bondholder (Exhibit 10.1(h) to the 2002 Form 10-K).
10.2	Tax Indemnification Agreement dated July 1, 1994 by and among ADTRAN and the stockholders of ADTRAN prior to ADTRAN’s initial public offering of Common Stock (Exhibit 10.5 to the 1994 Form 10-K).

74

Exhibit Number	Description
10.3	Management Contracts and Compensation Plans: (a)    Amended and Restated 1996 Employees Incentive Stock Option Plan, as amended by the First, Second and Third Amendments thereto (Exhibit 10.3(a) to the 2002 Form 10-K). (b)    Amended and Restated 1995 Directors Stock Option Plan, as amended by the First and Second Amendments thereto (Exhibit 10.3(b) to the 2002 Form 10-K). (c)    Third Amendment to the Amended and Restated 1995 Directors Stock Option Plan (Exhibit 10.3(c) to ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2003 (the “2003 Form 10-K”)). (d)    ADTRAN, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 2008 (Exhibit 10.3(d) to ADTRAN’s Form 10-K filed on February 27, 2009). (e)    ADTRAN, Inc. Management Incentive Bonus Plan (Exhibit 10.1 to ADTRAN’s Form 8-K on February 3, 2006). (f)     ADTRAN, Inc. 2006 Employee Stock Incentive Plan (Exhibit 4.1 to ADTRAN’s Registration Statement on Form S-8 (File No. 333-133927) filed on May 9, 2006). (g)    First Amendment to the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (Exhibit 10.3(h) to ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2007 (the “2007 Form 10-K”)). (h)    Form of Nonqualified Stock Option Agreement under the 2006 Employee Stock Incentive Plan (Exhibit 10.1 to ADTRAN’s Form 8-K filed June 8, 2006). (i)     Form of Incentive Stock Option Agreement under the 2006 Employee Stock Incentive Plan (Exhibit 10.2 to ADTRAN’s Form 8-K filed June 8, 2006). (j)     ADTRAN, Inc. 2005 Directors Stock Option Plan (Exhibit 10.1 to ADTRAN’s Form 8-K filed on May 20, 2005). (k)    First Amendment to the ADTRAN, Inc. 2005 Directors Stock Option Plan (Exhibit 10.3(l) to the 2007 Form 10-K). (l)     Summary of Non-Employee Director Compensation (Exhibit 10.3(k) to ADTRAN’s Form 10-K filed on February 28, 2007). (m)   Form of Performance Shares Agreement under the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (Exhibit 10.1 to ADTRAN’s Form 8-K filed on November 6, 2008). (n)    Form of Performance Shares Agreement under the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (Exhibit 10.1 to ADTRAN’s Form 8-K filed on November 9, 2010).
21*	Subsidiaries of ADTRAN.
23*	Consent of PricewaterhouseCoopers LLP.
24*	Powers of Attorney.
31*	Rule 13a-14(a)/15d-14(a) Certifications.
32*	Section 1350 Certifications.

75

Exhibit Number	Description
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document

* Filed herewith

** Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

76

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 29, 2012.

ADTRAN, Inc.
(Registrant)
By:	/s/ James E. Matthews
	James E. Matthews
	Senior Vice President – Finance,
	Chief Financial Officer, Treasurer, Secretary and Director
	(Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 29, 2012.

Signature		Title
/s/ Thomas R. Stanton		Chief Executive Officer and Chairman of the Board
Thomas R. Stanton
/s/ James E. Matthews		Senior Vice President-Finance, Chief Financial Officer, Treasurer, Secretary and Director
James E. Matthews
/s/ Balan Nair*		Director
Balan Nair
/s/ William L. Marks*		Director
William L. Marks
/s/ Roy J. Nichols*		Director
Roy J. Nichols
/s/ H. Fenwick Huss *		Director
H. Fenwick Huss
/s/ Ross K. Ireland *		Director
Ross K. Ireland
*By:	/s/ James E. Matthews
	James E. Matthews as Attorney in Fact

77

ADTRAN, INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

		September 30,		September 30,		September 30,		September 30,		September 30,
Column A	Column B		Column C		Column D		Column E		Column F
(In thousands)	Balance at Beginning of Period		Assumed on Acquisition		Charged to Costs & Expenses		Deductions		Balance at End of Period
Year ended December 31, 2011
Allowance for Doubtful Accounts	$	162		—		117		271	$	8
Inventory Reserve	$	8,932		—		1,137		650	$	9,419
Warranty Liability	$	3,304		33		2,860		2,079	$	4,118
Deferred Tax Asset Valuation Allowance	$	5,627		1,462		496		—	$	7,585
Year ended December 31, 2010
Allowance for Doubtful Accounts	$	138		—		72		48	$	162
Inventory Reserve	$	7,750		—		1,992		810	$	8,932
Warranty Liability	$	2,833		—		5,309		4,838	$	3,304
Deferred Tax Asset Valuation Allowance	$	5,340		—		391		104	$	5,627
Year ended December 31, 2009
Allowance for Doubtful Accounts	$	38		3		102		5	$	138
Inventory Reserve	$	7,728		—		1,681		1,659	$	7,750
Warranty Liability	$	2,812		—		2,665		2,644	$	2,833
Deferred Tax Asset Valuation Allowance	$	1,581		3,549		251		41	$	5,340

78

ADTRAN, INC.

INDEX OF EXHIBITS

Exhibit Number	Description
2.1*	Asset Sale and Purchase Agreement dated 11 December 2011 Regarding the Sale and Purchase of the NSN DSLAM, GPON and ACI Products and the Related Services Businesses.
3.1	Certificate of Incorporation, as amended (Exhibit 3.1 to ADTRAN’s Registration Statement on Form S-1, No. 33-81062 (the “Form S-1 Registration Statement”)).
3.2	Bylaws, as amended (Exhibit 3.1 to ADTRAN’s Current Report on Form 8-K filed October 16, 2007).
10.1	Documents relative to the $50,000,000 Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project) issued by the Alabama State Industrial Development Authority, consisting of the following: (a)    First Amended and Restated Financing Agreement dated April 25, 1997, among the State Industrial Development Authority, a public corporation organized under the laws of the State of Alabama (the “Authority”), ADTRAN and First Union National Bank of Tennessee, a national banking corporation (the “Bondholder”) (Exhibit 10.1(a) to ADTRAN’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (the “1997 Form 10-Q”)). (b)    First Amended and Restated Loan Agreement dated April 25, 1997, between the Authority and ADTRAN (Exhibit 10.1(b) to the 1997 Form 10-Q). (c)    First Amended and Restated Specimen Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project) (Exhibit 10.1(c) to the 1997 Form 10-Q). (d)    First Amended and Restated Specimen Note from ADTRAN to the Bondholder, dated April 25, 1997 (Exhibit 10.1(d) to the 1997 Form 10-Q). (e)    Amended and Restated Investment Agreement dated January 3, 2002 between ADTRAN and First Union National Bank (successor-in-interest to First Union National Bank of Tennessee (the “Successor Bondholder”)) (Exhibit 10.1(e) to ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2002 (the “2002 Form 10-K”)). (f)     Resolution of the Authority authorizing the amendment of certain documents, dated April 25, 1997, relating to the $50,000,000 Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project) (Exhibit 10.1(f) to the 1997 Form 10-Q). (g)    Resolution of ADTRAN authorizing the First Amended and Restated Financing Agreement, the First Amended and Restated Loan Agreement, the First Amended and Restated Note, and the Investment Agreement (Exhibit 10.1(g) to the 1997 Form 10-Q). (h)    Amendment to First Amended and Restated Financing Agreement and First Amended and Restated Loan Agreement dated January 3, 2002 between ADTRAN and the Successor Bondholder (Exhibit 10.1(h) to the 2002 Form 10-K).
10.2	Tax Indemnification Agreement dated July 1, 1994 by and among ADTRAN and the stockholders of ADTRAN prior to ADTRAN’s initial public offering of Common Stock (Exhibit 10.5 to the 1994 Form 10-K).

79

Exhibit Number	Description
10.3	Management Contracts and Compensation Plans: (a)    Amended and Restated 1996 Employees Incentive Stock Option Plan, as amended by the First, Second and Third Amendments thereto (Exhibit 10.3(a) to the 2002 Form 10-K). (b)    Amended and Restated 1995 Directors Stock Option Plan, as amended by the First and Second Amendments thereto (Exhibit 10.3(b) to the 2002 Form 10-K). (c)    Third Amendment to the Amended and Restated 1995 Directors Stock Option Plan (Exhibit 10.3(c) to ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2003 (the “2003 Form 10-K”)). (d)    ADTRAN, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 2008 (Exhibit 10.3(d) to ADTRAN’s Form 10-K filed on February 27, 2009). (e)    ADTRAN, Inc. Management Incentive Bonus Plan (Exhibit 10.1 to ADTRAN’s Form 8-K on February 3, 2006). (f)     ADTRAN, Inc. 2006 Employee Stock Incentive Plan (Exhibit 4.1 to ADTRAN’s Registration Statement on Form S-8 (File No. 333-133927) filed on May 9, 2006). (g)    First Amendment to the ADTRAN Inc. 2006 Employee Stock Incentive Plan (Exhibit 10.3(h) to ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2007 (the “2007 Form 10-K”)). (h)    Form of Nonqualified Stock Option Agreement under the 2006 Employee Stock Incentive Plan (Exhibit 10.1 to ADTRAN’s Form 8-K filed June 8, 2006). (i)     Form of Incentive Stock Option Agreement under the 2006 Employee Stock Incentive Plan (Exhibit 10.2 to ADTRAN’s Form 8-K filed June 8, 2006). (j)     ADTRAN, Inc. 2005 Directors Stock Option Plan (Exhibit 10.1 to ADTRAN’s Form 8-K filed on May 20, 2005). (k)    First Amendment to the ADTRAN, Inc. 2005 Directors Stock Option Plan (Exhibit 10.3(l) to the 2007 Form 10-K). (l)     Summary of Non-Employee Director Compensation (Exhibit 10.3(k) to ADTRAN’s Form 10-K filed on February 28, 2007). (m)   Form of Performance Shares Agreement under the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (Exhibit 10.1 to ADTRAN’s Form 8-K filed on November 6, 2008). (n)    Form of Performance Shares Agreement under the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (Exhibit 10.1 to ADTRAN’s Form 8-K filed on November 9, 2010).
21*	Subsidiaries of ADTRAN.
23*	Consent of PricewaterhouseCoopers LLP.
24*	Powers of Attorney.
31*	Rule 13a-14(a)/15d-14(a) Certifications.
32*	Section 1350 Certifications

80

Exhibit Number	Description
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document

* Filed herewith

** Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

81

EX-2.1

Exhibit 2.1

EXECUTION COPY

Asset Sale and Purchase Agreement

dated 11 December 2011

regarding the sale and purchase of the

NSN

DSLAM, GPON and ACI products and the related services businesses

Bird & Bird / METIS	ASPA EXECUTION COPY
Project London	11.12.2011

between

1. Nokia Siemens Networks B.V., Werner von Siemensstraat 7, 2712PN Zoetermeer, The Netherlands, a limited liability company (besloten vennootschap met beperkte aansprakelijkheid – B.V.) under the laws of The Netherlands, registered in the trade register under the number 34259706,

- “Parent Seller” -

2. Nokia Siemens Networks GmbH & Co. KG, St.-Martin-Straße 76, 81541 Munich, Germany, a German private limited partnership (Kommanditgesellschaft), registered with the commercial register of Munich under the number HRA 88537,

- “Seller Subsidiary 1” -

- Parent Seller and Seller Subsidiary 1 collectively the “Sellers” and each a “Seller” -

3. ADTRAN GmbH, c/o METIS Rechtsanwälte LLP, Untermainkai 30, 60329 Frankfurt/Main, a German limited liability company (Gesellschaft mit beschränkter Haftung), registered with the commercial register of Charlottenburg under the number HRB 135656 B,

- “Purchaser” -

4. ADTRAN, Inc., a corporation under the laws of the State of Delaware, USA, with its principal office at 901 Explorer Boulevard, Huntsville, Alabama 35806, USA,

- “Purchaser’s Parent” -

- Parent Seller, Seller Subsidiary 1 and Purchaser are hereinafter also collectively referred to as the “Parties” and each as a “Party”-

2

EXECUTION COPY

Table of Content

		September 30,
	page
Table of Content		3
Index of Defined Terms		4
Preamble		6
1. Selected Defined Terms and Abbreviations		7
2. Scope of Transaction and Purchaser Transfer Right		8
3. The Sold Business		9
4. The Sold Business pertaining to Seller Subsidiaries		14
5. Updates		15
6. Sale, Assignment and Transfer, Assumption of the Sold Business		16
7. Third party consents, Purchaser’s indemnification covenants, release of payments and subcontracting		20
8. New Agreements between Sellers and Purchaser		23
9. Purchase Price		23
10. Payment Terms		26
11. Working Capital, ET Working Capital, ETWC Statement		28
12. *		30
13. Closing; Closing Conditions		30
14. Guarantees by Sellers		35
15. Remedies of Purchaser and Third Party Claims		42
16. Limitation of Liability, Statute of Limitations, Default		45
17. Indemnification		46
18. Guarantees by Purchaser		48
19. Conduct of Sold Business		48
20. *		50
21. Indemnification and other covenants by Purchaser		50
22. Guarantee of Purchaser’s Parent		51
23. Non-compete covenant / *		52
24. Transition of Sold Business		52
25. Public announcements and confidentiality		53
26. Notices		54
27. Costs and expenses		54
28. Miscellaneous		55
List of Annexes and Schedules		58

*CONFIDENTIAL TREATMENT REQUESTED

Bird & Bird / METIS	ASPA EXECUTION COPY
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Index of Defined Terms

		September 30,
	Page
1st Cut-Off Day		37
*		18
Accounting Principles		7
ACI		6
Affiliate		7
Affiliate Purchaser		9
Affiliate Purchaser(s) Cut Off Date		9
Affiliate Purchasers		9
Affiliates		7
Agreement		6
AktG		7
AO		7
BGB		7
Breach Notice		51
Business		6
Business Days		7
Chinese Business Tax		7
Closing		37
Closing Confirmation		41
Closing Date		37
Closing Events		40
Competing Activities		61
Confidential Information		64
Contract		7
*		62
Country Official Notifications		48
Country Public Grants		49
*		25
*		25
Currency Conversion Principles		67
Customer Claim		56
Cut-Off Deadline		37
Damage		51
*		24
De Minimis Claim		54
DSLAM		6
Effective Time		7
*		47
Escrow Account		38
Escrow Amount		7
Escrow Claim		34
Escrow Period		34
ET Working Capital		35
ET Working Capital Estimate		31
ETWC Statement		35
ETWC Statement Expert		36
EUR		7
Excluded Assets		10
Excluded Contract Parts		14
Excluded Contracts		13
Excluded Items		14
Excluded Liabilities		12
Exempted Claims		53
Expenditure Level		58
Expert		28
*		24
Final Purchase Price		30
*		62
*		36
Fixed Purchase Price		30
GPON		6
Guarantee Claim		51
HGB		7
ICC-Rules		67
IFRS		7
Information Technology		43
IPR Indemnification		56
Joint Closing Condition		37
Key Country Official Notifications		48
Key Country Public Grants		49
Key Individuals		38
Leased Assets		44
Legal Entity		7
Material Adverse Change		39
*		23
*		23

*CONFIDENTIAL TREATMENT REQUESTED

4

Bird & Bird / METIS	ASPA EXECUTION COPY
Project London	11.12.2011

		September 30,
	Page
Official Notification(s)		48
Parent Seller		2
Parties		2
Party		2
Positive Closing Conditions		38
*		62
Public Grants		48
Purchaser		2
Purchaser Negative Closing Condition		39
Purchaser Positive Closing Conditions		37
Purchaser Transfer Right		8
Purchaser’s Parent		2
Restitution in Kind		50
Revised ETWC Statement		36
*		24
Scheduled Closing Date		37
Seller		2
Seller Breach		50
Seller Group		7
*		23
Seller Subsidiaries		8
Seller Subsidiaries 2 through 34		8
Seller Subsidiary		8
Seller Subsidiary 1		2
*		17
*		19
*		19
*		23
*		24
*		17
*		20
*		20
*		22
*		21
*		22
Sellers		2
Sellers Guarantees		26
Sellers’ Knowledge		7
Sellers Positive Closing Condition		38
Signing Date		8
Sold Assets		10
Sold Business		6
Sold Contract Parts		13
Sold Contracts		12
Sold Fixed Assets		10
Sold Inventory		10
Sold Liabilities		11
Sold Material Agreements		45
Sold Seller Subsidiaries 2 through 34 Assets		14
Sold Seller Subsidiaries 2 through 34 Contract Parts		14
Sold Seller Subsidiaries 2 through 34 Contracts		14
Sold Seller Subsidiaries 2 through 34 Fixed Assets		14
Sold Seller Subsidiaries 2 through 34 Inventory		14
Sold Seller Subsidiaries 2 through 34 Liabilities		14
Sold Seller Subsidiaries Assets		14
Sold Seller Subsidiaries Contract Parts		14
Sold Seller Subsidiaries Contracts		14
Sold Seller Subsidiaries Liabilities		14
Sold Seller Subsidiary 1 Assets		14
Sold Seller Subsidiary 1 Contract Parts		14
Sold Seller Subsidiary 1 Contracts		14
Sold Seller Subsidiary 1 Fixed Assets		14
Sold Seller Subsidiary 1 Inventory		14
Sold Seller Subsidiary 1 Liabilities		14
Subcontracting		29
Subsidiary		8
Tax		8
Taxes		8
Third Party Assumption Consent		27
Third Party Claim		52
Third Party IPR Claim		56
*		62
Transaction		6
*		22
Transfer Taxes		8, 66
*		22
Transition Period		58
Undue Advantage		50
*		36
Variable Purchase Price		30
VAT		8
Working Capital		35

*CONFIDENTIAL TREATMENT REQUESTED

5

Bird & Bird / METIS	ASPA EXECUTION COPY
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Preamble

A. Seller Group is (in the case of development and manufacturing of GPON, was) engaged, inter alia, in (i) the digital subscriber line access multiplexer business (“DSLAM”) comprising development, manufacturing, marketing, sales, services and support of DSLAM products that enable wireline access and connectivity for communication service providers, (ii) the gigabit-capable passive optical network business (“GPON”) comprising development, manufacturing, marketing, sales, services and support of GPON products that enable wireline access and connectivity for communication service providers, and (iii) the element management business for DSLAM and GPON products (“ACI”) comprising development, manufacturing, marketing, sales, services and support of Access Integrator Ethernet (ACI-E) products that enable element management for DSLAM and GPON products ((i) through (iii) together the “Business”). Parent Seller conducts the Business worldwide through the Seller Subsidiaries (as defined below).

B. Sellers intend to sell and transfer, and Purchaser intends to acquire, pursuant to the terms and conditions of this agreement including its Annexes and Schedules (the “Agreement”) the Business but excluding the Excluded Items as defined in Section 3.5 below. The Business excluding the Excluded Items shall hereinafter be referred to as the “Sold Business”.

C. Certain intellectual property rights which are required to continue operating the Sold Business are not held by either of the Sellers or any of their Subsidiaries, but by one of Parent Seller’s shareholders Nokia Corporation and Siemens AG or one of their respective Subsidiaries. In order to ensure that Purchaser will be in a position to continue to operate the Sold Business, Purchaser will therefore enter into license agreements with Parent Seller’s shareholders Nokia Corporation and Siemens AG.

D. The transaction described in Preamble B. and as contemplated in this Agreement is hereinafter referred to as the “Transaction”.

6

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1. Selected Defined Terms and Abbreviations

In this Agreement, except where set forth otherwise, the following terms and abbreviations shall have the following meaning:

“Accounting Principles”: generally accepted accounting principles (GAAP) under IFRS and the policies and practices in accordance with Sellers’ accounting principles attached hereto as Annex 1A as consistently applied in accordance with past practice to the extent such policies and practices do not conflict with IFRS.

“Affiliate” or “Affiliates”: related entity (verbundenes Unternehmen) within the meaning of Sec. 15 et. seq. of the German Stock Corporation Act (§§ 15 ff. Aktiengesetz).

“AktG”: the German Stock Corporation Act (Aktiengesetz).

“AO”: German Fiscal Code (Abgabenordnung).

“BGB”: the German Civil Code (Bürgerliches Gesetzbuch).

“Business Days”: any days other than Saturdays, Sundays and public holidays, in each case in Munich, Germany, and Huntsville, Alabama, USA.

“Chinese Business Tax”: the business tax levied in China (yingyeshui).

“Contract”: a contract, contractual offer or relationship similar to a contractual relationship (vertragsähnliches Rechtsverhältnis), in each case including (i) any side letters and side agreements, (ii) any rights (including warranty and defence rights) and obligations, (iii) any ancillary obligations (vertragliche Nebenpflichten) and statutory claims (e.g. tort (Delikt), unjustified enrichment (ungerechtfertigte Bereicherung), etc.), arising therefrom or in connection therewith, and as amended from time to time.

“Effective Time”: 24:00 hours CET on the Closing Date.

“Escrow Amount”: *

“EUR”: Euro, the common currency of the member states of the European Union who take part in the Economic and Monetary Union.

“HGB”: the German Commercial Code (Handelsgesetzbuch).

“IFRS”: the International Financial Reporting Standards being the guidelines and rules for compiling financial statements set by the International Accounting Standard Board.

“Legal Entity”: any corporation, company, partnership, association or any legal entity established pursuant to the laws of any jurisdiction.

“Seller Group”: Sellers and Seller Subsidiaries.

*CONFIDENTIAL TREATMENT REQUESTED

7

Bird & Bird / METIS	ASPA EXECUTION COPY
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“Sellers’ Knowledge”: any fact or circumstance shall be deemed to exist to “Sellers’ Knowledge” whenever any of the individuals listed in Annex 1B has positive knowledge of a fact or circumstance or has constructive knowledge thereof, being what a prudent merchant in a like position should have known (Kennen oder Kennenmüssen).

“Seller Subsidiaries 2 through 34 ”: any of the entities listed in Annex 1C.

“Seller Subsidiary”: either of Seller Subsidiaries 1 through 34 solely.

“Seller Subsidiaries”: all of Seller Subsidiaries 1 through 34 collectively.

“Signing Date”: the day on which this Agreement has been duly executed (Unterzeichnungstag) by all Parties to this Agreement.

“Subsidiary”: any Legal Entity which is directly or indirectly controlled (either alone or jointly with others).

“Tax” or “Taxes”: shall mean any tax (Steuern) within the meaning of Section 3 paragraphs 1 and 3 AO, or a corresponding foreign law provision, imposed by any federal, state or local tax authority competent for the imposition of such tax, together with any ancillary tax charges (steuerliche Nebenleistungen) (such as e.g. interest, costs, or additions to tax (Steuerzuschläge) within the meaning of Section 3 paragraph 4 AO, or a corresponding foreign law provision, as well as any liabilities for any of the aforementioned taxes; charges (Gebühren), duties (Zölle), levies (Beiträge), and any other public law levies (öffentlich-rechtliche Abgaben) that are imposed by any governmental authority or other public body or due under any legal provisions and all related charges, interest, penalties, expenses and fines thereon. Taxes shall not cover any social security contributions (Sozialversicherungsbeiträge).

“Transfer Taxes” has the meaning as defined in Section 1.1.

“VAT”: shall mean Value Added Tax levied in Germany in accordance with the applicable German Value Added Tax Act (Umsatzsteuergesetz) as well as Value Added Tax, Goods or Services Tax or similar indirect Tax levied in other countries outside Germany in accordance with acts similar to the German Value Added Tax Act or dealing with indirect taxes

2. Scope of Transaction and Purchaser Transfer Right

2.1 Scope of Transaction

The Transaction shall comprise (i) the sale of the Sold Business from Sellers to Purchaser or to one (1) or more Affiliate Purchaser(s) as defined in Section 2.2.1(b) (as the case may be) and (ii) the transfer of the Sold Business from Seller Group to Purchaser, or to one (1) or more Affiliates of Purchaser (as the case may be).

2.2 Purchaser Transfer Right

2.2.1 Purchaser Transfer Right

Purchaser is entitled to transfer after the Signing Date (the “Purchaser Transfer Right”), but no later than three (3) weeks prior to the Scheduled Closing Date as

8

Bird & Bird / METIS	ASPA EXECUTION COPY
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defined in Section 13.1 (the “Affiliate Purchaser(s) Cut Off Date”) however as many times as Purchaser deems appropriate

(a) this Agreement in full or in part, and/or

(b) any rights, claims, risks, obligations, covenants and/or other liabilities resulting from or in connection with this Agreement to one (1) or more of its current or future Affiliates (“Affiliate Purchaser” or “Affiliate Purchasers”), with the proviso for (a) and (b) hereinbefore that Purchaser shall:

(aa) not make use of the Purchase Transfer Right in a way that would cause any employee information letter to become inaccurate,

(bb) remain, in addition to Affiliate Purchaser(s), debtor of any and all risks, obligations, covenants and other liabilities so transferred,

(cc) cause the respective Affiliate Purchaser(s) to assume – in relation to the part of the Sold Business transferred to it—all risks, obligations, covenants and other liabilities resulting from or in connection with this Agreement so transferred as additional debtor (Schuldbeitritt) by executing an accession agreement substantially in the form attached hereto as Annex 2.2.1, and

(dd) notify Sellers of any such transfer in writing without undue delay.

2.2.2 Adjustment of transfer agreements

Sellers, Purchaser and Affiliate Purchaser(s) shall ensure that following exercise of the Purchaser Transfer Right, such transfer shall be taken into account for the purpose of the transfer, assignment and assumption agreements as referred to in 13.7.3(b). The Purchaser Transfer Right shall terminate upon expiry of the Affiliate Purchaser(s) Cut Off Date.

2.2.3 Cost allocation

Purchaser and Sellers shall each be responsible for their respective costs, liability, loss, damage or injury, together with all reasonable out-of-pocket costs and expenses relating thereto, including reasonable legal fees, expenses and disbursements incurred as a result of or relating to the exercise of the Purchaser Transfer Right.

3. The Sold Business

The Sold Business, which shall be sold to Purchaser under the terms of this Agreement, comprises:

(a) The Sold Assets as defined in Section 3.1.1,

(b) the Sold Liabilities as defined in Section 3.2.1,

(c) the Sold Contracts as defined in Section 3.3.1,

(d) the Sold Contract Parts as defined in Section 3.4.1, and

(e) the Seller Subsidiary 1 Employees Pensions as defined in Section 6.5.1.1.

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In addition, the Sold Business shall comprise the Transferred Employees as defined in Section 6.4.2(f).

3.1 Sold Assets and Excluded Assets

3.1.1 Sold Assets

The “Sold Assets” shall comprise all assets (Aktiva im Sinne von § 266 Abs. 2 HGB) pertaining to the Sold Business as at the Effective Time, excluding the Excluded Assets (as defined below). In particular, but without limitation, the Sold Assets shall comprise:

(a) all moveable assets (including, but not limited to, any test and trial equipment) as listed in Annex 3.1.1(a), (the “Sold Fixed Assets”),

(b) all raw materials, supplies, works in progress, finished goods and other inventories as listed in Annex 3.1.1(b) (the “Sold Inventory”),

(c) all rights and claims under

(aa) the Sold Contracts, and

(bb) the Sold Contract Parts,

(d) (i) all business books and business records, including without limitation all warranty documentation and records, product documentation, and Contracts, relating exclusively to the Sold Business which Seller and Seller Subsidiaries are not required to retain pursuant to applicable law and (ii) copies of (y) any business books and business records exclusively relating to the Sold Business or (z) those parts of any business books and business records relating to the Sold Business which Seller and Seller Subsidiaries are required to retain pursuant to applicable law.

3.1.2 Replacements of Sold Assets, warranty rights, expectancy rights

The Sold Assets shall include

(a) all assets as described in Section 3.1.1 which are acquired by a Seller or a Seller Subsidiary between the Signing Date and the Effective Time without breach of the covenants contained in Section 19 or are replacements of any Sold Assets,

(b) all claims against insurances, if and to the extent such claims against insurances have replaced any Sold Assets that are no longer in existence as at the Effective Time,

(c) any warranty rights and claims against suppliers of goods or services relating to the Sold Business, and

(d) in the event that any of the Sold Assets is subject to a retention of title right (Eigentumsvorbehalt) in favor of any third party, all existing expectancy rights (Anwartschaftsrechte) thereunder.

3.1.3 Excluded Assets

The following assets owned by a Seller Subsidiary are explicitly excluded from the sale and transfer to Purchaser (collectively the “Excluded Assets”):

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(a) any of the assets as described in Section 3.1.1 which are sold or otherwise disposed of by a Seller Subsidiary prior to the Effective Time without breach of the covenants contained in Section 19,

(b) any cash on hand, cheques, deposits with banks, and other cash equivalents,

(c) any claims for the refund of any Taxes, social security contributions or other public charges relating to any Tax period prior to the Effective Time,

(d) any trade accounts receivable,

(e) any intangible assets listed in Annex 3.1.3(e),

(f) any intellectual property rights (except as otherwise agreed upon in the intellectual property rights agreements as set forth in Sections 8(a) and 8(b)),

(g) any real estate or other real property rights,

(h) any rights regarding, as well as any rights in connection with or related to, the use of any trademarks or names, including, but not limited to, “Siemens”, “Nokia” and any combination or derivative thereof as well as any comparable trademarks and names, except as otherwise agreed upon in the intellectual property rights assignment agreement to be entered into at Closing and attached as Annex 8(b) or any of the transition agreements to be entered into at Closing and attached as Annex 8(d),

(i) the originals of any books and records which a Seller Subsidiary is required to retain pursuant to applicable law,

(j) any assets listed in Annex 3.1.3(j),

(k) any rights, claims and receivables resulting from this Agreement,

(l) any rights, claims and receivables to the extent related to the Excluded Items as defined in Section 3.5.

For the avoidance of doubt, any pre-payments received (erhaltene Anzahlungen) by Sellers or any of the Seller Subsidiaries under the Sold Contracts and the Sold Contract Parts will be taken into account as liabilities in the ET Working Capital as defined in Section 11.1.

3.2 Sold Liabilities and Excluded Liabilities

3.2.1 Sold Liabilities

The “Sold Liabilities” shall comprise all obligations and liabilities pertaining to the Sold Business as at the Effective Time, however excluding the Excluded Liabilities (as defined below). In particular, but without limitation, the Sold Liabilities shall comprise:

(a) all obligations (including, for the avoidance of doubt, warranties) and other liabilities arising out of or in connection with

(aa) the Sold Contracts,

(bb) the Sold Contract Parts, and/or

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(cc) any orders placed by Seller Group with suppliers of goods pertaining to the Sold Business as identified in Annex 3.2.1(a)(cc),

(b) except as identified in Annex 3.2.1(b) all obligations and other liabilities related to the Transferred Employees, and

(c) except as identified in Annex 3.2.1(c) any further obligations and other liabilities arising out of or in connection with the Sold Business.

3.2.2 Replacement of Sold Liabilities

The Sold Liabilities shall include the obligations and liabilities assumed or otherwise entered into by a Seller Subsidiary between the Signing Date and the Effective Time without breach of the covenants contained in Section 19.

3.2.3 Excluded Liabilities

The following obligations and liabilities, including, for the avoidance of doubt, contingent liabilities, are explicitly excluded from the sale and transfer to and assumption by Purchaser (collectively the “Excluded Liabilities”):

(a) any obligations and other liabilities of Seller and Seller Subsidiaries which are fully fulfilled or are otherwise settled between the Signing Date and the Effective Time,

(b) any liability identified in Annex 3.2.1(b),

(c) any liabilities covered by the tax indemnifications pursuant to Section 17.1,

(d) any obligations and liabilities as listed in Annex 3.2.3(d), or as otherwise explicitly excluded from the sale and transfer pursuant to any other provisions of this Agreement,

(e) any trade accounts payable,

(f) any obligations and liabilities resulting from this Agreement,

(g) any obligations and other liabilities arising out of, or in connection with, any Sold Contracts or Sold Contract Parts for which (i) the Third Party Assumption Consent is not granted prior to the Effective Time and (ii) for which no subcontracting is allowed.

If and to the extent that a liability or contingent liability which is not part of the Sold Liabilities will transfer to Purchaser by operation of law, Sellers shall, as between the Parties, be responsible to satisfy such transferring liability or contingent liability and shall indemnify Purchaser against any claims or negative consequences arising from such transferring liability or contingent liability.

3.3 Sold Contracts and Excluded Contracts

3.3.1 Sold Contracts

The “Sold Contracts” shall comprise the Contracts with customers and other business partners, lease Contracts, license Contracts, binding offers and binding orders as well as any other Contracts pertaining to the Sold Business, but not any of the Excluded Contracts (as defined below), insofar as the Sold Contracts have not yet been fully performed or settled as at the Effective Time and as listed in Annex 3.3.1.

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3.3.2 Additional Sold Contracts

The Sold Contracts shall include all Contracts of such type as listed in Section 3.3.1 which are entered into by any Seller or Seller Subsidiary between the Signing Date and the Effective Time without breach of the covenants contained in Section 19 and which relate exclusively to the Sold Business.

3.3.3 Excluded Contracts

The following Contracts of a Seller Subsidiary with customers, suppliers and other business partners are explicitly excluded from the sale and transfer to and assumption by Purchaser (collectively the “Excluded Contracts”):

(a) the Contracts with customers listed in Annex 3.3.3(a),

(b) any Contracts with suppliers,

(c) any R&D subcontracting frame Contracts,

(d) the lease Contracts listed in Annex 3.3.3(d),

(e) any Contracts under which all principal contractual obligations (including obligations under product or similar warranties) have been completely fulfilled as at the Effective Time; long-term agreements (Dauerschuldverhältnisse) which have been terminated without breach of the covenants contained in Section 19,

(f) the license Contracts listed in Annex 3.3.3(f),

(g) any Contracts relating to the sale or acquisition of any business or interest therein (whether by sale or purchase of shares or assets, merger, capital increase or otherwise),

(h) any insurance Contracts, unless transferred to Purchaser by operation of law upon Closing,

(i) offers and binding orders as listed in Annex 3.3.3(i) or relating to any of the Contracts referenced under this Section 3.3.3, and

(j) this Agreement.

3.3.4 Cooperation regarding excluded customer contracts

Regarding the customer contracts excluded as per Annex 3.3.3(a), the Parties will, to the extent necessary, conclude a separate agreement in accordance with the principles set out in Annex 3.3.4.

3.4 Sold Contract Parts and Excluded Contract Parts

3.4.1 Sold Contract Parts

The “Sold Contract Parts” shall comprise the parts of Contracts of a Seller Subsidiary with customers and other business partners not yet fully performed or settled as at the Effective Time and listed and described in Annex 3.4.1.

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3.4.2 Excluded Contract Parts

The “Excluded Contract Parts” shall comprise the parts of Contracts of a Seller Subsidiary with customers and other business partners not yet fully performed or settled as at the Effective Time and listed and described in Annex 3.4.2 and that are explicitly excluded from the sale and transfer to, and assumption by, Purchaser.

3.5 Excluded Items

The Excluded Assets, the Excluded Liabilities, the Excluded Contracts and the Excluded Contract Parts together are hereinafter collectively referred to as the “Excluded Items”.

4. The Sold Business pertaining to Seller Subsidiaries

The Sold Business shall be sold and transferred under this Agreement irrespective of which of the Sellers or Seller Subsidiaries it pertains to. The Annexes to Section 3, however, specify to which legal entity the respective asset, liability or Contract is attributable.

The “Sold Seller Subsidiary 1 Assets” and the “Sold Seller Subsidiaries 2 through 34 Assets” shall be the Sold Assets specified in the Annexes to Section 3.1.1 as pertaining to the respective Seller Subsidiary, and shall comprise the “Sold Seller Subsidiary 1 Fixed Assets”, the “Sold Seller Subsidiaries 2 through 34 Fixed Assets”, the “Sold Seller Subsidiary 1 Inventory”, and the “Sold Seller Subsidiaries 2 through 34 Inventory”.

The “Sold Seller Subsidiary 1 Liabilities” and the “Sold Seller Subsidiaries 2 through 34 Liabilities” shall be the Sold Liabilities specified in the Annexes to Section 3.2.1 as pertaining to the respective Seller Subsidiary.

The “Sold Seller Subsidiary 1 Contracts” and the “Sold Seller Subsidiaries 2 through 34 Contracts” shall be the Sold Contracts specified in the Annexes to Section 3.3.1 as pertaining to the respective Seller Subsidiary.

The “Sold Seller Subsidiary 1 Contract Parts” and the “Sold Seller Subsidiaries 2 through 34 Contract Parts” shall be the Sold Contract Parts specified in the Annexes to Section 3.4.1 as pertaining to the respective Seller Subsidiary.

The Sold Seller Subsidiaries 1 through 34 Assets shall hereinafter be referred to as the “Sold Seller Subsidiaries Assets”.

The Sold Seller Subsidiaries 1 through 34 Liabilities shall hereinafter be referred to as the “Sold Seller Subsidiaries Liabilities”.

The Sold Seller Subsidiaries 1 through 34 Contracts shall hereinafter be referred to as the “Sold Seller Subsidiaries Contracts”.

The Sold Seller Subsidiaries 1 through 34 Contract Parts shall hereinafter be referred to as the “Sold Seller Subsidiaries Contract Parts”.

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5. Updates

5.1 Updated Annexes

No later than fifteen (15) Business Days prior to the Closing Date, Parent Seller shall deliver to Purchaser updated Annexes reflecting the Sold Business existing and expected to exist on the Closing Date. Parent Seller shall once more update and deliver to Purchaser the Annexes as final Annexes on and as of the Closing Date, it being understood, however, that each such update made after the Signing Date and before or on the Closing Date may only result from transactions (i) if undertaken before the Signing Date, then in the ordinary course of business as set out in Section 14.13, or (ii) if undertaken on or after Signing Date, then in the ordinary course of business and in compliance with Section 19, or (iii) approved by Purchaser pursuant to the next sentence. For the avoidance of doubt, Parent Seller will present at Closing to Purchaser all final Annexes (to the extent not yet approved pursuant to the preceding sentence or otherwise pursuant to this Agreement) for approval by Purchaser. Purchaser may approve each individual change in such final annexes for the purpose of this Agreement at its sole discretion. For the avoidance of doubt, any updates under this Section 5.1 shall only be possible for Annexes under Section 3 of this Agreement unless an update of other Annexes is explicitly provided for in this Agreement.

Any updated Annexes shall be submitted in a form that allows easy identification of any changes made to the Annexes attached to this Agreement on the Signing Date. Should a change not be easily identifiable in an updated Annex, Purchaser may decide in its sole discretion whether to rely on the original Annex or on the updated Annex in each case where any such difference is relevant.

5.2 Further assets relating to the Business

(a) For a period of six (6) months after the Effective Time, Purchaser shall have the right to claim, at its sole discretion and without consideration, the sale, assignment, transfer, conveyance and delivery, of any fixed assets, which cumulatively: (i) are used, on a regular basis, 50% or more by the Sold Business as operated at the Effective Time, (ii) have not been listed in this Agreement as items of the Sold Business, irrespective of whether such asset is listed as an Excluded Asset (the “Further Assets”) to either Purchaser or to any of the Affiliates of Purchaser, in each case in accordance with the provisions of this Agreement, its Annexes and Schedules regarding the transfer and assignment provisions which would be applicable had such Further Assets been identified prior to Closing and listed in this Agreement, its Annexes and/or its Schedules. If Purchaser can reasonably provide evidence that any asset is a Further Asset, Sellers will grant Purchaser access to use such asset to the extent this is reasonably required for Purchaser’s ability to operate the Sold Business from the date of Purchaser’s request until such asset is transferred to Purchaser or to any of the Affiliates of Purchaser or, in case Sellers dispute the fact that such asset is a Further Asset, until a binding decision in accordance with Section 28.11 determines that such asset is not a Further Asset.

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(b) With respect to those certain assets listed in section 2 “Operations excluded Fixed Assets and equipment” and section 6 “End to end lab Munich excluded equipment” as per Annex 3.1.3(j), as well as with respect to NSN services labs and any other common NSN test labs used by several NSN businesses, the principle as per Section 3.1.3 shall override the principle as per Section 5.2 a) above.

(c) If any asset is used, on a regular basis, at least 30% or more but less than 50% by the Sold Business as operated at the Effective Time and irrespective of whether such asset is an Excluded Asset, Purchaser, for a period of six (6) months after the Effective Time, shall have the option to purchase from Sellers such asset as follows: The purchase price shall be the fair market price prorated to the percentage of remaining usage of such asset by Sellers; e. g. in the event an asset is used at 40% by the Purchaser, Purchaser shall be obliged to pay 60% of the fair market price. Furthermore, the Parties shall agree on fair market terms in good faith, provided that Sellers shall be granted sufficient time to source an adequate replacement for such asset. Sellers will grant Purchaser access to use of such asset to the extent reasonably required for Purchaser’s ability to operate the Sold Business from the date of the purchase request until the negotiations regarding the purchase or the replacement are finalized, however, such negotiations shall be concluded in a reasonable time.

(d) If Seller can reasonably establish within six (6) months after Closing that any asset exceeding EUR 2.000 (in words: Euro two thousand) is used, on a regular basis, as to less than 30%, by the Sold Business but is nevertheless required to operate the Sold Business (in each case as operated at the Effective Time) and irrespective of whether such asset is an Excluded Asset, Sellers will grant Purchaser access to use of such asset to the extent reasonably required for Purchaser’s ability to operate the Sold Business from the date of Purchaser’s request and for such period of time as sufficient for Purchaser to source an adequate replacement for such asset.

6. Sale, Assignment and Transfer, Assumption of the Sold Business

6.1 Sale, Assignment and Transfer of Sold Assets

6.1.1 Sale of Sold Assets

(a) Seller Subsidiary 1 hereby sells to Purchaser the Sold Seller Subsidiary 1 Assets,

(b) Parent Seller hereby sells to Purchaser all other Sold Assets, in particular the Sold Seller Subsidiaries Assets, with exception of the Sold Seller Subsidiary 1 Assets,

and Purchaser hereby accepts such sales.

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6.1.2 Assignment and transfer of Sold Assets

At Closing,

(a) Seller Subsidiary 1 shall assign and transfer to Purchaser title to the Sold Seller Subsidiary 1 Assets pursuant to Section 13.7.3(b),

(b) Parent Seller shall cause Seller Subsidiaries 2 through 34 to sell, assign and transfer to Purchaser or, as the case may be, to the respective Affiliate Purchaser or, if so instructed by Purchaser, to another Affiliate of Purchaser, title to the Sold Seller Subsidiaries Assets, with exception of the Sold Seller Subsidiary 1 Assets, pursuant to Section 13.7.3(b),

and Purchaser shall, or shall cause the respective Affiliate Purchaser or the respective Affiliate of Purchaser, to, accept such sale, assignment and transfer pursuant to Section 13.7.3(b) at Closing.

6.2 Sale, assignment, transfer and assumption of Sold Liabilities

6.2.1 Sale of Sold Liabilities

(a) Seller Subsidiary 1 hereby sells to Purchaser the Sold Seller Subsidiary 1 Liabilities,

(b) Parent Seller hereby sells to Purchaser the Sold Seller Subsidiaries Liabilities, with exception of the Sold Seller Subsidiary 1 Liabilities,

and Purchaser hereby accepts such sale.

6.2.2 Assignment, transfer and assumption of Sold Liabilities

At Closing,

(a) Seller Subsidiary 1 shall assign and transfer to Purchaser by way of assumption of liability under full discharge (Schuldübernahme mit schuldbefreiender Wirkung) of Seller Subsidiary 1 the Sold Seller Subsidiary 1 Liabilities pursuant to Section 13.7.3(b),

(b) Parent Seller shall cause Seller Subsidiaries 2 through 34 to sell, assign and transfer to Purchaser or, as the case may be, to the respective Affiliate Purchaser or, if so instructed by Purchaser, to another Affiliate of Purchaser, by way of assumption of liability under full discharge (Schuldübernahme mit schuldbefreiender Wirkung) of the respective Seller Subsidiary the Sold Seller Subsidiaries Liabilities, except for the Sold Seller Subsidiary 1 Liabilities, pursuant to Section 13.7.3(b),

and Purchaser shall, or shall cause its respective Affiliate Purchaser or the respective Affiliate of Purchaser, to, accept such sale, assignment, transfer and assumption pursuant to Section 13.7.3(b) at Closing.

6.3 Sale, assignment, transfer and assumption of Sold Contracts and Sold Contract Parts

6.3.1 Sale of Sold Contracts and Sold Contract Parts

(a) Seller Subsidiary 1 hereby sells to Purchaser the Sold Seller Subsidiary 1 Contracts and the Sold Seller Subsidiary 1 Contract Parts

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(b) Parent Seller hereby sells to Purchaser the Sold Seller Subsidiaries Contracts and the Sold Seller Subsidiaries Contract Parts, except for the Sold Seller Subsidiary 1 Contracts and the Sold Seller Subsidiary 1 Contract Parts,

and Purchaser hereby accepts such sale.

6.3.2 Assignment, transfer and assumption of Sold Contracts and Seller Subsidiary 1 Transferred Contract Parts

At Closing,

(a) Seller Subsidiary 1 shall assign and transfer to Purchaser by way of assumption of contract under full discharge (Vertragsübernahme mit schuldbefreiender Wirkung) of Seller Subsidiary 1 the Sold Seller Subsidiary 1 Contracts and the Sold Seller Subsidiary 1 Contract Parts, pursuant to Section 13.7.3(b),

(b) Parent Seller shall cause Seller Subsidiaries 2 through 34 to sell, assign and transfer to Purchaser or, as the case may be, to the respective Affiliate Purchaser or, if so instructed by Purchaser, to another Affiliate of Purchaser, by way of assumption of contract under full discharge (Vertragsübernahme mit schuldbefreiender Wirkung) of the respective Seller Subsidiary the Sold Seller Subsidiaries Contracts and Sold Seller Subsidiaries Contract Parts, with exception of the Sold Seller Subsidiary 1 Contracts and the Sold Seller Subsidiary 1 Contract Parts, pursuant to Section 13.7.3(b),

and Purchaser shall, or shall cause its respective Affiliate Purchaser or the respective Affiliate of Purchaser, to, accept such sale, assignment, transfer and assumption pursuant to Section 13.7.3(b) at Closing.

6.4 Transfer of Seller Group Employees

6.4.1 *

6.4.1.1 *

6.4.1.2 *

6.4.1.3 *

6.4.1.4 *

6.4.1.5 *

6.4.1.6 *

6.4.1.7 *

6.4.1.8  Transformation of works council agreements

The works council agreements (Konzernbetriebsvereinbarungen, Gesamtbetriebsvereinbarungen und örtliche Betriebsvereinbarungen) in existence and applicable to the Seller Subsidiary 1 Employment Contracts as at the Effective Time shall remain in force either as individual contractual agreements or as collective agreements in accordance with Section 613a BGB.

*CONFIDENTIAL TREATMENT REQUESTED

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6.4.1.9  Personnel files

Seller Subsidiary 1 shall deliver all relevant personnel files (for payroll purposes etc.) as well as the personnel file (Personalakte) of Seller Subsidiary 1 Transferred Employees to Purchaser at the Effective Time. Details of the delivery are subject to mutual agreement of Seller Subsidiary 1 and Purchaser.

6.4.2 *

6.4.3 *

6.4.4 *

6.5 *

6.6 Release and indemnification of Sellers from Sellers Guarantees

6.6.1 Release

Purchaser shall, prior to the Effective Time, use best reasonable efforts to procure the full and unconditional release with effect as of the Effective Time of Sellers, Seller Subsidiaries, their respective Affiliates, officers, directors, direct or indirect shareholders, employees and agents, from any obligations and liabilities relating to any guarantees, comfort letters, performance bonds and other security interests and/or co-liability of any kind which (i) are either listed in Annex 6.6.1 or (ii) have been provided or will be provided prior to the Effective Time with Purchaser’s written consent by any of the Sellers, Seller Subsidiaries, their respective Affiliates, officers, directors, direct or indirect shareholders, employees or agents, in favor of the Sold Business for obligations to banks, other financial institutions, suppliers, customers or other third parties (“Sellers Guarantees”) and each and any liability thereunder with effect as of the Effective Time provided, however, that Purchaser shall have no obligation to make any payment or bear any other cost or charge except for providing the beneficiary of any Sellers Guarantee with an equivalent guarantee. Sellers shall notify Purchaser of any outstanding Sellers Guarantees and the amount of the aggregate (actual or contingent) liability thereunder at least ten (10) Business Days prior to the Effective Time.

6.6.2 Indemnification

With effect as of the Effective Time, Purchaser hereby (i) assumes any and all obligations and liabilities relating to Sellers Guarantees, and (ii) shall indemnify and hold Sellers and/or Seller Subsidiaries harmless from and against any obligations and liabilities arising under or in connection with the Seller Guarantees, from which Sellers, Seller Subsidiaries, their respective Affiliates, officers, directors, direct or indirect shareholders, employees or agents have not been released by the Effective Time.

*CONFIDENTIAL TREATMENT REQUESTED

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7. Third party consents, Purchaser’s indemnification covenants, release of payments and subcontracting

7.1 Acknowledgement of third party consent requirements

The Parties acknowledge that the debt releasing effect (die schuldbefreiende Wirkung) with respect to the assumption of the Sold Liabilities, Sold Contracts and the Sold Contract Parts under this Agreement vis-à-vis any third party will most likely require the consent of the respective third party (the “Third Party Assumption Consent”) pursuant to the law governing the respective legal relationship.

7.2 Reasonable efforts to obtain Third Party Assumption Consent

Parent Seller and the respective Seller Subsidiary shall use all reasonable efforts to obtain all necessary Third Party Assumption Consents without undue delay ideally prior to the Effective Time and Purchaser shall provide reasonable assistance to Parent Seller and/or the respective Seller Subsidiary, as the case may be.

7.3 Separation and split of Sold Contract Parts

Without undue delay after the Signing Date, Parent Seller and the respective Seller Subsidiary on the one side and Purchaser on the other side shall use all reasonable efforts to agree with the contractual parties of the Sold Contract Parts on a separation, split, transition, continuation, termination or cancellation, as the case may be, of the relevant contracts with respect to which Sold Contract Parts have been sold under or due to this Agreement, in order to perfect the transfer of the Sold Contract Parts and the retention of the Excluded Contract Parts.

7.4 Compensation for Third Party Assumption Consent

For the avoidance of doubt, and without prejudice to any right of Purchaser to withdraw from this Agreement under Section 13.6, if a Third Party Assumption Consent may only be obtained by payment of a compensation, penalty or similar charge to the respective third party, no member of Seller Group, nor, for the avoidance of doubt, Purchaser or any Affiliate of Purchaser, shall be liable for, or obliged to make, such payment or otherwise bear a compensation, penalty or similar charge.

7.5 Payments under Sold Contracts and/or Sold Contract Parts

7.5.1 Entitlement to receive payments

The respective Seller Subsidiary shall be entitled to keep any payments received under the Sold Contracts and/or the Sold Contract Parts if and to the extent such payments relate to periods prior to the Effective Time, while Purchaser shall be entitled to keep any payments received under Sold Contracts and/or the Sold Contract Parts if and to the extent such payments relate to periods on or after the Effective Time.

7.5.2 Release of payments after Effective Time

If on or after the Effective Time either Purchaser or any of the Seller Subsidiaries, as the case may be, receives from a third party any amount in part or in full to be paid

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under any of the Sold Contracts, any of the Sold Contract Parts or under any other contract of any of the Seller Subsidiaries being part of the Excluded Items, which should, in accordance with the terms of this Agreement, have been paid to the respective other Party, then the Party having received such amount shall release (auskehren) it to the respective other Party as follows:

(a) Each of the Seller Subsidiaries on the one hand and Purchaser on the other hand shall, by the end of each month, provide to the respective other Party a statement showing the amounts of any such incorrect payment received by them.

(b) The aggregate amounts shown on the monthly statements of the respective Seller Subsidiary on the one hand and Purchaser on the other hand shall be automatically set off against each other upon receipt of the respective monthly statements by the respective Seller Subsidiary on the one hand and Purchaser on the other hand, and the net amount owed by the respective Seller Subsidiary to Purchaser (or vice versa, as the case may be) shall become due and payable (fällig) on the last Business Day of the subsequent month.

(c) Should any of the Seller Subsidiaries or Purchaser, after having received the relevant monthly statements and after reasonable consultation, disagree as to the net amount payable, then (i) Parent Seller and Purchaser shall mutually agree on and appoint a public accounting expert (Wirschaftsprüfer), and (ii) in the event Parent Seller and Purchaser will not mutually agree on and appoint a public accounting expert (Wirschaftsprüfer) within another two (2) weeks or such expert does not accept the appointment within such time period, each of the respective Seller Subsidiaries and Purchaser may request the “Institut der Wirtschaftsprüfer in Deutschland e.V.”, Düsseldorf, to appoint an internationally-renowned accounting firm to act as a public accounting expert (Wirtschaftsprüfer), (the “Expert”) to determine the respective net amount(s) payable with final and binding effect for both Parties. The Expert shall also decide upon the final and binding allocation of his fees and expenses based upon the degree of success of both Parties. Once the Expert has been appointed, such Expert shall also decide upon any future disagreements as to the respective net amount payable of any future statements.

(d) Section 7.5.2(a) through (c) shall apply from the Effective Time for a period of two (2) years with the proviso that the statements as referred to in Section 7.5.2(a) shall be provided on a quarterly basis during the second year only.

(e) After two (2) years from the Effective Time, Section 7.5.2(a) through (c) shall apply mutatis mutandis with the proviso that only one (1) further statement shall be produced with respect to the time period of one (1) additional year by the end of such subsequent year and that the respective net amount shall be due on the last Business Day of the month following such subsequent year.

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7.6 Subcontracting

7.6.1 Internal relationship

The respective Seller Subsidiary and Purchaser shall,

(a) for the period after the Effective Time until the necessary Third Party Assumption Consent has been obtained or the necessary condition required for the effective sale and transfer of an item of the Sold Business has been satisfied, or

(b) for an indefinite period of time, if it is impossible or impracticable to obtain the Third Party Assumption Consent or to satisfy a condition required for the effective sale and transfer of an item of the Sold Business, or if the third party refused to grant the Third Party Assumption Consent,

for the purposes of their internal relationship (im Innenverhältnis), conduct themselves in such a way as if the transfer of the respective item of the Sold Business had fully and effectively taken place as at the Effective Time. In these cases, the respective Seller Subsidiary shall, with regard to its external relationship (im Außenverhältnis), remain the owner of, debtor of, party to or responsible for the relevant item of the Sold Business, as the case may be, but will continue to hold and be responsible for the relevant item of the Sold Business in the internal relationship between the respective Seller Subsidiary and Purchaser for the account of Purchaser. With respect to any of the Sold Contracts and/or the Sold Contract Parts held by the respective Seller Subsidiary for the account of Purchaser, the respective Seller Subsidiary shall cause or permit the terms or conditions of the Sold Contracts and/or the Sold Contract Parts held by the respective Seller Subsidiary for the account of Purchaser to be modified without the prior written consent of Purchaser and Purchaser shall, vis-à-vis the other party of such Sold Contract and/or such Sold Contract Part and with regard to its external relationship, perform such Sold Contract and/or such Sold Contract Part, to the extent legally permissible, as subcontractor of the respective Seller Subsidiary for the account of the respective Seller Subsidiary (the “Subcontracting”). Further details of such subcontracting arrangement are set out in Annex3.4.1.

7.6.2 No Subcontracting

If and to the extent for any of the Sold Contracts and/or any of the Sold Contract Parts (i) the necessary Third Party Assumption Consent has not been obtained prior to the Effective Time and (ii) Subcontracting is legally not permissible, the respective Sold Contracts and/or the respective Sold Contract Parts shall be deemed not to have been transferred to Purchaser. Instead the respective Seller Subsidiary shall use reasonable efforts to terminate the respective Sold Contracts and/or the respective Sold Contract Parts vis-à-vis the third party as soon as possible and at its own costs and expenses. Purchaser shall use reasonable efforts to enter into a new contractual relationship regarding the respective terminated Sold Contracts and/or the respective terminated Sold Contract Parts with the respective third party as soon as practicable and the respective Seller Subsidiary shall use reasonable efforts to support Purchaser to enter into such new contractual relationship.

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8. New Agreements between Sellers and Purchaser

At Closing, Seller Group and Purchaser shall enter into the following agreements:

(a) Intellectual property rights license agreement in the form attached hereto as Annex 8(a);

(b) intellectual property rights assignment agreement in the form attached hereto as Annex 8(b);

(c) lease agreements on office space and premises substantially in the form attached hereto as Annex 8(c);

(d) the umbrella transition service agreement (with individual transition service agreements attached thereto as annexes) in the form as attached hereto as Annex 8(d);

(e) OEM agreements for certain product supply and services which the parties will negotiate in good faith between Signing and Closing.

9. Purchase Price

9.1 Fixed Purchase Price and Variable Purchase Price

Purchaser shall pay as consideration for the Sold Business a purchase price which is composed of a fixed purchase price and a variable purchase price.

9.2 Fixed Purchase Price

The fixed purchase price amounts to net * (the “Fixed Purchase Price”).

9.3 Variable Purchase Price

The variable purchase price shall be equal to the ET Working Capital as defined under Section 11.2.1 as at the Effective Time (the “Variable Purchase Price”). The Variable Purchase Price can be positive or negative.

9.4 Final Purchase Price

The aggregate amount of Fixed Purchase Price and Variable Purchase Price is hereinafter referred to as the “Final Purchase Price”.

*CONFIDENTIAL TREATMENT REQUESTED

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9.5 Withholding Taxes

9.5.1 The Purchaser will be entitled to deduct and/or withhold from the Purchase Price or any other payment made or deemed to have been made pursuant to this Agreement and any of the Ancillary Agreements such amounts as the Purchaser is required or entitled to deduct and/or withhold under the applicable Tax laws with respect to the making of such payment. If Purchaser is furnished by the respective recipient of such payment with a certificate of exemption (Freistellungsbescheinigung) certifying that Purchaser may refrain from withholding any withholding Tax sufficiently in advance of the time at which Purchaser executes the respective payment to allow Purchaser to ascertain the legal implications of the certificate of exemption provided to it, Purchaser will refrain from making a deduction and/or withholding insofar as the certificate of exemption allows Purchaser to do so. All amounts properly withheld and deducted shall be treated as paid to the applicable recipient to the extent that such amounts are properly remitted to the appropriate authority.

9.5.2 To the extent the Purchaser believes that it is required to deduct or withhold from the Purchase Price or any payment made or deemed to have been made pursuant to this Agreement or any Ancillary Agreements, the Purchaser shall provide the Seller with timely notice of its intent to deduct or withhold, the amount it believes it is required to deduct or withhold, and the legal basis for the deduction or withholding requirement. To the extent the Seller timely raises any objections to the requirement to deduct or withhold (or determination of the amount of deduction or withholding), the Purchaser shall work in good faith with the Seller to resolve any differences as to the requirement to deduct or withhold and the amount of required deduction or withholding for so long as Purchaser considers it not unlikely that such resolution will be reached.

9.5.3 The Purchaser shall provide reasonable assistance to the respective Seller by providing it with appropriate documentation on the effected payment and the Taxes withheld in order to help it to obtain a Tax refund or credit under the applicable Tax Laws.

9.6 Final Purchase Price allocation

Parent Seller shall prepare a written statement allocating the Final Purchase Price on the Sold Business taking into account, to the extent possible considering the Accounting Principles, Purchaser’s requirement to comply with US GAAP (the “Allocation Statement”) and shall provide Purchaser with the Allocation Statement within reasonable time, but not later than eight (8) weeks after the Closing Date taking into account arm’s length principles. Parent Seller shall update the Allocation Statement and provide Purchaser with an updated statement (the “Updated Allocation Statement”) within ten (10) Business Days following the delivery of the ETWC Statement pursuant to Section 11.2.2.

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Should Parent Seller and Purchaser not agree on the appropriate allocation of the Final Purchase Price within four (4) weeks after the Parent Seller has received the Updated Allocation Statement, then Parent Seller and Purchaser shall each be entitled to allocate the Purchase Price as they deem necessary under their applicable statutory requirements.

9.7 ET Working Capital

9.7.1 Determination of ET Working Capital

The ET Working Capital shall be determined on the basis of the Working Capital as defined in Section 11.1 and the ETWC Statement as defined in Section 11.2.1.

9.7.2 ET Working Capital Estimate

No later than five (5) Business Days prior to the Scheduled Closing Date, Parent Seller shall submit to Purchaser in writing a reasonable and good faith estimate of the ET Working Capital which will be based on the last monthly financial report available before the Closing Date and which estimate shall take into account material accounting transactions occurred after such monthly financial report but before submission of the good faith estimate (the “ET Working Capital Estimate”). In the event the Scheduled Closing Date is deferred, Parent Seller shall be entitled to submit to Purchaser a revised ET Working Capital Estimate.

9.8 Closing Payment

9.8.1 At Closing, Purchaser shall pay

(a) the Fixed Purchase Price less the Escrow Amount plus or minus, as the case may be, an amount equal to the ET Working Capital Estimate to the account specified in Section 11.2;

(b) the Escrow Amount into the Escrow Account to secure any Escrow Claim (as defined below), in each case on the terms set out in Section 10.6 below.

If the ET Working Capital Estimate is negative and such negative ET Working Capital Estimate exceeds the amount of *, the Purchaser’s payment under Section 9.8.1(b) shall be reduced accordingly and any balance, if any, shall be paid into the Escrow Account. The Seller shall provide to the Purchaser for the amount of any such reduction an unconditional, irrevocable guarantee issued by a reputable German or Scandinavian bank payable on first demand (auf erstes Anfordern) with payment only to be made into the Escrow Account with a waiver of the ‘guarantor’s defenses of disputability (Anfechtbarkeit) and set-off (Aufrechnung).

9.8.2 *

9.9 Closing payment adjustments

If the ET Working Capital is greater than the ET Working Capital Estimate, Purchaser shall pay the balance to Seller Subsidiary 1 no later than ten (10) Business Days after the ET Working Capital has become final and binding in accordance with Section 11.2. If the ET Working Capital Estimate is greater than the ET Working Capital, Seller Subsidiary 1 shall pay the balance to Purchaser no later than ten (10) Business Days after the ET Working Capital has become final and binding in

*CONFIDENTIAL TREATMENT REQUESTED

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accordance with Section 11.2. The allocation of the Variable Purchase Price pursuant to Annex 9.3 shall apply on a pro-rata basis also to the allocation of the Closing payment adjustment in this Section 9.9.

9.10 VAT

The Parties assume that no VAT shall become payable with respect to the sale of the Sold Business pursuant to this Agreement. If and to the extent that VAT has been assessed in any jurisdiction with respect to the sale of the Sold Business pursuant to this Agreement against a Seller it shall become due and payable by the respective Purchaser in addition to the Final Purchase Price. In the event that VAT has been assessed, the Parent Seller shall or, as the case may be, shall cause the respective Seller to promptly submit an invoice in accordance with Section 14 German Value Added Tax Act or with any applicable similar foreign statutory law regulation. Any late payment interest or penalty payable on any applicable VAT shall be borne by Purchaser unless such delay has been caused by Sellers. Section 1.1 remains unaffected by the foregoing.

10. Payment Terms

10.1 Payment terms

If not stated otherwise in this Agreement any payments under this Agreement shall be made by wire transfer in immediately available funds, value as at the relevant due date set out in this Agreement or otherwise provided by law, free of bank and/or any other charges.

10.2 Bank account of Seller Group

All payments to Seller Group under this Agreement shall be made to the following bank account of:

	September 30,
Owner of Account:	*
Bank, Place:	*
IBAN:	*
SWIFT Code:	*

or to such other bank accounts of which Parent Seller has notified Purchaser at least three (3) Business Days prior to the instructions for the respective wire transfer being given.

10.3 Fulfilling effect of payments on Seller Subsidiary 1 bank account

The Parties agree that any payment made in accordance with Section 10.2 shall also have fulfilling effect (Erfüllungswirkung) with respect to any payment obligation of Purchaser vis-à-vis Seller Subsidiaries.

10.4 Purchaser’s bank account

All payments to Purchaser under this Agreement shall be made to the following bank account of Purchaser:

*CONFIDENTIAL TREATMENT REQUESTED

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	September 30,
Owner of Account:	*
Bank, Place:	*
IBAN:	*
SWIFT Code:	*

or to such other bank accounts of which Purchaser has notified Parent Seller at least three (3) Business Days prior to the instructions for the respective wire transfer being given.

10.5 Interest rate

Unless provided for otherwise in this Agreement, any payments due under this Agreement shall bear interest from and including the respective due date to, but not including, the date of actual payment, at the annual rate equal to 3-months EURIBOR rate as published on the website www.euribor-rates.eu at approx. 11:00 CET plus 2.5% on the Business Day immediately prior to the beginning date of the delay calculated as actual days divided by 360.

10.6 Terms of Escrow Account

The funds in the Escrow Account shall be held on the following terms:

10.6.1 Any bank or other charges in connection with the Escrow Account shall be charged to the Escrow Account.

10.6.2 Any interest generated on the Escrow Account (subject to any deduction of tax at source) shall be credited to the Escrow Account. The Parties agree that the funds contained in the Escrow Account shall be invested as one-month money (Monatsgeld) or day-to-day money (Tagesgeld), in each case as Parent Seller shall in its absolute discretion determine.

10.6.3 Subject to Section 10.6.5 below, the funds in the Escrow Account shall be retained for * months from Closing (the “Escrow Period”). At the end of the relevant Escrow Period and subject to Sections 10.6.4 through 10.6.5 below, the Escrow Amount shall be released to Parent Seller.

10.6.4 The Escrow Amount shall not be released to Parent Seller to the extent that Purchaser has notified Parent Seller prior to the expiry of the Escrow Period of any Guarantee Claim, claim under Section 14 or claims with respect to the * (any such claim jointly an “Escrow Claim”) (such notification to include a description of the underlying facts in reasonable detail and an estimate of the claimed amount). Purchaser’s right to refuse the release of relevant funds to Parent Seller ceases, however, if Purchaser has not, within six (6) months of such notification of an Escrow Claim commenced arbitration proceedings in accordance with Section 28.11 to pursue such Escrow Claim. Furthermore, such right to refuse the release of relevant funds is limited to the amounts specified as follows:

(a) until the commencement of the arbitration proceedings: to the amount estimated by Purchaser in the aforementioned notification;

*CONFIDENTIAL TREATMENT REQUESTED

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(b) after the commencement of the arbitration proceedings and prior to the decision on the merits by the arbitration tribunal: to the amount Purchaser has claimed in such arbitration proceedings (if a claim for an exact amount has not been asserted, or has been asserted besides other claims, the amount in dispute estimated by Purchaser in its equitable discretion shall be relevant; such amount in dispute shall not be reduced by any reductions due to certain types of claims, but increased by the anticipated amount of the costs and expenses to be incurred by Purchaser);

(c) after the aforementioned decision on the merits: to the amount of an Escrow Claim awarded to Purchaser by the arbitration tribunal; if the arbitration tribunal determines—aside from, or instead of, the foregoing award—that Purchaser is entitled to a payment under an Escrow Claim on its merits without determining the amount of such claims, the amount in dispute set forth in 10.6.4(b) shall remain applicable;

(d) in the event of a compromise settlement between the Parties: to the amount agreed upon by the Parties, irrespective of the amounts set forth in 10.6.4(a) through (c).

In the event any amounts on the Escrow Account exceed the amount determined in accordance with 10.6.4(a) through (d), the balance shall then be released to Parent Seller.

10.6.5   To the extent that any Escrow Claim has been agreed upon by the Parties or determined by an award of the arbitration tribunal, the amount of such Escrow Claim shall be released from the Escrow Account to Purchaser.

10.6.6   The Parties undertake to issue instructions to the Bank of America for investments on and releases from the Escrow Account due under the above subsections in any case without undue delay and in writing.

10.6.7   Any rights and obligations of Purchaser under this Section 10.6 do not limit or restrict any claims and other rights of Purchaser under this Agreement. The Escrow Amount shall be held exclusively as security and collateral for any claims of Purchaser under this Agreement. Purchaser shall not be obligated to seek foreclosure on any such security or collateral.

11. Working Capital, ET Working Capital, ETWC Statement

11.1 Working Capital definition

The “Working Capital” shall mean the amount equal to the balance of

the aggregate amount of the Sold Inventory, pre-payments made (geleistete Anzahlungen) by Sellers or any of the Seller Subsidiaries under the Sold Contracts and the Sold Contract Parts,

less

the following of the Sold Liabilities: (v) pre-payments received (erhaltene Anzahlungen) by Sellers or any of the Seller Subsidiaries under the Sold Contracts and the Sold Contract Parts, (w) any other liabilities relating to the Transferred Employees, (x) warranty provisions for the Sold Contracts, (y)

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loss provisions for the Sold Contracts and (z) any other provisions related to the Sold Contracts.

A calculation example of Working Capital is attached as Annex 11.1.

11.2 ET Working Capital

11.2.1   ETWC Statement

The Working Capital as at the Effective Time shall be determined on the basis of an interim working capital statement for the Sold Business as at the Effective Time (the “ETWC Statement” and the Working Capital of the Sold Business as at the Effective Time so determined the “ET Working Capital”) which shall be prepared by Seller Subsidiary 1 in accordance with the Accounting Principles. The ETWC Statement may be revised with binding effect for the Parties in accordance with the provisions of Sections 11.2.2 to 11.2.4.

11.2.2   Delivery of ETWC Statement

Parent Seller shall deliver to Purchaser the ETWC Statement as soon as practicable, but no later than sixty (60) days, after the Closing Date including a calculation of the ET Working Capital based on the ETWC Statement.

11.2.3   Revised ETWC Statement

The ETWC Statement including the ET Working Capital shall be final and binding between the Parties unless Purchaser objects to the ETWC Statement including the ET Working Capital in writing within thirty (30) days after receipt of the ETWC Statement by providing Parent Seller within an additional sixty (60) days after receipt of the written objection to the ETWC Statement by Parent Seller with a written report asserting that the ETWC Statement including the ET Working Capital is incorrect or incomplete by way of

(a) stating specific objections to specific items, and

(b) submitting a revised ETWC Statement including the ET Working Capital (the “Revised ETWC Statement” prepared by or on behalf of Purchaser and taking into account the changes that are necessary in Purchaser’s view. Any costs incurred by Purchaser in accordance with the Revised ETWC Statement shall be borne by Purchaser.

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11.2.4 ETWC dispute resolution

If Parent Seller and Purchaser cannot agree on the changes shown in the Revised ETWC Statement within one (1) month following delivery of the Revised ETWC Statement, then (i) Parent Seller and Purchaser shall mutually agree on and appoint a public accounting expert (Wirschaftsprüfer), and (ii) in the event Parent Seller and Purchaser will not mutually agree on and appoint a public accounting expert (Wirschaftsprüfer) within another two (2) weeks or such expert does not accept the appointment within such time period, each of Parent Seller and Purchaser may request the “Institut der Wirtschaftsprüfer in Deutschland e.V.”, Düsseldorf, to appoint an internationally, renowned accounting firm to act as a public accounting expert (Wirtschaftsprüfer), (the “ETWC Statement Expert”) to determine the correct ETWC Statement including the ET Working Capital with final and binding effect for both Parties. The ETWC Statement Expert shall also decide upon the final and binding allocation of his fees and expenses based upon the degree of success of both Parties. To the extent that the ETWC Statement Expert requests any advance payment, Parent Seller and Purchaser shall make such advance payment in equal parts, such prepayment being taken into account by the ETWC Statement Expert in his decision on the allocation of his fees and expenses.

12. *

13. Closing; Closing Conditions

13.1 Closing; Closing Date

The Parties shall effect the consummation of the transactions contemplated by this Agreement (the “Closing”) at the offices of Bird & Bird LLP in Pacellistraße 14, 80333 Munich, Germany at 10:00 a.m. hours CET on the respective NSN cut-off day (as forth in Annex 13.1) that (i) directly follows the date on which the last of the Positive Closing Conditions (as defined below) has been satisfied or been waived by Purchaser (the “1^st Cut-Off Day”) provided that the last Closing Condition has been satisfied ten (10) Business Days prior to such NSN cut-off day at the latest (the “Cut-Off Deadline”), or (ii) directly follows the 1^st Cut-Off Day if the Cut-Off Deadline has not been met, however, in no event prior to 30 March 2012 (the latter date the “Scheduled Closing Date”), or at such place and time Parent Seller and Purchaser will have agreed upon. The date at which Closing actually occurs shall heretofore and hereinafter be referred to as the “Closing Date”.

13.2 Closing Conditions

13.2.1 Joint Closing Condition

The obligation to carry out the Closing shall be subject to the satisfaction of the following condition precedent (aufschiebende Bedingung) to Closing (the “Joint Closing Condition”):

the employment relationships (Anstellungsverhältnisse) of * Seller Group Employees have passed to Purchaser either by way of transfer of business or because they have entered into a tripartite agreement with Purchaser and

*CONFIDENTIAL TREATMENT REQUESTED

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their current employer and the time in which the respective Seller Group Employee can still object to the transfer of business has lapsed,

13.2.2   Purchaser Positive Closing Conditions

Purchaser shall only be obliged to carry out the Closing if – in addition to the Joint Closing Condition – each of the following conditions precedent (aufschiebende Bedingungen) has been satisfied (together with the Joint Closing Condition the “Purchaser Positive Closing Conditions”):

(a) The employment relationships (Anstellungsverhältnisse) of the individuals listed in Annex 13.2.2(a) (the “Key Individuals”) have passed to Purchaser either by way of transfer of business and the time in which the respective Key Individual can still object to the transfer of business has lapsed or because they have entered into a tripartite agreement with Purchaser and their current employer;

(b) legally binding consents to the transfer of the contractual relationships listed in Annex 13.2.2(b) have been obtained and delivered to Purchaser;

(c) Purchaser shall have obtained the information and documents regarding the IT systems pertaining to the Sold Business and in the form as set out in Annex 13.2.2(c);

(d) a period of one month has lapsed since the Seller Subsidiary 1 Employees Information Letter has been sent to the Seller Subsidiary 1 Employees transferring to Purchaser under Section 613a of the German Civil Code;

(e) (i) Nokia Corporation and Purchaser have signed a license agreement substantially in the form of Annex 13.2.2(e)(y) and (ii) Siemens AG and Purchaser have signed a license agreement substantially in the form of Annex 13.2.2(e)(z);

(f) the * Seller Group Employees as referred to in Section 13.2.1 shall be composed in accordance with Annex 13.2.2(f);

(g) Seller Subsidiary 1 and the relevant NSN works council(s) have entered into a conciliation of interests allowing to separate the Sold Business from NSN’s remaining business (Betriebsspaltungen) and to relocate the Sold Business to other premises (Betriebsverlagerungen) or the conciliation board (Einigungsstelle) has determined in accordance with Section 112 German Works Constitution Act (Betriebsverfassungsgesetz) that a conciliation of interests as described above has failed;

(h) the Parties have opened a joint bank account with * (herein referred to as the “Escrow Account”).

*CONFIDENTIAL TREATMENT REQUESTED

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13.2.3   Sellers Positive Closing Condition

Sellers shall only be obliged to carry out the Closing if – in addition to the Joint Closing Conditions –the following condition precedent (aufschiebende Bedingung) has been satisfied (the “Sellers Positive Closing Condition”; the Purchaser Positive Closing Conditions and the Sellers Positive Closing Condition jointly referred to as the “Positive Closing Conditions“):

Purchaser has established the Affiliates of Purchaser listed in subsection A of Annex 13.2.3 and has provided written evidence regarding the initiation of the establishment of the Affiliates of Purchaser listed in subsection B of Annex 13.2.3.

13.2.4   Purchaser Negative Closing Condition

Purchaser shall further only be obliged to carry out the Closing if the following (the “Purchaser Negative Closing Condition) did not occur:

A change, circumstance, event or effect has occurred or become known by either Purchaser or any of the Sellers since the Signing Date, with respect to the Sold Business that individually has a material adverse effect on the assets and liabilities, financial or profit situation or business operations, of the Sold Business, in each case being outside the Ordinary Course of Business and in excess of * (a “Material Adverse Change”).

For the avoidance of doubt, Purchaser shall bear the burden of proof that the Purchaser Negative Closing Condition has occurred. In the event that Purchaser refuses to close because Purchaser is of the opinion that the Purchaser Negative Closing Condition occurred, although the Purchaser Negative Closing Condition has in fact not occurred or could have been remedied by Seller Group prior to the Scheduled Closing Date, Purchaser shall indemnify Seller Group for all losses and detriments which Seller Group has suffered because Closing has not occurred or will not occur.

13.3   Waiver of Purchaser Closing Conditions

Purchaser shall be entitled in its absolute discretion, by written notice to Seller, (i) to waive the Purchaser Positive Closing Conditions and the Purchaser Negative Closing Condition with the exception of the Joint Closing Conditions either in whole or in part or (ii) to request from Seller to carry out the Closing. Any such waiver shall not preclude the exercise of any other right or remedy of Purchaser under this Agreement.

13.4   Waiver of Sellers Positive Closing Condition

Sellers shall be entitled in their absolute discretion, by written notice to Purchaser, (i) to waive the Sellers Positive Closing Condition either in whole or in part or (ii) to request from Purchaser to carry out the Closing. Any such waiver shall not preclude the exercise of any other right or remedy of Sellers under this Agreement.

13.5   Obligations with respect to the Closing Conditions

13.5.1 The Parties shall use all reasonable endeavors to ensure that the Closing Conditions are fulfilled as soon as possible after the Signing Date.

*CONFIDENTIAL TREATMENT REQUESTED

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13.5.2   The Parties shall inform each other without undue delay (unverzüglich) in each case as soon as any of the Positive Closing Conditions has been satisfied.

13.6   Right of Withdrawal

13.6.1   Each Party shall have the right to withdraw (zurücktreten) from this Agreement by written notice by the rescinding Party to the other Party if Closing has not occurred three (3) months after the Scheduled Closing Date.

13.6.2   In the event this Agreement is terminated due to withdrawal, the provisions set forth in Sections 19.8, 25, 26, 28.10 and 28.11 shall survive.

13.7   Closing and Closing Events

At the Closing, the Parties shall carry out the following actions as set out in Sections 13.7.1 through 13.7.3 (the “Closing Events”). Regardless of the order of the Closing Events set out below, each Closing Event shall only be deemed to have been carried out and become effective once all Closing Events have been carried out.

13.7.1 Deliveries of Parent Seller

Parent Seller shall deliver to Purchaser the following:

(a) an updated version of Annex 3.1.2(b), current as per three (3) Business Days prior to the Effective Time;

(b) one or several DVDs, containing the entirety of all documents uploaded to the electronic data room administered by * under the project name * (both regular data room and cleanroom), irrespective of whether such documents have been deleted from the electronic data room at a later point in time;

(c) documentation evidencing all Third Party Assumption Consents received until the Closing Date;

(d) resolutions of the board of directors of the Parent Seller approving the Transaction.

13.7.2   Deliveries of Purchaser

Purchaser shall

(a) deliver evidence to Seller Subsidiary 1 on the existence of Affiliate Purchaser(s), if any, as at Closing;

(b) resolutions of the board of directors of Purchaser’s Parent approving the Transaction;

(c) make the payments set out in Sections 9.8.1(a) and (b).

*CONFIDENTIAL TREATMENT REQUESTED

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13.7.3   Mutual deliveries

The relevant Parties shall subsequently execute, or provide, if executed prior to Closing, in the respective form:

(a) The agreements as set forth in Section 8;

(b) Transfer, assignment and assumption agreements for those parts of the Sold Business being sold pursuant to Sections 6.1.2, 6.2.2, 6.3.2(a) and (b), substantially in the form as attached as Annex 13.7.3(b) and in accordance with any applicable local laws.

13.8 Granting of possession

13.8.1   Sold Assets of Seller Subsidiary 1 located in Germany

Seller Subsidiary 1 shall grant possession of the Sold Seller Subsidiary 1 Assets which are located in Germany on the Closing Date at Sellers’ cost as follows:

(a) If and to the extent that Purchaser or the respective Affiliate Purchaser or the respective other Affiliate of Purchaser does not receive direct possession (unmittelbarer Besitz) of the Sold Seller Subsidiary 1 Assets on the Closing Date, Seller Subsidiary 1 hereby agrees, subject to the fulfilment of the Closing Events, as from the Closing Date, to hold the respective Sold Seller Subsidiary 1 Assets for the account, at the risk and the expense of, and as agent in accordance with Sections 930, 868 BGB (Besitzmittler) for, Purchaser and/or Affiliate Purchaser(s), if any, or the respective other Affiliates of Purchaser. Seller Subsidiary 1 shall deal with the respective Sold Seller Subsidiary 1 Assets in accordance with the reasonable instructions received from Purchaser and/or Affiliate Purchaser(s), if any and/or the respective other Affiliates of Purchaser.

(b) If and to the extent that Seller Subsidiary 1 is not in the direct possession of the Sold Seller Subsidiary 1 Assets on the Closing Date, Seller Subsidiary 1 assigns (abtreten) its claims for delivery (Herausgabeanspruch) of the respective Sold Seller Subsidiary 1 Assets against the respective third party to Purchaser and/or Affiliate Purchaser(s), if any, or the respective other Affiliates of Purchaser pursuant to Section 931 BGB.

13.8.2   Sold Assets located outside of Germany

Sellers shall procure that on the Closing Date or at the latest ten (10) Business Days thereafter, the respective Seller Subsidiaries grant Purchaser or the respective Affiliate Purchaser or the respective other Affiliate of Purchaser, as the case may be, possession of Sold Assets which are not located in Germany in accordance with local laws. Provided that Purchaser has set up local entities in accordance with the respective local laws in each country where parts of the Sold Assets are located and to which the Seller Group can validly transfer the respective part of the Sold Assets prior to or on the Closing Date, any costs related to the prior sentence shall be borne by Sellers; otherwise, any such costs shall be borne by Purchaser if and to the extent they exceed the costs otherwise to be borne by the Seller Group.

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13.9 Burden of risk and allocation of benefits

With respect to any particular Sold Asset sold, assigned and transferred pursuant to this Agreement, the risk of any incidental loss (zufälliger Untergang) or any incidental deterioration (zufällige Verschlechterung) of any such Sold Asset shall pass to Purchaser as at the Effective Time. The benefits and burdens (Nutzungen und Lasten) of all such Sold Assets shall accrue to Purchaser with effect as at the Effective Time. In particular, Purchaser shall, except as expressly otherwise provided for in this Agreement, be solely responsible and liable for costs involved in or associated with any investments relating exclusively or predominately to the Sold Business which are incurred on or after the Effective Time, including all costs of any reorganizations, redundancies or shut-downs initiated by Purchaser and carried out after Closing.

13.10 Closing Confirmation

At the Closing Date, immediately after all Closing Events have occurred, the Parties shall confirm to each other in writing (the “Closing Confirmation“) that all Closing Conditions and Closing Events have been duly fulfilled or waived and that Closing has occurred.

14. Guarantees by Sellers

Sellers hereby guarantee to Purchaser by way of an independent guarantee (selbständige Garantie) pursuant to Section 311 para. 1 BGB that the statements set forth in this Section 14 are complete, correct and not misleading, in each case as at the Signing Date and the Closing Date, unless it is specifically provided for that a guarantee shall be made as at a different date. Between Signing Date and Closing Date, Sellers may update any Annexes or Schedules under this Section 14 only if an update is expressly provided for in relation to a specific Annex or Schedule. For the avoidance of doubt, the underlying facts resulting in such an update shall not create any liability for Sellers.

14.1 Status of Seller Group

14.1.1 Parent Seller Status

Parent Seller has been duly established and validly exists as a Dutch limited liability company (besloten vennootschap met beperkte aansprakelijkheid – B.V.) under the laws of The Netherlands.

14.1.2 Seller Subsidiary 1 status

Seller Subsidiary 1 has been duly established and validly exists as a German private limited partnership (Kommanditgesellschaft) under the laws of Germany.

14.1.3   Seller Subsidiaries 2 through 34 status

Seller Subsidiaries 2 through 34 have been duly established and validly exist in the legal form as set forth in Annex 1C under the applicable local laws.

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14.1.4   Full authority

Each of the Sellers has the unrestricted right, power, authority and capacity to execute and consummate this Agreement and the transactions contemplated therein. All required approvals of any corporate bodies of Sellers and Seller Subsidiaries have been given.

14.1.5   No insolvency

No bankruptcy, insolvency or judicial composition or similar proceedings have been initiated or applied for under any applicable law regarding any of the Sellers, any of the Seller Subsidiaries or their assets, nor have any legal proceedings or other enforcement measures been initiated or applied for with respect to the legal estate (Vermögen) or individual assets of any of the Sellers or the Seller Subsidiaries. There exist no circumstances that would justify the opening of such proceedings in the future; in particular, none of the Sellers and the Seller Subsidiaries is over-indebted (überschuldet) or illiquid (zahlungsunfähig), nor is over-indebtedness or illiquidity impending.

14.1.6   No violation of legal provisions

The execution and consummation of this Agreement and of the transactions contemplated therein by Sellers and Seller Subsidiaries does not violate the articles of association or any partnership agreements or other corporate documents.

14.2 Validity of this Agreement

This Agreement constitutes legal, valid and binding obligations of Sellers.

14.3 *

14.4 Information Technology

Any computer hardware, software, firmware, and other information technology used by the Business and that belongs to the Sold Business (herein referred to as the “Information Technology”), is either owned or validly leased or licensed to the respective Seller or Seller Subsidiary for a period of at least up to the Closing Date. There are no circumstances in which the ownership, benefit, or right to use any Information Technology may be lost, or rendered liable to termination, by virtue of the performance of this Agreement, other than consent requirements.

The Information Technology has the necessary capacity to fulfill the requirements of the Sold Business. The elements of the Information Technology are functioning properly and have not been materially defective or materially failed to function during the last two (2) years. There have been no interruptions, virus outages or data loss in the Business which have had a material adverse effect on such Business. Sellers have taken all measures customary for the Business to prevent unauthorized access to the Information Technology and/or impairment of the Information Technology by computer viruses or similar programs. Sellers make regularly and sufficiently backup files of the software, data and databases used by them and prevent such software, data and databases from third parties’ access.

*CONFIDENTIAL TREATMENT REQUESTED

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14.5 Title to and condition of the Sold Assets

14.5.1   Title to the Sold Assets (General)

To the extent not indicated otherwise in Schedule 14.5.1(a), the sale and transfer of the Sold Assets does not require the consent and does not infringe the rights of third parties. Sellers and/or Seller Subsidiaries have the right to freely dispose of the Sold Assets. The Sold Assets (including the Leased Assets), comprise all material assets used in connection with and necessary to carry on the Sold Business as operated at the Signing Date. With the exception of the Leased Assets (as defined below) and of the assets listed in Schedule 14.5.1(b), the Parent Seller or any of the Seller Subsidiaries hold all rights, title and interest to or in all of the Sold Assets. The Sold Assets are free of any encumbrances or any other rights in favor of third parties with the exception or retention of title rights (Eigentumsvorbehalte) incurred in the ordinary course of business. Upon transfer of the Sold Assets, Purchaser shall acquire full and unrestricted title to the Sold Assets, free and clear of any rights of third parties, with the exception of the Leased Assets (as defined below) and of the assets listed in Schedule 14.5.1(c). Sellers shall be entitled to update Schedules 14.5.1 (a) to (c) with regards to facts and circumstances that occurred between the Signing Date and Closing, provided that such disclosure does not limit the guarantee as of the Signing Date.

14.5.2   Leased Assets

Annex 14.5.2 includes a complete and correct list of all assets related to the Business leased by any of the Sellers or the Seller Subsidiaries from any third party (the assets listed or to be listed in Annex 14.5.2 the “Leased Assets”). Sellers shall be entitled to update Annex 14.5.2 with regards to facts and circumstances that occurred between the Signing Date and Closing, provided that such disclosure does not limit the guarantee as of the Signing Date.

14.5.3   Condition of Sold Assets

Except as indicated otherwise in Schedule 14.5.3, the Sold Assets and the Leased Assets are in good operating condition and repair (ordinary wear and tear excepted) which is sufficient to carry on the Sold Business in the ordinary course of business and substantially in the same fashion and manner as conducted prior to the Closing Date.

14.5.4   Sold Fixed Assets

The Sold Fixed Assets are legally and beneficially owned and lawfully possessed by the respective Seller or the respective Seller Subsidiary unless sold in the ordinary course of business. Such Sold Fixed Assets are not charged or otherwise encumbered with third party rights. Exempted from the two foregoing sentences are transfers for security purposes (Sicherungsübereignungen), retention of title rights (Eigentumsvorbehalte) or statutory liens securing liabilities incurred in the ordinary course of business by the respective Seller or Seller Subsidiary with respect to the Sold Business.

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14.5.5 Sold Inventory

The Sold Inventory is legally and beneficially owned and lawfully possessed by Seller or the respective Seller Subsidiary unless sold in the ordinary course of business. Such current assets are not charged or otherwise encumbered with third party rights. Exempted from the two foregoing sentences are transfers for security purposes (Sicherungsübereignungen), retention of title rights (Eigentumsvorbehalte) or statutory liens securing liabilities incurred in the ordinary course of business by Seller or by a Seller Subsidiary with respect to the Sold Business.

The finished goods are in sound, serviceable and marketable condition.

14.6 Key Customers

Annex 14.6 contains, as of the Signing Date, a complete and correct list of the twenty (20) key customers of Sellers and Seller Subsidiaries in relation to the Sold Business as identified and agreed upon between the Parties already prior to the Signing Date, in each case indicating past approximate business volume.

14.7 Material Agreements

14.7.1 Sold Material Agreements

Annex 14.7.1 contains a complete and correct list of agreements (whether express or implied and whether entered into in writing or orally, in each case as amended) to which any of the Sellers and the Seller Subsidiaries is a party with respect to the Sold Business and which belong to the agreements assumed pursuant to Sections 3.3.1 and 3.4.1 and which have not yet been fully performed—including any secondary, accessory, contingent or future obligations—by all parties to such agreements, and falling within one or more of the following categories (collectively the “Sold Material Agreements”):

(a) agreements relating to the acquisition, sale or encumbrance of real property or rights similar to real property (grundstücksgleiche Rechte);

(b) agreements relating to the acquisition, sale or encumbrance of fixed assets, with a value of * or more in the individual case, and agreements relating to the acquisition or sale of enterprises, businesses or parts thereof;

(c) usufruct (Nießbrauch), rental, lease or leasing agreements (Miet- oder Leasingverträge) which impose annual payments of * or more in the individual case on any of the Sellers or the Seller Subsidiaries;

(d) license agreements entered into by any of the Sellers or the Seller Subsidiaries as licensor or licensee which impose annual payments of * or more in the individual case on the respective Seller or Seller Subsidiary;

(e) loan or other credit agreements entered into by any of the Sellers or the Seller Subsidiaries as lender or borrower (except for customary extensions of payment periods for receivables or payables granted or received in the ordinary course of business) as well as factoring agreements;

(f) agreements with authorized dealers (Vertragshändler) or commercial agents (Handelsvertreter);

*CONFIDENTIAL TREATMENT REQUESTED

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(g) employment agreements, service agreements or agreements with advisors or consultants providing for an annual remuneration of * or more in the individual case;

(h) agreements relating to profit or revenue participations (including employee participation schemes), stock options, and similar agreements or schemes;

(i) collective bargaining agreements (Tarifverträge) (including company collective bargaining agreements (Firmentarifverträge)) to which any of the Sellers or the Seller Subsidiaries is subject, including those effected by virtue of a decree of universal application (Allgemeinverbindlichkeitserklärung), shop agreements and in-house labor practices (betriebliche Übungen);

(j) joint venture, consortium, cooperation or similar agreements with third parties as well as any agreements which may have a restrictive impact on competition;

(k) agreements or obligations which have been entered into or incurred outside the ordinary course of business;

(l) other agreements and obligations which (i), to Sellers’ Knowledge, impose annual payments of * or more in the individual case on any of the Sellers or the Seller Subsidiaries, or (ii) the breach or termination of which could have a material adverse effect on the Sold Business.

All Sold Material Agreements are at arm’s length terms, valid, legally binding and enforceable. Since the Signing Date, none of the Sold Material Agreements has been terminated or materially amended. None of the Sellers and none of the Seller Subsidiaries has given or received any notice of ordinary or extraordinary termination to or from any counterparty with respect to any Sold Material Agreement. None of the Sold Material Agreements can be terminated as a consequence of the execution or consummation of this Agreement. There are no circumstances foreseeable due to which a Sold Material Agreement could be terminated for cause or otherwise subject to extraordinary termination. Sellers may update Annex 14.7.1 with regards to facts and circumstances that occurred between the Signing Date and Closing, provided that such disclosure does not limit the guarantee as of the Signing Date.

14.7.2 Performance of Sold Contracts

To Sellers’ Knowledge, the Sold Contracts are in full force and effect and are enforceable against the parties thereto in accordance with their respective terms. To Sellers’ Knowledge, Sellers and Seller Subsidiaries have performed and complied with all material obligations under the Sold Contracts and Seller Subsidiaries have not received any written information regarding any actual or possible material violation of any Sold Contracts.

14.8 *

*CONFIDENTIAL TREATMENT REQUESTED

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14.9 Permits

14.9.1 Annex 14.9.1 (a) contains a complete, correct and not misleading set of copies of all official permits, permissions, prohibitions, interdictions, sanctions (Auflagen), conditions (Bedingungen) and other official notifications (Bescheide) and orders (Verfügungen) of any authority, however, excluding any changes of laws and regulations (together “Official Notification(s)”) pertaining to the Sold Business or parts thereof which are still valid and in force and have been received by the respective Seller Subsidiary 1, Seller Subsidiary 8 or Subsidiary 10 at least one (1) month prior to the Signing Date or Closing, as the case may be (the “Key Country Official Notifications”). To Sellers’ Knowledge, Annex 14.9.1 (b) contains a complete, correct and not misleading set of copies of Official Notifications received any other Seller Subsidiary (“Country Official Notifications”) The Key Country Official Notifications and, to Sellers’ Knowledge, the Country Official Notifications, have been duly observed and will be duly observed until and including the Closing Date. The execution and consummation of this Agreement will not contravene any Key Country Official Notification and, to Sellers’ Knowledge, any Country Official Notifications. No Key Country Official Notification and, to Sellers’ Knowledge, no Country Official Notification, has been or is about to be revoked, suspended, annulled, restricted, tightened or otherwise modified as a whole or in part, and there are no circumstances which would justify such modification in the future. For the avoidance of doubt, any Official Notifications issued for the benefit of or to Sellers Group and that are tied to the respective local entity, such as export control licenses, are not transferred to Purchaser or any of its Affiliates under this Agreement.

14.9.2 Annex 14.9.2 (a) contains a complete, correct and not misleading list of all public subsidies, allowances, aids and other public grants, in particular, without limitation, within the meaning of Article 87 of the EC Treaty (the “Public Grants”) granted to any of the Sellers or the Seller Subsidiaries 8 and 10 with respect to the Sold Business under which Sellers or Sellers Subsidiaries 8 and 10 are as of the Effective Time still subject to obligations, specifying the type, amount and material terms and conditions of such Public Grants (the “Key Country Public Grants”). To Sellers’ Knowledge, Annex 14.9.2 (b) contains a complete, correct and not misleading list of Public Grants granted to any other Seller Subsidiaries with respect to the Sold Business under which such Seller Subsidiaries are as of the Effective Time still subject to obligations, specifying the type, amount and material terms and conditions of such Public Grants (the “Country Public Grants”). All Key Country Public Grants and, to Sellers’ Knowledge, all Country Public Grants, have been applied for, received and used only in accordance with applicable regulations. Except as disclosed in Schedules 14.9.2(a) and (b), the Key Country Public Grants and, to Sellers Knowledge, the Country Public Grants, will remain in full force and effect and available for use by Purchaser with respect to the Sold Business on identical terms and conditions as previously applicable and will, in particular, not have to be repaid as a result of the consummation of this Agreement or due to any other circumstances. None of the Sellers and the Seller Subsidiaries is under any obligation to maintain a certain number of employees at any location or in any region, or to maintain any business

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at all or in any region, under the terms of any of the Key Country Public Grants and, to Sellers’ Knowledge, any Country Public Grants, and no such obligation of Purchaser will be triggered by the execution and consummation of this Agreement.

14.9.3 Seller may update Annexes 14.9.1 (a) and (b) as wells as 14.9.2 (a) and (b) with regards to facts and circumstances that occurred between the Signing Date and Closing, provided that such disclosure does not limit the guarantee as of the Signing Date.

14.10 No Litigation

To Sellers’ Knowledge, except as disclosed in Schedule 14.10(a), there are (as per the Signing Date) no court litigation, arbitration, governmental investigations or inquiries, or administrative procedures initiated (anhängig), pending (rechtshängig) or threatened by or against any of the Sellers or the Seller Subsidiaries with respect to the Sold Business exceeding an amount in dispute of *.

Within the past three (3 ) years prior to the Signing Date, no judicial, arbitral or administrative litigation or other proceedings concerning the Sold Business and with a value in dispute of more than * other than those disclosed in Schedule 14.10(b) have been settled. The aforesaid shall apply mutatis mutandis to any judicial, arbitration or administrative litigation or other proceedings against managing directors, similar executives, supervisory board members, members of other corporate bodies or employees of the any of the Sellers or the Seller Subsidiaries arising from or in connection with their occupation with any of the Sellers or the Seller Subsidiaries.

14.11 Product Quality

Except as disclosed in Schedule 14.11(a), there are no claims based on product liability (Produkthaftung), product or service warranty or similar legal cause initiated (anhängig), pending (rechtshängig) or threatened against any of the Sellers or the Seller Subsidiaries relating to the Sold Business involving, in each case, an amount in excess of *. Except as disclosed in Schedule 14.11(b), within the past three (3) years prior to the Signing Date, none of the Sellers or the Seller Subsidiaries have, voluntarily or because they were under a statutory obligation to do so, recalled products or remedied defect products in connection with a product recall or issued a product warning to customers or consumers.

14.12 Compliance with Regulations

The Sold Business has been conducted in all material respects in compliance with all applicable legal provisions within the last three (3) years.

Neither any of the Sellers or of the Seller Subsidiaries, nor any managing director, similar executive, supervisory board member or other member of a corporate body of any of the Sellers or the Seller Subsidiaries or any of their employees have, in relation to the Sold Business, granted or promised any bribes (Schmiergelder) or other unlawful benefits (the “Undue Advantage”). None of the foregoing have accepted or been promised such Undue Advantage.

*CONFIDENTIAL TREATMENT REQUESTED

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14.13 Conduct of Business

From the beginning of the current fiscal year through the Signing Date, the Sold Business has been conducted exclusively in the ordinary course of business, with the standard of care of a prudent merchant (mit der Sorgfalt eines ordentlichen Kaufmanns) and consistent with prior practice, it being understood that Sellers and Seller Subsidiaries have since February 2011 not actively pursued new business opportunities with existing or new customers.

14.14 No Brokerage

Except as disclosed in Schedule 14.14 none of the Sellers or the Seller Subsidiaries is under any obligation to pay any brokerage, finder’s fee, commission, advisors’ fee, bonus, extra compensation, severance payment or other incentive to any third party in connection with the initiation, execution or consummation of the Transaction that would constitute a Sold Liability.

15. Remedies of Purchaser and Third Party Claims

15.1 Purchaser’s remedies

15.1.1 If and to the extent any of the statements in Section 14 is incomplete, incorrect or misleading (a “Seller Breach“), Sellers shall put Purchaser and/or, in Purchaser’s absolute discretion, any of the Affiliates of Purchaser within a period of one (1) month after receipt of a Breach Notice (as defined in Section 15.4 below) in the same position they would have been in had the statement been complete, correct and not misleading (“Restitution in Kind”—Naturalrestitution). To the extent that such Seller Breach consists in the existence of a liability, Purchaser’s right to demand restitution in kind shall include the right to demand a full indemnification with respect to such liability.

15.1.2 If Restitution in Kind as contemplated in Section 15.1.1 is impossible, or insufficient to fully compensate Purchaser, Sellers shall pay monetary damages (Schadenersatz in Geld) to Purchaser and/or, in Purchaser’s absolute discretion, to any of the Affiliates of Purchasers. If Restitution in Kind is fully impossible, such monetary damages shall substitute the Restitution in Kind; otherwise, monetary damages may be claimed by Purchaser in addition to Restitution in Kind.

15.1.3 If and to the extent that Sellers fail to provide Restitution in Kind within the period set forth in Section 15.1.1, Purchaser shall, in its absolute discretion, in whole or in part and in lieu of their right to demand Restitution in Kind, have the right to demand that Sellers shall pay monetary damages to Purchaser and/or, in Purchaser’s absolute discretion, to any of the Affiliates of Purchaser in such amount as would be necessary to effect the Restitution in Kind. Until Sellers have fully performed, Purchaser may freely modify its claim.

15.2 Definition of Damage

“Damage” shall mean all damages recoverable pursuant to Sec. 249 et seq. BGB.

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15.3 Advantages

Any advantages of Purchaser resulting from a Seller Breach (Vorteilsausgleich) and any rights of Purchaser against any third party for compensation for Damages shall be taken into account, even if Purchaser ceases to pursue reasonable actions to receive such advantages or rights upon becoming aware of the facts causing the Seller Breach. Unless provided otherwise herein, Sections 249 through 254 BGB shall apply.

15.4 Breach Notice

In the event that after Closing Purchaser obtains knowledge of a Seller Breach, Purchaser shall within sixty (60) days after discovery of the existence of a Guarantee Claim notify a Seller providing Purchaser’s reasoning for a potential claim as well as a description of the underlying facts in reasonable detail and an estimate of the claimed amount (the “Breach Notice”).

15.5 Exclusion of liability

Purchaser shall not be entitled to raise any claim in connection with a Seller Breach (a “Guarantee Claim”), if and to the extent

(a) an issue giving rise to a Guarantee Claim is covered under an insurance policy of or transferred to Purchaser;

(b) the underlying facts, circumstances or events forming the basis of Guarantee Claim were positively known by Purchaser at the Signing Date;

(c) have been disclosed to Purchaser in this Agreement and/or its Annexes and Schedules; or

(d) the Damage is higher than it otherwise would have been as a result of Purchaser having failed to

(aa) provide Parent Seller with a Breach Notice within the time period as set forth in Section 15.4,

(bb) give Parent Seller the opportunity to remedy the incorrectness within the time period pursuant to Section 15.1.1,

(cc) use reasonable efforts to mitigate the Damage,

(dd) comply with its obligations under Section 15.6.

(e) Purchaser has caused (verursacht oder mitverursacht) such Guarantee Claim.

15.6 Third Party Claims

Purchaser shall without undue delay (unverzüglich) give notice to Parent Seller of any claim, suit, action, audit or proceeding brought by a third party, including, without limitation, any government or tax authority, in respect of which Purchaser may seek any remedy against any of the Seller Subsidiaries hereunder (a “Third Party Claim”).

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15.7 Full access to information and participation rights of Parent Seller and/or Seller Subsidiaries

Purchaser shall ensure that Parent Seller is provided with all materials, information, documents and assistance relevant in relation to the Third Party Claim, be given reasonable opportunity to comment or discuss with Purchaser any measures which Parent Seller and/or the respective Seller Subsidiary may propose to take or to omit in connection with a Third Party Claim, and in particular Parent Seller shall be given without undue delay an opportunity to comment on, participate in (directly or through its Seller Subsidiaries), be provided with copies of and review any reports, orders (Bescheide), decisions, filings, motions and other documents of any court, authority or party to the conflict, including all relevant Tax and social security audits or other measures relating to the Sold Business. No acknowledgement of liability regarding Third Party Claims shall be made by or on behalf of a Purchaser, and the Third Party Claim shall not be compromised, disposed of or settled without the prior written consent of Parent Seller.

15.7.1 Parent Seller and/or Seller Subsidiaries Option Rights

Parent Seller may opt to (i) satisfy the respective Seller Subsidiary’s liability in respect of the Third Party Claim (directly or by its or respective Seller Subsidiary) (ii) deliver to Purchaser without undue delay a written notice of disagreement with the Third Party Claim and/or the liability of the respective Seller Subsidiary, specifying in reasonable detail, based upon the information then available to Parent Seller, the nature and extent of the disagreement. Parent Seller and/or the respective Seller Subsidiary may upon timely delivery of the notice of disagreement assume the defense against the Third Party Claim and, at Parent Seller’s and/or respective Seller Subsidiary’s own expense and discretion, take such action as it deems necessary to avoid, dispute, deny, defend, resist, appeal, compromise or contest such Third Party Claim (including making counter claims or other claims against third parties) in the name of and on behalf of Purchaser, and Purchaser will give subject to being paid all reasonable out-of-pocket costs and expenses, all such information and assistance, as described above. Sellers agree to use confidential information only for such purpose.

15.7.2 Standard of care when defending Third Party Claims

When defending the Third Party Claim, Parent Seller and/or respective Seller Subsidiary or Purchaser, as the case may be, shall (i) select counsel of recognized standing and competence, (ii) at all times diligently pursue a favorable resolution, (iii) keep each Party, at all times, informed about the status of defense measures, and (iv) comply with any reasonable request of the other Party with respect to the defense. Purchaser on one side or Parent Seller and/or respective Seller Subsidiary on the other side, as the case may be, shall be allowed a reasonable opportunity to participate in the defense with its own counsel and at its own expense.

15.7.3 Settlement of Third Party Claims

The defending Party shall be authorized to consent to a settlement of, or the entry of any judgment arising from, the Third Party Claim, only with the prior written consent of the other Party, such consent not to be unreasonably withheld. Notwithstanding the foregoing, each Party shall be entitled to settle any Third Party Claim at any time

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without the other Party’s consent, provided that it has previously assumed unconditionally and in writing any liability resulting from or in connection with such Third Party Claim.

15.7.4 Cost indemnification

Purchaser shall indemnify and hold Parent Seller and/or the respective Seller Subsidiary harmless from and against all losses incurred by Parent Seller and/or respective Seller Subsidiary in defending a Third Party Claim if and to the extent that such Third Party Claim or their underlying facts do not constitute a Seller Breach.

16. Limitation of Liability, Statute of Limitations, Default

16.1 Exclusion of other remedies

To the extent legally permissible, all explicit or implied representations or warranties by Sellers which might exist under statutory law or otherwise, other than those contained in this Agreement, are excluded. Furthermore, all other and further reaching rights and remedies of Purchaser which might exist under statutory law in connection with a Seller Breach, other than those contained in this Agreement, are excluded, including (i) any right of Purchaser to withdraw (zurücktreten) from this Agreement or to require the winding up of the transaction contemplated hereunder (e.g. by way of großer Schadenersatz or Schadenersatz statt der Leistung), (ii) any claims for breach of pre-contractual obligations (culpa in contrahendo), including, but not limited to, claims arising under Sections 241 (2), 311 (2) (3) BGB) (iii) any claims based on frustration of contract pursuant to Section 313 BGB (Störung der Geschäftsgrundlage), (iv) all remedies of Purchaser for defects of the purchase object under Sections 437 through 441 BGB, provided, however, that (a) claims for specific performance (Erfüllung) and (b) claims based on the respective Seller’s fraud (Arglist) or wilful misconduct (Vorsatz) shall not be excluded.

16.2 De Minimis, Basket, Cap

Sellers’ liability for Guarantee Claims, except for claims based on fraud (Arglist) or wilful misconduct (Vorsatz) or claims with respect to and to the extent to which a limitation is not permitted under German law (collectively “Exempted Claims”), shall be limited as follows:

16.2.1 De Minimis Claims

Guarantee Claims shall be excluded for a specific Seller Breach if and to the extent that the individual claim would be less than * (the “De Minimis Claim”).

16.2.2 Basket

Sellers’ liability for Guarantee Claims shall be excluded if the aggregate amount of all Guarantee Claims (excluding the De Minimis Claims) does not exceed *. Otherwise the complete aggregate amount shall be recoverable (Freigrenze).

16.2.3 Total liability cap

A Seller’s total liability for all claims of Purchaser other than Exempted Claims shall not exceed an amount equal to *.

*CONFIDENTIAL TREATMENT REQUESTED

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16.3 Statute of limitation

Claims of Purchaser shall be time-barred (verjähren) as follows:

(a) Claims of Purchaser based on a Seller Breach with regard to a statement set forth in Section 14.1, 14.2 and 14.5.1 shall be time-barred five (5) years after the Closing Date.

(b) Claims of Purchaser based on any of the Sellers’ fraud (Arglist) or wilful misconduct (Vorsatz) shall be time-barred three (3) years after Purchaser obtained knowledge of the existence and amount of the Guarantee Claim or Indemnity Claim.

(c) Claims of Purchaser for indemnification based on Section 17.1 shall be time-barred six (6) months after the relevant assessment (Bescheid) which is not subject to the statutory reservation for review by the relevant authority (Vorbehalt der Nachprüfung) has become final and binding (bestandskräftig).

(d) Any other claims of Purchaser pursuant to Section 14 of this Agreement shall be time-barred eighteen (18) months after the Closing Date.

(e) Sections 203 through 213 BGB shall apply.

16.4 No Seller Breach

For the avoidance of doubt: If and to the extent the transfer, assignment or assumption of a Sold Contract or a Sold Contract Part fails because a Third Party Assumption Consent could not be obtained, this shall not be deemed a Seller Breach.

17. Indemnification

17.1 Tax indemnifications by Sellers

17.1.1 General indemnification

With the exclusion of what is governed by Sections 9.5, 9.10 and/or 1.1 the respective Seller who has caused such liability shall indemnify and hold Purchaser harmless from and against any liability and secondary liability, in particular, without limitation, according to Section 75 AO, Section 13c and 15a Value Added Tax Act, and Section 25 of the Germany Commercial Code, for any Taxes which relate to the time period prior to the Effective Time and for Taxes of Sellers which, though relating to the time period prior to the Effective Time, arise from or in connection with the conduct of the Business by any Seller prior to the Effective Time. Any claim under this clause shall be borne by the entity which has caused the Taxes to be indemnified. In case the respective entity has not fully fulfilled its payment obligations under this clause according to Section 17.3 of this Agreement, the Sellers shall be responsible and liable for such Taxes jointly and severally.

17.1.2 Input VAT adjustment

If and to the extent that any VAT relating to the time period prior to the Effective Time has to be adjusted, in particular if any input VAT deducted prior to the Effective Time relating to the Sold Business as well as any supplies or services rendered in

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relation thereto has to be repaid, such adjustment shall be made for the account of the respective Seller and Sellers as joint debtors shall indemnify and hold the respective Purchaser harmless from and against any Taxes, and any other economic disadvantages related thereto. Such indemnification shall in particular cover any input VAT correction amounts according to Section 15a of the German Value Added Tax Act, or according to its applicable similar foreign statutory law regulation, due to a change of circumstances relevant for the input VAT treatment caused by or otherwise attributable to the respective Seller or its legal predecessor.

17.2 Tax indemnification by Purchaser

Purchaser or, at Parent Seller’s request, the Affiliate Purchasers, shall indemnify and hold Parent Seller and Seller Subsidiaries harmless from and against any Taxes imposed on Parent Seller or Sellers Subsidiaries if and to the extent such Taxes result from or are attributable to a breach of obligations or covenants of Purchaser or Affiliate Purchasers under this Agreement.

17.3 Payment of tax indemnification claims

All indemnification claims under Section 17.1 and 17.2 of this Agreement shall become due and payable ten (10) Business Days before the respective payment becomes payable to the tax authority, but not earlier than fifteen (15) Business Days after the indemnifying Party or entity pursuant to Sections 17.1 and 17.2 has been informed in writing by the Party to be indemnified on the underlying Tax claim.

17.4 Tax authority claims

Sections 15.6 and 15.7 shall apply mutatis mutandis with respect to any claims of any tax authority being subject to Sections 17.1 and/or 17.2.

17.5 IPR indemnification

(a) Sellers shall indemnify and hold Purchaser harmless from and against any costs and liabilities relating to claims raised by a customer of the Sold Business against Purchaser or any Affiliate of Purchaser after the Effective Time (the “Customer Claim”) if and to the extent (i) the Customer Claim is based on a claim raised by any third party against the respective customer claiming that a product of the Sold Business infringes such third party’s intellectual property rights (the “Third Party IPR Claim”), (ii) the Third Party IPR Claim is directed against products of the Sold Business that have been delivered to the respective customer by the Seller Group prior to the Closing Date and (iii) the Third Party IPR Claim is not a claim for cease and desist (Unterlassung) regarding the respective product of the Sold Business; it being understood that any such indemnification obligation of Sellers against Purchaser shall not exceed any obligation Seller Group would have had against the respective customer prior to Closing (the “IPR Indemnification”).

(b) For the avoidance of doubt, if and to the extent any Customer Claim based on a Third Party IPR Claim being directed against products of the Sold Business that have been delivered to the respective customer on or after the Closing Date, such Customer Claim shall not be subject to the IPR Indemnification.

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(c) Sections 15.6 and 15.7 shall apply mutatis mutandis with respect to any Customer Claim.

(d) Purchaser and/or any of the Affiliate Purchasers shall (i) comply with its obligations pursuant to Section 17.5(c) in conjunction with Sections 15.6 and 15.7, (ii) not take any defence and/or settlement measure regarding the respective Customer Claim without the prior written consent of Sellers and (iii) provide Sellers with any assistance, support, information and/or authority (e.g. respective intellectual property and product expertise) necessary to perform Sellers’ obligations under the IPR Indemnification.

(e) The obligations of Sellers under the IPR Indemnification shall not apply if Purchaser and/or any of the Affiliate Purchasers failed to comply with any of the obligations as set forth in Section 17.5(d).

18. Guarantees by Purchaser

Purchaser hereby represents to Sellers by way of an independent guarantee (selbständige Garantie) pursuant to Section 311 para. 1 BGB that the statements set forth in this Section 18 are correct, in each case as at the Signing Date, unless it is specifically provided for that a representation shall be made as at a different date:

(a) Purchaser has been duly established and validly exists as a limited liability company under the laws of Germany.

(b) Purchaser has the unrestricted right, power, authority and capacity to execute and consummate this Agreement and the transactions contemplated therein. All required approvals of any corporate bodies of Purchaser have been given.

(c) No bankruptcy, insolvency or judicial composition or similar proceedings have been initiated or applied for under any applicable law regarding Purchaser or its assets, nor have any legal proceedings or other enforcement measures been initiated or applied for with respect to the legal estate (Vermögen) or individual assets of Purchaser. There exist no circumstances that would justify the opening of such proceedings in the future; in particular, Purchaser is not over-indebted (überschuldet) or illiquid (zahlungsunfähig), nor is over-indebtedness or illiquidity impending.

(d) The execution and consummation of this Agreement and of the transactions contemplated therein by Purchaser does not violate the articles of association or any partnership agreements or other corporate documents.

(e) This Agreement constitutes legal, valid and binding obligations of Purchaser.

19. Conduct of Sold Business

19.1 Sellers shall, and shall cause Seller Subsidiaries to, conduct the Sold Business as from and including the Signing Date up to and including the Closing Date (the “Transition Period”) pursuant to the guidelines set out in this Section 19.

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19.2 Sellers and Seller Subsidiaries are entitled at any time to consult Purchaser with regard to the conduct of the Sold Business during the Transition Period; in the events of Section 19.5, the respective Seller or Seller Subsidiary shall be obligated to consult Purchaser. Sellers and Seller Subsidiaries are not obligated to review the legal implications or expedience of Purchaser’s recommendations.

19.3 Purchaser shall not propose any measures which to its knowledge would violate applicable laws, provisions and orders by regulatory authorities or binding agreements related to the Sold Business.

19.4 During the Transition Period, Sellers and Seller Subsidiaries shall (i) conduct the Sold Business in all material respects in the Ordinary Course of Business (as defined below), (ii) keep Purchaser fully informed and consult Purchaser regarding any transaction and decision which might substantially affect the Sold Business. The Ordinary Course of Business shall mean that Seller and Seller Subsidiaries shall conduct the business with the standard of care of a prudent merchant (mit der Sorgfalt eines ordentlichen Kaufmanns), in particular (i) fulfill all their obligations towards their customers, (ii) evaluate any customer requests by their existing customer base and (iii) take all reasonable efforts to further promote the Sold Business, provided that Sellers and Seller Subsidiaries shall not have the obligation to increase the expenditure for the Sold Business beyond the average expenditure level during the two (2) months prior to the Signing Date (the “Expenditure Level”).

19.5 Except in the event of an emergency management in accordance with Section 19.7, Sellers and Seller Subsidiaries shall obtain prior proposal from Purchaser before it performs any of the following measures with regard to the Sold Business:

(a) incur any obligation or liability exceeding the amount of * in the individual case or to any single supplier or third party;

(b) incur, create or assume any encumbrance exceeding the amount of * with respect to any Sold Asset;

(c) dispose of any Sold Asset exceeding the value * or acquire an asset that would qualify as a Sold Asset exceeding the value of *, unless in the Ordinary Course of Business;

(d) cancel, terminate, or amend any Sold Contract;

(e) enter into new contracts with existing or new customers with possible sales amounts exceeding * per year;

(f) enter into any collective agreements (including, without limitation, any agreements with works councils) applicable to the Transferred Employees;

(g) increase the wage or salary or other remuneration of any of the Transferred Employees or establish or improve any non-monetary benefits of the Transferred Employees except as in the Ordinary Course of Business or were required pursuant to statutory provisions;

(h) commence any new branches of business (Geschäftszweige);

(i) abandon branches or close premises (Betriebsstätten);

*CONFIDENTIAL TREATMENT REQUESTED

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(j) sell the Sold Business in whole or in material parts;

(k) perform transactions under the German Transformation Act (Umwandlungsgesetz) or similar transactions materially affecting the Sold Business.

19.6 If, following a Seller’s or Seller Subsidiary’s request, Purchaser fails to make proposals within five (5) Business Days, the respective Seller or Seller Subsidiary shall undertake those measures which it may consider necessary in the relevant respect, considering the justified interests of Purchaser.

19.7 In cases of special urgency, in which prior proposals by Purchaser cannot be obtained in time, Sellers and Seller Subsidiaries shall be entitled and obligated to undertake all measures they may consider necessary to maintain and continue the Sold Business.

19.8 If a Seller or a Seller Subsidiary becomes aware of a new business opportunity with an existing or a new customer which would require expenditures in excess of the Expenditure Level, the respective Seller or Seller Subsidiary shall inform Purchaser thereof without undue delay with an estimate of the magnitude of such incremental expenses. Sellers and Seller Subsidiaries shall pursue such business opportunity in close cooperation with, and only with the prior written consent of, Purchaser, and shall keep Purchaser informed of all correspondence and decisions made in connection therewith. Any incremental expenditures incurred by any Seller or any Seller Subsidiary with respect to measures taken in accordance with this Section 19.8 shall be borne by Purchaser. Purchaser’s obligation to pay such incremental expenditures shall survive even if Closing does not occur.

19.9 During the Transition Period, Sellers shall enable Purchaser to continue conducting a confirmatory due diligence with respect to the Sold Business at Purchaser’s own costs. During such confirmatory due diligence, Sellers shall in particular (i) grant Purchaser full access to all financial data regarding the Sold Business (provided that such access may only be indirect in the presence of an employee or auditor of the Sellers) and (ii) provide Purchaser with all information and employee access (including to the relevant sales teams) required to conduct its confirmatory due diligence as required to reasonably conduct the confirmatory due diligence.

20. *

21. Indemnification and other covenants by Purchaser

21.1 Indemnification

With effect as from the Effective Time, except as otherwise set forth in this Agreement and except for as set forth in Annex 21.1, Purchaser shall indemnify and hold Sellers and Seller Subsidiaries harmless from and against any losses incurred by any of the Sellers or Seller Subsidiaries, in relation to or arising out of

(a) any Sold Liabilities, any Sold Contracts or any Sold Contract Parts but with respect to losses in relation to or arising out of Sold Contracts or Sold Contract Parts only to the extent that for such Sold Contract or Sold Contract Part, respectively, (i) the requisite Third Party Assumption Consent has been granted or (ii) Subcontracting is legally permissible and conducted by the Parties in accordance with Section 7.6.1;

*CONFIDENTIAL TREATMENT REQUESTED

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(b) any risks, obligations, covenants or other liabilities which arise in connection with the use of the Sold Assets or otherwise in the conduct of the Sold Business by Purchaser or any Affiliate of Purchaser after the Effective Time;

(c) any guarantee or warranty claims raised by Purchaser or any of the Affiliate Purchasers under any of the agreements referred to in Section 13.7.3(b).

21.2 Third party claims

Upon Parent Seller’s written demand Purchaser and/or any of the Affiliate Purchasers shall provide Sellers with any assistance, support, information and/or authority (e.g. respective intellectual property and product expertise) regarding any third party claim against Sellers and/or Seller Subsidiaries concerning the Business.

Notwithstanding any of the foregoing, Sellers and Sellers Subsidiaries agree to apply the standard of care of a prudent merchant (Sorgfalt eines ordentlichen Kaufmanns) in the holding of any Sold Liabilities, Sold Contracts or Sold Contract Parts which remain with the Sellers or Sellers Subsidiaries after the Effective Time due to the lack of a Third Party Assumption Consent but for which Purchaser is ultimately liable according to this Agreement.

In case of a third party claim with respect to such Sold Liabilities, Sold Contracts or Sold Contracts Parts for which Purchaser is ultimately liable, Sellers or Sellers Subsidiaries

(a) will not exercise any rights vis-à-vis the third party without Purchaser’s prior written consent;

(b) shall make immediately available to Purchaser a copy of the third party claim or demand and of all time-sensitive documents;

(c) give Purchaser the opportunity to defend such claim.

Purchaser shall have the right to defend the claim by all appropriate proceedings and shall have the sole power to direct and control such defense. In particular, without limitation, Purchaser may (i) participate in and direct all negotiations and correspondence with the third party, (ii) in particular, without limitation, appoint and instruct counsel acting, if necessary, in the name of Sellers or Sellers Subsidiaries, and (iii) require that the claim be litigated or settled in accordance with Purchaser’s instructions. Purchaser shall conduct such proceedings in good faith with due regard to the concerns of Sellers or Sellers Subsidiaries.

22. Guarantee of Purchaser’s Parent

Purchaser’s Parent hereby guarantees

(a) the full and timely payment by Purchaser of the Final Purchase Price;

(b) the full and timely remedy or compensation for a breach of any of the guarantees given by Purchaser pursuant to Section 18;

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(c) the full and timely performance of * and

(d) the full and timely performance of Purchaser’s indemnification covenant pursuant to Section 1.

23. Non-compete covenant / Preferred Partner Status

23.1 Non-compete covenant

For a period of three (3) years after the Signing Date and subject to the limitations set forth in Section 23.2, Sellers shall not compete with the Sold Business (the “Competing Activities”). For the avoidance of doubt, the use of any technology or components underlying the products manufactured or services rendered under the Sold Business used outside the Sold Business shall not be deemed Competing Activities.

23.2 *

23.3 *

24. Transition of Sold Business

24.1 Smooth transition

Without prejudice to the rights of the Parties under this Agreement, the Parties shall cooperate after the Closing Date and use reasonable efforts to provide for the smooth transition of the Sold Business. Sellers shall use reasonable efforts to support Purchaser with respect to the transition as described under the transition agreements attached hereto as Annex 8(d).

24.2 Access to information

Purchaser shall undertake that Parent Seller and Seller Subsidiaries shall, following the Closing Date, be granted upon its reasonable request and at its expense full access during normal business hours to all sites and books, records, documents and information transferred by Sellers to Purchaser under this Agreement (including without limitation the right to receive hard copies and/or electronic copies thereof) and to the personnel and advisors of Purchaser, to the extent necessary or appropriate in Parent Seller’s and Seller Subsidiaries’ reasonable opinion, for any reasons under or in connection with this Agreement and/or in connection with the rights, claims or defenses of any of the Seller Subsidiaries with respect to any claim brought by any third party against any of the Seller Subsidiaries and the implementation of the procedures referred to in the Agreement as well as in connection with any of the Seller Subsidiaries’ Tax issues.

Sellers undertake that Purchaser shall, following the Closing Date, be granted upon its reasonable request and at its expense full access to all information required by Purchaser to enable Purchaser or any Affiliates of Purchaser to comply with any of their statutory, regulatory or other legal obligations.

*CONFIDENTIAL TREATMENT REQUESTED

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24.3 Cooperation in Tax matters

The Parties shall cooperate with each other and provide each other with such assistance (in particular access to books and records) as may reasonably be requested of them in connection with the preparation of any Tax return or any audit or other examination by any taxing authority, or any judicial or administrative proceedings relating to any liability for Taxes under this Agreement. In particular, the respective Seller will deliver to the respective Purchaser all documents necessary and provide upon the respective Purchaser’s reasonable request all information required to enable the respective Purchaser to correctly adjust any input VAT deducted (Section 15a para. 10 sentence 2 of the German Value Added Tax Act, or according to its applicable similar foreign statutory law regulation). The Party requesting assistance hereunder shall reimburse the Party providing assistance for all reasonable third-party out-of-pocket expenses incurred in providing such assistance.

25. Public announcements and confidentiality

25.1 Consent requirement for public announcement

Neither of the Parties shall make any public statements with respect to this Agreement and the transactions contemplated herein, without the consent of the other Party; provided, however, that (i) nothing herein shall prevent any Party from making any disclosures or statements required by law or stock exchange regulations, except that the disclosing Party shall use reasonable efforts to notify and consult with the other Party prior to making any such disclosure or statements, and (ii) after Closing, the Parties shall be permitted to make press releases regarding the transaction which are commonly made in such cases, without, however, divulging the Final Purchase Price, any other figure related to the Final Purchase Price as set forth in Section 9, or any other sensitive details of this Agreement.

25.2 Confidential Information

For purposes of this Section 25, the term “Confidential Information” shall mean information relating to this Agreement, the Parties and the Sold Business regardless of the manner of acquisition and of whether such information has been given verbally, in writing or otherwise (e.g., in the form of drawings, photographs or equipment).

25.3 Confidentiality covenant

The Parties shall keep secret and strictly confidential all Confidential Information. In particular, the Parties (i) shall not divulge and shall use reasonable efforts to prevent the divulgence to third parties of any Confidential Information; (ii) shall disclose Confidential Information only to legal and tax advisers who are under obligation of secrecy and need to know the Confidential Information; and (iii) shall neither directly nor indirectly exploit any Confidential Information on a commercial basis and shall make no use of Confidential Information unless otherwise agreed to in writing by the other Party.

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25.4 Exclusion from confidentiality

The obligations in this Section 25 shall not apply to any Confidential Information that can be proved to have been or become part of the public domain (i) other than by default of the other Party or (ii) as a result of acts by someone other than the other Party and through no fault or wrongful act of the other Party.

26. Notices

All notices and other communications hereunder shall be made in writing and shall be sent by telefax, mail or courier to the following addresses:

If to any of the Sellers, to:

*

with a copy to

*

If to Purchaser, to:

*

with a copy to

*

or to such other recipients or addresses which may be notified by any Party to the other Parties in the future in writing. The receipt of a copy by the persons indicated above as recipients of copy shall not constitute receipt of a document nor shall it be necessary for the validity of a notice or any other communications.

27. Costs and expenses

27.1 Allocation of costs and expenses

All costs, including fees, expenses and charges, in connection with the preparation, negotiation, execution and consummation of this Agreement or the transactions contemplated herein, including, without limitation, the fees and expenses of professional advisors, shall be borne by the Party commissioning such costs, except as otherwise provided for in this Agreement, including, but not limited, Section 27.2 and Section 1.1.

27.2 Notarization Costs

Costs for (if any) notarization of this Agreement and/or any of its Annexes excluding the agreements referenced in Section 13.7.3 shall be borne by Purchaser.

27.3 Transfer Taxes and stamp duties

Each Party shall bear any Taxes, stamp duties (such as a potential Chinese Business Tax and including the fees for notarization of any transfer agreement as mentioned in Section 13.7.3(b) or any other transfer documents required to transfer the Sold

*CONFIDENTIAL TREATMENT REQUESTED

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Business in accordance with this Agreement), registration duties and other charges in connection with any regulatory requirements (including proceedings to obtain anti-trust clearance and other costs payable or similar charges or duties payable by reason of the transactions contemplated by this Agreement, including, for the avoidance of doubt, its Annexes (the “Transfer Taxes”) in accordance with applicable law. The Parties shall cooperate with each other in minimizing the amount of any Transfer Taxes to the extent permitted by applicable law. Each Party shall be responsible for (i) the preparation and timely filing of Tax returns for any Transfer Taxes which it has to bear and (ii) the due payment of any Transfer Taxes which it has to bear to the competent governmental authorities or creditors of such Transfer Taxes. For the avoidance of doubt, Transfer Taxes shall not cover any income taxes (with the exception of withholding taxes which are subject to other specific regulations under this Agreement) or capital gains taxes.

28. Miscellaneous

28.1 Headings

For convenience only, the Parties have agreed on the wording of the headings which shall neither affect the interpretation of this Agreement nor create any rights or obligations of the Parties.

28.2 Annexes and Schedules

All Annexes and Schedules to this Agreement constitute an integral part of this Agreement. In the case of a conflict between any Annex or Schedule and the provisions of this Agreement, the provisions of this Agreement shall prevail.

28.3 Entire agreement

This Agreement including its Annexes and Schedules together with the agreements referenced in Section 13.7.3 comprise the entire agreement between the Parties concerning the subject matter hereof and shall supersede and replace all prior oral and written agreements and declarations of intention made by the Parties in respect thereof.

28.4 Amendments

Any amendments to this Agreement (including amendments to this clause) shall be valid only if made in writing, unless another form is required by mandatory law.

28.5 German terms

If provisions in this Agreement include English terms after which German terms have been inserted in brackets and/or italics, the respective German terms alone and not the English terms shall be authoritative for the interpretation of the respective provisions.

28.6 Interpretation

Whenever the term “shall” is used in this Agreement in connection with a person’s undertaking or obligation, it implies, for the avoidance of doubt, a contractual obligation (Rechtsbindungswille) of such person.

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28.7 No assignment

Without the written consent of the respective other Party and except as otherwise set forth in this Agreement, no Party shall be entitled to assign any rights or claims under this Agreement.

28.8 No set-off right or right of retention

Except as otherwise provided for in this Agreement, no Party shall be entitled to set-off (aufrechnen) or net (verrechnen) against any claims of any other Party under or in connection with this Agreement or to exercise any right of retention (Zurückbehaltungsrecht), except on the basis of claims which have not been contested by the other Party (unbestritten) or which have been assessed by a final and binding decision of a court or arbitrator (rechtskräftig festgestellt).

28.9 Currency Conversion

(i) For the purpose of determining the ETWC Statement as well as the Revised ETWC Statement any local currency shall be converted into EUR by using the NSN cut-off day exchange rates existing as of the Closing Date and in accordance with section 1 of Annex 28.9 and (ii) – only if and to the extent that Parent Seller decides at its sole discretion – for the purpose of determining any payments to be made by any of the Sellers under this Agreement, any local currency shall be converted into EUR by using the exchange rates in accordance with section 2 of Annex 28.9 (the “Currency Conversion Principles”) apply.

28.10 Governing law

This Agreement shall be governed by, and be construed in accordance with, the laws of the Federal Republic of Germany, without regard to principles of conflicts of laws. The Parties explicitly agree that the United Nations convention on Contracts for the International Sale of Goods shall not apply to this Agreement.

28.11 Arbitration and place of jurisdiction

All disputes arising under or in connection with this Agreement or its validity or this Section 28.11 shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce (the “ICC-Rules”) by three (3) arbitrators appointed in accordance with the ICC-Rules without recourse to the ordinary courts of law. The venue of the arbitration shall be Zurich, Switzerland. The language of the arbitration proceedings shall be English; however the Parties may submit any evidence in German or English.

28.12 Severability

In the event that, for whatever reason, any provision hereof is ineffective, unlawful or impracticable, any such ineffectiveness, unlawfulness or impracticability shall not affect the remaining provisions hereof. Any such ineffective, unlawful or impracticable provision shall be deemed replaced by an effective, lawful and practicable provision corresponding to the economic interests of the Parties. The same shall apply in the event of gaps (Vertragslücken) in this Agreement.

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Munich, 11 December 2011
Nokia Siemens Networks B.V.	Nokia Siemens Networks GmbH & Co. KG
by: Aulis Koivisto	by: Aulis Koivisto
(acting on the basis of a power of attorney)	(acting on the basis of a power of attorney)
by: Gerwin Zott	by: Gerwin Zott
(Procuratiehouder)	(Prokurist)
Huntsville, AL, 11 December 2011
ADTRAN GmbH	ADTRAN, Inc.
by: James E. Matthews	by: James E. Matthews
Managing Director/Geschäftsführer	Chief Financial Officer

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List of Annexes and Schedules+

Annexes
Annex 1A	Sellers’ Accounting Principles
Annex 1B	Sellers’ Knowledge (names of individuals)
Annex 1C	Seller Subsidiaries 2 through 34 (names of entities)
Annex 2.2.1	Accession agreement re. Affiliate Purchasers (accession to ASPA)
Annex 3.1.1(a)	Sold Fixed Assets
Annex 3.1.1(b)	Sold Inventory
Annex 3.1.3(e)	Excluded Assets (intangible assets)
Annex 3.1.3(j)	Excluded Assets (any other assets)
Annex 3.2.1(a) (cc)	Liabilities re. certain orders of Parent Seller and/or any Seller Subsidiary under the Contracts with their respective suppliers
Annex 3.2.1(b)	Certain liabilities re. Transferred Employees exempted from the Sold Liabilities
Annex 3.2.1(c)	Certain further liabilities exempted from the Sold Liabilities
Annex 3.2.3(d)	Excluded Liabilities
Annex 3.3.1	Sold Contracts (customers, leases, licenses, binding offers and binding orders, other Contracts)
Annex 3.3.3(a)	Excluded Contracts (customers)
Annex 3.3.3(d)	Excluded Contracts (leases)
Annex 3.3.3(f)	Excluded Contracts (licenses)
Annex 3.3.3(i)	Excluded Contracts (offers and binding orders)
Annex 3.3.4	Principles regarding cooperation concerning excluded customer contracts.
Annex 3.4.1	Sold Contract Parts
Annex 3.4.2	Excluded Contract Parts
Annex 6.4.1.1(a)	Seller Subsidiary 1 Employment Contracts (Section 613a BGB)
*
Annex 6.6.1	Sellers Guarantees (Sellers & Sellers’ Subsidiaries guarantees, comfort letters, performance bonds etc. to be released from by Purchaser)
Annex 7.6.1	Subcontracting, Revenue Split
Annex 8(a)	Intellectual property rights license agreement to be concluded at Closing

*CONFIDENTIAL TREATMENT REQUESTED

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Annex 8(b)	Intellectual property rights assignment agreement to be concluded at Closing
Annex 8(c)	Lease agreements to be concluded at Closing
Annexes 8(d)	Umbrella transition service agreement to be concluded at Closing
Annex 11.1	Working Capital – Calculation example
*
Annex 13.1	NSN cut-off days
Annex 13.2.2(a)	Key Individuals (Purchaser Positive Closing Condition)
Annex 13.2.2(b)	Consent of listed customers (Purchaser Positive Closing Condition)
Annex 13.2.2(c)	IT requirements (Purchaser Positive Closing Condition)
Annex 13.2.2(e)(y)	License agreements between Nokia Inc. and Purchaser (Purchaser Positive Closing Condition)
Annex 13.2.2(e)(z)	License agreements between Siemens AG and Purchaser (Positive Closing Condition)
Annex 13.2.2(f)	Composition of * Seller Group Employees (Purchaser Positive Closing Condition)
Annex 13.2.3	Sellers Positive Closing Condition
Annex 13.7.3(b)	Transfer, assignment and assumption agreement for parts of the Sold Business to Purchaser
*
Annex 14.5.2	Leased Assets
Annex 14.6	20 key customers of Sellers and Seller Subsidiaries
Annex 14.7.1	Sold Material Agreements
*
Annex 14.9.1(a)	Official Notification(s)
Annex 14.9.1(b)	Country Official Notifications
Annex 14.9.2(a)	Public Grants
Annex 14.9.2(b)	Country Public Grants
*
Annex 21.1	Losses exempted from the indemnification covenant of Purchaser
Annex 28.9	Currency Conversion Principle
Schedules
Schedule 14.5.1(a)	Third party consents required / third party rights infringed by the sale and transfer of the Sold Assets
Schedule 14.5.1(b)	Sold Assets Seller is not the legal and beneficial owner of

*CONFIDENTIAL TREATMENT REQUESTED

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Schedule 14.5.1(c)	Sold Assets, Purchaser shall not acquire full title to, unrestricted and free and clear of any rights of third parties
Schedule 14.5.3	Sold Assets and the Leased Assets that are not in a usable condition
*
Schedule 14.9.2 (a)	Public Grants that will change, terminate or have to be repaid due to consummation of this Agreement
Schedule 14.9.2 (b)	Country Public Grants to Sellers Knowledge
Schedule 14.10(a)	Court litigation, arbitration, governmental investigations or inquiries, or administrative procedures initiated (anhängig), pending (rechtshängig) or threatened
Schedule 14.10(b)	Judicial, arbitral or administrative litigation or other proceedings that have been settled
Schedule 14.11(a)	List of products or service warranty, liability, etc. pending
*
Schedule 14.14	Brokerage disclosure list

+ Exhibits, annexes schedules and similar attachments to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Any omitted exhibit, annex, schedule or similar attachment will be furnished supplementally to the SEC upon request.

*CONFIDENTIAL TREATMENT REQUESTED

60

EX-21

Exhibit 21

SUBSIDIARIES OF ADTRAN, INC.

December 31, 2011

Name of Subsidiary	Country or State of Incorporation
ADTRAN Networks Pty. Ltd.	Australia
ADTRAN International, Inc.	Delaware
ADTRAN Networks Hong Kong Limited	Hong Kong
ADTRAN Europe Limited	United Kingdom
ADTRAN Canada, Inc.	Canada
ADTRAN Networks Canada, Inc.	Canada
ADTRAN Networks S.A. de C.V.	Mexico
ADTRAN Singapore Pte. Ltd.	Singapore
Bluesocket Inc.	Delaware
ADTRAN Networks Worldwide, Inc.	Delaware
ADTRAN Peru S.R.L.	Peru
ADTRAN GmbH	Germany

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-168419, 333-133927, 333-126734, 333-66000, 333-41458, 333-78417, 333-30375, 333-29899, 333-4808) of ADTRAN, Inc. of our report dated February 29, 2012 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Birmingham, Alabama

February 29, 2012

EX-24

Exhibit 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Thomas R. Stanton and James E. Matthews, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of ADTRAN, Inc. for the fiscal year ended December 31, 2011 and any and all amendments thereto, and other documents in connection therewith and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and the NASDAQ Global Select Market, Inc., granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

This 29^th day of February 2012.

/s/ Balan Nair

Balan Nair

Director

/s/ H. Fenwick Huss

H. Fenwick Huss

Director

/s/ William L. Marks

William L. Marks

Director

/s/ Roy J. Nichols

Roy J. Nichols

Director

/s/ Ross K. Ireland

Ross K. Ireland

Director

EX-31

EXHIBIT 31

CERTIFICATIONS

I, Thomas R. Stanton, certify that:

1. I have reviewed this Annual Report on Form 10-K of ADTRAN, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 29, 2012

/s/ Thomas R. Stanton

Thomas R. Stanton

Chief Executive Officer and Chairman of the Board

I, James E. Matthews, certify that:

1. I have reviewed this Annual Report on Form 10-K of ADTRAN, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 29, 2012

/s/ James E. Matthews

James E. Matthews
Senior Vice President – Finance,

Chief Financial Officer, Treasurer,
Secretary and Director

EX-32

EXHIBIT 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of ADTRAN, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas R. Stanton, Chief Executive Officer and Chairman of the Board of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Thomas R. Stanton

Thomas R. Stanton

Chief Executive Officer and Chairman of the Board

Date: February 29, 2012

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of ADTRAN, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James E. Matthews, Senior Vice President – Finance and Chief Financial Officer, Treasurer, Secretary and Director of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ James E. Matthews

James E. Matthews

Senior Vice President – Finance,

Chief Financial Officer, Treasurer,

Secretary and Director

Date: February 29, 2012

XML

Nature of Business and Summary of Significant Accounting Policies (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010
Summary of warranty expense and write-off activity
Balance at beginning of period	$ 3,304	$ 2,833
Plus: amounts acquired or charged to cost and expenses	2,893	5,309
Less: deductions	(2,079)	(4,838)
Balance at end of period	$ 4,118	$ 3,304

XML

Investments (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Gross realized gains and losses related to investments
Gross realized gains	$ 13,641	$ 12,191	$ 1,978
Gross realized losses	$ (1,187)	$ (1,183)	$ (3,275)

XML

Stock Incentive Plans (Details 2) (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2011
Summary of RSUs and restricted stock outstanding
Number of RSUs, Unvested RSUs and restricted stock outstanding, Beginning balance	87
Weighted Average Grant Date Fair Value, RSUs and restricted stock outstanding, Beginning balance	$ 28.46
Number of RSUs, RSUs and restricted stock granted	39
Weighted Average Grant Date Fair Value, RSUs and restricted stock granted	$ 36.09
Number of RSUs, RSUs and restricted stock vested	(49)
Weighted Average Grant Date Fair Value, RSUs and restricted stock vested	$ 22.36
Number of RSUs, RSUs and restricted stock cancelled/forfeited	0
Weighted Average Grant Date Fair Value, RSUs and restricted stock cancelled/forfeited	$ 0.00
Number of RSUs, Adjustments to shares granted due to shares earned at vesting	13
Weighted Average Grant Date Fair Value, Adjustments to shares granted due to shares earned at vesting	$ 17.05
Number of RSUs, unvested RSUs and restricted stock outstanding, Ending balance	90
Weighted Average Grant Date Fair Value, unvested RSUs and restricted stock outstanding, Ending balance	$ 34.21

XML

Income Taxes (Details 2) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Current deferred tax assets
Accounts receivable	$ 4	$ 61
Inventory	6,709	6,032
Accrued expenses	5,412	4,524
Total Current Deferred Tax Assets	12,125	10,617
Non-current deferred tax assets
Accrued expenses	113	102
Deferred compensation	3,177	1,539
Stock-based compensation	3,808	3,542
State tax and interest expense	947	861
Foreign loss and state credit carry-forwards	7,891	5,988
Federal loss and research carry-forwards	14,778	0
Valuation allowance	(7,585)	(5,627)
Total Non-current Deferred Tax Assets	23,129	6,405
Total Deferred Tax Assets	35,254	17,022
Non-current deferred tax liabilities
Accumulated depreciation	(7,081)	(4,782)
Intellectual property	(2,594)	0
Investments	(5,109)	(11,973)
Total Non-current Deferred Tax Liabilities	(14,784)	(16,755)
Net Deferred Tax Assets	$ 20,470	$ 267

XML

Investments (Details 3) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Breakdown of investments with unrealized losses
Continuous Unrealized Loss Position for Less than 12 Months, Fair Value	$ 142,494	$ 40,554
Continuous Unrealized Loss Position for Less than 12 Months, Unrealized Losses	(3,502)	(356)
Continuous Unrealized Loss Position for 12 Months or Greater, Fair Value	48	176
Continuous Unrealized Loss Position for 12 Months or Greater, Unrealized Losses	(16)	(26)
Total Fair Value	142,542	40,730
Total Unrealized Losses	(3,518)	(382)
Deferred compensation plan assets [Member]
Breakdown of investments with unrealized losses
Continuous Unrealized Loss Position for Less than 12 Months, Fair Value	5,655	338
Continuous Unrealized Loss Position for Less than 12 Months, Unrealized Losses	(401)	(7)
Continuous Unrealized Loss Position for 12 Months or Greater, Fair Value	0	0
Continuous Unrealized Loss Position for 12 Months or Greater, Unrealized Losses	0	0
Total Fair Value	5,655	338
Total Unrealized Losses	(401)	(7)
Corporate bonds [Member]
Breakdown of investments with unrealized losses
Continuous Unrealized Loss Position for Less than 12 Months, Fair Value	112,345	32,326
Continuous Unrealized Loss Position for Less than 12 Months, Unrealized Losses	(2,505)	(229)
Continuous Unrealized Loss Position for 12 Months or Greater, Fair Value	0	0
Continuous Unrealized Loss Position for 12 Months or Greater, Unrealized Losses	0	0
Total Fair Value	112,345	32,326
Total Unrealized Losses	(2,505)	(229)
Municipal fixed-rate bonds [Member]
Breakdown of investments with unrealized losses
Continuous Unrealized Loss Position for Less than 12 Months, Fair Value	20,076	5,869
Continuous Unrealized Loss Position for Less than 12 Months, Unrealized Losses	(53)	(13)
Continuous Unrealized Loss Position for 12 Months or Greater, Fair Value	0	0
Continuous Unrealized Loss Position for 12 Months or Greater, Unrealized Losses	0	0
Total Fair Value	20,076	5,869
Total Unrealized Losses	(53)	(13)
Marketable equity securities [Member]
Breakdown of investments with unrealized losses
Continuous Unrealized Loss Position for Less than 12 Months, Fair Value	4,418	2,021
Continuous Unrealized Loss Position for Less than 12 Months, Unrealized Losses	(543)	(107)
Continuous Unrealized Loss Position for 12 Months or Greater, Fair Value	48	176
Continuous Unrealized Loss Position for 12 Months or Greater, Unrealized Losses	(16)	(26)
Total Fair Value	4,466	2,197
Total Unrealized Losses	$ (559)	$ (133)

XML

Segment Information and Major Customers (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2010	Sep. 30, 2010	Jun. 30, 2010	Mar. 31, 2010	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Sales information by geographic area
United States									$ 632,795	$ 573,845	$ 456,402
International									84,434	31,829	27,783
Sales	$ 175,286	$ 192,194	$ 184,227	$ 165,522	$ 165,329	$ 162,957	$ 150,361	$ 127,027	$ 717,229	$ 605,674	$ 484,185

XML

Stock Incentive Plans (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2011 years
Summary of stock options outstanding
Number of Options, Outstanding, Beginning Balance	6,234
Weighted Average Exercise Price, Outstanding, Beginning Balance	$ 23.09
Weighted Avg. Remaining Contractual Life in Years, Outstanding, Beginning Balance	6.21
Aggregate Intrinsic Value, Outstanding, Beginning Balance	$ 81,561
Number of Options, granted	1,031
Weighted Average Exercise Price, granted	$ 30.42
Number of Options, cancelled/forfeited	(87)
Weighted Average Exercise Price, cancelled/forfeited	$ 26.32
Number of Options, exercised	(1,778)
Weighted Average Exercise Price, exercised	$ 19.36
Number of Options, Outstanding, Ending Balance	5,400
Weighted Average Exercise Price, Outstanding, Ending Balance	$ 25.66
Weighted Avg. Remaining Contractual Life in Years, Outstanding, Ending Balance	6.78
Aggregate Intrinsic Value, Outstanding, Ending Balance	27,270
Number of Options, Options exercisable	3,054
Weighted Average Exercise Price, Options exercisable	$ 23.49
Weighted Avg. Remaining Contractual Life in Years, Options exercisable	5.20
Aggregate Intrinsic Value, Options exercisable	$ 21,042

XML

Income Taxes (Tables)

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

Summary of the components of the provision for income taxes

		September 30,		September 30,			September 30,
(In thousands)	2011		2010			2009
Current
Federal	$	59,813	$	49,144		$	30,756
State		7,177		6,380			3,615
Total Current		66,990		55,524			34,371
Deferred tax expense (benefit)		575		(1,324	)		(1,024	)
Total Provision for Income Taxes	$	67,565	$	54,200		$	33,347

The effective income tax rate differs from the federal statutory rate due to the following:

		September 30,			September 30,			September 30,
	2011			2010			2009
Tax provision computed at the federal statutory rate		35.00	%		35.00	%		35.00	%
State income tax provision, net of federal benefit		3.19			3.33			3.68
Federal research credits		(2.50	)		(2.90	)		(3.37	)
Tax-exempt income		(0.27	)		(0.46	)		(1.05	)
State tax incentives		(0.90	)		(0.86	)		(1.36	)
Stock-based compensation		0.03			0.34			1.64
Domestic production activity deduction		(1.84	)		(2.37	)		(3.33	)
Other, net		0.07			0.15			(0.21	)
Effective Tax Rate		32.78	%		32.23	%		31.00	%

The principal components of our current and non-current deferred taxes

 

(In thousands)	2011			2010
Current deferred tax assets
Accounts receivable	$	4		$	61
Inventory		6,709			6,032
Accrued expenses		5,412			4,524
Total Current Deferred Tax Assets		12,125			10,617
Non-current deferred tax assets
Accrued expenses		113			102
Deferred compensation		3,177			1,539
Stock-based compensation		3,808			3,542
State tax and interest expense		947			861
Foreign loss and state credit carry-forwards		7,891			5,988
Federal loss and research carry-forwards		14,778
Valuation allowance		(7,585	)		(5,627	)
Total Non-current Deferred Tax Assets		23,129			6,405
Total Deferred Tax Assets	$	35,254		$	17,022
Non-current deferred tax liabilities
Accumulated depreciation	$	(7,081	)	$	(4,782	)
Intellectual property		(2,594	)
Investments		(5,109	)		(11,973	)
Total Non-current Deferred Tax Liabilities	$	(14,784	)	$	(16,755	)
Net Deferred Tax Assets	$	20,470		$	267

Change in unrecognized income tax benefits

		September 30,			September 30,			September 30,
(In thousands)	2011			2010			2009
Balance at beginning of period	$	2,593		$	2,919		$	2,775
Increases for tax position related to:
Prior years		—			197			390
Current year		840			818			610
Decreases for tax positions related to:
Prior years		(92	)		(16	)		(1	)
Settlements with taxing authorities		(354	)		(630	)		(413	)
Expiration of applicable statute of limitations		(17	)		(695	)		(442	)
Balance at end of period	$	2,970		$	2,593		$	2,919

XML

Segment Information and Major Customers (Details Textual) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011 segments customers	Dec. 31, 2010 customers	Dec. 31, 2009 customers
Revenue, Major Customer [Line Items]
Threshold percentage of revenue generated by major customers	10.00%	10.00%	10.00%
Segment Information (Textual) [Abstract]
Number of operating reportable segments	2
Number of Product Categories	3
Inter-segment revenues	$ 0
Number of other customers who accounted for more than threshold percentage of revenue	0	0	0
Percentage of sales to service providers	72.00%	72.00%	69.00%
Percentage of sales to distributors	26.00%	26.00%	28.00%
Customer concentration risk [Member] | Company One [Member]
Revenue, Major Customer [Line Items]
Concentration Risk, Percentage	25.00%
Customer concentration risk [Member] | Company Two [Member]
Revenue, Major Customer [Line Items]
Concentration Risk, Percentage		20.00%	19.00%
Customer concentration risk [Member] | Company Three [Member]
Revenue, Major Customer [Line Items]
Concentration Risk, Percentage	10.00%	18.00%	22.00%
Customer concentration risk [Member] | Company Four [Member]
Revenue, Major Customer [Line Items]
Concentration Risk, Percentage		11.00%	11.00%

XML

Employee Benefit Plans (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Fair Value of Plan Assets
Fair Value of Plan Assets	$ 7,710	$ 4,246
Amounts Payable to Plan Participants
Amounts Payable to Plan Participants	7,710	4,246
Long- term Investments [Member]
Fair Value of Plan Assets
Fair Value of Plan Assets	7,710	4,246
Non-current Liabilities [Member]
Amounts Payable to Plan Participants
Amounts Payable to Plan Participants	$ 7,710	$ 4,246

XML

Investments (Details Textual) (USD $)	3 Months Ended	12 Months Ended																				12 Months Ended							12 Months Ended							12 Months Ended
	Dec. 31, 2011	Dec. 31, 2011 securities	Dec. 31, 2010	Dec. 31, 2011 BBB Rating [Member]	Dec. 31, 2011 Deferred compensation plan assets [Member]	Dec. 31, 2010 Deferred compensation plan assets [Member]	Dec. 31, 2011 Corporate bonds [Member] years	Dec. 31, 2010 Corporate bonds [Member]	Dec. 31, 2011 Corporate bonds [Member] AAA Rating [Member]	Dec. 31, 2011 Corporate bonds [Member] AA Rating [Member]	Dec. 31, 2011 Corporate bonds [Member] A Rating [Member]	Dec. 31, 2011 Corporate bonds [Member] BBB Rating [Member]	Dec. 31, 2011 Municipal fixed-rate bonds [Member] years	Dec. 31, 2010 Municipal fixed-rate bonds [Member]	Dec. 31, 2011 Municipal fixed-rate bonds [Member] Significant Other Observable Inputs (Level 2) [Member]	Dec. 31, 2010 Municipal fixed-rate bonds [Member] Significant Other Observable Inputs (Level 2) [Member]	Dec. 31, 2011 Municipal fixed-rate bonds [Member] AAA Rating [Member]	Dec. 31, 2011 Municipal fixed-rate bonds [Member] AA Rating [Member]	Dec. 31, 2011 Municipal fixed-rate bonds [Member] A Rating [Member]	Dec. 31, 2011 Fixed income bond fund [Member]	Dec. 31, 2010 Fixed income bond fund [Member]	Dec. 31, 2011 Marketable equity securities [Member]	Dec. 31, 2010 Marketable equity securities [Member]	Dec. 31, 2009 Marketable equity securities [Member]	Dec. 31, 2011 Marketable Single Equity Security [Member]	Dec. 31, 2010 Marketable Single Equity Security [Member]	Dec. 31, 2011 Other Equity Securities [Member]	Dec. 31, 2010 Other Equity Securities [Member]	Dec. 31, 2011 Municipal variable rate demand notes [Member]	Dec. 31, 2010 Municipal variable rate demand notes [Member]	Dec. 31, 2011 Municipal variable rate demand notes [Member] Significant Other Observable Inputs (Level 2) [Member]	Dec. 31, 2010 Municipal variable rate demand notes [Member] Significant Other Observable Inputs (Level 2) [Member]	Dec. 31, 2011 Municipal variable rate demand notes [Member] AAA Rating [Member]	Dec. 31, 2011 Municipal variable rate demand notes [Member] AA Rating [Member]	Dec. 31, 2011 Municipal variable rate demand notes [Member] A Rating [Member]	Dec. 31, 2011 Other Long-term Investments [Member]	Dec. 31, 2010 Other Long-term Investments [Member]	Dec. 31, 2009 Other Long-term Investments [Member]
Schedule of Available-for-sale Securities [Line Items]
Percentage of marketable securities under credit rating categories				2.00%					1.00%	11.00%	50.00%	38.00%					19.00%	64.00%	15.00%														18.00%	58.00%	24.00%
Available-for-sale securities, carrying value	$ 440,982,000	$ 440,982,000	$ 368,286,000		$ 7,712,000	$ 4,246,000	$ 156,753,000	$ 127,072,000					$ 174,826,000	$ 71,467,000						$ 721,000	$ 746,000	$ 31,310,000	$ 48,010,000		$ 17,300,000	$ 34,200,000	$ 48,300,000	$ 48,300,000	$ 69,660,000	$ 116,745,000	$ 69,700,000	$ 116,700,000				$ 2,100,000	$ 2,100,000
Duration of available-for-sale debt securities (in years)							0.8						1.3
Available for sale securities, reset period of interest rate																													7 days
Available for sales securities, number of shares held																									1,100,000	1,500,000
Available for sale securities, number of shares sold																									500,000
Available for sales securities, number of securities held																											400	415
Number of shares traded in European stock exchange per day																									800,000
Gross unrealized gain on marketable equity securities	20,171,000	20,171,000	38,545,000		119,000	770,000	181,000	630,000					579,000	268,000						194,000	220,000	19,098,000	36,657,000		16,900,000	33,700,000	2,200,000	3,000,000
Gross unrealized losses on marketable equity securities	3,518,000	3,518,000	382,000		401,000	7,000	2,505,000	229,000					53,000	13,000								559,000	133,000				600,000	100,000
Percentage of variable rate demand notes supported by letters of credit from banks	34.00%	34.00%																											34.00%
Percentage of variable rate demand notes supported by standby purchase agreements																													66.00%
Available-for-sale securities															331,600,000	198,500,000
Impairment of investments	36,000																					68,000	43,000	2,900,000												0	0	0
Investments (Textual) [Abstract]
Proceeds from sale of Marketable equity securities		9,200,000
Realized gain from sale of marketable equity securities		9,100,000
Restricted certificate of deposit held	48,250,000	48,250,000	48,250,000
Estimated fair value of bond	46,900,000	46,900,000
Other investments carried at cost	2,123,000	2,123,000	2,103,000
Number of private equity funds	2	2
Fair value of other investments	10,000,000	10,000,000
Aggregate Investment committed in private equity funds	7,900,000	7,900,000
Commitments towards private equity funds	7,700,000	7,700,000
Receipt of distribution related to the private equity funds	2,200,000	2,200,000
Duration of commitments		10 years
Private equity funds Commitments expired in 2013		100,000
Private equity funds Commitments expired in 2012		$ 100,000
Securities considered for impairment test		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
Number of marketable equity securities in an unrealized loss position		128

XML

Segment Information and Major Customers (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2010	Sep. 30, 2010	Jun. 30, 2010	Mar. 31, 2010	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Sales information by product category
Sales	$ 175,286	$ 192,194	$ 184,227	$ 165,522	$ 165,329	$ 162,957	$ 150,361	$ 127,027	$ 717,229	$ 605,674	$ 484,185
Carrier Systems [Member]
Sales information by product category
Sales									420,289	289,314	215,715
Business Networking [Member]
Sales information by product category
Sales									162,186	127,233	100,451
Loop Access [Member]
Sales information by product category
Sales									$ 134,754	$ 189,127	$ 168,019

XML

Subsequent Events (Details) (USD $) In Millions, except Per Share data, unless otherwise specified	1 Months Ended	12 Months Ended
	Jan. 31, 2012	Dec. 31, 2011
Subsequent Events (Textual) [Abstract]
Common stock dividends per share declared	$ 0.09
Record date for dividend payments		Feb. 02, 2012
Cash dividend payment date		Feb. 16, 2012
Quarterly dividend payable subsequent to balance sheet date		$ 5.7

XML

Commitments and Contingencies (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011
Future minimum rental payments under non-cancelable operating leases with original maturities of greater than 12 months
2012	$ 2,007
2013	1,207
2014	967
2015	710
2016	89
Total	$ 4,980

XML

Valuation and Qualifying Accounts (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Allowance for Doubtful Accounts [Member]
Valuation and Qualifying Accounts
Balance at Beginning of Period	$ 162	$ 138	$ 38
Assumed on Acquisition			3
Charged to Cost and Expenses	117	72	102
Deductions	271	48	5
Balance at End of Period	8	162	138
Inventory Reserve [Member]
Valuation and Qualifying Accounts
Balance at Beginning of Period	8,932	7,750	7,728
Charged to Cost and Expenses	1,137	1,992	1,681
Deductions	650	810	1,659
Balance at End of Period	9,419	8,932	7,750
Warranty Liability [Member]
Valuation and Qualifying Accounts
Balance at Beginning of Period	3,304	2,833	2,812
Assumed on Acquisition	33
Charged to Cost and Expenses	2,860	5,309	2,665
Deductions	2,079	4,838	2,644
Balance at End of Period	4,118	3,304	2,833
Deferred Tax Asset Valuation Allowance [Member]
Valuation and Qualifying Accounts
Balance at Beginning of Period	5,627	5,340	1,581
Assumed on Acquisition	1,462		3,549
Charged to Cost and Expenses	496	391	251
Deductions		104	41
Balance at End of Period	$ 7,585	$ 5,627	$ 5,340

XML

Segment Information and Major Customers (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2010	Sep. 30, 2010	Jun. 30, 2010	Mar. 31, 2010	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Subcategory revenues
Sales	$ 175,286	$ 192,194	$ 184,227	$ 165,522	$ 165,329	$ 162,957	$ 150,361	$ 127,027	$ 717,229	$ 605,674	$ 484,185
Core Products [Member]
Subcategory revenues
Sales									523,847	353,445	252,045
Core Products [Member] | Broadband Access (included in Carrier Systems) [Member]
Subcategory revenues
Sales									289,776	176,116	111,470
Core Products [Member] | Optical Access (included in Carrier Systems) [Member]
Subcategory revenues
Sales									82,535	66,206	60,596
Core Products [Member] | Internetworking (NetVanta & Multi-service Access Gateways) (included in Business Networking) [Member]
Subcategory revenues
Sales									151,536	111,123	79,979
Legacy Products [Member]
Subcategory revenues
Sales									193,382	252,229	232,140
Legacy Products [Member] | HDSL (does not include T1) (included in Loop Access) [Member]
Subcategory revenues
Sales									126,976	177,249	150,276
Legacy Products [Member] | Other products (excluding HDSL) [Member]
Subcategory revenues
Sales									$ 66,406	$ 74,980	$ 81,864

XML

Income Taxes (Details 3) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Change in unrecognized income tax benefits
Balance at beginning of period	$ 2,593	$ 2,919	$ 2,775
Increases for tax position related to Prior years		197	390
Increases for tax position related to Current year	840	818	610
Decreases for tax positions related to Prior years	(92)	(16)	(1)
Settlements with taxing authorities	(354)	(630)	(413)
Expiration of applicable statute of limitations	(17)	(695)	(442)
Balance at end of period	$ 2,970	$ 2,593	$ 2,919

XML

Nature of Business and Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2011

Nature of Business and Summary of Significant Accounting Policies [Abstract]

Principles of Consolidation

Principles of Consolidation

Our consolidated financial statements include ADTRAN and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

Cash and Cash Equivalents

Cash and cash equivalents represent demand deposits, money market funds, and short-term investments classified as available-for-sale with original maturities of three months or less. 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 the exposure of such credit risk to be minimal. As of December 31, 2011, $23.4 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.

Financial Instruments

Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the immediate or short-term maturity of these financial instruments. The carrying amount reported for bonds payable was $47.0 million compared to an estimated fair value of $46.9 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor's credit rating of A+.

Investments with maturities beyond one year, such as our municipal variable rate demand notes, may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. At December 31, 2011, 18% of our municipal variable rate demand notes had a credit rating of AAA, 58% had a credit rating of AA, 24% had a credit rating of A, and all contained put options of seven days. Despite the long-term nature of their stated contractual maturities, we routinely buy and sell these securities and we believe that we have the ability to quickly liquidate them. Our investments in these securities are recorded at fair value, and the interest rates reset every seven days. We believe 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. At December 31, 2011, approximately 34% of our variable rate demand notes were supported by letters of credit from banks that we believe to be in good financial condition. The remaining 66% of our variable rate demand notes were supported by standby purchase agreements. As a result of these factors, we had no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from these investments at December 31, 2011. 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.

Long-term investments represent a restricted certificate of deposit, municipal fixed-rate bonds, corporate bonds, a fixed income bond fund, marketable equity securities, and other equity investments. Marketable equity securities are reported at fair value as determined by the most recently traded price of the securities at the balance sheet date, although the securities may not be readily marketable due to the size of the available market. Unrealized gains and losses, net of tax, are reported as a separate component of stockholders' equity. Realized gains and losses on sales of securities are computed under the specific identification method and are included in current income. We periodically review our investment portfolio for investments considered to have sustained an other-than-temporary decline in value. Impairment charges for other-than-temporary declines in value are recorded as realized losses in the accompanying consolidated statements of income. All of our investments at December 31, 2011 and 2010 are classified as available-for-sale securities (see Note 4).

Accounts Receivable

Accounts Receivable

We record accounts receivable at net realizable value. Prior to issuing payment terms to a new customer, we perform a detailed credit review of the customer. Credit limits are established for each new customer based on the results of this credit review. Payment terms are established for each new customer, and collection experience is reviewed periodically in order to determine if the customer's payment terms and credit limits need to be revised. At December 31, 2011, three customers, each of which accounted for more than 10% of our accounts receivable, accounted for 57.3% of our total accounts receivable in the aggregate. At December 31, 2010, three customers, each of which accounted for more than 10% of our accounts receivable, accounted for 54.7% of our total accounts receivable in the aggregate.

We maintain an allowance for doubtful accounts for losses resulting from the inability of our customers to make required payments. We regularly review the allowance for doubtful accounts and consider factors such as the age of accounts receivable balances, the current economic conditions that may affect a customer's ability to pay, significant one-time events and our historical experience. If the financial condition of a customer 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 $8 thousand at December 31, 2011 and $162 thousand at December 31, 2010.

Other Receivables

Other Receivables

Other receivables are comprised primarily of amounts due from subcontract manufacturers for product component transfers, accrued interest on investments and on a restricted certificate of deposit and amounts due from employee stock option exercises.

Inventory

Inventory

Inventory is carried at the lower of cost or market, with cost being determined using the first-in, first-out method. Standard costs for material, labor and manufacturing overhead are used to value inventory. Standard costs are updated at least quarterly; therefore, inventory costs approximate actual costs at the end of each reporting period. We establish reserves for estimated excess, obsolete or unmarketable inventory equal to the difference between the cost of the inventory and the estimated fair value of the inventory based upon assumptions about future demand and market conditions. When we dispose of excess and obsolete inventories, the related write-downs are charged against the inventory reserve. See Note 5 of Notes to Consolidated Financial Statements for additional information.

Property, Plant and Equipment

Property, Plant and Equipment

Property, plant and equipment, which is stated at cost, is depreciated using the straight-line method over the estimated useful lives of the assets. We depreciate building and land improvements from five to 39 years, office machinery and equipment from three to seven years, engineering machinery and equipment from three to seven years and computer software from three to five years. Expenditures for repairs and maintenance are charged to expense as incurred. Betterments that materially prolong the lives of the assets are capitalized. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are removed from the accounts, and the gain or loss on such disposition is included in other income (expense), net in the accompanying consolidated statements of income. See Note 6 of Notes to Consolidated Financial Statements for additional information.

Liability for Warranty

Liability for Warranty

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 obligations totaled $4.1 million and $3.3 million at December 31, 2011 and 2010, respectively. These liabilities are included in accrued expenses in the accompanying consolidated balance sheets.

A summary of warranty expense and write-off activity for the years ended December 31, 2011 and 2010 is as follows:

		September 30,			September 30,
Year Ended December 31,	2011			2010
(In thousands)
Balance at beginning of period	$	3,304		$	2,833
Plus: amounts acquired or charged to cost and expenses		2,893			5,309
Less: deductions		(2,079	)		(4,838	)
Balance at end of period	$	4,118		$	3,304

Stock-Based Compensation

Stock-Based Compensation

We have two Board and stockholder approved stock option plans from which stock options and other awards are available for grant to employees and directors. All employee and director stock options granted under our stock option plans have an exercise price equal to the fair market value of the award, as defined in the plan, of the underlying common stock on the grant date. There are currently no vesting provisions tied to performance or market conditions for any option awards; vesting for all outstanding option grants is based only on continued service as an employee or director of ADTRAN. All of our outstanding stock option awards are classified as equity awards.

Under the provisions of our approved plans, we made grants of performance-based restricted stock units to five of our executive officers in 2011, 2010 and 2009. 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 (2009 grant) or against all the companies in the NASDAQ Telecommunications Index (2010 and 2011 grant) and vest at the end of a three-year performance period. The restricted stock units are converted into shares of common stock upon vesting. Depending on the relative total shareholder return over the performance period, the executive officers may earn from 0% to 150% of the number of restricted stock units granted. The fair value of the award is based on the market price of our common stock on the date of grant, adjusted for the expected outcome of the impact of market conditions using a Monte Carlo Simulation valuation method. The recipients of the restricted stock units also earn dividend credits during the performance period, which will be paid in cash upon the issuance of common stock for the restricted stock units.

Stock-based compensation expense recognized under the Stock Compensation Topic of the Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) in 2011, 2010 and 2009 was approximately $9.2 million, $7.7 million and $7.0 million, respectively. As of December 31, 2011, total compensation cost related to non-vested stock options, restricted stock units and restricted stock not yet recognized was approximately $21.9 million, which is expected to be recognized over an average remaining recognition period of 2.9 years. See Note 3 of Notes to Consolidated Financial Statements for additional information.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

We review long-lived assets used in operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by the asset are less than the asset's carrying value. An impairment loss would be recognized in the amount by which the recorded value of the asset exceeds the fair value of the asset, measured by the quoted market price of an asset or an estimate based on the best information available in the circumstances. There were no such impairment losses recognized during 2011, 2010 or 2009.

Goodwill and Purchased Intangible Assets

Goodwill and Purchased Intangible Assets

We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. When evaluating whether goodwill is impaired, we first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If we determine that the two-step quantitative test is necessary, then we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit's carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, then the amount of the impairment loss is measured. There were no impairment losses during 2011. Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, which is 2.5 to seven years.

Research and Development Costs

Research and Development Costs

Research and development costs include compensation for engineers and support personnel, outside contracted services, depreciation and material costs associated with new product development, the enhancement of current products, and product cost reductions. We continually evaluate new product opportunities and engage in intensive research and product development efforts. Research and development costs totaled $100.3 million, $90.3 million and $83.3 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Comprehensive Income

Comprehensive Income

Comprehensive income consists of all changes in equity (net assets) during a period from non-owner sources. Items included in comprehensive income include net income, changes in unrealized gains and losses on marketable securities, and foreign currency translation adjustments. Comprehensive income is presented in the Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income. The components of accumulated comprehensive income (loss) are as follows:

		September 30,			September 30,			September 30,
(In thousands)	Change in Unrealized Gains and (Losses) on Marketable Securities, Net of Tax			Foreign Currency Translation Adjustment			Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2008	$	(243	)	$	(766	)	$	(1,009	)
Activity in 2009		15,384			2,468			17,852
Reclassification adjustment for amounts included in net income		1,010			—			1,010
Balance at December 31, 2009		16,151			1,702			17,853
Activity in 2010		8,700			1,394			10,094
Reclassification adjustment for amounts included in net income		(999	)		—			(999	)
Balance at December 31, 2010		23,852			3,096			26,948
Activity in 2011		(13,004	)		(154	)		(13,158	)
Reclassification adjustment for amounts included in net income		(688	)		—			(688	)
Balance at December 31, 2011	$	10,160		$	2,942		$	13,102

Income Taxes

Income Taxes

The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from the difference between financial and tax bases of our assets and liabilities and are adjusted for changes in tax rates and tax laws when such changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

Foreign Currency

Foreign Currency

We record transactions denominated in foreign currencies on a monthly basis using exchange rates from throughout the year. Assets and liabilities denominated in foreign currencies are translated at the balance sheet dates using the closing rates of exchange between those foreign currencies and the U.S. dollar with any transaction gains or losses reported in income. Adjustments from translating financial statements of international subsidiaries are recorded as a component of accumulated other comprehensive income (loss).

Revenue Recognition

Revenue Recognition

Revenue is generally recognized upon shipment of the product to our customer in accordance with the title transfer terms of the sales agreement, generally FOB shipping point. In the case of consigned inventory, revenue is recognized when the end customer assumes ownership of the product. Contracts that contain multiple deliverables are evaluated to determine the units of accounting, and the revenue from the arrangement is allocated to each item requiring separate revenue recognition based on the relative selling price and corresponding terms of the contract. We strive to use vendor-specific objective evidence of selling price. When this evidence is not available, we are generally not able to determine third-party evidence of selling price because of the extent of customization among competing products or services from other companies. We record revenue associated with installation services when all contractual obligations are complete. Contracts that include both installation services and product sales are evaluated for revenue recognition in accordance with contract terms. As a result, depending on contract terms, installation services may be considered as a separate deliverable item or may be considered an element of the delivered product. Either the purchaser, ADTRAN, or a third party can perform the installation of our products. Shipping fees are recorded as revenue and the related cost is included in cost of sales. Revenue is recorded net of discounts. Also, revenue is recorded when the product price is fixed or determinable, collection of the resulting receivable is probable, and product returns are reasonably estimable. Sales returns are accrued based on historical sales return experience, which we believe provides a reasonable estimate of future returns.

A portion of Enterprise Networks products are sold to a non-exclusive distribution network of major technology distributors in the United States. These large 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 in an unaffiliated fashion. Additionally, with certain limitations our distributors may return unused and unopened product for stock-balancing purposes when such 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 included in marketing 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.

Unearned Revenue

Unearned Revenue

Unearned revenue primarily represents customer billings on our maintenance service programs and deferred revenues relating to multiple element contracts where we still have contractual obligations to our customers. We currently offer maintenance contracts ranging from one to five years, primarily on Enterprise Networks Division products sold through distribution channels. Revenue attributable to maintenance contracts is recognized on a straight-line basis over the related contract term. In addition, we provide software maintenance and a variety of hardware maintenance services to Carrier Network Division customers under contracts with terms up to ten years. Non-current unearned revenue is included in other non-current liabilities in the accompanying consolidated balance sheets. At December 31, 2011 and 2010, unearned revenue was as follows:

		September 30,		September 30,
(In thousands)	2011		2010
Current unearned revenue	$	9,965	$	10,138
Non-current unearned revenue		4,874		3,801
Total	$	14,839	$	13,939

Other Income (Expense), Net

Other Income (Expense), Net

Other income (expense), net, is comprised primarily of miscellaneous income and expense, 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.

Earnings per Share

Earnings per Share

Earnings per common share, and earnings per common share assuming dilution, are based on the weighted average number of common shares and, when dilutive, common equivalent shares outstanding during the year (see Note 13).

Dividends

Dividends

The Board of Directors presently anticipates that it will declare a regular quarterly dividend as long as the current tax treatment of dividends exists and adequate levels of liquidity are maintained. During the years ended December 31, 2011, 2010 and 2009, we paid $23.1 million, $22.5 million and $22.5 million, respectively, in dividend payments. On January 17, 2012, the Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to holders of record at the close of business on February 2, 2012. The ex-dividend date was January 31, 2012 and the payment date was February 16, 2012. The quarterly dividend payment was $5.7 million.

Business Combinations

Business Combinations

We use the acquisition method to account for business combinations. Under the acquisition method of accounting, we recognize the assets acquired and liabilities assumed at their fair value on the acquisition date. Goodwill is measured as the excess of the consideration transferred over the net assets acquired. Costs incurred to complete the business combination, such as legal, accounting or other professional fees, are charged to general and administrative expenses as they are incurred.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Our more significant estimates include the allowance for doubtful accounts, obsolete and excess inventory reserves, warranty reserves, customer rebates, allowance for sales returns, determination of the deferred revenue components of multiple element sales agreements, estimated income tax contingencies, the fair value of stock-based compensation, impairment of goodwill, and the evaluation of other-than-temporary declines in the value of investments. Actual amounts could differ significantly from these estimates.

Recently Issued Accounting Standards

Recently Issued Accounting Standards

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. While ASU 2011-05 changes the presentation of comprehensive income, it does not change the components that are recognized in net income or comprehensive income under current accounting guidance. This update is effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with early adoption permitted. We plan to adopt this amendment during the first quarter of 2012. Since ASU 2011-05 affects presentation only, it will have no effect on our consolidated results of operations or financial condition.

In December 2011, the FASB issued Accounting Standards Update No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12). ASU 2011-12 defers the effective date for certain presentation requirements that relate to reclassification adjustments and the effect of those reclassification adjustments on the financial statements. This update is effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with early adoption permitted. We plan to adopt this amendment during the first quarter of 2012. Since ASU 2011-12 affects presentation only, it will have no effect on our consolidated results of operations or financial condition.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The amendments are of two types: (i) those that clarify the Board's intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This update is effective for annual periods beginning after December 15, 2011. We do not expect the adoption of this amendment will have a material impact on our consolidated results of operations or financial condition.

During 2011, we adopted the following accounting standards, which had no material effect on our consolidated results of operations or financial condition:

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 provides amendments to the criteria in Subtopic 605-25 of the ASC for separating consideration in multiple-deliverable arrangements. As a result of those amendments, multiple-deliverable arrangements are separated in more circumstances than under previously existing U.S. GAAP. ASU 2009-13 established a selling price hierarchy for determining the selling price of a deliverable and replaced 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. ASU 2009 -13 also eliminated the residual method of allocation and required that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and required 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.

We generally sell our products and services separately, but in some circumstances products and services may be sold in bundles that contain multiple deliverables. A sale that includes multiple deliverables is evaluated to determine the units of accounting, and the revenue from the arrangement is allocated to each item requiring separate revenue recognition based on the relative selling price and corresponding terms of the contract. We strive to use vendor-specific objective evidence of selling price. When this evidence is not available, we are generally not able to determine third-party evidence of selling price because of the extent of customization among competing products or services from other companies. In these cases, estimated selling price is determined based on the particular circumstances of the arrangement and is used to allocate revenues to each unit of accounting. Revenue is recognized incrementally as the necessary criteria for each item are met.

We adopted this amendment during the first quarter of 2011. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the year ended December 31, 2011.

In October 2009, the FASB issued Accounting Standards Update No. 2009-14, Certain Revenue Arrangements that Include Software Arrangements. ASU 2009-14 changed 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 are no longer within the scope of the software revenue guidance in Subtopic 985-605 of the ASC. In addition, ASU 2009-14 requires that hardware components of a tangible product containing software components always be excluded from the software revenue guidance. In that regard, ASU 2009-14 provides 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. ASU 2009-14 also provides guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software. ASU 2009-14 also provides 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. We adopted this amendment during the first quarter of 2011. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the year ended December 31, 2011.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Testing Goodwill for Impairment (ASU 2011-08). Existing accounting guidance requires that an entity perform a test for goodwill impairment, on at least an annual basis, by first comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test is to be performed to measure the amount of impairment loss, if any. ASU 2011-08 will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We adopted this amendment during the fourth quarter of 2011. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the year ended December 31, 2011.

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Stock Incentive Plans (Details 4)	12 Months Ended
	Dec. 31, 2011 years	Dec. 31, 2010 years	Dec. 31, 2009 years
Stock Options [Member]
Weighted-average assumptions and value of options granted
Expected volatility	38.32%	39.57%	41.86%
Risk-free interest rate	1.01%	1.35%	2.29%
Expected dividend yield	1.19%	1.08%	1.55%
Expected life (in years)	5.15	5.78	5.10
Restricted Stock Units (RSUs) [Member]
Weighted-average assumptions and value of options granted
Expected volatility	39.32%	40.82%	41.41%
Risk-free interest rate	0.37%	0.51%	1.40%
Expected dividend yield	1.08%	1.07%	1.53%

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Nature of Business and Summary of Significant Accounting Policies (Details Textual) (USD $)	1 Months Ended	12 Months Ended
	Jan. 31, 2012	Dec. 31, 2011 ShareBasedCompensationPlans years employees customers	Dec. 31, 2010 employees customers	Dec. 31, 2009 employees
Nature of Business and Summary of Significant Accounting Policies (Textual) [Abstract]
Number of customers accounting for more than 10 percent of accounts receivable		3	3
Percentage of variable rate demand notes supported by letters of credit from banks		34.00%
Percentage of accounts receivable accounted by each customers		10.00%	10.00%
Original maturity period of cash and cash equivalents		three months or less
Cash, uninsured amount		$ 23,400,000
Bonds payable, carrying amount		47,000,000
Bonds payable, fair value		46,900,000
Cumulative gross unrealized holding gains (losses) from investments		0
Allowance for doubtful accounts		8,000	162,000
Liability for warranty obligations		4,118,000	3,304,000	2,833,000
Number of stock option plans		2
Number of executive officers to whom grants were made		5	5	5
Share based compensation performance period		3 years
Stock-based compensation expense		9,169,000	7,717,000	6,987,000
Total compensation cost related to non-vested stock options, restricted stock units and restricted stock not yet recognized		21,900,000
Recognition period of non-vested compensation cost		2.9
Impairment losses		0	0	0
Research and development costs		100,301,000	90,300,000	83,285,000
Dividend payments		23,100,000	22,500,000	22,500,000
Dividends payable, date declared		Jan. 17, 2012
Common stock dividends per share declared	$ 0.09
Record date for dividend payments		Feb. 02, 2012
Cash dividend payment date		Feb. 16, 2012
Ex-dividend date		Jan. 31, 2012
Quarterly dividend payable subsequent to balance sheet date		$ 5,700,000
Municipal variable rate demand notes [Member]
Guarantor Obligations [Line Items]
Percentage of variable rate demand notes supported by standby purchase agreements		66.00%
Interest rate reset period		7 days
Number of credit rating option days		7 days
Nature of Business and Summary of Significant Accounting Policies (Textual) [Abstract]
Percentage of variable rate demand notes supported by letters of credit from banks		34.00%
Municipal variable rate demand notes [Member] | AAA Rating [Member]
Guarantor Obligations [Line Items]
Municipal variable rate		18.00%
Municipal variable rate demand notes [Member] | AA Rating [Member]
Guarantor Obligations [Line Items]
Municipal variable rate		58.00%
Municipal variable rate demand notes [Member] | A Rating [Member]
Guarantor Obligations [Line Items]
Municipal variable rate		24.00%
Credit concentration risk [Member]
Guarantor Obligations [Line Items]
Percentage of aggregate accounts receivable accounted by customers		57.30%	54.70%

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Segment Information and Major Customers (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2010	Sep. 30, 2010	Jun. 30, 2010	Mar. 31, 2010	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Sales and gross profit of reportable segments
Sales	$ 175,286	$ 192,194	$ 184,227	$ 165,522	$ 165,329	$ 162,957	$ 150,361	$ 127,027	$ 717,229	$ 605,674	$ 484,185
Gross Profit	99,220	109,476	106,827	98,795	96,907	97,299	89,329	75,328	414,318	358,863	286,962
Carrier Networks [Member]
Sales and gross profit of reportable segments
Sales									569,579	476,030	371,349
Gross Profit									327,813	283,310	219,681
Enterprise Networks [Member]
Sales and gross profit of reportable segments
Sales									147,650	129,644	112,836
Gross Profit									$ 86,505	$ 75,553	$ 67,281

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Earnings Per Share (Tables)

12 Months Ended

Dec. 31, 2011

Earnings Per Share [Abstract]

Earnings per share

		September 30,		September 30,		September 30,
	Year Ended
(In thousands, except for per share amounts)	2011		2010		2009
Numerator
Net Income	$	138,577	$	113,989	$	74,221
Denominator
Weighted average number of shares – basic		64,145		62,490		62,459
Effect of dilutive securities:
Stock options		1,236		1,355		887
Restricted stock and restricted stock units		35		34		10
Weighted average number of shares – diluted		65,416		63,879		63,356
Net income per share – basic	$	2.16	$	1.82	$	1.19
Net income per share – diluted	$	2.12	$	1.78	$	1.17

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Investments (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Securities and investments recorded at either fair value or cost
Available-for-sale securities, Amortized Cost	$ 424,329	$ 330,123
Available-for-sale securities, Gross Unrealized Gains	20,171	38,545
Available-for-sale securities, Gross Unrealized Losses	(3,518)	(382)
Available-for-sale securities, Fair Value/Carrying value	440,982	368,286
Restricted investment held at cost	48,250	48,250
Other investments held at cost	2,123	2,103
Total carrying value of available-for-sale investments	491,355	418,639
Deferred compensation plan assets [Member]
Securities and investments recorded at either fair value or cost
Available-for-sale securities, Amortized Cost	7,994	3,483
Available-for-sale securities, Gross Unrealized Gains	119	770
Available-for-sale securities, Gross Unrealized Losses	(401)	(7)
Available-for-sale securities, Fair Value/Carrying value	7,712	4,246
Corporate bonds [Member]
Securities and investments recorded at either fair value or cost
Available-for-sale securities, Amortized Cost	159,077	126,671
Available-for-sale securities, Gross Unrealized Gains	181	630
Available-for-sale securities, Gross Unrealized Losses	(2,505)	(229)
Available-for-sale securities, Fair Value/Carrying value	156,753	127,072
Municipal fixed-rate bonds [Member]
Securities and investments recorded at either fair value or cost
Available-for-sale securities, Amortized Cost	174,300	71,212
Available-for-sale securities, Gross Unrealized Gains	579	268
Available-for-sale securities, Gross Unrealized Losses	(53)	(13)
Available-for-sale securities, Fair Value/Carrying value	174,826	71,467
Municipal variable rate demand notes [Member]
Securities and investments recorded at either fair value or cost
Available-for-sale securities, Amortized Cost	69,660	116,745
Available-for-sale securities, Fair Value/Carrying value	69,660	116,745
Fixed income bond fund [Member]
Securities and investments recorded at either fair value or cost
Available-for-sale securities, Amortized Cost	527	526
Available-for-sale securities, Gross Unrealized Gains	194	220
Available-for-sale securities, Fair Value/Carrying value	721	746
Marketable equity securities [Member]
Securities and investments recorded at either fair value or cost
Available-for-sale securities, Amortized Cost	12,771	11,486
Available-for-sale securities, Gross Unrealized Gains	19,098	36,657
Available-for-sale securities, Gross Unrealized Losses	(559)	(133)
Available-for-sale securities, Fair Value/Carrying value	$ 31,310	$ 48,010

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Alabama State Industrial Development Authority Financing and Economic Incentives (Details) (USD $)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009	Dec. 31, 2008	Jan. 13, 1995
Alabama State Industrial Development Authority Financing and Economic Incentives (Textual) [Abstract]
Proceeds from state industrial development authority issued taxable bonds loaned to ADTRAN					$ 20,000,000
Amount of outstanding bonds issued by Banks for Authority				50,000,000
Percentage of interest Amended and Restated Bond bears	5.00%
Maturity date of Amended and Restated Bond	Jan. 01, 2020
Estimated fair value of bond	46,900,000
Restricted certificate of deposit held	48,250,000	48,250,000
Total realized economic incentives	1,900,000	1,500,000	1,500,000
Bond debt outstanding classified as current liability	500,000
Payments on long-term debt	$ (1,000,000)	$ (250,000)	$ (500,000)

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Property, Plant and Equipment (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Property, Plant and Equipment
Land	$ 4,263	$ 4,263
Building and land improvements	16,857	15,507
Building	68,479	68,479
Furniture and fixtures	16,433	16,130
Computer hardware and software	64,053	61,898
Engineering and other equipment	91,232	83,946
Total Property, Plant and Equipment	261,317	250,223
Less accumulated depreciation	(186,022)	(176,237)
Total Property, Plant and Equipment (net)	$ 75,295	$ 73,986

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Stock Incentive Plans (Details 1) (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2011 years
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Options Outstanding at 12/31/2011	5,400
Options Exercisable at 12/31/2010	3,054
$ 8.70 - $23.46 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Lower Range Limit	$ 8.70
Upper Range Limit	$ 23.46
Options Outstanding at 12/31/2011	2,806
Weighted Average Remaining Contractual Life In Years	5.98
Weighted Average Exercise Price, Options Outstanding	$ 20.30
Options Exercisable at 12/31/2010	2,135
Weighted Average Exercise Price, Options Exercisable	$ 20.16
$23.47 - $30.04 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Lower Range Limit	$ 23.47
Upper Range Limit	$ 30.04
Options Outstanding at 12/31/2011	473
Weighted Average Remaining Contractual Life In Years	4.66
Weighted Average Exercise Price, Options Outstanding	$ 29.13
Options Exercisable at 12/31/2010	421
Weighted Average Exercise Price, Options Exercisable	$ 29.29
$30.05 - $33.33 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Lower Range Limit	$ 30.05
Upper Range Limit	$ 33.33
Options Outstanding at 12/31/2011	1,262
Weighted Average Remaining Contractual Life In Years	7.96
Weighted Average Exercise Price, Options Outstanding	$ 30.77
Options Exercisable at 12/31/2010	279
Weighted Average Exercise Price, Options Exercisable	$ 32.18
$33.34 - $41.92 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Lower Range Limit	$ 33.34
Upper Range Limit	$ 41.92
Options Outstanding at 12/31/2011	859
Weighted Average Remaining Contractual Life In Years	8.81
Weighted Average Exercise Price, Options Outstanding	$ 33.79
Options Exercisable at 12/31/2010	219
Weighted Average Exercise Price, Options Exercisable	$ 33.80

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Business Combinations

12 Months Ended

Dec. 31, 2011

Business Combinations [Abstract]

Business Combinations

Note 2 – Business Combinations

On August 4, 2011, we acquired all of the outstanding stock of Bluesocket, Inc., a provider of wireless network solutions with virtual control, for $23.7 million in cash. The acquisition provides us with IEEE802.11N enterprise class wireless LAN expertise, technology, and products to address the growing transition within small-medium enterprises and large enterprises to wireless networks and mobile devices. We have included the financial results of Bluesocket in our consolidated financial statements since the date of acquisition. Pro forma results of operations prior to the closing date for the acquisition have not been presented because the effect of the acquisition was not material to our financial results. The allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date is as follows:

		September 30,
(In Thousands)
Cash	$	1,027
Accounts receivable		298
Inventory		792
Prepaid expenses		357
Property, plant and equipment		173
Deferred tax assets, net		12,962
Accounts payable		(441	)
Unearned revenue		(600	)
Accrued expenses		(332	)
Net assets acquired		14,236
Customer relationships		1,530
Developed technology		3,230
Intellectual property		930
Trade names		270
Goodwill		3,492
Total purchase price	$	23,688

During the fourth quarter of 2011, the purchase price and purchase price allocation were adjusted for our final valuations. The adjustments resulted in a decrease to the goodwill recognized in the transaction.

The net deferred tax assets acquired are primarily related to net operating losses and previously capitalized and unamortized research and development expense for tax deduction purposes.

The fair value of the customer relationships, developed technology and intellectual property acquired was calculated using an income approach (excess earnings method) and is being amortized using the straight-line method. The customer relationships and intellectual property are being amortized over an estimated useful life of 7 years and the developed technology is being amortized over an average estimated useful life of 4.5 years.

The fair value of the trade names acquired was calculated using an income approach (relief from royalty method) and is being amortized using the straight-line method over the estimate useful life of 4.5 years.

The goodwill of $3.5 million generated from this acquisition is primarily related to expected synergies and was assigned to our Enterprise Networks division. The goodwill will not be deductible for U.S. federal income tax purposes.

For the year ended December 31, 2011, we incurred acquisition related expenses and amortization of acquired intangibles of $1.7 million related to this acquisition.

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Property, Plant and Equipment (Details Textual) (USD $) In Millions, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Property, Plant and Equipment (Textual) [Abstract]
Depreciation	$ 10.8	$ 10.2	$ 10.0

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Nature of Business and Summary of Significant Accounting Policies (Details Textual 1)	12 Months Ended
	Dec. 31, 2011
Property, Plant and Equipment [Line Items]
Period of maintenance contract	10 years
Maximum [Member]
Property, Plant and Equipment [Line Items]
Period of warranties for product defects	10
Units earn as percentage of units granted	150.00%
Period of maintenance contract	5 years
Estimated useful life of amortized finite lived assets, Maximum	7
Minimum [Member]
Property, Plant and Equipment [Line Items]
Period of warranties for product defects	1
Units earn as percentage of units granted	0.00%
Period of maintenance contract	1 year
Estimated useful life of amortized finite lived assets, Minimum	2.5
Building and land improvements [Member]
Property, Plant and Equipment [Line Items]
Estimated useful life, Minimum	5
Estimated useful life, Maximum	39
Office machinery and equipment [Member]
Property, Plant and Equipment [Line Items]
Estimated useful life, Minimum	3
Estimated useful life, Maximum	7
Engineering machinery and equipment [Member]
Property, Plant and Equipment [Line Items]
Estimated useful life, Minimum	3
Estimated useful life, Maximum	7
Computer Software [Member]
Property, Plant and Equipment [Line Items]
Estimated useful life, Minimum	3
Estimated useful life, Maximum	5

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Investments (Tables)

12 Months Ended

Dec. 31, 2011

Investments [Abstract]

Securities and investments recorded at either fair value or cost

We classify our investments as available-for-sale. At December 31, 2011, we held the following securities and investments, recorded at either fair value or cost.

		September 30,		September 30,		September 30,			September 30,
	Amortized		Gross Unrealized					Fair Value / Carrying
(In thousands)	Cost		Gains		Losses			Value
Deferred compensation plan assets	$	7,994	$	119	$	(401	)	$	7,712
Corporate bonds		159,077		181		(2,505	)		156,753
Municipal fixed-rate bonds		174,300		579		(53	)		174,826
Municipal variable rate demand notes		69,660		—		—			69,660
Fixed income bond fund		527		194		—			721
Marketable equity securities		12,771		19,098		(559	)		31,310
Available-for-sale securities held at fair value	$	424,329	$	20,171	$	(3,518	)	$	440,982
Restricted investment held at cost									48,250
Other investments held at cost									2,123
Total carrying value of available-for-sale investments								$	491,355

At December 31, 2010, we held the following securities and investments, recorded at either fair value or cost.

		September 30,		September 30,		September 30,			September 30,
	Amortized		Gross Unrealized					Fair Value / Carrying
(In thousands)	Cost		Gains		Losses			Value
Deferred compensation plan assets	$	3,483	$	770	$	(7	)	$	4,246
Corporate bonds		126,671		630		(229	)		127,072
Municipal fixed-rate bonds		71,212		268		(13	)		71,467
Municipal variable rate demand notes		116,745		—		—			116,745
Fixed income bond fund		526		220		—			746
Marketable equity securities		11,486		36,657		(133	)		48,010
Available-for-sale securities held at fair value	$	330,123	$	38,545	$	(382	)	$	368,286
Restricted investment held at cost									48,250
Other investments held at cost									2,103
Total carrying value of available-for-sale investments								$	418,639

Contractual maturities of corporate and municipal fixed-rate bonds

		September 30,		September 30,
(In thousands)	Corporate bonds		Municipal fixed-rate bonds
Less than one year	$	10,093	$	79,592
One to two years		54,245		64,001
Two to three years		92,415		18,990
Three to five years		—		12,243
Total	$	156,753	$	174,826

Realized gains and losses on sales of securities

		September 30,			September 30,			September 30,
Year Ended December 31, (In thousands)	2011			2010			2009
Gross realized gains	$	13,641		$	12,191		$	1,978
Gross realized losses	$	(1,187	)	$	(1,183	)	$	(3,275	)

Breakdown of investments with unrealized losses

Continuous Unrealized Loss Position for Less than 12 Months					Continuous Unrealized Loss Position for 12 Months or Greater					Total
(In thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Deferred compensation plan assets	$	5,655	$	(401	)	$	—	$	—		$	5,655	$	(401	)
Corporate bonds		112,345		(2,505	)		—		—			112,345		(2,505	)
Municipal fixed-rate bonds		20,076		(53	)		—		—			20,076		(53	)
Marketable equity securities		4,418		(543	)		48		(16	)		4,466		(559	)
Total	$	142,494	$	(3,502	)	$	48	$	(16	)	$	142,542	$	(3,518	)

The following table presents the breakdown of investments with unrealized losses at December 31, 2010.

		September 30,		September 30,			September 30,		September 30,			September 30,		September 30,
	Continuous Unrealized Loss Position for Less than 12 Months					Continuous Unrealized Loss Position for 12 Months or Greater					Total
(In thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Deferred compensation plan assets	$	338	$	(7	)	$	—	$	—		$	338	$	(7	)
Corporate bonds		32,326		(229	)		—		—			32,326		(229	)
Municipal fixed-rate bonds		5,869		(13	)		—		—			5,869		(13	)
Marketable equity securities		2,021		(107	)		176		(26	)		2,197		(133	)
Total	$	40,554	$	(356	)	$	176	$	(26	)	$	40,730	$	(382	)

Fair value measurement of cash equivalents held in money market funds and our investments

Fair Value Measurements at December 31, 2011 Using
(In thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents
Money market funds	$	13,696	$	13,696	$	—	$	—
Available-for-sale securities
Deferred compensation plan assets		7,712		7,712		—		—
Available-for-sale debt securities
Corporate bonds		156,753		—		156,753		—
Municipal fixed-rate bonds		174,826		—		174,826		—
Municipal variable rate demand notes		69,660		—		69,660		—
Fixed income bond fund		721		721		—		—
Available-for-sale marketable equity securities
Marketable equity securities – technology industry		18,743		18,743		—		—
Marketable equity securities – other		12,567		12,567		—		—
Available-for-sale securities		440,982		39,743		401,239		—
Total	$	454,678	$	53,439	$	401,239	$	—

		September 30,		September 30,		September 30,		September 30,
	Fair Value Measurements at December 31, 2010 Using
(In thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents
Money market funds	$	14,532	$	14,532	$	—	$	—
Available-for-sale securities
Deferred compensation plan assets		4,246		4,246		—		—
Available-for-sale debt securities
Corporate bonds		127,072		—		127,072		—
Municipal fixed-rate bonds		71,467		—		71,467		—
Municipal variable rate demand notes		116,745		—		116,745		—
Fixed income bond fund		746		746		—		—
Available-for-sale marketable equity securities
Marketable equity securities – technology industry		35,596		35,596		—		—
Marketable equity securities – other		12,414		12,414		—		—
Available-for-sale securities		368,286		53,002		315,284		—
Total	$	382,818	$	67,534	$	315,284	$	—

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Stock Incentive Plans (Tables)

12 Months Ended

Dec. 31, 2011

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Summary of stock options outstanding

		September 30,			September 30,		September 30,		September 30,
(In thousands, except per share amounts)	Number of Options			Weighted Average Exercise Price		Weighted Avg. Remaining Contractual Life in Years		Aggregate Intrinsic Value
Options outstanding, December 31, 2010		6,234		$	23.09		6.21	$	81,561
Options granted		1,031		$	30.42
Options cancelled/forfeited		(87	)	$	26.32
Options exercised		(1,778	)	$	19.36
Options outstanding, December 31, 2011		5,400		$	25.66		6.78	$	27,270
Options exercisable, December 31, 2011		3,054		$	23.49		5.20	$	21,042

Stock options outstanding

		September 30,		September 30,		September 30,		September 30,		September 30,
	Options Outstanding						Options Exercisable
Range of Exercise Prices	Options Outstanding  at 12/31/11 (In thousands)		Weighted Avg. Remaining Contractual Life in Years		Weighted Average Exercise Price		Options Exercisable  at 12/31/10 (In thousands)		Weighted Average Exercise Price
$ 8.70 - $23.46		2,806		5.98	$	20.30		2,135	$	20.16
$23.47 - $30.04		473		4.66	$	29.13		421	$	29.29
$30.05- $33.33		1,262		7.96	$	30.77		279	$	32.18
$33.34 - $41.92		859		8.81	$	33.79		219	$	33.80
		5,400						3,054

Summary of RSUs and restricted stock outstanding

		September 30,			September 30,
(In thousands, except per share amounts)	Number of shares			Weighted Average Grant Date Fair Value
Unvested RSUs and restricted stock outstanding, December 31, 2010		87		$	28.46
RSUs and restricted stock granted		39		$	36.09
RSUs and restricted stock vested		(49	)	$	22.36
RSUs and restricted stock cancelled/forfeited		—		$	—
Adjustments to shares granted due to shares earned at vesting		13		$	17.05
Unvested RSUs and restricted stock outstanding, December 31, 2011		90		$	34.21

Stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock under the Stock Compensation Topic of the FASB (ASC)

		September 30,			September 30,			September 30,
(In thousands)	2011			2010			2009
Stock-based compensation expense included in cost of sales	$	412		$	317		$	268
Selling, general and administrative expense		4,316			3,575			3,039
Research and development expense		4,441			3,825			3,680
Stock-based compensation expense included in operating expenses		8,757			7,400			6,719
Total stock-based compensation expense		9,169			7,717			6,987
Tax benefit for expense associated with non-qualified options		(1,321	)		(650	)		(634	)
Total stock-based compensation expense, net of tax	$	7,848		$	7,067		$	6,353

Stock Options [Member]

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Weighted-average assumptions and value of options granted

		September 30,			September 30,			September 30,
	2011			2010			2009
Expected volatility		38.32	%		39.57	%		41.86	%
Risk-free interest rate		1.01	%		1.35	%		2.29	%
Expected dividend yield		1.19	%		1.08	%		1.55	%
Expected life (in years)		5.15			5.78			5.10

Restricted Stock Units (RSUs) [Member]

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Weighted-average assumptions and value of options granted

		September 30,			September 30,			September 30,
	2011			2010			2009
Expected volatility		39.32	%		40.82	%		41.41	%
Risk-free interest rate		0.37	%		0.51	%		1.40	%
Expected dividend yield		1.08	%		1.07	%		1.53	%

XML

Investments (Details 4) (Fair Value, Measurements, Recurring [Member], USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	$ 440,982	$ 368,286
Total	454,678	382,818
Money market funds [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Money market funds	13,696	14,532
Deferred compensation plan assets [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	7,712	4,246
Corporate bonds [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	156,753	127,072
Municipal fixed-rate bonds [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	174,826	71,467
Municipal variable rate demand notes [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	69,660	116,745
Fixed income bond fund [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	721	746
Marketable equity securities - technology industry [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	18,743	35,596
Marketable equity securities - other [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	12,567	12,414
Quoted Prices in Active Market for Identical Assets (Level 1) [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	39,743	53,002
Total	53,439	67,534
Quoted Prices in Active Market for Identical Assets (Level 1) [Member] | Money market funds [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Money market funds	13,696	14,532
Quoted Prices in Active Market for Identical Assets (Level 1) [Member] | Deferred compensation plan assets [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	7,712	4,246
Quoted Prices in Active Market for Identical Assets (Level 1) [Member] | Corporate bonds [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	0	0
Quoted Prices in Active Market for Identical Assets (Level 1) [Member] | Municipal fixed-rate bonds [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	0	0
Quoted Prices in Active Market for Identical Assets (Level 1) [Member] | Municipal variable rate demand notes [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	0	0
Quoted Prices in Active Market for Identical Assets (Level 1) [Member] | Fixed income bond fund [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	721	746
Quoted Prices in Active Market for Identical Assets (Level 1) [Member] | Marketable equity securities - technology industry [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	18,743	35,596
Quoted Prices in Active Market for Identical Assets (Level 1) [Member] | Marketable equity securities - other [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	12,567	12,414
Significant Other Observable Inputs (Level 2) [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	401,239	315,284
Total	401,239	315,284
Significant Other Observable Inputs (Level 2) [Member] | Money market funds [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Money market funds		0
Significant Other Observable Inputs (Level 2) [Member] | Deferred compensation plan assets [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	0	0
Significant Other Observable Inputs (Level 2) [Member] | Corporate bonds [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	156,753	127,072
Significant Other Observable Inputs (Level 2) [Member] | Municipal fixed-rate bonds [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	174,826	71,467
Significant Other Observable Inputs (Level 2) [Member] | Municipal variable rate demand notes [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	69,660	116,745
Significant Other Observable Inputs (Level 2) [Member] | Fixed income bond fund [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	0	0
Significant Other Observable Inputs (Level 2) [Member] | Marketable equity securities - technology industry [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	0	0
Significant Other Observable Inputs (Level 2) [Member] | Marketable equity securities - other [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	0	0
Significant Unobservable Inputs (Level 3) [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	0	0
Total	0	0
Significant Unobservable Inputs (Level 3) [Member] | Money market funds [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Money market funds		0
Significant Unobservable Inputs (Level 3) [Member] | Deferred compensation plan assets [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	0	0
Significant Unobservable Inputs (Level 3) [Member] | Corporate bonds [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	0	0
Significant Unobservable Inputs (Level 3) [Member] | Municipal fixed-rate bonds [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	0	0
Significant Unobservable Inputs (Level 3) [Member] | Municipal variable rate demand notes [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	0	0
Significant Unobservable Inputs (Level 3) [Member] | Fixed income bond fund [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	0	0
Significant Unobservable Inputs (Level 3) [Member] | Marketable equity securities - technology industry [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	0	0
Significant Unobservable Inputs (Level 3) [Member] | Marketable equity securities - other [Member]
Fair value measurement of cash equivalents held in money market funds and our investments
Available-for-sale securities	$ 0	$ 0

XML

Business Combinations (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011
Preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date
Goodwill	$ 3,500
Bluesocket [Member]
Preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date
Cash	1,027
Accounts receivable	298
Inventory	792
Prepaid expenses	357
Property, plant and equipment	173
Deferred tax assets, net	12,962
Accounts payable	(441)
Unearned revenue	(600)
Accrued expenses	(332)
Net assets acquired	14,236
Goodwill	3,492
Total purchase price	23,688
Bluesocket [Member] | Customer relationships [Member]
Preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date
Intangible assets	1,530
Bluesocket [Member] | Developed technology [Member]
Preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date
Intangible assets	3,230
Bluesocket [Member] | Intellectual property [Member]
Preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date
Intangible assets	930
Bluesocket [Member] | Trade names [Member]
Preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date
Intangible assets	$ 270

XML

Inventory (Tables)

12 Months Ended

Dec. 31, 2011

Inventory [Abstract]

Inventory

		September 30,		September 30,
(In thousands)	2011		2010
Raw materials	$	44,588	$	43,897
Work in process		3,954		2,871
Finished goods		39,258		27,506
Total	$	87,800	$	74,274

XML

Property, Plant and Equipment (Tables)

12 Months Ended

Dec. 31, 2011

Property, Plant and Equipment [Abstract]

Property, Plant and Equipment

		September 30,			September 30,
(In thousands)	2011			2010
Land	$	4,263		$	4,263
Building and land improvements		16,857			15,507
Building		68,479			68,479
Furniture and fixtures		16,433			16,130
Computer hardware and software		64,053			61,898
Engineering and other equipment		91,232			83,946
Total Property, Plant and Equipment		261,317			250,223
Less accumulated depreciation		(186,022	)		(176,237	)
Total Property, Plant and Equipment (net)	$	75,295		$	73,986

XML

Nature of Business and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2011

Nature of Business and Summary of Significant Accounting Policies [Abstract]

Nature of Business and Summary of Significant Accounting Policies

Note 1 – Nature of Business and Summary of Significant Accounting Policies

ADTRAN, Inc. designs, manufactures and markets solutions and provides services and support for communications networks. Our solutions are widely deployed by providers of communications services (serviced by our Carrier Networks Division), and small and mid-sized enterprises (SMEs) (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.

Principles of Consolidation

Our consolidated financial statements include ADTRAN and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

Cash and cash equivalents represent demand deposits, money market funds, and short-term investments classified as available-for-sale with original maturities of three months or less. 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 the exposure of such credit risk to be minimal. As of December 31, 2011, $23.4 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.

Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the immediate or short-term maturity of these financial instruments. The carrying amount reported for bonds payable was $47.0 million compared to an estimated fair value of $46.9 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor's credit rating of A+.

Investments with maturities beyond one year, such as our municipal variable rate demand notes, may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. At December 31, 2011, 18% of our municipal variable rate demand notes had a credit rating of AAA, 58% had a credit rating of AA, 24% had a credit rating of A, and all contained put options of seven days. Despite the long-term nature of their stated contractual maturities, we routinely buy and sell these securities and we believe that we have the ability to quickly liquidate them. Our investments in these securities are recorded at fair value, and the interest rates reset every seven days. We believe 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. At December 31, 2011, approximately 34% of our variable rate demand notes were supported by letters of credit from banks that we believe to be in good financial condition. The remaining 66% of our variable rate demand notes were supported by standby purchase agreements. As a result of these factors, we had no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from these investments at December 31, 2011. 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.

Long-term investments represent a restricted certificate of deposit, municipal fixed-rate bonds, corporate bonds, a fixed income bond fund, marketable equity securities, and other equity investments. Marketable equity securities are reported at fair value as determined by the most recently traded price of the securities at the balance sheet date, although the securities may not be readily marketable due to the size of the available market. Unrealized gains and losses, net of tax, are reported as a separate component of stockholders' equity. Realized gains and losses on sales of securities are computed under the specific identification method and are included in current income. We periodically review our investment portfolio for investments considered to have sustained an other-than-temporary decline in value. Impairment charges for other-than-temporary declines in value are recorded as realized losses in the accompanying consolidated statements of income. All of our investments at December 31, 2011 and 2010 are classified as available-for-sale securities (see Note 4).

Accounts Receivable

We record accounts receivable at net realizable value. Prior to issuing payment terms to a new customer, we perform a detailed credit review of the customer. Credit limits are established for each new customer based on the results of this credit review. Payment terms are established for each new customer, and collection experience is reviewed periodically in order to determine if the customer's payment terms and credit limits need to be revised. At December 31, 2011, three customers, each of which accounted for more than 10% of our accounts receivable, accounted for 57.3% of our total accounts receivable in the aggregate. At December 31, 2010, three customers, each of which accounted for more than 10% of our accounts receivable, accounted for 54.7% of our total accounts receivable in the aggregate.

We maintain an allowance for doubtful accounts for losses resulting from the inability of our customers to make required payments. We regularly review the allowance for doubtful accounts and consider factors such as the age of accounts receivable balances, the current economic conditions that may affect a customer's ability to pay, significant one-time events and our historical experience. If the financial condition of a customer 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 $8 thousand at December 31, 2011 and $162 thousand at December 31, 2010.

Other Receivables

Other receivables are comprised primarily of amounts due from subcontract manufacturers for product component transfers, accrued interest on investments and on a restricted certificate of deposit and amounts due from employee stock option exercises.

Inventory

Inventory is carried at the lower of cost or market, with cost being determined using the first-in, first-out method. Standard costs for material, labor and manufacturing overhead are used to value inventory. Standard costs are updated at least quarterly; therefore, inventory costs approximate actual costs at the end of each reporting period. We establish reserves for estimated excess, obsolete or unmarketable inventory equal to the difference between the cost of the inventory and the estimated fair value of the inventory based upon assumptions about future demand and market conditions. When we dispose of excess and obsolete inventories, the related write-downs are charged against the inventory reserve.  See Note 5 of Notes to Consolidated Financial Statements for additional information.

Property, Plant and Equipment

Property, plant and equipment, which is stated at cost, is depreciated using the straight-line method over the estimated useful lives of the assets. We depreciate building and land improvements from five to 39 years, office machinery and equipment from three to seven years, engineering machinery and equipment from three to seven years and computer software from three to five years. Expenditures for repairs and maintenance are charged to expense as incurred. Betterments that materially prolong the lives of the assets are capitalized. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are removed from the accounts, and the gain or loss on such disposition is included in other income (expense), net in the accompanying consolidated statements of income. See Note 6 of Notes to Consolidated Financial Statements for additional information.

Liability for Warranty

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 obligations totaled $4.1 million and $3.3 million at December 31, 2011 and 2010, respectively. These liabilities are included in accrued expenses in the accompanying consolidated balance sheets.

A summary of warranty expense and write-off activity for the years ended December 31, 2011 and 2010 is as follows:

		September 30,			September 30,
Year Ended December 31,	2011			2010
(In thousands)
Balance at beginning of period	$	3,304		$	2,833
Plus: amounts acquired or charged to cost and expenses		2,893			5,309
Less: deductions		(2,079	)		(4,838	)
Balance at end of period	$	4,118		$	3,304

Stock-Based Compensation

We have two Board and stockholder approved stock option plans from which stock options and other awards are available for grant to employees and directors. All employee and director stock options granted under our stock option plans have an exercise price equal to the fair market value of the award, as defined in the plan, of the underlying common stock on the grant date. There are currently no vesting provisions tied to performance or market conditions for any option awards; vesting for all outstanding option grants is based only on continued service as an employee or director of ADTRAN. All of our outstanding stock option awards are classified as equity awards.

Under the provisions of our approved plans, we made grants of performance-based restricted stock units to five of our executive officers in 2011, 2010 and 2009. 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 (2009 grant) or against all the companies in the NASDAQ Telecommunications Index (2010 and 2011 grant) and vest at the end of a three-year performance period. The restricted stock units are converted into shares of common stock upon vesting. Depending on the relative total shareholder return over the performance period, the executive officers may earn from 0% to 150% of the number of restricted stock units granted. The fair value of the award is based on the market price of our common stock on the date of grant, adjusted for the expected outcome of the impact of market conditions using a Monte Carlo Simulation valuation method. The recipients of the restricted stock units also earn dividend credits during the performance period, which will be paid in cash upon the issuance of common stock for the restricted stock units.

Stock-based compensation expense recognized under the Stock Compensation Topic of the Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) in 2011, 2010 and 2009 was approximately $9.2 million, $7.7 million and $7.0 million, respectively. As of December 31, 2011, total compensation cost related to non-vested stock options, restricted stock units and restricted stock not yet recognized was approximately $21.9 million, which is expected to be recognized over an average remaining recognition period of 2.9 years. See Note 3 of Notes to Consolidated Financial Statements for additional information .

Impairment of Long-Lived Assets

We review long-lived assets used in operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by the asset are less than the asset's carrying value. An impairment loss would be recognized in the amount by which the recorded value of the asset exceeds the fair value of the asset, measured by the quoted market price of an asset or an estimate based on the best information available in the circumstances. There were no such impairment losses recognized during 2011, 2010 or 2009.

Goodwill and Purchased Intangible Assets

We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. When evaluating whether goodwill is impaired, we first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If we determine that the two-step quantitative test is necessary, then we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit's carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, then the amount of the impairment loss is measured. There were no impairment losses during 2011. Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, which is 2.5 to seven years.

Research and Development Costs

Research and development costs include compensation for engineers and support personnel, outside contracted services, depreciation and material costs associated with new product development, the enhancement of current products, and product cost reductions. We continually evaluate new product opportunities and engage in intensive research and product development efforts. Research and development costs totaled $100.3 million, $90.3 million and $83.3 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Comprehensive Income

Comprehensive income consists of all changes in equity (net assets) during a period from non-owner sources. Items included in comprehensive income include net income, changes in unrealized gains and losses on marketable securities, and foreign currency translation adjustments. Comprehensive income is presented in the Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income. The components of accumulated comprehensive income (loss) are as follows:

		September 30,			September 30,			September 30,
(In thousands)	Change in Unrealized Gains and (Losses) on Marketable Securities, Net of Tax			Foreign Currency Translation Adjustment			Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2008	$	(243	)	$	(766	)	$	(1,009	)
Activity in 2009		15,384			2,468			17,852
Reclassification adjustment for amounts included in net income		1,010			—			1,010
Balance at December 31, 2009		16,151			1,702			17,853
Activity in 2010		8,700			1,394			10,094
Reclassification adjustment for amounts included in net income		(999	)		—			(999	)
Balance at December 31, 2010		23,852			3,096			26,948
Activity in 2011		(13,004	)		(154	)		(13,158	)
Reclassification adjustment for amounts included in net income		(688	)		—			(688	)
Balance at December 31, 2011	$	10,160		$	2,942		$	13,102

Income Taxes

The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from the difference between financial and tax bases of our assets and liabilities and are adjusted for changes in tax rates and tax laws when such changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized .

Foreign Currency

We record transactions denominated in foreign currencies on a monthly basis using exchange rates from throughout the year. Assets and liabilities denominated in foreign currencies are translated at the balance sheet dates using the closing rates of exchange between those foreign currencies and the U.S. dollar with any transaction gains or losses reported in income. Adjustments from translating financial statements of international subsidiaries are recorded as a component of accumulated other comprehensive income (loss).

Revenue Recognition

Revenue is generally recognized upon shipment of the product to our customer in accordance with the title transfer terms of the sales agreement, generally FOB shipping point. In the case of consigned inventory, revenue is recognized when the end customer assumes ownership of the product. Contracts that contain multiple deliverables are evaluated to determine the units of accounting, and the revenue from the arrangement is allocated to each item requiring separate revenue recognition based on the relative selling price and corresponding terms of the contract. We strive to use vendor-specific objective evidence of selling price. When this evidence is not available, we are generally not able to determine third-party evidence of selling price because of the extent of customization among competing products or services from other companies. We record revenue associated with installation services when all contractual obligations are complete. Contracts that include both installation services and product sales are evaluated for revenue recognition in accordance with contract terms. As a result, depending on contract terms, installation services may be considered as a separate deliverable item or may be considered an element of the delivered product. Either the purchaser, ADTRAN, or a third party can perform the installation of our products. Shipping fees are recorded as revenue and the related cost is included in cost of sales. Revenue is recorded net of discounts. Also, revenue is recorded when the product price is fixed or determinable, collection of the resulting receivable is probable, and product returns are reasonably estimable. Sales returns are accrued based on historical sales return experience, which we believe provides a reasonable estimate of future returns.

A portion of Enterprise Networks products are sold to a non-exclusive distribution network of major technology distributors in the United States. These large 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 in an unaffiliated fashion. Additionally, with certain limitations our distributors may return unused and unopened product for stock-balancing purposes when such 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 included in marketing 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.

Unearned Revenue

Unearned revenue primarily represents customer billings on our maintenance service programs and deferred revenues relating to multiple element contracts where we still have contractual obligations to our customers. We currently offer maintenance contracts ranging from one to five years, primarily on Enterprise Networks Division products sold through distribution channels. Revenue attributable to maintenance contracts is recognized on a straight-line basis over the related contract term. In addition, we provide software maintenance and a variety of hardware maintenance services to Carrier Network Division customers under contracts with terms up to ten years. Non-current unearned revenue is included in other non-current liabilities in the accompanying consolidated balance sheets. At December 31, 2011 and 2010, unearned revenue was as follows:

		September 30,		September 30,
(In thousands)	2011		2010
Current unearned revenue	$	9,965	$	10,138
Non-current unearned revenue		4,874		3,801
Total	$	14,839	$	13,939

Other Income (Expense), Net

Other income (expense), net, is comprised primarily of miscellaneous income and expense, 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 .

Earnings per Share

Earnings per common share, and earnings per common share assuming dilution, are based on the weighted average number of common shares and, when dilutive, common equivalent shares outstanding during the year (see Note 13).

Dividends

The Board of Directors presently anticipates that it will declare a regular quarterly dividend as long as the current tax treatment of dividends exists and adequate levels of liquidity are maintained. During the years ended December 31, 2011, 2010 and 2009, we paid $23.1 million, $22.5 million and $22.5 million, respectively, in dividend payments. On January 17, 2012, the Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to holders of record at the close of business on February 2, 2012. The ex-dividend date was January 31, 2012 and the payment date was February 16, 2012. The quarterly dividend payment was $5.7 million.

Business Combinations

We use the acquisition method to account for business combinations. Under the acquisition method of accounting, we recognize the assets acquired and liabilities assumed at their fair value on the acquisition date. Goodwill is measured as the excess of the consideration transferred over the net assets acquired. Costs incurred to complete the business combination, such as legal, accounting or other professional fees, are charged to general and administrative expenses as they are incurred.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Our more significant estimates include the allowance for doubtful accounts, obsolete and excess inventory reserves, warranty reserves, customer rebates, allowance for sales returns, determination of the deferred revenue components of multiple element sales agreements, estimated income tax contingencies, the fair value of stock-based compensation, impairment of goodwill, and the evaluation of other-than-temporary declines in the value of investments. Actual amounts could differ significantly from these estimates.

Recently Issued Accounting Standards

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. While ASU 2011-05 changes the presentation of comprehensive income, it does not change the components that are recognized in net income or comprehensive income under current accounting guidance. This update is effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with early adoption permitted. We plan to adopt this amendment during the first quarter of 2012. Since ASU 2011-05 affects presentation only, it will have no effect on our consolidated results of operations or financial condition.

In December 2011, the FASB issued Accounting Standards Update No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12). ASU 2011-12 defers the effective date for certain presentation requirements that relate to reclassification adjustments and the effect of those reclassification adjustments on the financial statements. This update is effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with early adoption permitted. We plan to adopt this amendment during the first quarter of 2012. Since ASU 2011-12 affects presentation only, it will have no effect on our consolidated results of operations or financial condition.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The amendments are of two types: (i) those that clarify the Board's intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This update is effective for annual periods beginning after December 15, 2011. We do not expect the adoption of this amendment will have a material impact on our consolidated results of operations or financial condition.

During 2011, we adopted the following accounting standards, which had no material effect on our consolidated results of operations or financial condition:

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 provides amendments to the criteria in Subtopic 605-25 of the ASC for separating consideration in multiple-deliverable arrangements. As a result of those amendments, multiple-deliverable arrangements are separated in more circumstances than under previously existing U.S. GAAP. ASU 2009-13 established a selling price hierarchy for determining the selling price of a deliverable and replaced 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. ASU 2009 -13 also eliminated the residual method of allocation and required that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and required 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.

We generally sell our products and services separately, but in some circumstances products and services may be sold in bundles that contain multiple deliverables. A sale that includes multiple deliverables is evaluated to determine the units of accounting, and the revenue from the arrangement is allocated to each item requiring separate revenue recognition based on the relative selling price and corresponding terms of the contract. We strive to use vendor-specific objective evidence of selling price. When this evidence is not available, we are generally not able to determine third-party evidence of selling price because of the extent of customization among competing products or services from other companies. In these cases, estimated selling price is determined based on the particular circumstances of the arrangement and is used to allocate revenues to each unit of accounting. Revenue is recognized incrementally as the necessary criteria for each item are met.

We adopted this amendment during the first quarter of 2011. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the year ended December 31, 2011.

In October 2009, the FASB issued Accounting Standards Update No. 2009-14, Certain Revenue Arrangements that Include Software Arrangements. ASU 2009-14 changed 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 are no longer within the scope of the software revenue guidance in Subtopic 985-605 of the ASC. In addition, ASU 2009-14 requires that hardware components of a tangible product containing software components always be excluded from the software revenue guidance. In that regard, ASU 2009-14 provides 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. ASU 2009-14 also provides guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software. ASU 2009-14 also provides 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. We adopted this amendment during the first quarter of 2011. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the year ended December 31, 2011.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Testing Goodwill for Impairment (ASU 2011-08). Existing accounting guidance requires that an entity perform a test for goodwill impairment, on at least an annual basis, by first comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test is to be performed to measure the amount of impairment loss, if any. ASU 2011-08 will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We adopted this amendment during the fourth quarter of 2011. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the year ended December 31, 2011.

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Goodwill and Intangible Assets (Tables)

12 Months Ended

Dec. 31, 2011

Goodwill and Intangible Assets [Abstract]

Changes in the carrying value of goodwill

		September 30,
(In thousands)
Balance, December 31, 2010	$	—
Acquisitions		3,492
Impairment losses		—
Balance, December 31, 2011	$	3,492
Balance as of December 31, 2011:
Goodwill	$	3,492
Accumulated impairment losses		—
Total goodwill	$	3,492

Summary of intangible assets

		September 30,		September 30,			September 30,		September 30,		September 30,			September 30,
	December 31, 2011							December 31, 2010
(In thousands)	Gross Value		Accumulated Amortization			Net Value		Gross Value		Accumulated Amortization			Net Value
Customer relationships	$	1,623	$	(194	)	$	1,429	$	93	$	(60	)	$	33
Developed technology		3,230		(303	)		2,927		—		—			—
Intellectual property		2,340		(525	)		1,815		1,410		(260	)		1,150
Trade names		270		(28	)		242		—		—			—
Total	$	7,463	$	(1,050	)	$	6,413	$	1,503	$	(320	)	$	1,183

Estimated future amortization expense related to intangible assets

		September 30,
(In thousands)	Amount
2012	$	1,221
2013		1,271
2014		1,120
2015		1,018
2016		781
Thereafter		1,002
Total	$	6,413

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Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2010	Sep. 30, 2010	Jun. 30, 2010	Mar. 31, 2010	Dec. 31, 2011		Dec. 31, 2010		Dec. 31, 2009
Numerator
Net income	$ 31,163	$ 36,213	$ 36,943	$ 34,258	$ 35,960	$ 32,084	$ 27,751	$ 18,194	$ 138,577		$ 113,989		$ 74,221
Denominator
Weighted average number of shares - basic									64,145,000		62,490,000		62,459,000
Effect of dilutive securities
Stock options									1,236,000		1,355,000		887,000
Restricted stock and restricted stock units									35,000		34,000		10,000
Weighted average number of shares - diluted									65,416,000	[1]	63,879,000	[1]	63,356,000	[1]
Net income per share - basic	$ 0.49	$ 0.57	$ 0.57	$ 0.53	$ 0.57	$ 0.51	$ 0.45	$ 0.29	$ 2.16		$ 1.82		$ 1.19
Net income per share - diluted	$ 0.48	$ 0.56	$ 0.56	$ 0.52	$ 0.56	$ 0.50	$ 0.44	$ 0.29	$ 2.12	[1]	$ 1.78	[1]	$ 1.17	[1]
Earnings Per Share (Textual) [Abstract]
Anti dilutive options, Total									1,200,000		2,000,000		3,500,000

[1] Assumes exercise of dilutive stock options calculated under the treasury method. See Notes 1 and 13 of the Notes to Consolidated Financial Statements

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Nature of Business and Summary of Significant Accounting Policies (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009	Dec. 31, 2008
Components of accumulated comprehensive income (loss)
Change in Unrealized Gains and (Losses) on Marketable Securities, Net of Tax	$ 10,160	$ 23,852	$ 16,151	$ (243)
Foreign Currency Translation Adjustment	2,942	3,096	1,702	(766)
Accumulated Other Comprehensive Income (Loss)	13,102	26,948	17,853	(1,009)
Change in Unrealized Gains and (Losses) on Marketable Securities, Net of Tax, Activity during the year	(13,004)	8,700	15,384
Foreign Currency Translation Adjustment, Activity during the year	(154)	1,394	2,468
Accumulated Other Comprehensive Income (Loss), Activity during the year	(13,158)	10,094	17,852
Reclassification adjustment for amounts included in net income, net of deferred tax expense (benefit) of $617, $(598) and $(389) in 2009, 2010 and 2011, respectively	(688)	(999)	1,010
Foreign Currency Translation Adjustment, Reclassification adjustment for amounts included in net income
Accumulated Other Comprehensive Income (Loss), Reclassification adjustment for amounts included in net income	$ (688)	$ (999)	$ 1,010

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Investments (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Contractual maturities of corporate and municipal fixed-rate bonds
Available-for-sale securities, carrying value	$ 440,982	$ 368,286
Corporate bonds [Member]
Contractual maturities of corporate and municipal fixed-rate bonds
Less than one year	10,093
One to two years	54,245
Two to three years	92,415
Available-for-sale securities, carrying value	156,753	127,072
Municipal fixed-rate bonds [Member]
Contractual maturities of corporate and municipal fixed-rate bonds
Less than one year	79,592
One to two years	64,001
Two to three years	18,990
Three to five years	12,243
Available-for-sale securities, carrying value	$ 174,826	$ 71,467

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Income Taxes (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009	Dec. 31, 2008
Income Taxes (Textual) [Abstract]
Deferred tax (benefit) provision recorded as an adjustment to other comprehensive income	$ (7,800,000)	$ 4,600,000
Foreign and domestic loss, unamortized research and development cost and state credit carry-forwards	22,700,000
Income tax benefit from exercise of stock options	10,525,000	4,909,000	1,549,000
Unrecognized tax benefits	2,970,000	2,593,000	2,919,000	2,775,000
Unrecognized tax benefits that would affect the effective tax rate	2,400,000	2,000,000	2,300,000
Accrued interest and penalties	$ 1,200,000	$ 1,000,000	$ 1,200,000

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Current Assets
Cash and cash equivalents	$ 42,979	$ 31,677
Short-term investments	159,347	157,479
Accounts receivable, less allowance for doubtful accounts of $8 and $162 at December 31, 2011 and 2010, respectively	76,130	70,893
Other receivables	9,743	3,962
Income tax receivable, net	0	2,741
Inventory	87,800	74,274
Prepaid expenses	3,119	3,270
Deferred tax assets, net	12,125	10,617
Total Current Assets	391,243	354,913
Property, plant and equipment, net	75,295	73,986
Deferred tax assets, net	8,345	0
Goodwill	3,492	0
Other assets	7,131	1,915
Long-term investments	332,008	261,160
Total Assets	817,514	691,974
Current Liabilities
Accounts payable	29,404	22,785
Unearned revenue	9,965	10,138
Accrued expenses	5,876	4,913
Accrued wages and benefits	13,518	12,125
Income tax payable, net	3,169	0
Total Current Liabilities	61,932	49,961
Deferred tax liabilities, net	0	10,350
Other non-current liabilities	16,951	11,841
Bonds payable	46,500	47,500
Total Liabilities	125,383	119,652
Commitments and contingencies (see Note 12)
Stockholders' Equity
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 63,703 shares outstanding at December 31, 2011 and 79,652 shares issued and 63,010 shares outstanding at December 31, 2010	797	797
Additional paid-in capital	213,560	193,866
Accumulated other comprehensive income	13,102	26,948
Retained earnings	840,206	731,962
Less treasury stock at cost: 15,949 and 16,642 shares at December 31, 2011 and 2010, respectively	(375,534)	(381,251)
Total Stockholders' Equity	692,131	572,322
Total Liabilities and Stockholders' Equity	$ 817,514	$ 691,974

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Business Combinations (Details Textual) (USD $)		12 Months Ended
	Dec. 31, 2011	Dec. 31, 2011 Customer relationships [Member] years	Dec. 31, 2011 Intellectual property [Member] years	Dec. 31, 2011 Developed technology [Member] years	Dec. 31, 2011 Trade names [Member] years	Dec. 31, 2011 Bluesocket [Member]	Aug. 04, 2011 Bluesocket [Member]
Business Acquisition [Line Items]
Acquisition cost							$ 23,700,000
Average estimated useful life		7	7	4.5	4.5
Goodwill	3,500,000					3,492,000
Business Combinations (Textual) [Abstract]
Acquisition related expenses and amortization of acquired intangibles	$ 1,700,000

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Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income (Parenthetical) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income [Abstract]
Deferred tax effect on marketable securities	$ (7,427)	$ 5,223	$ 9,218
Reclassification adjustment amounts included in net income, net deferred tax expense (benefit)	$ (389)	$ (598)	$ 617
Treasury stock, shares purchased	1,112	729	755
Treasury stock, shares issued	1,813	1,483	856
Treasury stock, received	7	4

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Inventory (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Inventory
Raw materials	$ 44,588	$ 43,897
Work in process	3,954	2,871
Finished goods	39,258	27,506
Total	$ 87,800	$ 74,274

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Segment Information and Major Customers (Tables)

12 Months Ended

Dec. 31, 2011

Segment Information and Major Customers [Abstract]

Sales and gross profit of reportable segments

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
Sales and Gross Profit by Market Segment	2011				2010				2009
(In thousands)	Sales		Gross Profit		Sales		Gross Profit		Sales		Gross Profit
Carrier Networks	$	569,579	$	327,813	$	476,030	$	283,310	$	371,349	$	219,681
Enterprise Networks		147,650		86,505		129,644		75,553		112,836		67,281
	$	717,229	$	414,318	$	605,674	$	358,863	$	484,185	$	286,962

Sales information by product category

		September 30,		September 30,		September 30,
(In thousands)	2011		2010		2009
Carrier Systems	$	420,289	$	289,314	$	215,715
Business Networking		162,186		127,233		100,451
Loop Access		134,754		189,127		168,019
Total	$	717,229	$	605,674	$	484,185

Subcategory revenues

		September 30,		September 30,		September 30,
(In thousands)	2011		2010		2009
Core Products
Broadband Access (included in Carrier Systems)	$	289,776	$	176,116	$	111,470
Optical Access (included in Carrier Systems)		82,535		66,206		60,596
Internetworking (NetVanta® & Multi-service Access Gateways) (included in Business Networking)		151,536		111,123		79,979
Total	$	523,847	$	353,445	$	252,045
Legacy Products
HDSL (does not include T1) (included in Loop Access)		126,976		177,249		150,276
Other products (excluding HDSL)		66,406		74,980		81,864
Total	$	193,382	$	252,229	$	232,140
Total	$	717,229	$	605,674	$	484,185

Sales information by geographic area

		September 30,		September 30,		September 30,
(In thousands)	2011		2010		2009
United States	$	632,795	$	573,845	$	456,402
International		84,434		31,829		27,783
Total	$	717,229	$	605,674	$	484,185

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Goodwill and Intangible Assets (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011
Estimated future amortization expense related to intangible assets
2012	$ 1,221
2013	1,271
2014	1,120
2015	1,018
2016	781
Thereafter	1,002
Total	$ 6,413

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Related Party Transactions

12 Months Ended

Dec. 31, 2011

Related Party Transactions [Abstract]

Related Party Transactions

Note 15 – Related Party Transactions

We employ the law firm of our director emeritus for legal services. All bills for services rendered by this firm are reviewed and approved by our Chief Financial Officer. We believe that the fees for such services are comparable to those charged by other firms for services rendered to us. For the years ended 2011, 2010 and 2009, we incurred fees of $10 thousand per month for these legal services.

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Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2011

Commitments and Contingencies [Abstract]

Future minimum rental payments under non-cancelable operating leases with original maturities of greater than 12 months

		September 30,
(In thousands)
2012	$	2,007
2013		1,207
2014		967
2015		710
2016		89
Total	$	4,980

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Valuation and Qualifying Accounts

12 Months Ended

Dec. 31, 2011

Valuation and Qualifying Accounts [Abstract]

VALUATION AND QUALIFYING ACCOUNTS

ADTRAN, INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

		September 30,		September 30,		September 30,		September 30,		September 30,
Column A	Column B		Column C		Column D		Column E		Column F
(In thousands)	Balance at Beginning of Period		Assumed on Acquisition		Charged to Costs & Expenses		Deductions		Balance at End of Period
Year ended December 31, 2011
Allowance for Doubtful Accounts	$	162		—		117		271	$	8
Inventory Reserve	$	8,932		—		1,137		650	$	9,419
Warranty Liability	$	3,304		33		2,860		2,079	$	4,118
Deferred Tax Asset Valuation Allowance	$	5,627		1,462		496		—	$	7,585
Year ended December 31, 2010
Allowance for Doubtful Accounts	$	138		—		72		48	$	162
Inventory Reserve	$	7,750		—		1,992		810	$	8,932
Warranty Liability	$	2,833		—		5,309		4,838	$	3,304
Deferred Tax Asset Valuation Allowance	$	5,340		—		391		104	$	5,627
Year ended December 31, 2009
Allowance for Doubtful Accounts	$	38		3		102		5	$	138
Inventory Reserve	$	7,728		—		1,681		1,659	$	7,750
Warranty Liability	$	2,812		—		2,665		2,644	$	2,833
Deferred Tax Asset Valuation Allowance	$	1,581		3,549		251		41	$	5,340

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Income Taxes (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Current
Federal	$ 59,813	$ 49,144	$ 30,756
State	7,177	6,380	3,615
Total Current	66,990	55,524	34,371
Deferred tax expense (benefit)	575	(1,324)	(1,024)
Total Provision for Income Taxes	$ 67,565	$ 54,200	$ 33,347

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Cash flows from operating activities
Net income	$ 138,577	$ 113,989	$ 74,221
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	11,499	10,545	10,084
Amortization of net premium on available-for-sale investments	6,617	4,380	3,686
Net realized (gain) loss on long-term investments	(12,454)	(11,008)	1,297
Net (gain) loss on disposal of property, plant and equipment	6	2	(31)
Stock-based compensation expense	9,169	7,717	6,987
Deferred income taxes	575	(1,324)	(1,024)
Tax benefit from stock option exercises	10,525	4,909	1,549
Excess tax benefits from stock-based compensation arrangements	(9,373)	(4,404)	(998)
Change in operating assets and liabilities:
Accounts receivable, net	(4,939)	(2,849)	(15,143)
Other receivables	(5,781)	135	(1,195)
Income tax receivable, net	2,741	(2,741)
Inventory	(12,734)	(28,600)	1,732
Prepaid expenses and other assets	522	(574)	(489)
Accounts payable	6,178	(2,997)	5,442
Accrued expenses and other liabilities	6,309	8,626	1,010
Income taxes payable, net	3,169	(3,017)	3,027
Net cash provided by operating activities	150,606	92,789	90,155
Cash flows from investing activities
Purchases of property, plant and equipment	(11,912)	(9,872)	(8,740)
Proceeds from sales and maturities of available-for-sale investments	466,243	275,442	186,193
Purchases of available-for-sale investments	(554,629)	(340,489)	(262,067)
Acquisition of business, net of cash acquired	(22,661)		(1,370)
Net cash used in investing activities	(122,959)	(74,919)	(85,984)
Cash flows from financing activities
Proceeds from stock option exercises	34,125	24,942	13,471
Purchases of treasury stock	(35,565)	(18,316)	(15,896)
Dividend payments	(23,124)	(22,502)	(22,486)
Payments on long-term debt	(1,000)	(250)	(500)
Excess tax benefits from stock-based compensation arrangements	9,373	4,404	998
Net cash used in financing activities	(16,191)	(11,722)	(24,413)
Net increase (decrease) in cash and cash equivalents	11,456	6,148	(20,242)
Effect of exchange rate changes	(154)	1,394	2,468
Cash and cash equivalents, beginning of year	31,677	24,135	41,909
Cash and cash equivalents, end of year	42,979	31,677	24,135
Supplemental disclosure of cash flow information
Cash paid during the year for interest	2,396	2,411	2,435
Cash paid during the year for income taxes	$ 51,402	$ 57,662	$ 30,869

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Consolidated Balance Sheets [Abstract]
Allowance for doubtful accounts	$ 8	$ 162
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	200,000	200,000
Common stock, shares issued	79,652	79,652
Common stock, shares outstanding	63,703	63,010
Treasury stock, shares	15,949	16,642

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Employee Benefit Plans

12 Months Ended

Dec. 31, 2011

Employee Benefit Plans [Abstract]

Employee Benefit Plans

Note 10 – Employee Benefit Plans

401(k) Savings Plan

We maintain the ADTRAN, Inc. 401(k) Retirement Plan (Savings Plan) for the benefit of our eligible employees. The Savings Plan is intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (Code), and is intended to be a "safe harbor" 401(k) plan under Code Section 401(k)(12). The Savings Plan allows employees to save for retirement by contributing part of their compensation to the plan on a tax-deferred basis. The Savings Plan also requires us to contribute a "safe harbor" amount each year. We match up to 4% of employee contributions (100% of an employee's first 3% of contributions and 50% of their next 2% of contributions), beginning on the employee's one year anniversary date. In calculating our matching contribution, we only use compensation up to the statutory maximum under the Code ($245 thousand for 2011). All contributions under the Savings Plan are 100% vested. Expenses recorded for employer contributions and plan administration costs for the Savings Plan amounted to approximately $4.3 million, $4.6 million and $4.2 million in 2011, 2010 and 2009, respectively.

Deferred Compensation Plans

We maintain the ADTRAN, Inc. Deferred Compensation Plan (Deferred Compensation Plan). This plan is offered as a supplement to our tax-qualified 401(k) plan and is available to certain executive management employees who have been designated by our Board of Directors. The deferred compensation plan allows participants to defer all or a portion of certain specified bonuses and up to 25% of remaining cash compensation, and permits us to make matching contributions on a discretionary basis, without the limitations that apply to the 401(k) plan. To date, we have not made any matching contributions under this plan.

We also maintain the ADTRAN, Inc. Equity Deferral Program for Employees for the purpose of providing deferred compensation for certain executive management employees. Participants may elect to defer all or a portion of their vested Performance Share awards to the Plan. Such deferrals shall continue to be held and deemed to be invested in shares of ADTRAN stock unless and until the amounts are distributed or such deferrals are moved to another deemed investment pursuant to an election made by the Participant.

We have set aside the plan assets for both plans in a rabbi trust (Trust) and all contributions are credited to bookkeeping accounts for the participants. The Trust assets are subject to the claims of our creditors in the event of bankruptcy or insolvency. The assets of the Trust are deemed to be invested in pre-approved mutual funds as directed by each participant, and the participant's bookkeeping account is credited with the earnings and losses attributable to those investments. Benefits are scheduled to be distributed six months after termination of employment in a single lump sum payment or annual installments paid over a three or ten year term. Distributions will be made on a pro rata basis from each of the hypothetical investments of the Participant's account in cash. Any whole shares of ADTRAN, Inc. common stock that are distributed will be distributed in-kind.

Assets of the Trust are deemed invested in mutual funds that cover an investment spectrum ranging from equities to money market instruments. These mutual funds are publicly quoted and reported at fair value. The fair value of the assets held by the Trust and the amounts payable to the plan participants are as follows:

		September 30,		September 30,
(In thousands)	2011		2010
Fair Value of Plan Assets
Long-term Investments	$	7,710	$	4,246
Total Fair Value of Plan Assets	$	7,710	$	4,246
Amounts Payable to Plan Participants
Non-current Liabilities	$	7,710	$	4,246
Total Amounts Payable to Plan Participants	$	7,710	$	4,246

Interest and dividend income of the Trust have been included in interest and dividend income in the accompanying 2011, 2010 and 2009 Consolidated Statements of Income. Changes in the fair value of the plan assets held by the Trust have been included in accumulated other comprehensive income in the accompanying 2011 and 2010 Consolidated Balance Sheets. Changes in the fair value of the deferred compensation liability are included as selling, general and administrative expense in the accompanying 2011, 2010 and 2009 Consolidated Statements of Income. Based on the changes in the total fair value of the Trust's assets, we recorded deferred compensation adjustments in 2011, 2010 and 2009 of $(0.2) million, $0.4 million and $0.6 million, respectively.

Retiree Medical Coverage

We provide medical, dental and prescription drug coverage to one retired former officer and his spouse, for his life, on the same terms as provided to our active officers, and to the spouse of a former deceased officer for up to 30 years. At December 31, 2011 and 2010, this liability totaled $0.2 million.

XML

Document and Entity Information (USD $)	12 Months Ended
	Dec. 31, 2011	Feb. 14, 2012	Jun. 30, 2011
Document and Entity Information [Abstract]
Entity Registrant Name	ADTRAN INC
Entity Central Index Key	0000926282
Document Type	10-K
Document Period End Date	Dec. 31, 2011
Amendment Flag	false
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	FY
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	Yes
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Public Float			$ 2,497,687,885
Entity Common Stock, Shares Outstanding		63,822,229

XML

Segment Information and Major Customers

12 Months Ended

Dec. 31, 2011

Segment Information and Major Customers [Abstract]

Segment Information and Major Customers

Note 11 – Segment Information and Major Customers

We operate in two reportable segments: (1) the Carrier Networks Division and (2) the Enterprise Networks Division. The accounting policies of the segments are the same as those described in the "Nature of Business and Summary of Significant Accounting Policies" (see Note 1) to the extent that such policies affect the reported segment information. We evaluate the performance of our segments based on gross profit; therefore, selling, general and administrative expense, research and development expenses, interest income and dividend income, interest expense, net realized investment gain/loss, other income/expense and provision for taxes are reported on an entity-wide basis only. There are no inter-segment revenues.

The following table presents information about the reported sales and gross profit of our reportable segments for each of the years ended December 31, 2011, 2010 and 2009. Asset information by reportable segment is not reported, since we do not produce such information internally.

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
Sales and Gross Profit by Market Segment	2011				2010				2009
(In thousands)	Sales		Gross Profit		Sales		Gross Profit		Sales		Gross Profit
Carrier Networks	$	569,579	$	327,813	$	476,030	$	283,310	$	371,349	$	219,681
Enterprise Networks		147,650		86,505		129,644		75,553		112,836		67,281
	$	717,229	$	414,318	$	605,674	$	358,863	$	484,185	$	286,962

Sales by Product

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

Carrier Systems products are used by communications service providers to provide 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, Ultra Broadband Ethernet (UBE) 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 and transceivers including those used in our Optical Networking Edge (ONE) products, NetVanta 8000 series products, and our family of OPTI products. Optical access products are used to deliver higher bandwidth services, aggregate large numbers of low bandwidth services, or transport wavelength services across a fiber optic infrastructure. Total Access 1500 products, 303 concentrator products, M13 multiplexer products, and a number of 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 small and mid-sized enterprises (SME) market. The Business Networking category includes Internetworking products and Integrated Access Devices (IADs). Internetworking products consist of our Total Access IP Business Gateways, Optical Network Terminals (ONTs), Virtual Wireless LAN products 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, Unified Threat Management (UTM) solutions, and Carrier Ethernet Network Terminating Equipment (NTE). IAD products consist of our Total Access 600 Series and the Total Access 850.

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.

The table below presents sales information by product category for the years ended December 31, 2011, 2010 and 2009:

		September 30,		September 30,		September 30,
(In thousands)	2011		2010		2009
Carrier Systems	$	420,289	$	289,314	$	215,715
Business Networking		162,186		127,233		100,451
Loop Access		134,754		189,127		168,019
Total	$	717,229	$	605,674	$	484,185

In addition, we identify subcategories of product revenues, which we divide into our core products and legacy products. Our core products consist of Broadband Access and Optical Access products (included in Carrier Systems) and Internetworking products (included in Business Networking) and our legacy products include HDSL products (included in Loop Access) and other products not included in the aforementioned core products.

The table below presents subcategory revenues for the years ended December 31, 2011, 2010 and 2009:

		September 30,		September 30,		September 30,
(In thousands)	2011		2010		2009
Core Products
Broadband Access (included in Carrier Systems)	$	289,776	$	176,116	$	111,470
Optical Access (included in Carrier Systems)		82,535		66,206		60,596
Internetworking (NetVanta® & Multi-service Access Gateways) (included in Business Networking)		151,536		111,123		79,979
Total	$	523,847	$	353,445	$	252,045
Legacy Products
HDSL (does not include T1) (included in Loop Access)		126,976		177,249		150,276
Other products (excluding HDSL)		66,406		74,980		81,864
Total	$	193,382	$	252,229	$	232,140
Total	$	717,229	$	605,674	$	484,185

Sales by Geographic Region

The following table presents sales information by geographic area for the years ended December 31, 2011, 2010 and 2009. International sales correlate to shipments with a non-U.S. destination.

		September 30,		September 30,		September 30,
(In thousands)	2011		2010		2009
United States	$	632,795	$	573,845	$	456,402
International		84,434		31,829		27,783
Total	$	717,229	$	605,674	$	484,185

Single customers comprising more than 10% of our revenue in 2011 included two customers at 25% and 10%, respectively. Single customers comprising more than 10% of our revenue in 2010 included three customers at 20%, 18%, and 11%, respectively. Single customers comprising more than 10% of our revenue in 2009 included three customers at 22%, 19%, and 11%, respectively. No other customer accounted for 10% or more of our sales in 2011, 2010 or 2009.

Sales to Major Service Providers amounted to approximately 72%, 72% and 69% of total sales during the years ended December 31, 2011, 2010 and 2009, respectively. In addition, a significant portion of our products are sold directly to distributors and certain value-added resellers, which accounted for approximately 26%, 26% and 28% of our revenue for each of the years ended December 31, 2011, 2010 and 2009, respectively.

As of December 31, 2011, long-lived assets, net totaled $75.3 million, which includes $73.9 million held in the United States and $1.4 million held outside the United States. As of December 31, 2010, long-lived assets, net totaled $74.0 million, which includes $73.0 million held in the United States and $1.0 million held outside the United States.

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Segment Information and Major Customers (Details Textual 1) (USD $) In Millions, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2009
Revenues from External Customers and Long-Lived Assets [Line Items]
Long-Lived Assets	$ 75.3	$ 74.0
US [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Long-Lived Assets	73.9	73.0
Outside US [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Long-Lived Assets	$ 1.4	$ 1.0

XML

Consolidated Statements of Income (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2011		Dec. 31, 2010		Dec. 31, 2009
Consolidated Statements of Income [Abstract]
Sales	$ 717,229		$ 605,674		$ 484,185
Cost of sales	302,911		246,811		197,223
Gross Profit	414,318		358,863		286,962
Selling, general and administrative expenses	124,879		114,699		99,446
Research and development expenses	100,301		90,300		83,285
Operating Income	189,138		153,864		104,231
Interest and dividend income	7,642		6,557		6,933
Interest expense	(2,398)		(2,436)		(2,430)
Net realized investment gain (loss)	12,454		11,008		(1,297)
Other income (expense), net	(694)		(804)		131
Income before provision for income taxes	206,142		168,189		107,568
Provision for income taxes	(67,565)		(54,200)		(33,347)
Net Income	$ 138,577		$ 113,989		$ 74,221
Weighted average shares outstanding - basic	64,145		62,490		62,459
Weighted average shares outstanding - diluted	65,416	[1]	63,879	[1]	63,356	[1]
Earnings per common share - basic	$ 2.16		$ 1.82		$ 1.19
Earnings per common share - diluted	$ 2.12	[1]	$ 1.78	[1]	$ 1.17	[1]

[1] Assumes exercise of dilutive stock options calculated under the treasury method. See Notes 1 and 13 of the Notes to Consolidated Financial Statements

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Inventory

12 Months Ended

Dec. 31, 2011

Inventory [Abstract]

Inventory

Note 5 – Inventory

At December 31, 2011 and 2010, inventory was comprised of the following:

		September 30,		September 30,
(In thousands)	2011		2010
Raw materials	$	44,588	$	43,897
Work in process		3,954		2,871
Finished goods		39,258		27,506
Total	$	87,800	$	74,274

We establish reserves for estimated excess, obsolete, or unmarketable inventory equal to the difference between the cost of the inventory and the estimated fair value of the inventory based upon assumptions about future demand and market conditions. At December 31, 2011 and 2010, raw materials reserves totaled $7.9 million and $7.3 million, respectively, and finished goods inventory reserves totaled $1.5 million and $1.6 million, respectively.

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Investments

12 Months Ended

Dec. 31, 2011

Investments [Abstract]

Investments

Note 4 – Investments

We classify our investments as available-for-sale. At December 31, 2011, we held the following securities and investments, recorded at either fair value or cost.

		September 30,		September 30,		September 30,			September 30,
	Amortized		Gross Unrealized					Fair Value / Carrying
(In thousands)	Cost		Gains		Losses			Value
Deferred compensation plan assets	$	7,994	$	119	$	(401	)	$	7,712
Corporate bonds		159,077		181		(2,505	)		156,753
Municipal fixed-rate bonds		174,300		579		(53	)		174,826
Municipal variable rate demand notes		69,660		—		—			69,660
Fixed income bond fund		527		194		—			721
Marketable equity securities		12,771		19,098		(559	)		31,310
Available-for-sale securities held at fair value	$	424,329	$	20,171	$	(3,518	)	$	440,982
Restricted investment held at cost									48,250
Other investments held at cost									2,123
Total carrying value of available-for-sale investments								$	491,355

At December 31, 2010, we held the following securities and investments, recorded at either fair value or cost.

		September 30,		September 30,		September 30,			September 30,
	Amortized		Gross Unrealized					Fair Value / Carrying
(In thousands)	Cost		Gains		Losses			Value
Deferred compensation plan assets	$	3,483	$	770	$	(7	)	$	4,246
Corporate bonds		126,671		630		(229	)		127,072
Municipal fixed-rate bonds		71,212		268		(13	)		71,467
Municipal variable rate demand notes		116,745		—		—			116,745
Fixed income bond fund		526		220		—			746
Marketable equity securities		11,486		36,657		(133	)		48,010
Available-for-sale securities held at fair value	$	330,123	$	38,545	$	(382	)	$	368,286
Restricted investment held at cost									48,250
Other investments held at cost									2,103
Total carrying value of available-for-sale investments								$	418,639

At December 31, 2011 and 2010, we held $7.7 million and $4.2 million, respectively, of deferred compensation plan assets, carried at fair value.

At December 31, 2011 and 2010, we held $156.8 million and $127.1 million, respectively, of corporate bonds. These bonds are classified as available-for-sale and had an average duration of 0.8 years at December 31, 2011. At December 31, 2011, approximately 1% of our corporate bond portfolio had a credit rating of AAA, 11% had a credit rating of AA, 50% had a credit rating of A, and 38% had a credit rating of BBB.

At December 31, 2011 and 2010, we held $174.8 million and $71.5 million, respectively, of municipal fixed-rate bonds. These bonds are classified as available-for-sale investments and had an average duration of 1.3 years at December 31, 2011. At December 31, 2011, approximately 19% of our municipal fixed-rate bond portfolio had a credit rating of AAA, 64% had a credit rating of AA, 15% had a credit rating of A, and 2% had a credit rating of BBB. 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.

As of December 31, 2011, corporate and municipal fixed-rate bonds had the following contractual maturities:

		September 30,		September 30,
(In thousands)	Corporate bonds		Municipal fixed-rate bonds
Less than one year	$	10,093	$	79,592
One to two years		54,245		64,001
Two to three years		92,415		18,990
Three to five years		—		12,243
Total	$	156,753	$	174,826

At December 31, 2011 and 2010, we held $69.7 million and $116.7 million, respectively, of municipal variable rate demand notes, all of which were classified as available-for-sale short-term investments. At December 31, 2011, 18% of our municipal variable rate demand notes had a credit rating of AAA, 58% had a credit rating of AA, 24% had a credit rating of A, and all contained put options of seven days. Despite the long-term nature of their stated contractual maturities, we routinely buy and sell these securities and we believe that we have the ability to quickly liquidate them. Our investments in these securities are recorded at fair value, and the interest rates reset every seven days. We believe 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. At December 31, 2011, approximately 34% of our variable rate demand notes were supported by letters of credit from banks that we believe to be in good financial condition. The remaining 66% of our variable rate demand notes were supported by standby purchase agreements. As a result of these factors, we had no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from these investments. 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.

At December 31, 2011 and 2010, we held $0.7 million of a fixed income bond fund. This bond fund had unrealized gains of $0.2 million at December 31, 2011 and 2010.

At December 31, 2011, we held $31.3 million of marketable equity securities, including a single security, of which we held 1.1 million shares, carried at a fair value of $17.3 million. We sold 0.5 million shares of this security during the 12 months ended December 31, 2011. The sales resulted in proceeds of $9.2 million and a realized gain of $9.1 million. This single security traded approximately 0.8 million shares per day in 2011, in an active market on a European stock exchange. This single security comprises $16.9 million of the gross unrealized gains included in the fair value of our marketable equity securities at December 31, 2011. The remaining $2.2 million of gross unrealized gains and $0.6 million of gross unrealized losses at December 31, 2011 were spread amongst more than 400 equity securities. At December 31, 2010, we held $48.0 million of marketable equity securities, including the single security mentioned above, of which we held 1.5 million shares, carried at a fair value of $34.2 million. This single security comprised $33.7 million of the gross unrealized gains included in the fair value of our marketable equity securities at December 31, 2010. The remaining $3.0 million of unrealized gains and $0.1 million of gross unrealized losses at December 31, 2010 were spread amongst more than 415 equity securities.

At December 31, 2011 and 2010, we held a $48.3 million restricted certificate of deposit, which is carried at cost. This investment serves as a collateral deposit against the principal amount outstanding under loans made to ADTRAN pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond). At December 31, 2011, the estimated fair value of the Bond was approximately $46.9 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor's credit rating of A+. 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. For more information on the Bond, see Note 8 of Notes to Consolidated Financial Statements.

At December 31, 2011 and 2010, we held $2.1 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. The fair value of these investments was estimated to be approximately $10.0 million at December 31, 2011, based on unobservable inputs including information supplied by the company and the fund managers. We have committed to invest up to an aggregate of $7.9 million in the two private equity funds, and we have contributed $8.4 million as of December 31, 2011, of which $7.7 million has been applied toward these commitments. As of December 31, 2011 we have received distributions related to these two private equity funds of $8.8 million, of which $2.2 million was recorded as investment income. These investments are carried at cost, net of distributions, with distributions in excess of our investment recorded as investment income. The duration of each of these commitments is ten years with $0.1 million expiring in 2013 and $0.1 million expiring in 2012. We have not been required to record any impairment losses related to these investments during the years ended December 31, 2011, 2010 or 2009.

Our investment policy provides limitations for issuer concentration, which limits, at the time of purchase, the concentration in any one issuer to 5% of the market value of our total investment portfolio.

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 recorded an other-than-temporary impairment charge of $36 thousand during the fourth quarter of 2011. For each of the years ended December 31, 2011, 2010 and 2009 we recorded a charge of $68 thousand, $43 thousand and $2.9 million, respectively, related to the other-than-temporary impairment of certain marketable equity securities, a fixed income bond fund and deferred compensation plan assets.

Realized gains and losses on sales of securities are computed under the specific identification method. The following table presents gross realized gains and losses related to our investments.

		September 30,			September 30,			September 30,
Year Ended December 31, (In thousands)	2011			2010			2009
Gross realized gains	$	13,641		$	12,191		$	1,978
Gross realized losses	$	(1,187	)	$	(1,183	)	$	(3,275	)

The following table presents the breakdown of investments with unrealized losses at December 31, 2011.

		September 30,		September 30,			September 30,		September 30,			September 30,		September 30,
	Continuous Unrealized Loss Position for Less than 12 Months					Continuous Unrealized Loss Position for 12 Months or Greater					Total
(In thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Deferred compensation plan assets	$	5,655	$	(401	)	$	—	$	—		$	5,655	$	(401	)
Corporate bonds		112,345		(2,505	)		—		—			112,345		(2,505	)
Municipal fixed-rate bonds		20,076		(53	)		—		—			20,076		(53	)
Marketable equity securities		4,418		(543	)		48		(16	)		4,466		(559	)
Total	$	142,494	$	(3,502	)	$	48	$	(16	)	$	142,542	$	(3,518	)

The following table presents the breakdown of investments with unrealized losses at December 31, 2010.

		September 30,		September 30,			September 30,		September 30,			September 30,		September 30,
	Continuous Unrealized Loss Position for Less than 12 Months					Continuous Unrealized Loss Position for 12 Months or Greater					Total
(In thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Deferred compensation plan assets	$	338	$	(7	)	$	—	$	—		$	338	$	(7	)
Corporate bonds		32,326		(229	)		—		—			32,326		(229	)
Municipal fixed-rate bonds		5,869		(13	)		—		—			5,869		(13	)
Marketable equity securities		2,021		(107	)		176		(26	)		2,197		(133	)
Total	$	40,554	$	(356	)	$	176	$	(26	)	$	40,730	$	(382	)

The increase in unrealized losses during 2011, as reflected in the table above, is primarily due to credit yield spreads widening during the second half of 2011 primarily impacting our corporate bonds. At December 31, 2011, a total of 128 of our marketable equity securities were in an unrealized loss position.

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; 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.

		September 30,		September 30,		September 30,		September 30,
	Fair Value Measurements at December 31, 2011 Using
(In thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents
Money market funds	$	13,696	$	13,696	$	—	$	—
Available-for-sale securities
Deferred compensation plan assets		7,712		7,712		—		—
Available-for-sale debt securities
Corporate bonds		156,753		—		156,753		—
Municipal fixed-rate bonds		174,826		—		174,826		—
Municipal variable rate demand notes		69,660		—		69,660		—
Fixed income bond fund		721		721		—		—
Available-for-sale marketable equity securities
Marketable equity securities – technology industry		18,743		18,743		—		—
Marketable equity securities – other		12,567		12,567		—		—
Available-for-sale securities		440,982		39,743		401,239		—
Total	$	454,678	$	53,439	$	401,239	$	—

		September 30,		September 30,		September 30,		September 30,
	Fair Value Measurements at December 31, 2010 Using
(In thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents
Money market funds	$	14,532	$	14,532	$	—	$	—
Available-for-sale securities
Deferred compensation plan assets		4,246		4,246		—		—
Available-for-sale debt securities
Corporate bonds		127,072		—		127,072		—
Municipal fixed-rate bonds		71,467		—		71,467		—
Municipal variable rate demand notes		116,745		—		116,745		—
Fixed income bond fund		746		746		—		—
Available-for-sale marketable equity securities
Marketable equity securities – technology industry		35,596		35,596		—		—
Marketable equity securities – other		12,414		12,414		—		—
Available-for-sale securities		368,286		53,002		315,284		—
Total	$	382,818	$	67,534	$	315,284	$	—

As of December 31, 2011 and 2010, the fair value of the investments in available-for-sale Level 2 corporate bonds and municipal fixed-rate bonds was $331.6 million and $198.5 million, respectively. The fair value of these securities is calculated using a weighted average market price for each security. Market prices are obtained from a variety of industry standard data providers, security master files from large financial institutions, and other third-party sources. These multiple market prices are used as inputs into a distribution-curve-based algorithm to determine the daily market value of each security.

As of December 31, 2011 and 2010, the fair value of the investments in available-for-sale Level 2 municipal variable rate demand notes was $69.7 million and $116.7 million, respectively. These securities have a structure that implies a standard expected market price. The frequent interest rate resets make it reasonable to expect the price to stay at par. These securities are priced at the expected market price.

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Subsequent Events

12 Months Ended

Dec. 31, 2011

Subsequent Events [Abstract]

Subsequent Events

Note 16 – Subsequent Events

On January 17, 2012, 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 2, 2012. The quarterly dividend payment was $5.7 million and was paid on February 16, 2012. In July 2003, our Board of Directors elected to begin declaring quarterly dividends on our common stock considering the tax treatment of dividends and adequate levels of Company liquidity.

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Commitments and Contingencies

12 Months Ended

Dec. 31, 2011

Commitments and Contingencies [Abstract]

Commitments and Contingencies

 

Note 12 – Commitments and Contingencies

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. Although the outcome of any claim or litigation can never be certain, it is our opinion that the outcome of all contingencies of which we are currently aware will not materially affect our business, operations, financial condition or cash flows.

We lease office space and equipment under operating leases which expire at various dates through 2016. As of December 31, 2011, future minimum rental payments under non-cancelable operating leases with original maturities of greater than 12 months are approximately as follows:

		September 30,
(In thousands)
2012	$	2,007
2013		1,207
2014		967
2015		710
2016		89
Total	$	4,980

Rental expense was approximately $2.4 million, $1.8 million and $1.5 million for the years ended December 31, 2011, 2010 and 2009, respectively

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Summarized Quarterly Financial Data (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2010	Sep. 30, 2010	Jun. 30, 2010	Mar. 31, 2010	Dec. 31, 2011		Dec. 31, 2010		Dec. 31, 2009
Quarterly Operating Results
Net sales	$ 175,286	$ 192,194	$ 184,227	$ 165,522	$ 165,329	$ 162,957	$ 150,361	$ 127,027	$ 717,229		$ 605,674		$ 484,185
Gross profit	99,220	109,476	106,827	98,795	96,907	97,299	89,329	75,328	414,318		358,863		286,962
Operating income	41,115	51,107	51,310	45,606	44,857	45,045	38,617	25,345	189,138		153,864		104,231
Net income	$ 31,163	$ 36,213	$ 36,943	$ 34,258	$ 35,960	$ 32,084	$ 27,751	$ 18,194	$ 138,577		$ 113,989		$ 74,221
Earnings per common share - basic	$ 0.49	$ 0.57	$ 0.57	$ 0.53	$ 0.57	$ 0.51	$ 0.45	$ 0.29	$ 2.16		$ 1.82		$ 1.19
Earnings per common share - diluted	$ 0.48	$ 0.56	$ 0.56	$ 0.52	$ 0.56	$ 0.50	$ 0.44	$ 0.29	$ 2.12	[1]	$ 1.78	[1]	$ 1.17	[1]

[1] Assumes exercise of dilutive stock options calculated under the treasury method. See Notes 1 and 13 of the Notes to Consolidated Financial Statements

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Alabama State Industrial Development Authority Financing and Economic Incentives

12 Months Ended

Dec. 31, 2011

Alabama State Industrial Development Authority Financing and Economic Incentives [Abstract]

Alabama State Industrial Development Authority Financing and Economic Incentives

Note 8 – Alabama State Industrial Development Authority Financing and Economic Incentives

In conjunction with an expansion of our Huntsville, Alabama, facility, we were approved for participation in an incentive program offered by the State of Alabama 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) (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. An Amended and Restated Taxable Revenue Bond ("Amended and Restated Bond") was issued and the original financing agreement was amended. The Amended and Restated Bond bears interest, payable monthly. The interest rate is 5% per annum. The Amended and Restated Bond matures on January 1, 2020. The estimated fair value of the bond at December 31, 2011 was approximately $46.9 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor's credit rating of A+. We are required to make payments to the Authority in amounts necessary to pay the principal of and interest on the Amended and Restated Bond. Included in long-term investments at December 31, 2011 is $48.3 million which is invested in a restricted certificate of deposit. These funds serve as a collateral deposit against the principal of this bond, and 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. For the years ended December 31, 2011, 2010 and 2009, we realized economic incentives related to payroll withholdings totaling $1.9 million, $1.5 million and $1.5 million, respectively.

Due to continued positive cash flow from operating activities, we made a business decision in 2006 to begin an early partial redemption of the Bond. We made principal payments of $1.0 million and $0.3 million for the years ended December 31, 2011 and 2010, respectively. 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 accounts payable in the Consolidated Balance Sheets at December 31, 2011 and 2010.

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Inventory (Details Textual) (USD $) In Millions, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Inventory (Textual) [Abstract]
Raw materials reserves, Total	$ 7.9	$ 7.3
Finished goods inventory reserves, Total	$ 1.5	$ 1.6

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Property, Plant and Equipment

12 Months Ended

Dec. 31, 2011

Property, Plant and Equipment [Abstract]

Property, Plant and Equipment

Note 6 – Property, Plant and Equipment

At December 31, 2011 and 2010, property, plant and equipment were comprised of the following:

		September 30,			September 30,
(In thousands)	2011			2010
Land	$	4,263		$	4,263
Building and land improvements		16,857			15,507
Building		68,479			68,479
Furniture and fixtures		16,433			16,130
Computer hardware and software		64,053			61,898
Engineering and other equipment		91,232			83,946
Total Property, Plant and Equipment		261,317			250,223
Less accumulated depreciation		(186,022	)		(176,237	)
Total Property, Plant and Equipment (net)	$	75,295		$	73,986

Depreciation expense was $10.8 million, $10.2 million and $10.0 million in 2011, 2010 and 2009, respectively.

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Goodwill and Intangible Assets

12 Months Ended

Dec. 31, 2011

Goodwill and Intangible Assets [Abstract]

Goodwill and Intangible Assets

Note 7 – Goodwill and Intangible Assets

The changes in the carrying value of goodwill, all of which is included in our Enterprise Networks division, for the year ended December 31, 2011 are as follows:

		September 30,
(In thousands)
Balance, December 31, 2010	$	—
Acquisitions		3,492
Impairment losses		—
Balance, December 31, 2011	$	3,492
Balance as of December 31, 2011:
Goodwill	$	3,492
Accumulated impairment losses		—
Total goodwill	$	3,492

We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. When evaluating whether goodwill is impaired, we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit's carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, then the amount of the impairment loss is measured. There were no impairment losses during 2011.

The following table presents our intangible assets as of December 31, 2011 and 2010. Intangible assets are included in other assets in the accompanying Consolidated Balance Sheets and include intangible assets acquired with our acquisitions of Objectworld Communications Corporation on September 15, 2009 and Bluesocket, Inc. on August 4, 2011.

		September 30,		September 30,			September 30,		September 30,		September 30,			September 30,
	December 31, 2011							December 31, 2010
(In thousands)	Gross Value		Accumulated Amortization			Net Value		Gross Value		Accumulated Amortization			Net Value
Customer relationships	$	1,623	$	(194	)	$	1,429	$	93	$	(60	)	$	33
Developed technology		3,230		(303	)		2,927		—		—			—
Intellectual property		2,340		(525	)		1,815		1,410		(260	)		1,150
Trade names		270		(28	)		242		—		—			—
Total	$	7,463	$	(1,050	)	$	6,413	$	1,503	$	(320	)	$	1,183

Amortization expense was $0.7 million, $0.4 million and $0.1 million in 2011, 2010 and 2009, respectively.

As of December 31, 2011, the estimated future amortization expense of intangible assets is as follows:

		September 30,
(In thousands)	Amount
2012	$	1,221
2013		1,271
2014		1,120
2015		1,018
2016		781
Thereafter		1,002
Total	$	6,413

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Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

Income Taxes

Note 9 – Income Taxes

A summary of the components of the provision for income taxes as of December 31, 2011, 2010 and 2009 is as follows:

		September 30,		September 30,			September 30,
(In thousands)	2011		2010			2009
Current
Federal	$	59,813	$	49,144		$	30,756
State		7,177		6,380			3,615
Total Current		66,990		55,524			34,371
Deferred tax expense (benefit)		575		(1,324	)		(1,024	)
Total Provision for Income Taxes	$	67,565	$	54,200		$	33,347

The effective income tax rate differs from the federal statutory rate due to the following:

		September 30,			September 30,			September 30,
	2011			2010			2009
Tax provision computed at the federal statutory rate		35.00	%		35.00	%		35.00	%
State income tax provision, net of federal benefit		3.19			3.33			3.68
Federal research credits		(2.50	)		(2.90	)		(3.37	)
Tax-exempt income		(0.27	)		(0.46	)		(1.05	)
State tax incentives		(0.90	)		(0.86	)		(1.36	)
Stock-based compensation		0.03			0.34			1.64
Domestic production activity deduction		(1.84	)		(2.37	)		(3.33	)
Other, net		0.07			0.15			(0.21	)
Effective Tax Rate		32.78	%		32.23	%		31.00	%

Deferred income taxes on the balance sheet result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The principal components of our current and non-current deferred taxes are as follows:

		September 30,			September 30,
(In thousands)	2011			2010
Current deferred tax assets
Accounts receivable	$	4		$	61
Inventory		6,709			6,032
Accrued expenses		5,412			4,524
Total Current Deferred Tax Assets		12,125			10,617
Non-current deferred tax assets
Accrued expenses		113			102
Deferred compensation		3,177			1,539
Stock-based compensation		3,808			3,542
State tax and interest expense		947			861
Foreign loss and state credit carry-forwards		7,891			5,988
Federal loss and research carry-forwards		14,778			—
Valuation allowance		(7,585	)		(5,627	)
Total Non-current Deferred Tax Assets		23,129			6,405
Total Deferred Tax Assets	$	35,254		$	17,022
Non-current deferred tax liabilities
Accumulated depreciation	$	(7,081	)	$	(4,782	)
Intellectual property		(2,594	)		—
Investments		(5,109	)		(11,973	)
Total Non-current Deferred Tax Liabilities	$	(14,784	)	$	(16,755	)
Net Deferred Tax Assets	$	20,470		$	267

At December 31, 2011 and 2010, non-current deferred tax liabilities and non-current deferred tax assets, respectively, related to investments reflect deferred taxes on unrealized gains and losses on available-for-sale investments. The net change in non-current deferred taxes associated with these investments, a deferred tax benefit of $7.8 million in 2011 and a deferred tax provision of $4.6 million in 2010, is recorded as an adjustment to other comprehensive income, presented in the Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income.

We have deferred tax assets for both foreign and domestic loss, unamortized research and development cost and state credit carry-forwards of $22.7 million which will expire between 2012 and 2030. 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, net operating loss carry-forwards acquired through the acquisition of a foreign entity and net operating losses and research and development cost acquired through the acquisition of a domestic entity. 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 full benefits of the deferred tax asset arising from these losses and credits, and accordingly, have provided a valuation allowance against these assets. We do not provide for U.S. income tax on undistributed earnings of our foreign operations, whose earnings are intended to be permanently reinvested. For years ended December 31, 2011, 2010 and 2009, foreign profits before income taxes were not material.

During 2011, 2010 and 2009, we recorded an income tax benefit of $10.5 million, $4.9 million and $1.5 million, respectively, as an adjustment to equity in accordance with the Stock Compensation Topic of the FASB ASC. This deduction is calculated on the difference between the exercise price of stock option exercises and the market price of the underlying common stock upon exercise.

The change in the unrecognized income tax benefits for 2011, 2010 and 2009 is reconciled below:

		September 30,			September 30,			September 30,
(In thousands)	2011			2010			2009
Balance at beginning of period	$	2,593		$	2,919		$	2,775
Increases for tax position related to:
Prior years		—			197			390
Current year		840			818			610
Decreases for tax positions related to:
Prior years		(92	)		(16	)		(1	)
Settlements with taxing authorities		(354	)		(630	)		(413	)
Expiration of applicable statute of limitations		(17	)		(695	)		(442	)
Balance at end of period	$	2,970		$	2,593		$	2,919

As of December 31, 2011, 2010, and 2009, our total liability for unrecognized tax benefits was $3.0 million, $2.6 million, and $2.9 million, respectively, of which $2.4 million, $2.0 million, and $2.3 million, respectively, would reduce our effective tax rate if we were successful in upholding all of the uncertain positions and recognized the amounts recorded. We classify interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense. As of December 31, 2011, 2010 and 2009, the balances of accrued interest and penalties were $1.2 million, $1.0 million and $1.2 million, respectively.

We do not anticipate a single tax position generating a significant increase or decrease in our liability for unrecognized tax benefits within 12 months of this reporting date. We file income tax returns in the U.S. federal and various state jurisdictions and several foreign jurisdictions. We have been audited by the Internal Revenue Service and the state of Alabama through the 2007 tax year. Generally, we are not subject to changes in income taxes by any taxing jurisdiction for the years prior to 2008.

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Goodwill and Intangible Assets (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Summary of intangible assets
Gross Value	$ 7,463	$ 1,503
Accumulated Amortization	(1,050)	(320)
Net Value	6,413	1,183
Customer relationships [Member]
Summary of intangible assets
Gross Value	1,623	93
Accumulated Amortization	(194)	(60)
Net Value	1,429	33
Developed technology [Member]
Summary of intangible assets
Gross Value	3,230	0
Accumulated Amortization	(303)	0
Net Value	2,927	0
Intellectual property [Member]
Summary of intangible assets
Gross Value	2,340	1,410
Accumulated Amortization	(525)	(260)
Net Value	1,815	1,150
Trade names [Member]
Summary of intangible assets
Gross Value	270	0
Accumulated Amortization	(28)	0
Net Value	$ 242	$ 0

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Related Party Transactions (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Related Party Transactions (Textual) [Abstract]
Related party legal fees per month	$ 10	$ 10	$ 10

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Goodwill and Intangible Assets (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Goodwill and Intangible Assets (Textual) [Abstract]
Impairment losses	$ 0
Amortization Expense	$ 700,000	$ 400,000	$ 100,000

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Goodwill and Intangible Assets (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011
Changes in the carrying value of goodwill
Goodwill, Beginning Balance	$ 0
Impairment losses	0
Goodwill, Ending Balance	3,492
Enterprise Networks [Member]
Changes in the carrying value of goodwill
Goodwill, Beginning Balance	0
Acquisitions	3,492
Impairment losses	0
Accumulated impairment losses	0
Goodwill, Ending Balance	$ 3,492

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Employee Benefit Plans (Tables)

12 Months Ended

Dec. 31, 2011

Employee Benefit Plans [Abstract]

Fair value of the assets held by the Trust and amounts payable to the plan participants

		September 30,		September 30,
(In thousands)	2011		2010
Fair Value of Plan Assets
Long-term Investments	$	7,710	$	4,246
Total Fair Value of Plan Assets	$	7,710	$	4,246
Amounts Payable to Plan Participants
Non-current Liabilities	$	7,710	$	4,246
Total Amounts Payable to Plan Participants	$	7,710	$	4,246

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Stock Incentive Plans (Details Textual) (USD $) In Millions, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2011 years	Dec. 31, 2010	Dec. 31, 2009
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unamortized compensation cost	$ 21.9
Weighted Average Grant Date Fair Value, RSUs and restricted stock granted	$ 36.09
Stock Based Compensation (Textual) [Abstract]
Number of shares available for grant	8.0
Total pre-tax intrinsic value of options exercised	39.8	20.3	5.3
Fair value of options fully vested	7.3	6.9	7.1
Recognition period of non-vested compensation cost	2.9
Weighted-average estimated value	$ 9.53	$ 11.69	$ 8.11
Estimated forfeitures for stock options	1.60%
Forfeitures rate for restricted stock units	0.00%
Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares granted for issuance	13.0
Weighted Average Grant Date Fair Value, RSUs and restricted stock granted	$ 38.73	$ 39.21	$ 26.65
Performance period of shares	3 years
Minimum earn out percentage	0.00%
Maximum earn out percentage	150.00%
1996 Employee Incentive Stock Option Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares of common stock authorized	17.0
Vesting period	four or five-year
Contractual term	10 years
Expiration date of options	2012 to 2015
2006 Employee Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares of common stock authorized	13.0
Vesting period	4 years
Contractual term	10 years
Expiration date of options	2016 to 2021
Shares granted for issuance	5.0
2010 Directors Stock Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares of common stock authorized	0.5
Contractual term	10 years
Expiration date of options	2012 to 2020
Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period	1 year
2006 Employee Stock Incentive Plan other than Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share based compensation arrangement number of shares other than option plan available for grant	3.3
Stock Plans Other Than Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unamortized compensation cost	$ 2.2

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Summarized Quarterly Financial Data

12 Months Ended

Dec. 31, 2011

Summarized Quarterly Financial Data [Abstract]

Summarized Quarterly Financial Data (Unaudited)

Note 14 – Summarized Quarterly Financial Data (Unaudited)

The following table presents unaudited quarterly operating results for each of our last eight fiscal quarters. This information has been prepared on a basis consistent with our audited financial statements and includes all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the data.

Unaudited Quarterly Operating Results

(In thousands, except for per share amounts)

		September 30,		September 30,		September 30,		September 30,
Three Months Ended	March 31, 2011		June 30, 2011		September 30, 2011		December 31, 2011
Net sales	$	165,522	$	184,227	$	192,194	$	175,286
Gross profit	$	98,795	$	106,827	$	109,476	$	99,220
Operating income	$	45,606	$	51,310	$	51,107	$	41,115
Net income	$	34,258	$	36,943	$	36,213	$	31,163
Earnings per common share	$	0.53	$	0.57	$	0.57	$	0.49
Earnings per common share assuming dilution (1)	$	0.52	$	0.56	$	0.56	$	0.48

		September 30,		September 30,		September 30,		September 30,
Three Months Ended	March 31, 2010		June 30, 2010		September 30, 2010		December 31, 2010
Net sales	$	127,027	$	150,361	$	162,957	$	165,329
Gross profit	$	75,328	$	89,329	$	97,299	$	96,907
Operating income	$	25,345	$	38,617	$	45,045	$	44,857
Net income	$	18,194	$	27,751	$	32,084	$	35,960
Earnings per common share	$	0.29	$	0.45	$	0.51	$	0.57
Earnings per common share assuming dilution (1)	$	0.29	$	0.44	$	0.50	$	0.56

(1) Assumes exercise of dilutive stock options calculated under the treasury stock method.

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Nature of Business and Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2011

Nature of Business and Summary of Significant Accounting Policies [Abstract]

Summary of warranty expense and write-off activity

		September 30,			September 30,
Year Ended December 31,	2011			2010
(In thousands)
Balance at beginning of period	$	3,304		$	2,833
Plus: amounts acquired or charged to cost and expenses		2,893			5,309
Less: deductions		(2,079	)		(4,838	)
Balance at end of period	$	4,118		$	3,304

Components of accumulated comprehensive income (loss)

		September 30,			September 30,			September 30,
(In thousands)	Change in Unrealized Gains and (Losses) on Marketable Securities, Net of Tax			Foreign Currency Translation Adjustment			Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2008	$	(243	)	$	(766	)	$	(1,009	)
Activity in 2009		15,384			2,468			17,852
Reclassification adjustment for amounts included in net income		1,010			—			1,010
Balance at December 31, 2009		16,151			1,702			17,853
Activity in 2010		8,700			1,394			10,094
Reclassification adjustment for amounts included in net income		(999	)		—			(999	)
Balance at December 31, 2010		23,852			3,096			26,948
Activity in 2011		(13,004	)		(154	)		(13,158	)
Reclassification adjustment for amounts included in net income		(688	)		—			(688	)
Balance at December 31, 2011	$	10,160		$	2,942		$	13,102

Unearned Revenue

		September 30,		September 30,
(In thousands)	2011		2010
Current unearned revenue	$	9,965	$	10,138
Non-current unearned revenue		4,874		3,801
Total	$	14,839	$	13,939

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Stock Incentive Plans (Details 3) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock under the Stock Compensation Topic of the FASB (ASC)
Total stock-based compensation expense	$ 9,169	$ 7,717	$ 6,987
Tax benefit for expense associated with non-qualified options	(1,321)	(650)	(634)
Total stock-based compensation expense, net of tax	7,848	7,067	6,353
Cost of sales [Member]
Stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock under the Stock Compensation Topic of the FASB (ASC)
Total stock-based compensation expense	412	317	268
Selling, general and administrative expense [Member]
Stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock under the Stock Compensation Topic of the FASB (ASC)
Total stock-based compensation expense	4,316	3,575	3,039
Research and development expense [Member]
Stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock under the Stock Compensation Topic of the FASB (ASC)
Total stock-based compensation expense	4,441	3,825	3,680
Operating expenses [Member]
Stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock under the Stock Compensation Topic of the FASB (ASC)
Total stock-based compensation expense	$ 8,757	$ 7,400	$ 6,719

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Nature of Business and Summary of Significant Accounting Policies (Details 2) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Unearned Revenue
Current unearned revenue	$ 9,965	$ 10,138
Non-current unearned revenue	4,874	3,801
Total	$ 14,839	$ 13,939

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Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income (USD $) In Thousands	Common Stock	Additional Paid-In Capital	Retained Earnings	Treasury Stock	Accumulated Other Comprehensive Income (Loss)	Total
Beginning Balance at Dec. 31, 2008	$ 797	$ 172,704	$ 603,600	$ (400,273)	$ (1,009)	$ 375,819
Beginning Balance, shares at Dec. 31, 2008	79,652
Net income			74,221			74,221
Net change in unrealized gains (losses) related to marketable securities, net of deferred tax expense (benefit) of $9,218, $5,223 and $(7,427) in 2009, 2010 and 2011, respectively					15,384	15,384
Reclassification adjustment for amounts included in net income, net of deferred tax expense (benefit) of $617, $(598) and $(389) in 2009, 2010 and 2011, respectively					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, 729 and 1,112 shares in 2009, 2010 and 2011, respectively				(15,896)		(15,896)
Income tax benefit from exercise of stock options		1,549				1,549
Stock-based compensation expense		6,987				6,987
Ending Balance at Dec. 31, 2009	797	181,240	649,256	(396,631)	17,853	452,515
Ending Balance, shares at Dec. 31, 2009	79,652
Net income			113,989			113,989
Net change in unrealized gains (losses) related to marketable securities, net of deferred tax expense (benefit) of $9,218, $5,223 and $(7,427) in 2009, 2010 and 2011, respectively					8,700	8,700
Reclassification adjustment for amounts included in net income, net of deferred tax expense (benefit) of $617, $(598) and $(389) in 2009, 2010 and 2011, respectively					(999)	(999)
Foreign currency translation adjustment					1,394	1,394
Comprehensive income						123,084
Dividend payments			(22,502)			(22,502)
Dividends accrued for unvested restricted stock units			(27)			(27)
Stock options exercised: Various prices per share			(8,754)	33,696		24,942
Purchase of treasury stock: 755, 729 and 1,112 shares in 2009, 2010 and 2011, respectively				(18,316)		(18,316)
Income tax benefit from exercise of stock options		4,909				4,909
Stock-based compensation expense		7,717				7,717
Ending Balance at Dec. 31, 2010	797	193,866	731,962	(381,251)	26,948	572,322
Ending Balance, shares at Dec. 31, 2010	79,652
Net income			138,577			138,577
Net change in unrealized gains (losses) related to marketable securities, net of deferred tax expense (benefit) of $9,218, $5,223 and $(7,427) in 2009, 2010 and 2011, respectively					(13,004)	(13,004)
Reclassification adjustment for amounts included in net income, net of deferred tax expense (benefit) of $617, $(598) and $(389) in 2009, 2010 and 2011, respectively					(688)	(688)
Foreign currency translation adjustment					(154)	(154)
Comprehensive income						124,731
Dividend payments			(23,124)			(23,124)
Dividends accrued for unvested restricted stock units			(52)			(52)
Stock options exercised: Various prices per share			(6,345)	40,470		34,125
Restricted stock units vested			(812)	812
Purchase of treasury stock: 755, 729 and 1,112 shares in 2009, 2010 and 2011, respectively				(35,565)		(35,565)
Income tax benefit from exercise of stock options		10,525				10,525
Stock-based compensation expense		9,169				9,169
Ending Balance at Dec. 31, 2011	$ 797	$ 213,560	$ 840,206	$ (375,534)	$ 13,102	$ 692,131
Ending Balance, shares at Dec. 31, 2011	79,652

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Stock Incentive Plans

12 Months Ended

Dec. 31, 2011

Stock Incentive Plans [Abstract]

Stock Incentive Plans

Note 3 – Stock Incentive Plans

Stock Incentive Program Descriptions

Our Board of Directors adopted the 1996 Employee Incentive Stock Option Plan (1996 Plan) effective February 14, 1996, as amended, under which 17.0 million shares of common stock were authorized for issuance to certain employees and officers through incentive stock options and non-qualified stock options. Options granted under the 1996 Plan typically become exercisable beginning after one year of continued employment, normally pursuant to a four or five-year vesting schedule beginning on the first anniversary of the grant date, and have a ten-year contractual term. The 1996 Plan expired February 14, 2006, and expiration dates of options outstanding at December 31, 2011 under the 1996 Plan range from 2012 to 2015.

On January 23, 2006, the Board of Directors adopted the 2006 Employee Stock Incentive Plan (2006 Plan), which authorizes 13.0 million shares of common stock for issuance to certain employees and officers through incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units. The 2006 Plan was adopted by stockholder approval at our annual meeting of stockholders held on May 9, 2006. Options granted under the 2006 Plan typically become exercisable beginning after one year of continued employment, normally pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date, and have a ten-year contractual term. Expiration dates of options outstanding at December 31, 2011 under the 2006 Plan range from 2016 to 2021.

Our stockholders approved the 2010 Directors Stock Plan (2010 Directors Plan) on May 5, 2010, under which 0.5 million shares of common stock have been reserved. This plan replaces the 2005 Directors Stock Option Plan. The 2010 Directors Plan provides that the Company may issue stock options, restricted stock and restricted stock units to our non-employee directors. Stock awards issued under the 2010 Directors Plan normally become vested in full on the first anniversary of the grant date. Options issued under the 2010 Directors Plan have a ten-year contractual term. We currently also have options outstanding under the 1995 Directors Plan, as amended, and the 2005 Directors Plan. Expiration dates of options outstanding under both plans at December 31, 2011 range from 2012 to 2020.

The following table is a summary of our stock options outstanding as of December 31, 2010 and 2011 and the changes that occurred during 2011:

		September 30,			September 30,		September 30,		September 30,
(In thousands, except per share amounts)	Number of Options			Weighted Average Exercise Price		Weighted Avg. Remaining Contractual Life in Years		Aggregate Intrinsic Value
Options outstanding, December 31, 2010		6,234		$	23.09		6.21	$	81,561
Options granted		1,031		$	30.42
Options cancelled/forfeited		(87	)	$	26.32
Options exercised		(1,778	)	$	19.36
Options outstanding, December 31, 2011		5,400		$	25.66		6.78	$	27,270
Options exercisable, December 31, 2011		3,054		$	23.49		5.20	$	21,042

The following table further describes our stock options outstanding as of December 31, 2011:

		September 30,		September 30,		September 30,		September 30,		September 30,
	Options Outstanding						Options Exercisable
Range of Exercise Prices	Options Outstanding  at 12/31/11 (In thousands)		Weighted Avg. Remaining Contractual Life in Years		Weighted Average Exercise Price		Options Exercisable  at 12/31/10 (In thousands)		Weighted Average Exercise Price
$ 8.70 - $23.46		2,806		5.98	$	20.30		2,135	$	20.16
$23.47 - $30.04		473		4.66	$	29.13		421	$	29.29
$30.05- $33.33		1,262		7.96	$	30.77		279	$	32.18
$33.34 - $41.92		859		8.81	$	33.79		219	$	33.80
		5,400						3,054

All of the options above were issued at exercise prices that approximate fair market value at the date of grant. At December 31, 2011, 8.0 million options were available for grant under the shareholder approved plans.

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between ADTRAN's closing stock price on the last trading day of 2011 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2011. The amount of aggregate intrinsic value will change based on the fair market value of ADTRAN's stock.

The total pre-tax intrinsic value of options exercised during 2011, 2010 and 2009 was $39.8 million, $20.3 million and $5.3 million, respectively. The fair value of options fully vesting during 2011, 2010 and 2009 was $7.3 million, $6.9 million and $7.1 million, respectively.

Restricted Stock Program Description

On November 6, 2008, the Compensation Committee of the Board of Directors approved the Performance Shares Agreement under the 2006 Plan which sets forth the terms and conditions of awards of performance-based restricted stock units (RSUs). Of the 13.0 million shares of common stock authorized for issuance under the 2006 Plan, we may grant up to 5.0 million shares of common stock for issuance to certain employees and officers for awards other than stock options, which would include RSUs. Under a proposal that was approved by the Board of Directors and shareholders at the 2010 annual meeting, the number of shares available for awards other than stock options under all stock plans was reduced to 3.3 million. The number of shares of common stock earned by a recipient pursuant to the RSUs is subject to a market condition based on ADTRAN's relative total shareholder return against a peer group (2009 grant) or against all companies in the NASDAQ Telecommunications Index (2010 and 2011 grant) at the end of a three-year performance period. Depending on the relative total shareholder return over the performance period, the recipient may earn from 0% to 150% of the shares underlying the RSUs, with the shares earned distributed upon the vesting of the RSUs at the end of the three-year performance period. The fair value of the award is based on the market price of our common stock on the date of grant, adjusted for the expected outcome of the impact of market conditions using a Monte Carlo Simulation valuation method. A portion of the granted RSUs also vest and the underlying shares become deliverable upon the death or disability of the recipient or upon a change of control of ADTRAN, as defined by the 2006 Plan. The recipients of the RSUs receive dividend credits based on the shares of common stock underlying the RSUs. The dividend credits are vested and earned in the same manner as the RSUs and will be paid in cash upon the issuance of common stock for the RSUs.

The following table is a summary of our RSUs and restricted stock outstanding as of December 31, 2010 and 2011 and the changes that occurred during 2011:

		September 30,			September 30,
(In thousands, except per share amounts)	Number of shares			Weighted Average Grant Date Fair Value
Unvested RSUs and restricted stock outstanding, December 31, 2010		87		$	28.46
RSUs and restricted stock granted		39		$	36.09
RSUs and restricted stock vested		(49	)	$	22.36
RSUs and restricted stock cancelled/forfeited		—		$	—
Adjustments to shares granted due to shares earned at vesting		13		$	17.05
Unvested RSUs and restricted stock outstanding, December 31, 2011		90		$	34.21

As of December 31, 2011, there was approximately $2.2 million of total unamortized compensation cost related to the non-vested portion of RSUs and restricted stock granted, which will be recognized on a straight-line basis over the remainder of the three-year performance period for RSUs and over the remainder of the one-year vesting period for restricted stock.

Valuation and Expense Information

We use the Black-Scholes option pricing model (Black-Scholes Model) for the purpose of determining the estimated fair value of stock option awards on the date of grant. The Black-Scholes Model requires the input of certain assumptions that involve judgment. Because our stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, existing models may not provide reliable measures of fair value of our stock options. We use a Monte Carlo Simulation valuation method to value our performance-based RSUs. The fair value of restricted stock issued is equal to the closing price of our stock on the date of grant. We will continue to assess the assumptions and methodologies used to calculate the estimated fair value of stock-based compensation. If circumstances change, and additional data becomes available over time, we may change our assumptions and methodologies, which may materially impact our fair value determination.

The following table summarizes stock-based compensation expense related to stock options, RSUs and restricted stock under the Stock Compensation Topic of the FASB ASC for the years ended December 31, 2011, 2010 and 2009, which was recognized as follows:

		September 30,			September 30,			September 30,
(In thousands)	2011			2010			2009
Stock-based compensation expense included in cost of sales	$	412		$	317		$	268
Selling, general and administrative expense		4,316			3,575			3,039
Research and development expense		4,441			3,825			3,680
Stock-based compensation expense included in operating expenses		8,757			7,400			6,719
Total stock-based compensation expense		9,169			7,717			6,987
Tax benefit for expense associated with non-qualified options		(1,321	)		(650	)		(634	)
Total stock-based compensation expense, net of tax	$	7,848		$	7,067		$	6,353

At December 31, 2011, total compensation cost related to non-vested stock options, RSUs and restricted stock not yet recognized was approximately $21.9 million, which is expected to be recognized over an average remaining recognition period of 2.9 years.

The stock option pricing model requires the use of several significant assumptions that impact the fair value estimate. These variables include, but are not limited to, the volatility of our stock price and employee exercise behaviors. The assumptions and variables used for the current period grants were developed based on guidance in the Stock Compensation Topic of the FASB ASC. There were no material changes made during 2011 to the methodology used to determine our assumptions.

The weighted-average estimated fair value of stock options granted to employees and directors during the twelve months ended December 31, 2011, 2010 and 2009 was $9.53 per share, $11.69 per share and $8.11 per share, respectively, with the following weighted-average assumptions:

		September 30,			September 30,			September 30,
	2011			2010			2009
Expected volatility		38.32	%		39.57	%		41.86	%
Risk-free interest rate		1.01	%		1.35	%		2.29	%
Expected dividend yield		1.19	%		1.08	%		1.55	%
Expected life (in years)		5.15			5.78			5.10

We based our estimate of expected volatility for the 12 months ended December 31, 2011, 2010 and 2009 on the sequential historical daily trading data of our common stock for a period equal to the expected life of the options granted. The selection of the historical volatility method was based on available data indicating our historical volatility is as equally representative of our future stock price trends as is our implied volatility. We have no reason to believe the future volatility of our stock price is likely to differ from its past volatility.

The risk-free interest rate assumption is based upon implied yields of U.S. Treasury zero-coupon bonds on the date of grant having a remaining term equal to the expected life of the options granted. The dividend yield is based on our historical and expected dividend payouts.

The expected life of our stock options is based upon historical exercise and cancellation activity of our previous stock-based grants with a ten-year contractual term.

The RSU pricing model also requires the use of several significant assumptions that impact the fair value estimate. The estimated fair value of the RSUs granted to employees in 2011, 2010 and 2009 was $38.73 per share, $39.21 per share and $26.65 per share, respectively, with the following assumptions:

		September 30,			September 30,			September 30,
	2011			2010			2009
Expected volatility		39.32	%		40.82	%		41.41	%
Risk-free interest rate		0.37	%		0.51	%		1.40	%
Expected dividend yield		1.08	%		1.07	%		1.53	%

Stock-based compensation expense recognized in our Consolidated Statements of Income for the 12 months ended December 31, 2011, 2010 and 2009 is based on RSUs and options ultimately expected to vest, and has been reduced for estimated forfeitures. Estimates for forfeiture rates are based upon historical experience and are evaluated quarterly. We expect our forfeiture rate for stock option awards to be approximately 1.6% annually. We estimated a 0% forfeiture rate for our RSUs and restricted stock due to the limited number of recipients and historical experience for these awards.

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Investments (Details Textual 1) (USD $)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Schedule of Investments [Line Items]
Net realized gain on long-term investments	$ 12,454,000	$ 11,008,000	$ (1,297,000)
Private Equity Funds [Member]
Schedule of Investments [Line Items]
Net realized gain on long-term investments	8,800,000
Contribution to private equity funds	$ 8,400,000
Investments [Member]
Schedule of Investments [Line Items]
Investment concentration risk percentage	5.00%

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Commitments and Contingencies (Details Textual) (USD $) In Millions, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Commitments and Contingencies (Textual) [Abstract]
Rental expense	$ 2.4	$ 1.8	$ 1.5

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Income Taxes (Details 1)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
The effective income tax rate differs from the federal statutory rate due to the following:
Tax provision computed at the federal statutory rate	35.00%	35.00%	35.00%
State income tax provision, net of federal benefit	3.19%	3.33%	3.68%
Federal research credits	(2.50%)	(2.90%)	(3.37%)
Tax-exempt income	(0.27%)	(0.46%)	(1.05%)
State tax incentives	(0.90%)	(0.86%)	(1.36%)
Stock-based compensation	0.03%	0.34%	1.64%
Domestic production activity deduction	(1.84%)	(2.37%)	(3.33%)
Other, net	0.07%	0.15%	(0.21%)
Effective Tax Rate	32.78%	32.23%	31.00%

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Business Combinations (Tables)

12 Months Ended

Dec. 31, 2011

Business Combinations [Abstract]

Preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date

		September 30,
(In Thousands)
Cash	$	1,027
Accounts receivable		298
Inventory		792
Prepaid expenses		357
Property, plant and equipment		173
Deferred tax assets, net		12,962
Accounts payable		(441	)
Unearned revenue		(600	)
Accrued expenses		(332	)
Net assets acquired		14,236
Customer relationships		1,530
Developed technology		3,230
Intellectual property		930
Trade names		270
Goodwill		3,492
Total purchase price	$	23,688

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Employee Benefit Plans (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Employee Benefit Plans (Textual) [Abstract]
Upper limit of employer match	4.00%
Criteria of employer to contribute in employee Saving Plan	100% of an employee's first 3% of contributions and 50% of their next 2% of contributions
Percentage of employer match to employee's first 3 % contribution	100.00%
Percentage of employer match to the next 2% of contributions	50.00%
Maximum statutory compensation under code	$ 245,000
Percentage contributions under the savings plan, vested	100.00%
Contributions and plan administration costs for Savings Plan	4,300,000	4,600,000	4,200,000
Maximum percentage of cash compensation allowed to be deferred under the Deferred Compensation Plan	25.00%
Criteria for benefit distribution	six months after termination of employment in a single lump sum cash payment
Deferred compensation adjustments due to fair value of the trust assets	(200,000)	400,000	600,000
Total liability recorded to provide medical, dental and prescription drug coverage	$ 200,000	$ 200,000
Maximum number of years medical, dental and prescription drug coverage to spouse of deceased officer	30 years

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Summarized Quarterly Financial Data (Tables)

12 Months Ended

Dec. 31, 2011

Summarized Quarterly Financial Data [Abstract]

Quarterly Operating Results

Unaudited Quarterly Operating Results

(In thousands, except for per share amounts)

		September 30,		September 30,		September 30,		September 30,
Three Months Ended	March 31, 2011		June 30, 2011		September 30, 2011		December 31, 2011
Net sales	$	165,522	$	184,227	$	192,194	$	175,286
Gross profit	$	98,795	$	106,827	$	109,476	$	99,220
Operating income	$	45,606	$	51,310	$	51,107	$	41,115
Net income	$	34,258	$	36,943	$	36,213	$	31,163
Earnings per common share	$	0.53	$	0.57	$	0.57	$	0.49
Earnings per common share assuming dilution (1)	$	0.52	$	0.56	$	0.56	$	0.48

		September 30,		September 30,		September 30,		September 30,
Three Months Ended	March 31, 2010		June 30, 2010		September 30, 2010		December 31, 2010
Net sales	$	127,027	$	150,361	$	162,957	$	165,329
Gross profit	$	75,328	$	89,329	$	97,299	$	96,907
Operating income	$	25,345	$	38,617	$	45,045	$	44,857
Net income	$	18,194	$	27,751	$	32,084	$	35,960
Earnings per common share	$	0.29	$	0.45	$	0.51	$	0.57
Earnings per common share assuming dilution (1)	$	0.29	$	0.44	$	0.50	$	0.56

(1) Assumes exercise of dilutive stock options calculated under the treasury stock method.

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Earnings Per Share

12 Months Ended

Dec. 31, 2011

Earnings Per Share [Abstract]

Earnings Per Share

Note 13 – Earnings per Share

A summary of the calculation of basic and diluted earnings per share (EPS) for the years ended December 31, 2011, 2010 and 2009 is as follows:

		September 30,		September 30,		September 30,
	Year Ended
(In thousands, except for per share amounts)	2011		2010		2009
Numerator
Net Income	$	138,577	$	113,989	$	74,221
Denominator
Weighted average number of shares – basic		64,145		62,490		62,459
Effect of dilutive securities:
Stock options		1,236		1,355		887
Restricted stock and restricted stock units		35		34		10
Weighted average number of shares – diluted		65,416		63,879		63,356
Net income per share – basic	$	2.16	$	1.82	$	1.19
Net income per share – diluted	$	2.12	$	1.78	$	1.17

For each of the years ended December 31, 2011, 2010 and 2009, 1.2 million, 2.0 million and 3.5 million stock options were outstanding but were not included in the computation of that year's diluted EPS because the options' exercise prices were greater than the average market price of the common shares, therefore making them anti-dilutive under the treasury stock method.