1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements of ADTRAN^®, Inc. and its subsidiaries (ADTRAN) have been prepared pursuant to the rules and regulations for reporting on Quarterly Reports on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles for complete financial statements are not included herein. The December 31, 2010 Consolidated Balance Sheet is derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

In the opinion of management, all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. The results of operations for an interim period are not necessarily indicative of the results for the full year. The interim statements should be read in conjunction with the financial statements and notes thereto included in ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2010, filed on February 25, 2011 with the SEC.

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, estimated income tax contingencies, the fair value of stock-based compensation, and the evaluation of other-than-temporary declines in the value of investments. Actual amounts could differ significantly from these estimates.

Recent Accounting Pronouncements

During the first quarter of 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 Financial Accounting Standards Board (FASB) issued Update No. 2009-13, which amends the Revenue Recognition topic of the FASB Accounting Standards Codification (ASC). This update 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 will be separated in more circumstances than under existing U.S. GAAP. The amendments establish a selling price hierarchy for determining the selling price of a deliverable and will replace the term fair value in the revenue allocation guidance with selling price to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. The amendments will also eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and will require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis.

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 is met.

We adopted this guidance for the three months ended March 31, 2011. The adoption of this guidance had no effect on our consolidated results of operations and financial condition for the three months ended March 31, 2011.

In October 2009, the FASB issued Update No. 2009-14, which amends the Software topic of the ASC. The amendments in this update change the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality is no longer within the scope of the software revenue guidance in Subtopic 985-605 of the ASC. In addition, the amendments in this update require that hardware components of a tangible product containing software components always be excluded from the software revenue guidance. In that regard, the amendments provide additional guidance on how to determine which software, if any, relating to the tangible product also would be excluded from the scope of the software revenue guidance. The amendments also provide guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software. The amendments also provide further guidance on how to allocate arrangement consideration when an arrangement includes deliverables both included and excluded from the scope of the software revenue guidance. We adopted this guidance for the three months ended March 31, 2011. The adoption of this guidance had no effect on our consolidated results of operations and financial condition for the three months ended March 31, 2011.

2. INCOME TAXES

Our effective tax rate decreased from 35.7% in the three months ended March 31, 2010 to 30.7% in the three months ended March 31, 2011. The decrease is primarily due to the research and development tax credit and increased tax benefits from a higher volume of stock option exercises during the first quarter of 2011. The tax provision rate in the first quarter of 2010 did not include the benefit of the research and development tax credit, which expired on December 31, 2009. The credit was reinstated during the fourth quarter of 2010. The inclusion of this benefit in the first quarter of 2011 resulted in a 2.2 percentage point decrease in our tax rate. Also, increased benefits from a higher volume of stock option exercises in the first quarter of 2011 resulted in a 3.9 percentage point decrease in our tax rate.

3. STOCK-BASED COMPENSATION

The following table summarizes the stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock under the Stock Compensation Topic of the FASB ASC for the three months ended March 31, 2011 and 2010, which was recognized as follows:

		Three Months Ended
		March 31,
(In thousands)		2011				2010
Stock-based compensation expense included in cost of sales		$	91			$	68
Selling, general and administrative expense			1,007				750
Research and development expense			991				871
Stock-based compensation expense included in operating expenses			1,998				1,621
Total stock-based compensation expense			2,089				1,689
Tax benefit for expense associated with non-qualified options			(440	)			(177	)
Total stock-based compensation expense, net of tax		$	1,649			$	1,512

The fair value of our stock options was estimated using the Black-Scholes model. The determination of the fair value of stock options on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables that may have a significant impact on the fair value estimate.

There were no options granted during the three month period ended March 31, 2011. The weighted-average assumptions and value of options granted for the three months ended March 31, 2010 are summarized as follows:

		Three Months Ended
		March 31,
		2011				2010
Expected volatility			—				41.29	%
Risk-free interest rate			—				2.52	%
Expected dividend yield			—				1.59	%
Expected life (in years)			—				5.22
Weighted-average estimated value		$	—			$	7.86

The fair value of our RSUs is calculated using a Monte Carlo Simulation valuation method. There were no RSU grants during the three months ended March 31, 2011 or 2010.

The fair value of restricted stock is equal to the closing price of our stock on the date of grant. There were no restricted stock grants during the three months ended March 31, 2011 or 2010.

Stock-based compensation expense recognized in our Consolidated Statements of Income for the three months ended March 31, 2011 and 2010 is based on options, RSUs and restricted stock ultimately expected to vest, and has been reduced for estimated forfeitures. Estimated forfeitures for stock options were based upon historical experience and approximate 2.0% 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.

As of March 31, 2011, total compensation expense related to non-vested stock options, RSUs and restricted stock not yet recognized was approximately $18.1 million, which is expected to be recognized over an average remaining recognition period of 2.9 years.

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

										Weighted Avg.
										Remaining				Aggregate
		Number of				Weighted Avg.				Contractual				Intrinsic
(In thousands, except per share amounts)		Options				Exercise Price				Life In years				Value
Options outstanding, December 31, 2010			6,234			$	23.09				6.21			$	81,561
Options granted			—			$	—
Options cancelled/forfeited			(23	)		$	25.07
Options exercised			(1,653	)		$	19.42
Options outstanding, March 31, 2011			4,558			$	24.41				6.80			$	82,295
Options exercisable, March 31, 2011			2,318			$	23.08				5.05			$	44,921

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 the quarter 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 March 31, 2011. The 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 the three month period ended March 31, 2011 was $37.4 million.

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

						Weighted
						Average
		Number of				Grant Date
(In thousands, except per share amounts)		shares				Fair Value
RSUs and restricted stock outstanding, December 31, 2010			87			$	28.46
RSUs and restricted stock granted			—				—
RSUs and restricted stock vested			—				—
RSUs and restricted stock cancelled/forfeited			—				—
Unvested RSUs and restricted stock, March 31, 2011			87			$	28.46

4. INVESTMENTS

At March 31, 2011, we held the following securities and investments, recorded at either fair value or cost.

		Amortized				Gross Unrealized								Carrying
(In thousands)		Cost				Gains				Losses				Value
Deferred compensation plan assets		$	5,738			$	839			$	—			$	6,577
Corporate bonds			183,761				668				(294	)			184,135
Municipal fixed-rate bonds			133,700				371				(53	)			134,018
Municipal variable rate demand notes			58,710				—				—				58,710
Fixed income bond fund			527				232				—				759
Marketable equity securities			11,940				32,993				(132	)			44,801
Available-for-sale securities held at fair value		$	394,376			$	35,103			$	(479	)		$	429,000
Restricted investment held at cost															48,250
Other investments held at cost															2,103
Total carrying value of available-for-sale investments														$	479,353

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

		Amortized				Gross Unrealized								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 March 31, 2011, we held $6.6 million of deferred compensation plan assets, carried at fair value.

At March 31, 2011, we held $184.1 million of corporate bonds. These bonds are classified as available-for-sale and had an average duration of 2.3 years at March 31, 2011. At March 31, 2011, approximately 1% of our corporate bond portfolio had a credit rating of AAA, 16% had a credit rating of AA, 52% had a credit rating of A, and 31% had a credit rating of BBB.

At March 31, 2011, we held $134.0 million of municipal fixed-rate bonds. These bonds are classified as available-for-sale and had an average duration of 1.5 years at March 31, 2011. At March 31, 2011, approximately 21% of our municipal fixed-rate bond portfolio had a credit rating of AAA, 64% had a credit rating of AA, and 15% had a credit rating of A. 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 March 31, 2011, we held $58.7 million of municipal variable rate demand notes, all of which were classified as available-for-sale. At March 31, 2011, 30% of our municipal variable rate demand notes had a credit rating of AAA, 55% had a credit rating of AA, 15% 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 March 31, 2011, approximately 38% 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 62% 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 March 31, 2011, we held $0.8 million of a fixed income bond fund.

At March 31, 2011, we held $44.8 million of marketable equity securities, including a single security, of which we held 1.4 million shares, carried at a fair value of $29.8 million. We sold 93 thousand shares of this security during the three months ended March 31, 2011. The sale of this security resulted in proceeds of $2.1 million and a realized gain of $2.0 million. This single security traded approximately 1.1 million shares per day in the first quarter of 2011 in an active market on a European stock exchange. This single security comprises $29.3 million of the gross unrealized gains included in the fair value of our marketable equity securities at March 31, 2011. The remaining $3.7 million of gross unrealized gains and $0.1 million of gross unrealized losses at March 31, 2011 were spread amongst more than 400 equity securities.

At March 31, 2011, 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 March 31, 2011, the estimated fair value of the Bond was approximately $43.7 million, based on a debt security with a comparable interest rate and maturity and a Standard and 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 “Debt” under “Liquidity and Capital Resources” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 2 of Part I of this report.

At March 31, 2011, 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 $10.8 million at March 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 $8.0 million as of March 31, 2011, of which $7.4 million has been applied toward these commitments. As of March 31, 2011, we have received distributions related to these two private equity funds of $7.2 million, of which $0.9 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 $0.4 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 three months ended March 31, 2011.

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 $4 thousand during the first quarter of 2011 related to one marketable equity security. For the three months ended March 31, 2010, we recorded an other-than-temporary impairment charge of $2 thousand related to one marketable equity security.

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.

		Fair Value Measurements at March 31, 2011 Using
						Quoted Prices
						in Active				Significant
						Market for				Other				Significant
						Identical				Observable				Unobservable
						Assets				Inputs				Inputs
(In thousands)		Fair Value				(Level 1)				(Level 2)				(Level 3)
Cash equivalents
Money market funds		$	14,276			$	14,276			$	—			$	—
Available-for-sale securities
Deferred compensation plan assets			6,577				6,577				—				—
Available-for-sale debt securities
Corporate bonds			184,135				—				184,135				—
Municipal fixed-rate bonds			134,018				—				134,018				—
Municipal variable rate demand notes			58,710				—				58,710				—
Fixed income bond fund			759				759				—				—
Available-for-sale marketable equity securities
Equity securities — technology industry			31,201				31,201				—				—
Equity securities — other			13,600				13,600				—				—
Available-for-sale securities			429,000				52,137				376,863				—
Total		$	443,276			$	66,413			$	376,863			$	—

		Fair Value Measurements at December 31, 2010 Using
						Quoted Prices
						in Active				Significant
						Market for				Other				Significant
						Identical				Observable				Unobservable
						Assets				Inputs				Inputs
(In thousands)		Fair Value				(Level 1)				(Level 2)				(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
Equity securities — technology industry			35,596				35,596				—				—
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 March 31, 2011 and December 31, 2010, the fair value of the investments in available-for-sale Level 2 corporate bonds and municipal fixed-rate bonds was $318.2 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 March 31, 2011 and December 31, 2010, the fair value of the investments in available-for-sale Level 2 municipal variable rate demand notes was $58.7 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.

5. INVENTORY

At March 31, 2011 and December 31, 2010, inventory consisted of the following:

		March 31,				December 31,
(In thousands)		2011				2010
Raw materials		$	42,446			$	43,897
Work in process			3,807				2,871
Finished goods			32,781				27,506
Total		$	79,034			$	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 March 31, 2011 and December 31, 2010, raw materials reserves totaled $8.0 million and $7.3 million, respectively, and finished goods inventory reserves totaled $1.9 million and $1.6 million, respectively.

6. STOCKHOLDERS’ EQUITY

A summary of the changes in stockholders’ equity for the three months ended March 31, 2011 is as follows:

		Stockholders’
(In thousands)		Equity
Balance, December 31, 2010		$	572,322
Net income			34,258
Dividend payments			(5,775	)
Dividends accrued for unvested restricted stock units			(10	)
Net change in unrealized gains and losses on marketable securities (net of deferred taxes)			(2,651	)
Reclassification adjustment for amounts included in net income (net of deferred taxes)			(159	)
Foreign currency translation adjustment			87
Proceeds from stock option exercises			31,815
Tax benefits from stock option exercises			9,942
Stock-based compensation expense			2,089
Balance, March 31, 2011		$	641,918

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 30 million shares of our common stock. During the three months ended March 31, 2011, we did not repurchase any shares of our common stock. We have the authority to purchase an additional 2.0 million shares of our common stock under the plan approved by the Board of Directors on April 14, 2008.

Stock Option Exercises

We issued 1.7 million shares of treasury stock during the three months ended March 31, 2011 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $10.50 to $36.64. We received proceeds totaling $31.8 million from the exercise of these stock options during the three months ended March 31, 2011.

Dividend Payments

During the first quarter of 2011, we paid cash dividends as follows (in thousands except per share amount):

Record Date		Payment Date				Per Share Amount				Total Dividend Paid
February 3, 2011		February 17, 2011				$	0.09			$	5,775

Comprehensive Income

Comprehensive income consists of net income, net change in unrealized gains and losses on marketable securities, reclassification adjustments for amounts included in net income related to impaired securities and foreign currency translation adjustments.

		Three Months Ended
		March 31,
(In thousands)		2011				2010
Net income		$	34,258			$	18,194
Net change in unrealized gains and losses related to marketable securities, net of deferred tax benefit (expense) of $673 and $(2,772) for the three months ended March 31, 2011 and 2010, respectively			(2,651	)			4,622
Reclassification adjustment for amounts included in net income, net of deferred tax benefit of $43 and $31 for the three months ended March 31, 2011 and 2010, respectively			(159	)			(52	)
Foreign currency translation adjustment			87				168
Total comprehensive income		$	31,535			$	22,932

7. EARNINGS PER SHARE

A summary of the calculation of basic and diluted earnings per share for the three months ended March 31, 2011 and 2010 is as follows:

		Three Months Ended
		March 31,
(In thousands, except per share amounts)		2011				2010
Numerator
Net income		$	34,258			$	18,194
Denominator
Weighted average number of shares — basic			64,189				61,999
Effect of dilutive securities
Stock options			1,711				1,045
Restricted stock and restricted stock units			57				16
Weighted average number of shares — diluted			65,957				63,060
Net income per share — basic		$	0.53			$	0.29
Net income per share — diluted		$	0.52			$	0.29

Anti-dilutive options to purchase common stock outstanding were excluded from the above calculations. Anti-dilutive options totaled 0.9 million and 3.3 million for the three months ended March 31, 2011 and 2010, respectively.

8. SEGMENT INFORMATION

We operate in two reportable segments: (1) the Carrier Networks Division and (2) the Enterprise Networks Division. We evaluate the performance of our segments based on gross profit; therefore, selling, general and administrative expenses, research and development expenses, interest and dividend income, interest expense, net realized investment gain/loss, other expense, net and provision for income 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 the three months ended March 31, 2011 and 2010. Asset information by reportable segment is not reported, since we do not produce such information internally.

		Three Months Ended
		March 31, 2011								March 31, 2010
(In thousands)		Sales				Gross Profit				Sales				Gross Profit
Carrier Networks		$	132,360			$	79,498			$	99,524			$	59,266
Enterprise Networks			33,162				19,297				27,503				16,062
Total		$	165,522			$	98,795			$	127,027			$	75,328

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, and Digital Subscriber Line Access Multiplexer (DSLAM) products. Our broadband access products are used by service providers to deliver high-speed Internet access, Voice over Internet Protocol (VoIP), IP Television (IPTV), and/or Ethernet services from the central office or remote terminal locations to customer premises. The Carrier Systems category also includes our optical access products. These products consist of optical access multiplexers including our family of OPTI products and our Optical Networking Edge (ONE) products. Optical access products are used to deliver higher bandwidth services, or to aggregate large numbers of low bandwidth services for transportation across fiber optic infrastructure. Total Access 1500 products, 303 concentrator products, M13 multiplexer products, and 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), 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 three months ended March 31, 2011 and 2010.

		Three Months Ended
		March 31,
(In thousands)		2011				2010
Carrier Systems		$	86,750			$	58,093
Business Networking			36,363				26,457
Loop Access			42,409				42,477
Total		$	165,522			$	127,027

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

Subcategory revenues included in the above are as follows:

		Three Months Ended
		March 31,
(In thousands)		2011				2010
Growth Products
Broadband Access (included in Carrier Systems)		$	51,782			$	36,362
Optical Access (included in Carrier Systems)			20,916				11,259
Internetworking (NetVanta & Multi-service Access Gateways) (included in Business Networking)			32,883				22,183
Total			105,581				69,804
Traditional Products
HDSL (does not include T1) (included in Loop Access)			40,945				39,930
Other products (excluding HDSL)			18,996				17,293
Total			59,941				57,223
Total		$	165,522			$	127,027

Sales by Geographic Region

The table below presents sales information by geographic area for the three months ended March 31, 2011 and 2010. International sales correlate to shipments with a non-U.S. destination.

		Three Months Ended
		March 31,				March 31,
(In thousands)		2011				2010
United States		$	153,113			$	120,300
International			12,409				6,727
Total		$	165,522			$	127,027

9. LIABILITY FOR WARRANTY RETURNS

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 $3.5 million at March 31, 2011 and $3.3 million at December 31, 2010. These liabilities are included in accrued expenses in the accompanying Consolidated Balance Sheets.

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

Three Months Ended March 31,
(In thousands)		2011				2010
Balance at beginning of period		$	3,304			$	2,833
Plus: Amounts charged to cost and expenses			835				771
Less: Deductions			(620	)			(703	)
Balance at end of period		$	3,519			$	2,901

10. 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 three months ended March 31, 2011 and 2010, we incurred fees of $10 thousand per month for these legal services.

11. 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 have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we have contributed $8.0 million as of March 31, 2011, of which $7.4 million has been applied to these commitments. See Note 4 of Notes to Consolidated Financial Statements for additional information.

12. SUBSEQUENT EVENTS

On April 12, 2011, we announced that our Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to stockholders of record at the close of business on April 28, 2011. The payment date will be May 12, 2011. The quarterly dividend payment will be approximately $5.8 million. 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.