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, 2009 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, 2009, filed on February 26, 2010 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, determination of the deferred revenue components of multiple element sales agreements, 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

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. These amendments will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We do not expect the adoption of this amendment will have a material impact on our consolidated results of operations or financial condition.

In October 2009, the FASB issued Update No. 2009-14, which amends the Software topic of the 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. These amendments will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We do not expect the adoption of this amendment will have a material impact on our consolidated results of operations or financial condition.

During the nine months ended September 30, 2010, we adopted the following accounting standards, which had no material effect on our consolidated results of operations or financial condition:

In January 2010, the FASB issued Update No. 2010-06, which amends the Fair Value Measurements and Disclosures topic of the ASC. The amendments in this update require new disclosures about transfers in and out of Level 1 and Level 2 fair value measurements and the activity in Level 3 fair value measurements and, in addition, clarify existing disclosures required for levels of disaggregation and inputs and valuation techniques. These amendments are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about activity in Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted this amendment for the period ended March 31, 2010, and we have provided the disclosures required for the period ended September 30, 2010.

In February 2010, the FASB issued Update No. 2010-09, which amends the Subsequent Events topic of the ASC. The amendments in this update require entities that are SEC filers to evaluate subsequent events through the date that the financial statements are issued. Additionally, SEC filers are no longer required to disclose the date through which subsequent events were evaluated. The amendments in this update were effective upon issuance. We adopted this amendment for the period ended March 31, 2010, and we have provided the disclosures required for the period ended September 30, 2010.

2. INCOME TAXES

Our effective tax rate increased from 30.6% in the nine months ended September 30, 2009 to 34.6% in the nine months ended September 30, 2010. The increase is partially attributable to a one-time tax benefit of $1.7 million recorded in the first quarter of 2009, which decreased our effective tax rate by 2.1 percentage points for the nine months ended September 30, 2009. The $1.7 million benefit resulted from a review of our deduction for manufacturer’s domestic production activities for the years 2005, 2006 and 2007 under Internal Revenue Code Section 199, which was completed during the first quarter of 2009. Amended income tax returns were filed during the first quarter of 2009 in association with this benefit. In addition, the manufacturer’s domestic production activities deduction increased from six percent in 2009 to nine percent in 2010, resulting in approximately a 1.0 percentage point decrease in our effective tax rate for the nine months ended September 30, 2010.

The tax provision for the nine months ended September 30, 2009 also included the benefit from the research and development tax credit. The tax provision for the nine months ended September 30, 2010 did not include a benefit from the research and development tax credit, which expired on December 31, 2009. The exclusion of the benefit from the research and development tax credits resulted in approximately a 2.8 percentage point increase in our effective tax rate in the nine months ended September 30, 2010. Finally, the completion of an audit for the years 2006 and 2007 by the Internal Revenue Service resulted in the reversal of several uncertain tax positions, which resulted in approximately a 0.8 percentage point decrease in our effective tax rate for the nine months ended September 30, 2010.

3. STOCK-BASED COMPENSATION

The following table summarizes the stock-based compensation expense related to stock options and restricted stock units (RSUs) under the Stock Compensation Topic of the FASB ASC for the three and nine months ended September 30, 2010 and 2009, which was recognized as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In thousands)		2010				2009				2010				2009
Stock-based compensation expense included in cost of sales		$	69			$	66			$	210			$	196
Selling, general and administrative expense			775				658				2,360				2,160
Research and development expense			886				860				2,657				2,639
Stock-based compensation expense included in operating expenses			1,661				1,518				5,017				4,799
Total stock-based compensation expense			1,730				1,584				5,227				4,995
Tax benefit for expense associated with non-qualified options			(43	)			(157	)			(415	)			(453	)
Total stock-based compensation expense, net of tax		$	1,687			$	1,427			$	4,812			$	4,542

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.

The weighted-average assumptions and value of options granted for the three and nine months ended September 30, 2010 and 2009 are summarized as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Expected volatility			39.75	%			42.67	%			40.92	%			42.77	%
Risk-free interest rate			1.98	%			2.11	%			2.47	%			1.54	%
Expected dividend yield			1.27	%			1.68	%			1.51	%			2.26	%
Expected life (in years)			5.38				4.62				5.19				4.84
Weighted-average estimated value		$	9.72			$	7.13			$	8.29			$	5.08

ADTRAN uses the Monte Carlo Simulation valuation technique to value its RSUs. There were no RSU grants, forfeitures, or vesting activities that occurred during the nine months ended September 30, 2010 or 2009.

Stock-based compensation expense recognized in our Consolidated Statements of Income for the three and nine months ended September 30, 2010 and 2009 is based on options and RSUs ultimately expected to vest, and has been reduced for estimated forfeitures. Estimated forfeitures for stock options were based upon historical experience and approximate 3% annually. We estimated a 0% forfeiture rate for our RSUs due to the limited number of recipients and lack of historical experience for these awards.

As of September 30, 2010, total compensation cost related to non-vested stock options and RSUs not yet recognized was approximately $11.2 million, which is expected to be recognized over an average remaining recognition period of 2.4 years.

The following schedule summarizes the activity in our stock option plans for the nine months ended September 30, 2010:

										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, 2009			6,916			$	20.42				6.05			$	25,719
Options granted			15			$	23.95
Options cancelled/forfeited			(73	)		$	24.02
Options exercised			(1,231	)		$	15.96
Options outstanding, September 30, 2010			5,627			$	21.33				5.81			$	70,388
Options exercisable, September 30, 2010			3,358			$	21.63				4.21			$	40,996

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 September 30, 2010. 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 and nine month periods ended September 30, 2010 was $10.4 million and $16.8 million, respectively.

4. INVESTMENTS

At September 30, 2010, we held the following securities and investments, recorded at either fair value or cost.

														Fair Value /
		Amortized				Gross Unrealized								Carrying
(In thousands)		Cost				Gains				Losses				Value
Deferred compensation plan assets		$	3,293			$	637			$	(19	)		$	3,911
Corporate bonds			109,432				920				(4	)			110,348
Municipal fixed-rate bonds			83,332				452				(2	)			83,782
Municipal variable rate demand notes			107,420				—				—				107,420
Fixed income bond fund			526				216				—				742
Marketable equity securities			10,322				28,529				(282	)			38,569
Available-for-sale securities held at fair value		$	314,325			$	30,754			$	(307	)		$	344,772
Restricted investment held at cost															48,250
Other investments held at cost															2,228
Total carrying value of available-for-sale investments														$	395,250

At September 30, 2010, we held $3.9 million of deferred compensation plan assets, carried at fair value.

At September 30, 2010, we held $110.3 million of corporate bonds, including a $1.5 million bond that has been issued by one bank and is guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program (TLGP). These bonds are classified as available-for-sale and had an average duration of 2.2 years at September 30, 2010. At September 30, 2010, approximately 4% of our corporate bond portfolio had a credit rating of AAA, 11% had a credit rating of AA, 51% had a credit rating of A, and 34% had a credit rating of BBB.

At September 30, 2010, we held $83.8 million of municipal fixed-rate bonds. These bonds are classified as available-for-sale investments and had an average duration of 1.1 years at September 30, 2010. At September 30, 2010, approximately 19% of our municipal fixed-rate bond portfolio had a credit rating of AAA, 69% had a credit rating of AA, and 12% 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 September 30, 2010, we held $107.4 million of municipal variable rate demand notes, all of which are classified as available-for-sale short-term investments. At September 30, 2010, 33% of our municipal variable rate demand notes had a credit rating of AAA, 59% had a credit rating of AA, 8% 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 September 30, 2010, approximately 32% 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 68% 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 September 30, 2010, we held $0.7 million of a fixed income bond fund.

At September 30, 2010, we held $38.6 million of marketable equity securities, including a single security, of which we held 1.6 million shares, carried at a fair value of $26.6 million. We sold 416 thousand shares of this security during the nine months ended September 30, 2010. The sales resulted in proceeds of $6.2 million and a realized gain of $6.0 million. This single security traded approximately 1.1 million shares per day in the first nine months of 2010 in an active market on a European stock exchange. This single security comprises $26.1 million of the gross unrealized gains included in the fair value of our marketable equity securities at September 30, 2010. The remaining $2.5 million of gross unrealized gains and $0.3 million of gross unrealized losses at September 30, 2010 were spread among 397 equity securities.

At September 30, 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 September 30, 2010, the estimated fair value of the Bond was approximately $47.1 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 September 30, 2010, we held $2.2 million of other investments carried at cost, consisting of interests in two private equity funds and an investment in a privately held telecommunications equipment manufacturer. The fair value of these investments was estimated to be approximately $10.2 million at September 30, 2010, 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 September 30, 2010, of which $7.5 million has been applied toward these commitments. As of September 30, 2010, we have received distributions related to these two private equity funds of $6.7 million, of which $0.9 million was recorded as a realized investment gain. These investments are carried at cost, net of distributions, with distributions in excess of our investment recorded as a realized investment gain. The duration of each of these commitments is ten years with $0.1 million expiring in 2010 and $0.3 million expiring in 2012. We have not been required to record any impairment losses related to these investments during the nine months ended September 30, 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 $43 thousand during the nine months ending September 30, 2010 related to five marketable equity securities. For the nine months ended September 30, 2009, we recorded an other-than-temporary impairment charge of $2.0 million related to 117 marketable equity securities. In addition to the impairment charge we recorded on our marketable equity securities, we recorded an impairment charge of $0.4 million related to our investment in a fixed income bond fund and $0.5 million related to our deferred compensation plan assets during the first nine months of 2009 as a result of similar reviews. There were no impairment charges related to the fixed income bond fund or deferred compensation plan assets during the nine months ended September 30, 2010.

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 issuers.

		Fair Value Measurements at September 30, 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		$	12,569			$	12,569			$	—			$	—
Deferred compensation plan assets			3,911				3,911				—				—
Available-for-sale debt securities
Corporate bonds			110,348				—				110,348				—
Municipal fixed-rate bonds			83,782				—				83,782				—
Municipal variable rate demand notes			107,420				—				107,420				—
Fixed income bond fund			742				742				—				—
Available-for-sale marketable equity securities
Marketable equity securities — technology industry			27,802				27,802				—				—
Marketable equity securities — other			10,767				10,767				—				—
Available-for-sale securities			344,772				43,222				301,550				—
Total		$	357,341			$	55,791			$	301,550			$	—

		Fair Value Measurements at December 31, 2009 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		$	18,370			$	18,370			$	—			$	—
Deferred compensation plan assets			3,424				3,424				—				—
Available-for-sale debt securities
Corporate bonds			20,414				—				20,414				—
Municipal fixed-rate bonds			141,285				—				141,285				—
Municipal variable rate demand notes			84,359				—				84,359				—
Fixed income bond fund			1,163				1,163				—				—
Available-for-sale marketable equity securities
Marketable equity securities — technology industry			23,491				23,491				—				—
Marketable equity securities — other			10,044				10,044				—				—
Available-for-sale securities			284,180				38,122				246,058				—
Total		$	302,550			$	56,492			$	246,058			$	—

As of September 30, 2010 and December 31, 2009, the fair value of the investments in available-for-sale Level 2 corporate bonds and municipal fixed-rate bonds was $194.1 million and $161.7 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 September 30, 2010 and December 31, 2009, the fair value of the investments in available-for-sale Level 2 municipal variable rate demand notes was $107.4 million and $84.4 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 September 30, 2010 and December 31, 2009, inventory consisted of the following:

		September 30,				December 31,
(In thousands)		2010				2009
Raw materials		$	50,129			$	33,930
Work in progress			2,892				2,662
Finished goods			25,695				16,832
Inventory reserves			(8,764	)			(7,750	)
Total		$	69,952			$	45,674

6. STOCKHOLDERS’ EQUITY

A summary of the changes in stockholders’ equity for the nine months ended September 30, 2010 is as follows:

		Stockholders’
(In thousands)		Equity
Balance, December 31, 2009		$	452,515
Net income			78,029
Dividend payments			(16,822	)
Dividends accrued for unvested restricted stock units			(26	)
Net change in unrealized gains and losses on marketable securities (net of deferred taxes)			2,882
Foreign currency translation adjustment			863
Proceeds from stock option exercises			19,769
Tax benefits from stock option exercises			4,459
Stock-based compensation expense			5,227
Purchases of treasury stock			(10,330	)
Balance, September 30, 2010		$	536,566

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 nine months ended September 30, 2010, we repurchased 0.5 million shares of our common stock at a weighted average price of $21.62 per share. We have the authority to purchase an additional 2.2 million shares of our common stock under the plan approved by the Board of Directors on April 14, 2008.

Stock Option Exercises

We issued 1.2 million shares of treasury stock during the nine months ended September 30, 2010 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $8.69 to $32.27. We received proceeds totaling $19.8 million from the exercise of these stock options during the nine months ended September 30, 2010.

Dividend Payments

During the nine months ended September 30, 2010, we have paid cash dividends as follows (in thousands except per share amount):

Record Date		Payment Date				Per Share Amount				Total Dividend Paid
February 4, 2010		February 18, 2010				$	0.09			$	5,577
April 29, 2010		May 13, 2010				$	0.09			$	5,594
July 29, 2010		August 12, 2010				$	0.09			$	5,651

Comprehensive Income

Comprehensive income consists of net income, net change in unrealized gains and losses on marketable securities and foreign currency translation adjustments.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In thousands)		2010				2009				2010				2009
Net income		$	32,084			$	21,583			$	78,029			$	55,606
Net change in unrealized gains and losses related to:
Marketable securities, net of deferred tax benefit (expense) of $(2,538) and $(3,310) for the three months ended September 30, 2010 and 2009, respectively, and $(1,907) and $(5,811) for the nine months ended September 30, 2010 and 2009, respectively			4,230				5,510				3,174				9,705
Impaired marketable securities, net of deferred tax benefit (expense) of $47 and $264 for the three months ended September 30, 2010 and 2009, respectively, and $174 and $(666) for the nine months ended September 30, 2010 and 2009, respectively			(80	)			(450	)			(292	)			1,091
Foreign currency translation adjustment			1,465				679				863				2,300
Total comprehensive income		$	37,699			$	27,322			$	81,774			$	68,702

7. EARNINGS PER SHARE

A summary of the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009 is as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In thousands, except per share amounts)		2010				2009				2010				2009
Numerator
Net income		$	32,084			$	21,583			$	78,029			$	55,606
Denominator
Weighted average number of shares — basic			62,771				62,762				62,316				62,417
Effect of dilutive securities
Stock options			1,491				1,099				1,286				835
Restricted stock units			38				9				36				6
Weighted average number of shares — diluted			64,300				63,870				63,638				63,258
Net income per share — basic		$	0.51			$	0.34			$	1.25			$	0.89
Net income per share — diluted		$	0.50			$	0.34			$	1.23			$	0.88

Anti-dilutive options to purchase common stock outstanding were excluded from the above calculations. Anti-dilutive options totaled 0.5 million and 2.6 million for the three months ended September 30, 2010 and 2009, respectively, and 2.0 million and 3.8 million for the nine months ended September 30, 2010 and 2009, respectively.

8. SEGMENT INFORMATION

ADTRAN operates 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 and nine months ended September 30, 2010 and 2009. Asset information by reportable segment is not reported, since we do not produce such information internally.

		Three Months Ended
		September 30, 2010								September 30, 2009
(In thousands)		Sales				Gross Profit				Sales				Gross Profit
Carrier Networks		$	128,581			$	77,372			$	98,643			$	56,706
Enterprise Networks			34,376				19,927				29,419				17,751
Total		$	162,957			$	97,299			$	128,062			$	74,457

		Nine Months Ended
		September 30, 2010								September 30, 2009
(In thousands)		Sales				Gross Profit				Sales				Gross Profit
Carrier Networks		$	345,684			$	206,910			$	277,493			$	164,469
Enterprise Networks			94,661				55,046				82,461				49,138
Total		$	440,345			$	261,956			$	359,954			$	213,607

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

Business Networking products provide access to telecommunication services, facilitating the delivery of converged services and Unified Communications to the SMB and Enterprise markets. The Business Networking category includes Internetworking products 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, and Carrier Ethernet Network Terminating Equipment (NTE).

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 and nine months ended September 30, 2010 and 2009.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In thousands)		2010				2009				2010				2009
Carrier Systems		$	76,349			$	59,865			$	207,590			$	158,804
Business Networking			33,830				26,124				92,452				72,568
Loop Access			52,778				42,073				140,303				128,582
Total		$	162,957			$	128,062			$	440,345			$	359,954

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

Subcategory revenues included in the above are as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In thousands)		2010				2009				2010				2009
Growth Products
Broadband Access (included in Carrier Systems)		$	45,099			$	29,518			$	126,432			$	83,128
Optical Access (included in Carrier Systems)			18,619				20,094				46,006				44,260
Internetworking (NetVanta & Multi-service Access Gateways) (included in Business Networking)			29,475				21,276				79,560				57,018
Total			93,193				70,888				251,998				184,406
Traditional Products
HDSL (does not include T1) (included in Loop Access)			49,383				37,610				131,487				114,880
Other products (excluding HDSL)			20,381				19,564				56,860				60,668
Total			69,764				57,174				188,347				175,548
Total		$	162,957			$	128,062			$	440,345			$	359,954

Sales by Geographic Region

The table below presents sales information by geographic area for the three and nine months ended September 30, 2010 and 2009. International sales correlate to shipments with a non-U.S. destination.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In thousands)		2010				2009				2010				2009
United States		$	154,648			$	121,403			$	416,994			$	339,906
International			8,309				6,659				23,351				20,048
Total		$	162,957			$	128,062			$	440,345			$	359,954

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 $3.2 million at September 30, 2010 and $2.8 million at December 31, 2009. These liabilities are included in accrued expenses in the accompanying Consolidated Balance Sheets.

A summary of warranty expense and write-off activity for the nine months ended September 30, 2010 and 2009 is as follows:

		Nine Months Ended
		September 30,
(In thousands)		2010				2009
Balance at beginning of period		$	2,833			$	2,812
Plus: Amounts charged to cost and expenses			2,544				1,849
Less: Deductions			(2,137	)			(1,825	)
Balance at end of period		$	3,240			$	2,836

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 and nine month periods ended September 30, 2010 and 2009, 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 September 30, 2010, of which $7.5 million has been applied to these commitments. See Note 4 of Notes to Consolidated Financial Statements for additional information.

12. SUBSEQUENT EVENTS

On October 12, 2010, 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 October 28, 2010. The payment date will be November 11, 2010. The quarterly dividend payment will be approximately $5.7 million. In July 2003, our Board of Directors elected to begin declaring quarterly dividends on our common stock considering the favorable tax treatment of dividends and adequate levels of Company liquidity.