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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
 
x 	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934	
For the Quarterly Period Ended June 30, 2008
OR
 
¨ 	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 No.)	
901 Explorer Boulevard, Huntsville, Alabama 35806-2807
(Address of principal executive offices, including zip code)
(256) 963-8000
(Registrant’s telephone number, including area code)

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 twelve 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 is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large 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
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date:

Class	  	Outstanding at July 25, 2008	
Common Stock, $.01 Par Value	  	63,421,645 shares	

 

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ADTRAN, INC.
Quarterly Report on Form 10-Q
For the Three and Six Months Ended June 30, 2008
 Table of Contents

Item
Number	  	 	  	Page
Number	
	  	PART I. FINANCIAL INFORMATION	  		
			
1	  	Financial Statements:	  		
	  	Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007	  	3	
	  	Consolidated Statements of Income for the three and six months ended June 30, 2008 and 2007 – (Unaudited)	  	4	
	  	Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 – (Unaudited)	  	5	
	  	Notes to Consolidated Financial Statements – (Unaudited)	  	6	
2	  	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	16	
3	  	Quantitative and Qualitative Disclosures About Market Risk	  	25	
4	  	Controls and Procedures	  	25	
			
	  	PART II. OTHER INFORMATION	  		
			
1A	  	Risk Factors	  	25	
4	  	Submission of Matters to a Vote of Security Holders	  	25	
6	  	Exhibits	  	26	
			
	  	SIGNATURE	  	27	
			
	  	EXHIBIT INDEX	  	28	
FORWARD LOOKING STATEMENTS
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, our other filings with the Securities and Exchange Commission (SEC) and in our reports to 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 us or on our behalf are subject to uncertainties and other factors that could cause such statements to be wrong. A list of factors that could materially affect our business, financial condition or operating results is included under “Factors That Could Affect Our Future Results” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 2 of Part I of this report. They have also been discussed in Item 1A of Part I in our most recent Annual Report on Form 10-K filed on February 28, 2008 with the SEC. 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 a combination of factors may have on our business.
You are further cautioned not to place undue reliance on these forward-looking statements because they speak only of our views as of the date that 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.
 
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PART I. FINANCIAL INFORMATION
 
ITEM 1.	FINANCIAL STATEMENTS	
 ADTRAN, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

 	  	June 30,
2008	 	 	December 31,
2007	 	
 	  	(Unaudited)	 	 	 	 	
ASSETS	  				 				
Current Assets	  				 				
Cash and cash equivalents	  	$	57,854	 	 	$	13,941	 	
Short-term investments	  	 	120,915	 	 	 	148,416	 	
Accounts receivable, less allowance for doubtful accounts of $56 at June 30, 2008 and $109 at December 31, 2007	  	 	62,688	 	 	 	70,667	 	
Other receivables	  	 	2,854	 	 	 	3,085	 	
Inventory, net	  	 	49,825	 	 	 	48,546	 	
Prepaid expenses	  	 	1,704	 	 	 	2,023	 	
Deferred tax assets, net	  	 	8,126	 	 	 	7,659	 	
	  	 	 	 	 	 	 	 	
Total current assets	  	 	303,966	 	 	 	294,337	 	
Property, plant and equipment, net	  	 	75,776	 	 	 	75,969	 	
Deferred tax assets, net	  	 	3,196	 	 	 	1,113	 	
Other assets	  	 	110	 	 	 	505	 	
Long-term investments	  	 	123,120	 	 	 	107,296	 	
	  	 	 	 	 	 	 	 	
Total assets	  	$	506,168	 	 	$	479,220	 	
	  	 	 	 	 	 	 	 	
LIABILITIES AND STOCKHOLDERS’ EQUITY	  				 				
Current Liabilities	  				 				
Accounts payable	  	$	24,545	 	 	$	22,200	 	
Unearned revenue	  	 	6,265	 	 	 	5,361	 	
Accrued expenses	  	 	4,186	 	 	 	3,801	 	
Accrued wages and benefits	  	 	10,623	 	 	 	10,497	 	
Income tax payable, net	  	 	5,739	 	 	 	1,217	 	
	  	 	 	 	 	 	 	 	
Total current liabilities	  	 	51,358	 	 	 	43,076	 	
Other non-current liabilities	  	 	10,028	 	 	 	9,213	 	
Bonds payable	  	 	48,500	 	 	 	48,500	 	
	  	 	 	 	 	 	 	 	
Total liabilities	  	 	109,886	 	 	 	100,789	 	
Commitments and contingencies (see Note 10)	  				 				
Stockholders’ Equity	  				 				
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued at June 30, 2008 and December 31, 2007	  	 	797	 	 	 	797	 	
Additional paid-in capital	  	 	168,840	 	 	 	164,385	 	
Accumulated other comprehensive income	  	 	4,410	 	 	 	5,704	 	
Retained earnings	  	 	578,037	 	 	 	551,764	 	
Less treasury stock at cost: 15,368 shares at June 30, 2008 and 14,739 shares at December 31, 2007	  	 	(355,802	)	 	 	(344,219	)	
	  	 	 	 	 	 	 	 	
Total stockholders’ equity	  	 	396,282	 	 	 	378,431	 	
	  	 	 	 	 	 	 	 	
Total liabilities and stockholders’ equity	  	$	506,168	 	 	$	479,220	 	
	  	 	 	 	 	 	 	 	
See notes to consolidated financial statements
 
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 ADTRAN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)

 	  	Three Months Ended
June 30,	 	 	Six Months Ended
June 30,	 	
 	  	2008	 	 	2007	 	 	2008	 	 	2007	 	
Sales	  	$	131,183	 	 	$	123,674	 	 	$	251,068	 	 	$	233,986	 	
Cost of sales	  	 	51,789	 	 	 	50,115	 	 	 	101,434	 	 	 	94,637	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross profit	  	 	79,394	 	 	 	73,559	 	 	 	149,634	 	 	 	139,349	 	
Selling, general and administrative expenses	  	 	25,709	 	 	 	26,155	 	 	 	51,256	 	 	 	52,631	 	
Research and development expenses	  	 	20,215	 	 	 	19,546	 	 	 	39,768	 	 	 	37,904	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income	  	 	33,470	 	 	 	27,858	 	 	 	58,610	 	 	 	48,814	 	
Interest and dividend income	  	 	2,219	 	 	 	3,006	 	 	 	4,502	 	 	 	5,914	 	
Interest expense	  	 	(660	)	 	 	(626	)	 	 	(1,279	)	 	 	(1,245	)	
Net realized investment gain (loss)	  	 	(15	)	 	 	185	 	 	 	(104	)	 	 	268	 	
Other income, net	  	 	339	 	 	 	199	 	 	 	466	 	 	 	497	 	
Life insurance proceeds	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	1,000	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before provision for income taxes	  	 	35,353	 	 	 	30,622	 	 	 	62,195	 	 	 	55,248	 	
Provision for income taxes	  	 	(12,939	)	 	 	(10,779	)	 	 	(22,734	)	 	 	(18,477	)	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	22,414	 	 	$	19,843	 	 	$	39,461	 	 	$	36,771	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average shares outstanding – basic	  	 	64,239	 	 	 	68,797	 	 	 	64,419	 	 	 	69,073	 	
Weighted average shares outstanding – diluted	  	 	65,340	 	 	 	70,267	 	 	 	65,400	 	 	 	70,583	 	
Earnings per common share – basic	  	$	0.35	 	 	$	0.29	 	 	$	0.61	 	 	$	0.53	 	
Earnings per common share – diluted	  	$	0.34	 	 	$	0.28	 	 	$	0.60	 	 	$	0.52	 	
Dividend per share	  	$	0.09	 	 	$	0.09	 	 	$	0.18	 	 	$	0.18	 	
See notes to consolidated financial statements
 
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 ADTRAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

 	  	Six Months Ended
June 30,	 	
 	  	2008	 	 	2007	 	
Cash flows from operating activities:	  				 				
Net income	  	$	39,461	 	 	$	36,771	 	
Adjustments to reconcile net income to net cash provided by operating activities:	  				 				
Depreciation and amortization	  	 	4,823	 	 	 	5,336	 	
Amortization of net premium on available-for-sale investments	  	 	873	 	 	 	1,153	 	
Net realized loss (gain) on long-term investments	  	 	104	 	 	 	(268	)	
Loss (gain) on disposal of property, plant and equipment	  	 	(15	)	 	 	70	 	
Stock-based compensation expense	  	 	3,999	 	 	 	4,535	 	
Deferred income taxes	  	 	(1,411	)	 	 	(2,159	)	
Tax benefits from stock option exercises	  	 	456	 	 	 	3,787	 	
Excess tax benefits from stock-based compensation arrangements	  	 	(247	)	 	 	(2,842	)	
Changes in operating assets and liabilities:	  				 				
Accounts receivable, net	  	 	7,979	 	 	 	(9,653	)	
Other receivables	  	 	231	 	 	 	3,130	 	
Income tax receivable, net	  	 	—  	 	 	 	1,446	 	
Inventory, net	  	 	(1,279	)	 	 	10,327	 	
Prepaid expenses and other assets	  	 	714	 	 	 	929	 	
Accounts payable	  	 	2,345	 	 	 	(3,095	)	
Accrued expenses and other liabilities	  	 	2,230	 	 	 	2,082	 	
Income tax payable, net	  	 	4,522	 	 	 	439	 	
	  	 	 	 	 	 	 	 	
Net cash provided by operating activities	  	 	64,785	 	 	 	51,988	 	
	  	 	 	 	 	 	 	 	
Cash flows from investing activities:	  				 				
Purchases of property, plant and equipment	  	 	(4,615	)	 	 	(3,816	)	
Proceeds from sales and maturities of available-for-sale investments	  	 	120,232	 	 	 	98,980	 	
Purchases of available-for-sale investments	  	 	(112,590	)	 	 	(116,650	)	
	  	 	 	 	 	 	 	 	
Net cash provided by (used in) investing activities	  	 	3,027	 	 	 	(21,486	)	
	  	 	 	 	 	 	 	 	
Cash flows from financing activities:	  				 				
Proceeds from stock option exercises	  	 	1,724	 	 	 	12,921	 	
Purchases of treasury stock	  	 	(14,871	)	 	 	(52,289	)	
Dividend payments	  	 	(11,624	)	 	 	(12,465	)	
Excess tax benefits from stock-based compensation arrangements	  	 	247	 	 	 	2,842	 	
	  	 	 	 	 	 	 	 	
Net cash used in financing activities	  	 	(24,524	)	 	 	(48,991	)	
	  	 	 	 	 	 	 	 	
Net increase (decrease) in cash and cash equivalents	  	 	43,288	 	 	 	(18,489	)	
Effect of exchange rate changes	  	 	625	 	 	 	403	 	
Cash and cash equivalents, beginning of period	  	 	13,941	 	 	 	40,147	 	
	  	 	 	 	 	 	 	 	
Cash and cash equivalents, end of period	  	$	57,854	 	 	$	22,061	 	
	  	 	 	 	 	 	 	 	
See notes to consolidated financial statements
 
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 ADTRAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
 
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, 2007 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, 2007.
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. ADTRAN’s 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
Updates to recent accounting standards as disclosed in ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2007 are as follows:
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007), Business Combinations , (SFAS 141R) which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any non-controlling interest in the acquiree in a business combination. SFAS 141R establishes principles stipulating how goodwill acquired in a business combination or a gain from a bargain purchase should be recognized and measured. The statement also expands the disclosure requirements related to the nature and financial impact of business combinations. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. We are currently evaluating the impact the adoption of SFAS 141R might have on our consolidated results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements- an Amendment of ARB No. 51 (SFAS 160), which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 also provides guidance when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners of a subsidiary.
 
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SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are currently evaluating the impact the adoption of SFAS 160 might have on our consolidated results of operations and financial condition.
During the first quarter of 2008, we adopted the following accounting standards, neither of which had a material effect on our consolidated results of operations or financial condition:
 
 	•	 	FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115 (SFAS 159) provides entities the option to measure certain financial assets and financial liabilities at fair value, with changes in fair value recognized in earnings each period. SFAS 159 permits the fair value option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. We adopted SFAS 159 as of January 1, 2008. We elected not to apply the provisions of SFAS 159 to our eligible financial assets and financial liabilities on the date of adoption. Accordingly, the initial application of SFAS 159 had no effect on our consolidated results of operations and financial condition.	
 
 	•	 	FASB Statement No. 157, Fair Value Measurements (SFAS 157) establishes a definition of fair value and a framework for measuring fair value, and expands disclosures about fair value measurements. The definition of fair value focuses on the price that would be received upon the sale of an asset or the amount paid to transfer a liability. Under SFAS 157, the fair value measurement should reflect all of the assumptions that market participants would use in pricing the asset or liability. SFAS 157 establishes a three-level hierarchy to prioritize the inputs used in valuation techniques for fair value, consisting of: 1) observable inputs that reflect quoted prices in active markets; 2) inputs other than quoted prices with observable market data; and 3) unobservable data. SFAS 157 requires disclosures detailing the extent to which we measure assets and liabilities at fair value, the methods and assumptions used to measure fair value and the effect of fair value measurements on earnings. We adopted SFAS 157 in its entirety, including fair value measurements for nonfinancial assets and nonfinancial liabilities, and the initial application of SFAS 157 had no effect on our consolidated results of operations and financial condition. See Note 3 to the Consolidated Financial Statements for more information.	
 
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2.	STOCK-BASED COMPENSATION	
The following table summarizes the stock-based compensation expense related to stock options under SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), for the three and six months ended June 30, 2008 and 2007, which was recognized as follows:

 	  	Three Months Ended
June 30,	 	 	Six Months Ended
June 30,	 	
(In thousands)	  	2008	 	 	2007	 	 	2008	 	 	2007	 	
Stock-based compensation expense included in cost of sales	  	$	79	 	 	$	94	 	 	$	158	 	 	$	187	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Selling, general and administrative expense	  	 	889	 	 	 	1,120	 	 	 	1,843	 	 	 	2,199	 	
Research and development expense	  	 	992	 	 	 	1,082	 	 	 	1,998	 	 	 	2,149	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Stock-based compensation expense included in operating expenses	  	 	1,881	 	 	 	2,202	 	 	 	3,841	 	 	 	4,348	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total stock-based compensation expense	  	 	1,960	 	 	 	2,296	 	 	 	3,999	 	 	 	4,535	 	
Tax benefit for expense associated with non-qualified options	  	 	(196	)	 	 	(230	)	 	 	(404	)	 	 	(416	)	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total stock-based compensation expense, net of tax	  	$	1,764	 	 	$	2,066	 	 	$	3,595	 	 	$	4,119	 	

The fair value of ADTRAN’s 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 six months ended June 30, 2008 and 2007 are summarized as follows:

  

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	June 30,	 	 	June 30,	 	
 	  	2008	 	 	2007	 	 	2008	 	 	2007	 	
Expected volatility	  	 	41.42	%	 	 	46.56	%	 	 	41.56	%	 	 	46.46	%	
Risk-free interest rate	  	 	3.12	%	 	 	4.54	%	 	 	3.08	%	 	 	4.58	%	
Expected dividend yield	  	 	1.54	%	 	 	1.41	%	 	 	1.59	%	 	 	1.45	%	
Expected life (in years)	  	 	4.90	 	 	 	5.18	 	 	 	4.91	 	 	 	5.07	 	
Weighted-average estimated value	  	$	8.25	 	 	$	10.72	 	 	$	8.02	 	 	$	10.37	 	
Stock-based compensation expense recognized in our Consolidated Statements of Income for the three and six months ended June 30, 2008 is based on options ultimately expected to vest, and has been reduced for estimated forfeitures. Estimated forfeitures were based upon historical experience and approximate 5.0% annually.
As of June 30, 2008, total compensation cost related to non-vested stock options not yet recognized was approximately $10.8 million, which is expected to be recognized over an average remaining recognition period of 2.4 years using the ratable single-option approach.
 
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The following schedule summarizes the activity in our stock-based compensation plans for the six months ended June 30, 2008:

(In thousands, except per share amounts)	  	Number of
Options	 	 	Weighted Avg.
Exercise Price	  	Weighted Avg.
Remaining
Contractual
Life in Years	 	 	Aggregate
Intrinsic
Value	
Options outstanding, December 31, 2007	  	 	6,375	 	 	$	19.79	  	 	5.94	 	 	$	24,737	
Options granted	  	 	21	 	 	$	22.93	  				 			
Options cancelled/forfeited	  	 	(85	)	 	$	25.14	  				 			
Options exercised	  	 	(141	)	 	$	12.17	  				 			
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	
Options outstanding, June 30, 2008	  	 	6,170	 	 	$	19.90	  	 	5.53	 	 	$	32,789	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	
Options exercisable, June 30, 2008	  	 	4,192	 	 	$	18.01	  	 	4.11	 	 	$	30,992	

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 June 30, 2008. 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 six month period ended June 30, 2008 was $1.1 million and $1.5 million, respectively.
 
3.      INVESTMENTS
 
At June 30, 2008, we held the following securities and investments, recorded at either fair value or cost.	
				
(In thousands)	  	Amortized
Cost	 	 	Gross Unrealized	 	 	Fair Value /
Carrying
Value	
	  			 	Gains	  	Losses	 	 		
Restricted investments	  	$	2,996	 	 	$	30	  	$	—  	 	 	$	3,026	
Municipal fixed-rate bonds	  	 	129,118	 	 	 	434	  	 	(192	)	 	 	129,360	
Municipal variable rate demand notes	  	 	40,567	 	 	 	—  	  	 	—  	 	 	 	40,567	
Marketable equity securities	  	 	16,405	 	 	 	5,255	  	 	(1,494	)	 	 	20,166	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	
Available-for-sale securities held at fair value	  	$	189,086	 	 	$	5,719	  	$	(1,686	)	 	$	193,119	
	  	 	 	 	 	 	 	  	 	 	 	 			
Restricted investments held at cost	  				 			  				 	 	49,000	
Other investments held at cost	  				 			  				 	 	1,916	
	  				 			  				 	 	 	
Total carrying value of available-for-sale securities and investments	  				 			  				 	$	244,035	
	  				 			  				 	 	 	
At June 30, 2008, we held $3.0 million of restricted deferred compensation plan assets, carried at fair value.
At June 30, 2008, we held $129.4 million of municipal fixed-rate bonds. Approximately 41% of our municipal fixed-rate bond portfolio had a credit rating of AAA, 57% had a credit rating of AA and the balance had a credit rating of A. These bonds are classified as available-for-sale investments and had an average duration of 0.8 years at June 30, 2008. 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.
 
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At June 30, 2008, we held $40.6 million of municipal variable rate demand notes, all of which are classified as available-for-sale short-term investments and had a credit rating of A-1+. Despite the long-term nature of their stated contractual maturities, we have the ability to quickly liquidate these securities. Our investments in these securities are recorded at fair value, and the interest rates typically reset every seven, 28, or 35 days. As a result, 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 or municipal auction rate securities, and we have held no municipal auction rate securities since February 7, 2008.
At June 30, 2008, we held $20.2 million of marketable equity securities, including a single security, of which we held 2.5 million shares, carried at a fair value of $5.2 million. We estimate that this single security trades approximately 23,000 shares per day, in an active market on a European stock exchange. This single security carried $4.3 million of the gross unrealized gains included in the fair market value of our marketable equity securities.
At June 30, 2008, we held a $49.0 million restricted certificate of deposit, 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). 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 June 30, 2008, we held $1.9 million of other investments carried at cost consisting of two private equity funds and a direct investment in a telecommunications equipment manufacturer. The fair value of these investments was estimated to be approximately $15.2 million at June 30, 2008, based on unobservable inputs including information supplied by the investees. We have committed to invest up to an aggregate of $7.8 million in the two private equity funds, and we have contributed $7.7 million to date, of which $7.2 million has been applied toward these commitments. As of June 30, 2008, we have received distributions related to these two private equity funds of $5.9 million, of which $0.1 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 $0.2 million expiring in 2010 and $0.4 million expiring in 2012.
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 market value that has declined from its original or adjusted cost basis by 25% for more than six months. We then evaluate the individual security based on the previously identified factors to determine the amount of the write-down, if any. For the six months ended June 30, 2008, we had a charge of $0.2 million related to the impairment of certain publicly traded equity securities. There were no such charges in the six months ended June 30, 2007.
In accordance with SFAS No. 157, we have categorized 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 investments as follows: Level 1 - Investment values based on unadjusted quoted prices for identical assets or liabilities in an active market; Level 2 - Investment 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 - Investment 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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 	  	 	  	Fair Value Measurements at June 30, 2008 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)	
Restricted investments	  	$	3,026	  	$	3,026	  	$	—  	  	$	—  	
Municipal fixed-rate bonds	  	 	129,360	  	 	—  	  	 	129,360	  	 	—  	
Municipal variable rate demand notes	  	 	40,567	  	 	—  	  	 	40,567	  	 	—  	
Marketable equity securities	  	 	20,166	  	 	20,166	  	 	—  	  	 	—  	
	  	 	 	  	 	 	  	 	 	  	 	 	
Available-for-sale securities held at fair value	  	$	193,119	  	$	23,192	  	$	169,927	  	$	—  	

4.	INVENTORY	
At June 30, 2008 and December 31, 2007, inventory consisted of the following:

(In thousands)	  	June 30,
2008	 	 	December 31,
2007	 	
Raw materials	  	$	34,034	 	 	$	30,519	 	
Work in progress	  	 	2,351	 	 	 	2,552	 	
Finished goods	  	 	20,194	 	 	 	21,899	 	
Inventory reserves	  	 	(6,754	)	 	 	(6,424	)	
	  	 	 	 	 	 	 	 	
Inventory, net	  	$	49,825	 	 	$	48,546	 	

5.	STOCKHOLDERS’ EQUITY	
A summary of the changes in stockholders’ equity for the six months ended June 30, 2008 is as follows:

(In thousands)	  	Stockholders’ Equity	 	
Balance, December 31, 2007	  	$	378,431	 	
Net income	  	 	39,461	 	
Dividend payments	  	 	(11,624	)	
Change in unrealized loss on marketable securities (net of deferred taxes)	  	 	(2,062	)	
Reclassification adjustment for amounts included in net income (net of tax)	  	 	143	 	
Foreign currency translation adjustment	  	 	625	 	
Proceeds from stock option exercises	  	 	1,724	 	
Tax benefits from stock option exercises	  	 	456	 	
Stock-based compensation expense	  	 	3,999	 	
Purchases of treasury stock	  	 	(14,871	)	
	  	 	 	 	
Balance, June 30, 2008	  	$	396,282	 	
	  	 	 	 	
Stock Repurchase Program
Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase transactions. As of June 30, 2008, the Board of Directors had authorized cumulative repurchases of up to 34 million shares of our common stock. During the six months ended June 30, 2008, we repurchased 0.8 million shares of our common stock at an average price of $19.29 per share, and all of these repurchases occurred in the first quarter of 2008. We currently have the authority to purchase an additional 0.8 million shares of our common stock under the plan approved by the Board of Directors on July 16, 2007.
 
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On April 14, 2008, we announced that our Board of Directors had authorized the repurchase of an additional 5.0 million shares of our common stock, through open market or private purchases from time to time as conditions warrant, to commence upon completion of the repurchase plan announced on July 16, 2007.
Stock Option Exercises
We issued 0.1 million shares of treasury stock during the six months ended June 30, 2008 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $8.70 to $22.53. We received proceeds totaling $1.7 million from the exercise of these stock  options during the first six months of 2008.
Dividend Payments
During 2008, ADTRAN has paid cash dividends as follows (in thousands except per share amounts):

Record Date	  	Payment Date	  	Per Share Amount	  	Total Dividend Paid	
February 7, 2008	  	February 21, 2008	  	$	0.09	  	$	5,846	
May 1, 2008	  	May 15, 2008	  	$	0.09	  	$	5,778	
Comprehensive Income
Comprehensive income consists of net income, foreign currency translation adjustments, reclassification adjustments for amounts included in net income and unrealized gains and losses on marketable securities.

 	  	Three Months Ended
June 30,	  	Six Months Ended
June 30,	
(In thousands)	  	2008	 	 	2007	  	2008	 	 	2007	
Net income	  	$	22,414	 	 	$	19,843	  	$	39,461	 	 	$	36,771	
Foreign currency translation gain, net of deferred taxes	  	 	318	 	 	 	284	  	 	625	 	 	 	403	
Reclassification adjustment for amounts included in net income	  	 	41	 	 	 	—  	  	 	143	 	 	 	—  	
Change in net unrealized gains (losses) on available-for- sale securities, net of deferred taxes	  	 	(246	)	 	 	1,114	  	 	(2,062	)	 	 	1,940	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	
Total comprehensive income	  	$	22,527	 	 	$	21,241	  	$	38,167	 	 	$	39,114	

6.	EARNINGS PER SHARE	
A summary of the calculation of basic and diluted earnings per share for the three and six months ended June 30, 2008 and 2007 is as follows:

 	  	Three Months Ended
June 30,	  	Six Months Ended
June 30,	
(In thousands, except per share amounts)	  	2008	  	2007	  	2008	  	2007	
Numerator	  			  			  			  			
Net income	  	$	22,414	  	$	19,843	  	$	39,461	  	$	36,771	
	  	 	 	  	 	 	  	 	 	  	 	 	
Denominator	  			  			  			  			
Weighted average number of shares - basic	  	 	64,239	  	 	68,797	  	 	64,419	  	 	69,073	
Effect of dilutive securities - stock options	  	 	1,101	  	 	1,470	  	 	981	  	 	1,510	
	  	 	 	  	 	 	  	 	 	  	 	 	
Weighted average number of shares - diluted	  	 	65,340	  	 	70,267	  	 	65,400	  	 	70,583	
	  	 	 	  	 	 	  	 	 	  	 	 	
Net income per share - basic	  	$	0.35	  	$	0.29	  	$	0.61	  	$	0.53	
Net income per share - diluted	  	$	0.34	  	$	0.28	  	$	0.60	  	$	0.52	
Anti-dilutive options to purchase common stock outstanding were excluded from the above calculations. Anti-dilutive options totaled 3.3 million and 2.6 million for the three months ended June 30, 2008 and 2007, respectively. Anti-dilutive options totaled 3.5 million and 2.7 million for the six months ended June 30, 2008 and 2007, respectively.
 
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7.	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 income, 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 six months ended June 30, 2008 and 2007. Asset information by reportable segment is not reported, since ADTRAN does not produce such information internally.

 	  	Three Months Ended	
 	  	June 30, 2008	  	June 30, 2007	
(In thousands)	  	Sales	  	Gross Profit	  	Sales	  	Gross Profit	
Carrier Networks	  	$	104,591	  	$	64,213	  	$	93,288	  	$	55,243	
Enterprise Networks	  	 	26,592	  	 	15,181	  	 	30,386	  	 	18,316	
	  	 	 	  	 	 	  	 	 	  	 	 	
Total	  	$	131,183	  	$	79,394	  	$	123,674	  	$	73,559	

 	  	Six Months Ended	
 	  	June 30, 2008	  	June 30, 2007	
(In thousands)	  	Sales	  	Gross Profit	  	Sales	  	Gross Profit	
Carrier Networks	  	$	199,063	  	$	119,958	  	$	177,734	  	$	106,032	
Enterprise Networks	  	 	52,005	  	 	29,676	  	 	56,252	  	 	33,317	
	  	 	 	  	 	 	  	 	 	  	 	 	
Total	  	$	251,068	  	$	149,634	  	$	233,986	  	$	139,349	

Sales by Geographic Region
 
The table below presents sales information by geographic region for the three and six months ended June 30, 2008 and 2007.	
			
 	  	Three Months Ended	  	Six Months Ended	
(In thousands)	  	June 30, 2008	  	June 30, 2007	  	June 30, 2008	  	June 30, 2007	
United States	  	$	123,422	  	$	115,419	  	$	236,861	  	$	217,891	
International	  	 	7,761	  	 	8,255	  	 	14,207	  	 	16,095	
	  	 	 	  	 	 	  	 	 	  	 	 	
Total	  	$	131,183	  	$	123,674	  	$	251,068	  	$	233,986	
	  	 	 	  	 	 	  	 	 	  	 	 	
Sales by Product
Our three major product categories are Loop Access, Carrier Systems and Business Networking.
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 (ISDN) (Total Reach ® ) products, High bit-rate Digital Subscriber Line (HDSL) products including Total Access ® 3000 based HDSL and Time Division Multiplexed-Symmetrical HDSL (TDM-SHDSL) products, T1/E1/T3, Channel Service Units/Data Service Units (CSUs/DSUs), and TRACER ® fixed wireless products.
 
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Carrier Systems products are used by telecommunications 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 comprising Digital Subscriber Line Access Multiplexer (DSLAM) products, Total Access ® 5000 multi-access and aggregation platform products, and Fiber-To-The-Node (FTTN) products. Our broadband access products are used by service providers to deliver high speed Internet access, Voice over Internet Protocol (VoIP), IPTV, and/or Ethernet services from 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 systems, 303 concentrator products, M13 multiplexer products and wireless network backhaul products are also included in the Carrier Systems product category.
Business Networking products provide enterprises access to telecommunication networks and facilitate networking capabilities for voice, data and video networks. The Business Networking category includes integrated access devices (IAD) and Internetworking products. Internetworking products consist of our NetVanta ® product lines, including IP access routers, Ethernet switches, Internet security/firewall appliances, IP Private Branch Exchange (PBX) products, Carrier Ethernet Network Terminating Equipment (NTE) and IP Business Gateways.
The table below presents sales information by product category for the three and six months ended June 30, 2008 and 2007.

(In thousands)	  	Three Months Ended
June 30,	  	Six Months Ended
June 30,	
	  	2008	  	2007	  	2008	  	2007	
Loop Access	  	$	51,728	  	$	55,003	  	$	99,425	  	$	106,251	
Carrier Systems	  	 	57,684	  	 	46,491	  	 	108,886	  	 	86,055	
Business Networking	  	 	21,771	  	 	22,180	  	 	42,757	  	 	41,680	
	  	 	 	  	 	 	  	 	 	  	 	 	
Total	  	$	131,183	  	$	123,674	  	$	251,068	  	$	233,986	

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:	
			
(In thousands)	  	Three Months Ended
June 30,	  	Six Months Ended
June 30,	
	  	2008	  	2007	  	2008	  	2007	
Broadband Access (included in Carrier Systems)	  	$	31,309	  	$	20,163	  	$	59,911	  	$	38,434	
Optical Access (included in Carrier Systems)	  	 	13,383	  	 	9,833	  	 	24,549	  	 	18,450	
Internetworking (NetVanta & Multi-service Access Gateways) (included in Business Networking)	  	 	15,986	  	 	13,591	  	 	30,899	  	 	24,683	
	  	 	 	  	 	 	  	 	 	  	 	 	
Growth Products	  	 	60,678	  	 	43,587	  	 	115,359	  	 	81,567	
HDSL (does not include T1) (included in Loop Access)	  	 	45,348	  	 	46,319	  	 	87,298	  	 	90,071	
Other products (included in the above table)	  	 	25,157	  	 	33,768	  	 	48,411	  	 	62,348	
	  	 	 	  	 	 	  	 	 	  	 	 	
Traditional Products	  	 	70,505	  	 	80,087	  	 	135,709	  	 	152,419	
	  	 	 	  	 	 	  	 	 	  	 	 	
Total	  	$	131,183	  	$	123,674	  	$	251,068	  	$	233,986	

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8.	LIABILITY FOR WARRANTY RETURNS	
Our products generally include warranties of one to ten years for product defects. We accrue for warranty returns based on our estimate of the cost to repair or replace the defective products at the time revenue is recognized. 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. These products could require more warranty cost to be incurred at the installed location due to their size and complexity, rather than at a manufacturing site or repair depot. This field service obligation, as well as the increasing complexity of our products, may 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 higher than our estimates, we will be required to record additional warranty expense. Alternatively, if we provide for more reserves than we require, we will reverse a portion of such provisions in future periods.
The liability for warranty returns totaled $2.9 million at June 30, 2008 and December 31, 2007. These liabilities are included in accrued expenses in the accompanying Consolidated Balance Sheets.

(In thousands)	  	June 30, 2008	 	
Balance at December 31, 2007	  	$	2,944	 	
Plus: amounts charged to cost and expenses	  	 	1,148	 	
Less: deductions	  	 	(1,197	)	
	  	 	 	 	
Balance at June 30, 2008	  	$	2,895	 	

9.	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. We paid $30 thousand during each of the three month periods ended June 30, 2008 and 2007 for legal services rendered. We paid $60 thousand during each of the six month periods ended June 30, 2008 and 2007 for legal services rendered.
 
10.	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 contractual agreements with customers or suppliers, liquidated damages related to our delivery or product performance under customer contracts 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 $7.8 million in two private equity funds, and we have contributed $7.7 million to date, of which $7.2 million has been applied to these commitments. See Note 3 to the Consolidated Financial Statements for additional information.
 
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11.	SUBSEQUENT EVENTS	
On July 14, 2008, ADTRAN announced that its 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 July 31, 2008. The payment date will be August 14, 2008. The quarterly dividend payment will be approximately $5.7 million. 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.
In July 2008, ADTRAN repurchased 1.3 million shares of its common stock through open market purchases at an average cost of $22.64 per share and has the authority to repurchase an additional 4.4 million shares under the plan approved by the Board of Directors on April 14, 2008.
 
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	
The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.
OVERVIEW
ADTRAN, Inc. designs, manufactures, markets and services network access solutions for communications networks. Our solutions are widely deployed by providers of telecommunications services (serviced by our Carrier Networks Division), and small and mid-sized businesses and enterprises (serviced by our Enterprise Networks Division), and enable voice, data, video and Internet communications across copper, fiber and wireless networks. Many of these solutions are currently in use by every major United States service provider and many global ones, as well as by many public, private and governmental organizations worldwide.
Our success depends upon our ability to increase unit volume and market share through the introduction of new products and succeeding generations of products having lower selling prices and increased functionality as compared to both the prior generation of a product and to the products of competitors. An important part of our strategy is to reduce the cost of each succeeding product generation and then lower the product’s selling price based on the cost savings achieved in order to gain market share and/or improve gross margins. As a part of this strategy, we seek in most instances to be a high-quality, low-cost provider of products in our markets. Our success to date is attributable in large measure to our ability to design our products initially with a view to their subsequent redesign, allowing both increased functionality and reduced manufacturing costs in each succeeding product generation. This strategy enables us to sell succeeding generations of products to existing customers, while increasing our market share by selling these enhanced products to new customers.
Our three major product categories are Loop Access, Carrier Systems and Business Networking. Loop Access products are used by carrier and enterprise customers for access to copper-based telecommunications networks. Carrier Systems products are used by telecommunications service providers to provide last mile access in support of data, voice and video services to consumers and enterprises. Business Networking products provide enterprises access to telecommunication networks and facilitate networking capabilities for voice, data and video networks.
In addition, we identify sub-categories of product revenues, which we divide into growth products, representing our primary growth areas, and traditional products. Our growth products consist of broadband access and optical access products (included in Carrier Systems) and Internetworking products (included in Business Networking) and our traditional products include HDSL products (included in Loop Access) and other products. Many of our customers are migrating their networks to deliver higher bandwidth services by utilizing newer technologies. We believe that products in our primary growth areas position the Company well for this migration. We anticipate that revenues of many of our traditional products, including HDSL, may continue for years because of the time required for our customers to transition to newer technologies.
 
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See Note 7 of Notes to Consolidated Financial Statements in this report for further information regarding these product categories.
Sales increased 6.1% and 7.3% for three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007 due to increased product sales in our three primary growth areas, Broadband Access, Optical Access and Internetworking. Total sales of products in these growth areas were $60.7 million and $115.4 million for the three and six months ended June 30, 2008 compared to $43.6 million and $81.6 million for the three and six months ended June 30, 2007. Our gross margin increased for the three months ended June 30, 2008 to 60.5% from 59.5% for the three months ended June 30, 2007, while remaining at 59.6% for both six month periods ended June 30, 2008 and 2007. Our operating margin increased to 25.5% for the three months ended June 30, 2008 from 22.5% for the three months ended June 30, 2007 and increased to 23.3% for the six months ended June 30, 2008 from 20.9% for the six months ended June 30, 2007. The increase in our operating margin is primarily the result of higher margins achieved on increased sales and lower selling, general and administrative costs in relation to these higher sales. Earnings per share, assuming dilution, were $0.34 and $0.60 for the three and six months ended June 30, 2008 compared to $0.28 and $0.52 for the three and six months ended June 30, 2007.
The results for the six months ended June 30, 2007 included a benefit of $0.9 million in “Provision for Income Taxes” primarily relating to closure of tax audits from prior years and also included a pre-tax life insurance benefit of $1.0 million. These two items increased earnings per share, assuming dilution, by approximately $0.02 in the six months ended June 30, 2007. The higher earnings per share for the three and six months ended June 30, 2008 compared to the same period in 2007 reflects higher net income as well as a lower weighted average number of shares outstanding in 2008 due to stock repurchases under the share repurchase plans approved by our Board of Directors.
Our operating results have fluctuated on a quarterly basis in the past, and may vary significantly in future periods due to a number of factors. We normally operate with very little order backlog. A majority of our sales in each quarter result from orders booked in that quarter and firm purchase orders released in that quarter by customers under agreements containing non-binding purchase commitments. Many of our customers require prompt delivery of products. This results in a limited backlog of orders for these products and requires us to maintain sufficient inventory levels to satisfy anticipated customer demand. If near-term demand for our products declines, or if potential sales in any quarter do not occur as anticipated, our financial results could be adversely affected. Operating expenses are relatively fixed in the short term; therefore, a shortfall in quarterly revenues could significantly impact our financial results in a given quarter. 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 such 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 impact our operating results in a given quarter.
Our operating results may also fluctuate as a result of a number of other factors, including increased competition, customer order patterns, changes in product mix, timing differences between price decreases and product cost reductions, product warranty returns, and announcements of new products by us or our competitors. 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. A list of factors that could materially affect our business, financial condition or operating results is included under “Factors That Could Affect Our Future Results” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 2 of Part I of this report. These factors have also been discussed in more detail in Item 1A of Part I in our most recent Annual Report on Form 10-K filed on February 28, 2008 with the SEC.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies and estimates have not changed significantly from those detailed in our most recent Annual Report on Form 10-K for the year ended December 31, 2007.
 
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EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 to the Consolidated Financial Statements in Item 1 of this Form 10-Q for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operation and financial condition, which is incorporated herein by reference.
RESULTS OF OPERATIONS – THREE AND SIX MONTHS ENDED JUNE 30, 2008 COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2007
SALES
ADTRAN’s sales increased 6.1% from $123.7 million in the three months ended June 30, 2007 to $131.2 million in the three months ended June 30, 2008, and increased 7.3% from $234.0 million in the six months ended June 30, 2007 to $251.1 million in the six months ended June 30, 2008.
The increase in sales for the three months ended June 30, 2008 compared to the three months ended June 30, 2007 is primarily attributable to an $11.2 million increase in sales of our Carrier Systems products. Carrier Systems product sales increased due to an $11.1 million increase in Broadband Access product sales, primarily attributable to increased shipments of our 1100 series fiber-to-the-node products and Total Access 5000 products. Carrier Systems products sales also increased due to a $3.6 million increase in Optical Access product sales, resulting from increased shipments of our Opti-6100 products and market share gains across numerous customers including the top three U.S. carriers. Partially offsetting these increases in Carrier Systems product sales were decreases in shipments of traditional TDM products as customers shifted emphasis to newer technologies. Many of these newer technologies are integral to our Broadband Access and Optical Access product areas.
Business Networking product sales decreased $0.4 million in the three months ended June 30, 2008 compared to the three months ended June 30, 2007 primarily due to a decline in shipments of traditional IAD products as customers shifted to newer technologies. Many of these newer technologies are integral to our Internetworking product area, and Internetworking product sales increased $2.4 million in the three months ended June 30, 2008 compared to the three months ended June 30, 2007. The increase in Internetworking product sales is primarily a result of increased product shipments due to customers shifting to newer technologies and our efforts to improve our focus on addressing traditional enterprise channels and leveraging our carrier distribution channels.
Loop Access product sales decreased $3.3 million in the three months ended June 30, 2008 compared to the three months ended June 30, 2007 primarily due to a 2.1% or $1.0 million decrease in HDSL product revenues as well as declines in Enterprise T1 product sales and DDS product sales.
The increase in sales for the six months ended June 30, 2008 compared to the six months ended June 30, 2007 is primarily attributable to a $21.5 million increase in sales of our Broadband Access products, a $6.1 million increase in sales of our Optical Access products and a $6.2 million increase in sales of our Internetworking products. HDSL product revenues decreased 3.1% or $2.8 million and other traditional products decreased 22.4% or $13.9 million.
Carrier Networks sales increased 12.1% from $93.3 million in the three months ended June 30, 2007 to $104.6 million in the three months ended June 30, 2008. Carrier Networks sales increased 12.0% from $177.7 million in the six months ended June 30, 2007 to $199.1 million in the six months ended June 30, 2008. The increase in Carrier Networks sales for the three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007 is primarily attributable to the aforementioned increases in Broadband Access and Optical Access products sales, partially offset by declines in HDSL and other TDM product sales.
Enterprise Networks sales decreased 12.5% from $30.4 million in the three months ended June 30, 2007 to $26.6 million in the three months ended June 30, 2008 and decreased 7.6% from $56.3 million in the six months ended June 30, 2007 to $52.0 million in the six months ended June 30, 2008. The decrease in Enterprise Network sales for the three and six month period of 2008 compared to the three and six month period of 2007 is primarily attributable to the aforementioned
 
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declines in sales of traditional IAD products, Enterprise T1 products and DDS products, partially offset by increased sales of Internetworking products. Enterprise Networks sales as a percentage of total sales decreased from 24.6% for the three months ended June 30, 2007 to 20.3% for the three months ended June 30, 2008 and decreased from 24.0% for the six months ended June 30, 2007 to 20.7% for the six months ended June 30, 2008.
International sales, which are included in the Carrier Networks and Enterprise Networks amounts discussed above, decreased 6.0% from $8.3 million in the three months ended June 30, 2007 to $7.8 million in the three months ended June 30, 2008 and decreased 11.8% from $16.1 million in the six months ended June 30, 2007 to $14.2 million in the six months ended June 30, 2008. International sales, as a percentage of total sales, decreased from 6.7% for the three months ended June 30, 2007 to 5.9% for the three months ended June 30, 2008, and decreased from 6.9% for the six months ended June 30, 2007 to 5.7% for the six months ended June 30, 2008. International sales decreased in the three and six month periods of 2008 compared to the 2007 periods primarily due to a reduction in product shipments to the Asia Pacific region.
COST OF SALES
As a percentage of sales, cost of sales decreased from 40.5% in the three months ended June 30, 2007 to 39.5% in the three months ended June 30, 2008 and remained at 40.4% in both the six months ended June 30, 2007 and the six months ended June 30, 2008. The decrease in cost of sales as a percentage of sales for the three month period is primarily related to a more favorable product mix and lower manufacturing costs, primarily associated with a consistent order flow throughout the quarter that allowed us to more efficiently and effectively plan for shipments, lowering freight, labor and expediting costs.
Carrier Networks cost of sales, as a percent of division sales, decreased from 40.8% in the three months ended June 30, 2007 to 38.6% in the three months ended June 30, 2008 and decreased from 40.3% in the six months ended June 30, 2007 to 39.7% in the six months ended June 30, 2008. These decreases were primarily related to the more favorable product mix and lower cost of sales discussed above.
Enterprise Networks cost of sales, as a percent of division sales, increased from 39.7% in the three months ended June 30, 2007 to 42.9% in the three months ended June 30, 2008 and increased from 40.8% in the six months ended June 30, 2007 to 42.9% in the six months ended June 30, 2008. These increases were primarily related to the impact of lower sales volume on allocated cost of sales elements to the division.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 1.9% from $26.2 million in the three months ended June 30, 2007 to $25.7 million in the three months ended June 30, 2008 and decreased 2.5% from $52.6 million in the six months ended June 30, 2007 to $51.3 million in the six months ended June 30, 2008. The decrease in selling, general and administrative expenses for the three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007 is primarily related to a decrease in certain senior management compensation costs and, to a lesser extent, a reduction in stock option and other fringe benefit expenses.
Selling, general, and administrative expenses as a percentage of sales decreased from 21.2% in the three months ended June 30, 2007 to 19.6% in the three months ended June 30, 2008 and decreased from 22.5% in the six months ended June 30, 2007 to 20.4% in the six months ended June 30, 2008. These decreases are the result of higher sales in the current periods in relation to selling, general and administrative costs that are largely fixed.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 3.6% from $19.5 million in the three months ended June 30, 2007 to $20.2 million in the three months ended June 30, 2008 and increased 5.0% from $37.9 million in the six months ended June 30, 2007 to $39.8 million in the six months ended June 30, 2008. The increase in research and development expenses primarily reflects increased staffing expense related to customer specific product development activities, as well as costs related to product approvals, primarily for one or more of the top three U.S. carriers.
 
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As a percentage of sales, research and development expenses decreased from 15.8% in the three months ended June 30, 2007 to 15.4% in the three months ended June 30, 2008 and decreased from 16.2% in the six months ended June 30, 2007 to 15.8% in the six months ended June 30, 2008.
ADTRAN expects to continue to incur research and development expenses in connection with its new and existing products and its expansion into international markets. ADTRAN continually evaluates new product opportunities and engages in intensive research and product development efforts which provide for new product development, enhancement of existing products and product cost reductions. ADTRAN expenses all product research and development costs as incurred. As a result, ADTRAN may incur significant research and development expenses prior to the receipt of revenues from a major new product group or market expansion.
INTEREST AND DIVIDEND INCOME
Interest and dividend income decreased 26.7% from $3.0 million in the three months ended June 30, 2007 to $2.2 million in the three months ended June 30, 2008 and decreased 23.7% from $5.9 million in the six months ended June 30, 2007 to $4.5 million in the six months ended June 30, 2008. The decreases in interest and dividend income were driven primarily by a reduction in our investment balances as a result of our share repurchase activity and a reduction in interest rates.
INTEREST EXPENSE
Total interest expense increased slightly in the three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007. Interest expense on our taxable revenue bond remained constant at $0.6 million in each of the three months ended June 30, 2008 and 2007, and $1.2 million in the six month periods ended June 30, 2008 and 2007. See “Liquidity and Capital Resources” below for additional information on our revenue bond.
NET REALIZED INVESTMENT GAIN (LOSS)
Net realized investment gain decreased from a $0.2 million gain in the three months ended June 30, 2007 to a $15 thousand loss in the three months ended June 30, 2008 and decreased from a $0.3 million gain in the six months ended June 30, 2007 to a $0.1 million loss in the six months ended June 30, 2008. These changes primarily resulted from an impairment charge of approximately $0.2 million for certain equity investments and from lower realized gains on investments. See Note 3 of Notes to Consolidated Financial Statements.
OTHER INCOME, NET
Other income, net, comprised primarily of miscellaneous income, gains and losses on foreign currency transactions, investment account management fees and scrap raw material sales, increased from $0.2 million in the three months ended June 30, 2007 to $0.3 million in the three months ended June 30, 2008 and remained at $0.5 million in the six months ended June 30, 2007 and 2008.
LIFE INSURANCE PROCEEDS
We realized a gain on life insurance proceeds of $1.0 million during the first quarter of 2007 as a result of the death of our co-founder and then Chairman of the Board, Mark Smith.
INCOME TAXES
Our effective tax rate increased from 35.2% in the three months ended June 30, 2007 to 36.6% in the three months ended June 30, 2008 and from 33.4% in the six months ended June 30, 2007 to 36.6% in the six months ended June 30, 2008. The lower effective tax rate in the first six months of 2007 included a benefit recorded in the first quarter of 2007 relating to the closure of tax audits from prior years, which resulted in approximately a 2.0 percentage point decrease in our effective tax rate. The effective tax rate for the first six months of 2008 was unusually high due to the delay in legislation extending research tax credits that expired December 31, 2007, which resulted in approximately a 2.0 percentage point increase in our effective tax rate assuming the same basis for research and development credits used in 2007. Federal legislation to extend research tax credits has been drafted, but we have no assurances regarding the outcome of this potential legislation.
 
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NET INCOME
As a result of the above factors, net income increased $2.6 million from $19.8 million in the three months ended June 30, 2007 to $22.4 million in the three months ended June 30, 2008 and increased $2.7 million from $36.8 million in the six months ended June 30, 2007 to $39.5 million in the six months ended June 30, 2008.
As a percentage of sales, net income increased from 16.0% in the three months ended June 30, 2007 to 17.1% in the three months ended June 30, 2008 and remained at 15.7% in both six month periods ended June 30, 2007 and June 30, 2008.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
At June 30, 2008, cash on hand was $57.9 million and short-term investments were $120.9 million, which resulted in available short-term liquidity of $178.8 million. At December 31, 2007, our cash on hand of $13.9 million and short-term investments of $148.4 million resulted in available short-term liquidity of $162.3 million.
Operating Activities
Our working capital, which consists of current assets less current liabilities, increased 0.5% from $251.3 million as of December 31, 2007 to $252.6 million as of June 30, 2008. The quick ratio, defined as cash, cash equivalents, short-term investments, and net accounts receivable, divided by current liabilities, decreased from 5.41 as of December 31, 2007 to 4.70 as of June 30, 2008. The current ratio, defined as current assets divided by current liabilities, decreased from 6.83 as of December 31, 2007 to 5.92 as of June 30, 2008. We expect these liquidity ratios to fluctuate as revenues fluctuate and as our inventory, accounts receivable and income tax position change. The quick ratio and the current ratio decreased from 2007 to 2008 mainly due to a $4.5 million increase in income taxes payable in 2008.
Net accounts receivable decreased from $70.7 million at December 31, 2007 to $62.7 million at June 30, 2008. Our allowance for doubtful accounts was $0.1 million at December 31, 2007 and June 30, 2008. Quarterly accounts receivable days sales outstanding (DSO) decreased from 55 days as of December 31, 2007 to 43 days as of June 30, 2008. Net accounts receivables and DSO decreased for the quarter ended June 30, 2008 primarily because sales were recognized more evenly throughout the quarter and were therefore weighted less in the last month of the quarter compared to the quarter ended December 31, 2007.
Quarterly inventory turnover was 4.1 turns as of December 31, 2007 and 4.3 turns as of June 30, 2008. Inventory increased 2.6% from December 31, 2007 to June 30, 2008. We expect inventory levels to fluctuate as we attempt to maintain sufficient inventory to ensure competitive lead times while managing the risk of inventory obsolescence that may occur due to rapidly changing technology and customer demand.
Accounts payable increased 10.4% from $22.2 million at December 31, 2007 to $24.5 million at June 30, 2008. The lower balance at December 31, 2007 was primarily attributable to the timing of receipt and subsequent payment for finished product assemblies manufactured by our subcontractors. 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.
At June 30, 2008, we had income taxes payable of $5.7 million primarily related to estimated tax payments for current year taxable income. At December 31, 2007, we had income taxes payable of $1.2 million.
Investing Activities
Capital expenditures totaled approximately $4.6 million and $3.8 million for the six months ended June 30, 2008 and 2007, respectively. These expenditures were primarily used to purchase computer hardware, software and manufacturing and test equipment.
Our combined short-term and long-term investments decreased $11.7 million from $255.7 million at December 31, 2007 to $244.0 million at June 30, 2008, primarily reflecting the impact of our treasury share repurchase program.
 
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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 June 30, 2008, these investments included municipal variable rate demand notes of $40.6 million and municipal fixed-rate bonds of $129.4 million. At December 31, 2007, these investments included municipal variable rate demand notes of $47.5 million, municipal auction rate securities of $9.0 million and municipal fixed-rate bonds of $122.1 million.
Our municipal variable rate demand notes are classified as available-for-sale short-term investments and had a credit rating of A-1+ at June 30, 2008. Despite the long-term nature of their stated contractual maturities, we believe that we have the ability to quickly liquidate these securities. Our investments in these securities are recorded at fair value and the interest rates typically reset every seven, 28 or 35 days. As a result, 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. Further, we have not been required to record any losses relating to municipal variable rate demand notes or municipal auction rate securities, and we have held no municipal auction rate securities since February 7, 2008.
At June 30, 2008, approximately 41% of our municipal fixed-rate bonds had a credit rating of AAA, 57% had a credit rating of AA and the balance had a credit rating of A. These bonds are classified as available-for-sale investments and had an average duration of 0.8 years at June 30, 2008. 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 14.7% from $107.3 million at December 31, 2007 to $123.1 million at June 30, 2008. Municipal fixed-rate bonds classified as long-term investments increased $18.8 million from $30.2 million at December 31, 2007 to $49.0 million at June 30, 2008. Long-term investments at June 30, 2008 and December 31, 2007 included an investment in a certificate of deposit of $49.0 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 $16.4 million and $16.1 million, and with a fair value of $20.2 million and $22.9 million, at June 30, 2008 and December 31, 2007, respectively, including a single equity security, of which we held 2.5 million shares, carried at $5.2 million and $6.7 million of fair value at June 30, 2008 and December 31, 2007, respectively. We estimate that this single security trades approximately 23,000 shares per day, in an active market on a European stock exchange. This single security carried $4.3 million of the gross unrealized gains included in the fair market value of our marketable securities at June 30, 2008. Long-term investments at June 30, 2008 and December 31, 2007 also include $3.0 million and $3.1 million, respectively, related to our deferred compensation plan.
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 market value that has declined from its original or adjusted cost basis by 25% for more than six months. We then evaluate the individual security based on the previously identified factors to determine the amount of the write-down, if any. For the six months ended June 30, 2008, we had a charge of $0.2 million related to the impairment of certain publicly traded equity securities. There were no such charges in the six months ended June 30, 2007.
Financing Activities
Dividends
In July 2003, our Board of Directors elected to begin declaring quarterly dividends on our common stock, and 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. During the six months ended June 30, 2008, ADTRAN paid dividends totaling $11.6 million.
 
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Debt
We have amounts outstanding under loans made pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond) which totaled $49.0 million at June 30, 2008 and December 31, 2007. Included in long-term investments are restricted funds in the amount of $49.0 million at June 30, 2008 and December 31, 2007, which is a collateral deposit against the principal amount of the Bond. The Bond matures on January 1, 2020, and bears interest at the rate of 5% per annum. 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 we are required to remit to the state for those employment positions that qualify under this program.
We are required to make payments in the amounts necessary to pay the principal and interest on the amounts currently outstanding. Due to continued positive cash flow from operating activities, we made a business decision to begin an early partial redemption of the Bond. It is our intent to make annual principal payments of between $0.5 million and $5.0 million in addition to the interest amounts that are due. In connection with this decision, $0.5 million of the Bond debt has been reclassified to a current liability in the Consolidated Balance Sheet.
Stock Repurchase Program
During the six months ended June 30, 2008, we repurchased 0.8 million shares of our common stock at an average price of $19.29 per share under the repurchase plans approved by our Board of Directors. All of these repurchases occurred during the first quarter of 2008. Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase transactions. We have the authority to purchase an additional 0.8 million shares of our common stock under the plan approved by the Board of Directors on July 16, 2007. During 2007, we repurchased 5.8 million shares of our common stock at an average price of $24.08 per share.
On April 14, 2008, we announced that our Board of Directors had authorized the repurchase of an additional 5.0 million shares of our common stock to commence upon completion of the repurchase plan announced on July 16, 2007. Upon completion of the current plan, the new plan to repurchase 5.0 million shares will be implemented through open market or private purchases from time to time as conditions warrant.
To accommodate employee stock option exercises, we issued 0.1 million shares of treasury stock for $1.7 million during the six months ended June 30, 2008. During the six months ended June 30, 2007, we issued 1.0 million shares of treasury stock for $12.9 million.
Off-Balance Sheet Arrangements and Contractual Obligations
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. During the six months ended June 30, 2008, there have been no material changes in contractual obligations and commercial commitments from those discussed in our most recent Form 10-K filed on February 28, 2008.
We have committed to invest up to an aggregate of $7.8 million in two private equity funds, and we have contributed $7.7 million to date, of which $7.2 million has been applied to these commitments. See Note 3 to the Consolidated Financial Statements for additional information.
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.
 
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FACTORS THAT COULD AFFECT OUR FUTURE RESULTS
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 revenue for a particular period can be difficult to predict, and a shortfall in revenue may harm our operating results.	
 
 	•	 	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.	
 
 	•	 	We expect gross margin to vary over time, and our level of product gross margin may not be sustainable.	
 
 	•	 	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.	
 
 	•	 	Our products may not continue to comply with the regulations governing their sale, which may harm our business.	
 
 	•	 	If our products do not interoperate with our customers’ networks, installations will be delayed or cancelled and could harm our business.	
 
 	•	 	We do not engage in long-term research and development processes, and as a consequence may miss certain market opportunities enjoyed by larger companies with substantially greater research and development efforts.	
 
 	•	 	We depend heavily on sales to certain customers; the loss of any of these customers would significantly reduce our revenues and net income.	
 
 	•	 	The lengthy approval process required by Incumbent Local Exchange Carriers (ILECs) and other service providers could result in fluctuations in our revenue.	
 
 	•	 	Our strategy of outsourcing a portion of our manufacturing requirements to subcontractors located in Asia may result in us not meeting our cost, quality or performance standards.	
 
 	•	 	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.	
 
 	•	 	We compete in markets that have become increasingly competitive, which may result in reduced gross profit margins and market share.	
 
 	•	 	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.	
 
 	•	 	Managing our inventory is complex and may include write-downs of excess or obsolete inventory.	
 
 	•	 	Increased sales volume in international markets could result in increased costs or loss of revenue due to factors inherent in these markets.	
 
 	•	 	We may be adversely affected by fluctuations in currency exchange rates.	
 
 	•	 	Our success depends on our ability to reduce the selling prices of succeeding generations 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.	
 
 	•	 	We may incur liabilities or become subject to litigation that would have a material effect on our business.	
 
 	•	 	Consolidation and deterioration in the competitive service provider market could result in a significant decrease in our revenue.	
 
 	•	 	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.	
 
 	•	 	If we are unable to successfully develop relationships with system integrators, service providers, and enterprise value added resellers, our sales may be negatively affected.	
 
 	•	 	If we fail to manage our exposure to worldwide financial and securities markets successfully, our operating results and financial statements could be materially impacted.	
 
 	•	 	Changes in our effective tax rate or assessments arising from tax audits may have an adverse impact on our results.	
 
 	•	 	Our success depends on attracting and retaining key personnel.	
 
 	•	 	While we believe our controls over financial reporting are 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.	
 
 	•	 	The price of our common stock has been volatile and may continue to fluctuate significantly.	
The foregoing list of risks is not exclusive. For a more detailed description of the risk factors associated with our business, see Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007.
 
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ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	
Details of the fair value of our available-for-sale investments as of June 30, 2008 are discussed in Note 3 of Notes to Consolidated Financial Statements.
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. At June 30, 2008, our municipal variable rate demand notes had a credit rating of A-1+. Approximately 41% of our municipal fixed-rate bonds had a credit rating of AAA, 57% had a credit rating of AA and the balance had a credit rating of A.
As of June 30, 2008, interest income on approximately $93.4 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), 100 bps and 150 bps, while all other variables remain constant. Hypothetical 50 bps, 100 bps and 150 bps declines in interest rates as of June 30, 2008 would reduce annualized interest income on our money market instruments and municipal variable rate demand notes by approximately $0.5 million, $0.9 million and $1.4 million, respectively. In addition, hypothetical 50 bps, 100 bps and 150 bps increases in interest rates as of June 30, 2008 would reduce the fair value of our municipal fixed-rate bonds by approximately $0.7 million, $1.3 million and $2.0 million, respectively.
 
 ITEM 4.	CONTROLS AND PROCEDURES	
(a) 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 ADTRAN. 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 quarterly report, have concluded that our disclosure controls and procedures are effective.
(b) 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.
PART II. OTHER INFORMATION
 
 ITEM 1A.	RISK FACTORS	
A list of factors that could materially affect our business, financial condition or operating results is included under “Factors That Could Affect Our Future Results” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 2 of Part I of this report. There have been no material changes to the risk factors as disclosed in Item 1A of Part I of our most recent Annual Report on Form 10-K filed on February 28, 2008.
 
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	
The 2008 Annual Meeting of Stockholders of ADTRAN was held on May 6, 2008. Proxies with regard to the matters voted upon at the Annual Meeting were solicited under Regulation 14A of the Securities Exchange Act of 1934, as amended. Set forth below is a brief description of each matter voted upon at the Annual Meeting and the results of voting on each such matter.
 
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 	(a)	Election of each director named below to serve until the next Annual Meeting of Stockholders. There was no solicitation in opposition to any of the nominees listed in the proxy statement, and all of the nominees were elected.	

   	  	Votes	
Nominees	  	For	  	Withheld	
Thomas R. Stanton	  	60,583,719	  	556,056	
James E. Matthews	  	59,294,089	  	1,845,686	
H. Fenwick Huss	  	60,938,585	  	201,190	
Ross K. Ireland	  	60,943,285	  	196,490	
William L. Marks	  	60,492,648	  	647,127	
Balan Nair	  	60,942,987	  	196,788	
Roy J. Nichols	  	60,571,531	  	568,244	
 
 	(b)	Ratification of the appointment of PricewaterhouseCoopers LLP as ADTRAN’s independent registered public accounting firm for 2008.	

Votes	
For	  	Against	  	Abstain	
60,460,686	  	662,607	  	568,244	
 
 ITEM 6.	EXHIBITS	
Exhibits.

Exhibit No.	  	Description	
		
31	  	Rule 13a-14(a)/15d-14(a) Certifications	
		
32	  	Section 1350 Certifications	
 
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 SIGNATURE
Pursuant to the requirements 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.

	 		 	ADTRAN, INC.	
	 		 	(Registrant)	
			
Date: August 1, 2008	 		 	/s/ James E. Matthews	
	 		 	James E. Matthews	
	 		 	Senior Vice President – Finance,	
	 		 	Chief Financial Officer, Treasurer,	
	 		 	Secretary and Director	
 
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 EXHIBIT INDEX

Exhibit No.	  	Description	
		
31	  	Rule 13a-14(a)/15d-14(a) Certifications	
		
32	  	Section 1350 Certifications	
 
28

Exhibit 31
CERTIFICATIONS
I, Thomas R. Stanton, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q 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(s) 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(s) 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: August 1, 2008

/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 Quarterly Report on Form 10-Q 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(s) 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(s) 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: August 1, 2008

/s/ James E. Matthews	
James E. Matthews	
Senior Vice President – Finance,	
Chief Financial Officer, Treasurer,	
Secretary and Director	

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 Quarterly Report of ADTRAN, Inc. (the “Company”) on Form 10-Q for the quarter ending June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas R. Stanton, Chief Executive Officer 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	
August 1, 2008	

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 Quarterly Report of ADTRAN, Inc. (the “Company”) on Form 10-Q for the quarter ending June 30, 2008 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 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	
August 1, 2008