## Notes to Consolidated Financial Statements 

## 1 Nature of Business and Summary of Significant Accounting Policies 

ADTRAN$^{™}$, Inc. designs, develops, manufactures, markets, and services a broad range of high-speed network access products utilized by providers of telecommunications services (serviced by ADTRAN's Carrier Networks Division) and corporate end-users (serviced by ADTRAN's Enterprise Networks Division) to implement advanced digital data services over public and private networks. ADTRAN’s products are used primarily in the “last mile” of the network, or the local loop. The last mile is that segment of a telecommunications network that connects end-user subscribers to a service provider’s closest facility. Our products typically connect two ends of a telecommunications circuit, and serve to transmit data, voice, and video over that circuit. 

## Principles of Consolidation 

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

## Cash and Cash Equivalents 

Cash and cash equivalents represent demand deposits, money market accounts and short-term investments classified as held-to-maturity (see Note 2) with original maturities of three months or less. 

## Financial Instruments 

The carrying amount reported in the balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the immediate or short-term maturity of these financial instruments. The carrying amount reported for bonds payable approximates fair value because the underlying instruments are at variable rates that re-price frequently. 

Investments represent re-marketed preferred stocks, municipal bonds and marketable equity securities. Re-marketed preferred stocks are designed to be marketed as money market instruments. These instruments’ dividend rates reset on a short-term basis to maintain the price of the instruments at par. These instruments may be redeemed on the date the interest rate resets. The fair value of short-term investments is estimated based on quoted market prices (see Note 2). 

Long-term investments represent restricted money market funds, municipal bonds, marketable equity securities, and other equity and debt investments (see Note 2). The fair value of the restricted money market funds approximate fair value due to a variable interest rate. Marketable equity securities are reported at market value as determined by the most recently traded price of the securities at the balance sheet date, although the securities may not be readily marketable due to the size of the available market. Unrealized gains and losses, net of tax, are reported as a separate component of stockholders’ equity. Realized gains and losses on sales of securities are computed under the specific identification method and are included in current income. ADTRAN periodically reviews its investment portfolio for investments considered to have sustained an other-than-temporary decline in value. Impairment charges for other-than- temporary declines in value are recorded as realized losses in the accompanying consolidated statements of income (see Note 2). ADTRAN’s investments at December 31, 2002 and 2001 are classified as available-for-sale or held-to-maturity. 

## Other Receivables 

Other receivables are comprised primarily of accrued interest, amounts due from subcontract manufacturers for product component sales, and rebates due from vendors. 

