## Inventory 

Inventory is carried at the lower of cost or market, with cost being determined using the first-in, first-out method. Standard costs for material, labor, and manufacturing overhead are used to value inventory. All standard costs are rolled forward on a monthly basis. Therefore, inventory costs approximate actual costs at the end of each reporting period. ADTRAN establishes reserves for estimated excess, obsolete, or unmarketable inventory by an amount equal to the difference between the cost of the inventory and the estimated market value of the inventory based upon assumptions about future demand and market conditions. When excess and obsolete inventories are disposed of by ADTRAN, the related write-downs are charged against the inventory reserve. 

## Property, Plant and Equipment 

Property, plant and equipment, which are stated at cost, are depreciated using methods which approximate straight- line depreciation over the estimated useful lives of the assets. ADTRAN depreciates its building and land improvements from five to 39 years, office machinery and equipment from three to seven years, and its engineering machinery and equipment from three to seven years. Expenditures for repairs and maintenance are charged to expense as incurred; betterments which materially prolong the lives of the assets are capitalized. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are removed from the accounts and the gain or loss on such disposition is included in income. 

## Liability for Warranty Returns 

ADTRAN’s products generally include warranties of one to 10 years for product defects. ADTRAN accrues for warranty returns at the cost to repair or replace the defective products at the time revenue is recognized. ADTRAN engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers. Our warranty obligation is affected by product failure rates, material usage and other rework costs incurred in correcting a product failure. The liability for warranty returns totaled $1,276,753 and $1,384,429 at December 31, 2002 and 2001, respectively. These liabilities are included in accrued expenses in the accompanying consolidated balance sheets. 

## Impairment of Long-Lived Assets 

ADTRAN reviews long-lived assets for impairment under the guidance prescribed by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . ADTRAN evaluates long-lived assets used in operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying values. An impairment loss would be recognized in the amount by which the recorded value of the asset exceeds the fair value of the asset, measured by the quoted market price of an asset or an estimate based on the best information available in the circumstances. There were no such losses recognized during 2002, 2001 and 2000. 

## Research and Development Costs 

Research and development costs are expensed as incurred. Research and development costs totaled $56,295,048, $58,934,952 and $50,628,190 for the years ended December 31, 2002, 2001 and 2000, respectively. 

## Advertising Costs 

Advertising costs are expensed as incurred. Advertising expense was $2,744,093, $2,897,931 and $3,191,014 for the years ended December 31, 2002, 2001 and 2000, respectively. 

## Comprehensive Income 

Comprehensive income consists of all changes in equity (net assets) during a period from non-owner sources. Items included in comprehensive income include net income and changes in unrealized gains and losses on marketable securities. Comprehensive income is presented in the consolidated statements of changes in stockholders’ equity. 

