Public Policy – The Future of Broadband

1. Public Policy – The Future of Broadband Gary Bolton Vice President, Global Marketing

2. About ADTRAN Leading Suppler of Communications Networks Comprehensive product portfolio > 1,700 products Revenues ~ $500M 2009 Product Development Investment - $83M 1,600 direct employees Broadband Solutions FTTH, FTTN, DSL, Carrier Ethernet Solutions Enterprise Solutions Converged Access and Unified Business Solutions Mobile Backhaul Ethernet, Optical and TDM U.S. Based Company Headquartered in Huntsville, AL US Manufacturing – Huntsville, AL Traded on NASDAQ: ADTN Strong Balance Sheet 25 year history of continuous profitability

3. Broadband Stimulus Programs – Round 1 $7.2B Broadband Stimulus Program Round 1 Infrastructure NOFA RUS: $2B NTIA: $1.2B 2200 Round 1 Applications for $28B Tier 1 and most Tier 2 providers did not apply 133 Awardees (6% of applicants) 51% Last Mile 39% Middle Mile 10% Wireless $1.87B has been awarded ($1.51B grants + $357M loans) Only 27% of $7.2B Broadband Stimulus has been awarded No Funds have been distributed yet for Infrastructure projects

4. Highlights of BBS Round 2 • Rural Utilities Service – Broadband Initiatives Program (BIP) • $2.2B in funding • $1.7B for Last Mile projects • $300M for Middle Mile projects • $100M for Satellite Projects • $5M for Rural Library Broadband and Technical Assistance • $95M available for a reserve • NTIA – BB Technology Opportunities Program (BTOP) • $2.6B overall distribution • $2.35B for Comprehensive Community Infrastructure (CCI) projects • $100M Sustainable Broadband Adoption (SBA) • $150M Public Computer Center (PCC) • Round 2 Application Window Closed 3/26/10 • 867 BTOP Applicants requesting $11B in grants • All $7.2B BB Stimulus Funds must be allocated by 9/30/10 • Project must be substantively complete within 2 yrs of award

5. Key Broadband Stimulus Changes

6. National Broadband Plan Plan delivered to Congress on 3/16/10 360 pages, 6 goals, 200 recommendations, 60 proceedings to be initiated Unprecedented Record 36 workshops and 9 hearings Over 250 witnesses Nearly 50,000 pages of written comments 31 Public Notices The Plan reflects the FCC’s view and likely policies, although it did not actually do anything substantive Congressional Oversight Hearing held 3/25 NBP hearing with all FCC Commissioners FCC published a schedule of 60 proceedings Julius Genachowski FCC Chairman Blair Levin NBP Team

7. 2010 Key FCC Broadband Action Agenda

8. National Broadband Plan Plan sets 6 aspirational goals by 2020 (national compass) 100 Squared Initiative Global Leadership in Mobile Broadband Affordable access and skills to use broadband 1Gbps to Community Anchor Institutions Broadband for Public Safety networks Broadband for Smart Grid

9. Current Situation US suffers from slow progress on Availability, Adoption and Utilization of broadband 100M Americans do not subscribe to broadband • 14M lack adequate infrastructure • 10M school children are without home access to broadband • Millions of Americans lack internet skills for jobs • Gap in utilization for other national priorities such as health information technology, Smart Grid, education, and public safety • Considerable lags among poor, elderly, racial and ethnic minorities, rural areas, and those with disabilities

10. Current Situation cont… U.S. has numerous providers (vs dominant fixed provider) Cable plays prominent role Must strike balance between public and private sectors to spur broadband Government policy can drive, and has driven progress 3 Categories of Government Policies Fostering innovation and competition in networks Redirecting assets that government controls or influences Optimizing use of broadband to help achieve national priorities

11. High Performance America Mission: Create “High-Performance America” Productive, creative, efficient, with affordable broadband everywhere, and everyone able to use valuable broadband applications 4 Categories of Recommendations • Policies to ensure robust competition and maximize consumer welfare, innovation, and investment • Encourage network upgrades and competitive entry, ensure efficient allocation and management of assets government controls or influences, such as spectrum, poles and right-of-ways • Reform current universal service mechanisms to support deployment of broadband and voice in high-cost areas, ensure affordability for low-income, and boost adoption and utilization • Reform laws, policies, standards, and incentives to maximize broadband in sectors government influences such as public education, health care, and government operations

12. National Broadband Plan Implications Potential Winners FTTH Providers 100/50Mbps actual rate to 100M Households by 2020, 50/20Mbps to 100M by 2015 $24B anticipated for wireline broadband build out for universal 4/1Mbps broadband CLECs FCC will make facility-based providers provide easier access to facilities, interconnection and wholesales services (although the pricing set by the regulators will be important) Apps Developers Key to adoption; regulatory environment to encourage investment and innovation Wireless Providers and Emerging Wireless Providers Thumb on the scale to enable wireless to compete with wireline providers and also as a “complementary” broadband service Potential Losers Cable providers and TV Broadcasters STB lack innovation, Cable perceived and dominant provider, spectrum demand Satellite Relegated to be relevant to only last 1% which still are unserved Tier 1s 50% of Federal broadband subsidies will be targeted to AT&T, Vz and Qwest serving areas (could also be viewed as subsidy opportunity for Tier 1s)

13. Key NBP Proceedings • Open Internet/Net Neutrality – Pro: Google Con: Telcos and Cable • Potential to discourage new investment from Incumbents • Copper Retirement – Pro: CBeyond/XO Con: ILECs • CLECs have asked FCC to limit ILECs ability to retire copper when fiber is deployed • Special Access Pricing Regulation – Pro: Wireless Con: Wireline • Limits on special access pricing used for wireless broadband could “subsidize” such wireless services to the detriment of wireline broadband • USF Reform – Pro: Wireless/Wireline broadband Con: Wireline voice and Wireless ETC • $7.7B/yr USF funding ($4.5B/yr for High-Cost) will be retargeted to broadband • Title I vs Title II – Pro: Wireless/CLECs Con: ILECs • FCC is considering reclassifying broadband from Title I information service to a Title II communications service. Heavier Title II regulations will likely result in disincentives for ILEC broadband deployment • “Actual” vs “Advertised” Speeds focus by the FCC provides significantly advantages for wireline, eliminating artificial advantage of wireless broadband and cable services • Regulation of Pole Attachment Rates – Pro: RLEC/ILECs/CLECs Con: Power and Cable • ILEC rates for attachment substantially higher than that charged to cable companies

14. Comcast Decision • Tuesday April 6th the D.C. Circuit Court vacated the Comcast Order • On grounds that the FCC did not properly assert ancillary jurisdiction to impose requirements on Comcast’s network management practices • As a result, the FCC extended the reply comment deadline in its Open Internet proceeding from April 8th to April 26th.   • FCC still intends to go forward with network management regulation • FCC must ensure that it has the proper jurisdiction • Potential Options for the FCC • Reclassification (Title I vs Title II) • FCC can challenge the court’s decision • Congressional legislation

15. Possible Outcomes from FCC NBP FCC is anticipating scenario #1 as justification for more spectrum allowing wireless to compete with wireline to ensure broadband competition

16. USF and Intercarrier Compensations In 2009, USF = $7.7B ($3.56B in 1998) $4.5B High-cost program $2.1B Schools and Library program $897M Low-income program $206M Rural Healthcare program 14% of LD revenue (5% in 1998) Universal Reform Act of 2009 USF and ICC role in National Broadband Plan Goal of making broadband universally available Contribution Methodology Transition Impact of Changes in Current Revenue Flow

17. USF and ICC Reform – Stage 1 Stage 1: Laying the Foundation for Reform (2010-2011) • Recognize that business case is some high cost areas doesn’t work • Create Connect America Fund (CAF) for High Cost areas • Support one broadband provider per geographic area • Make support competitively and technology neutral • Use market-based mechanisms for awarding support • Hold funding recipients accountable by • Imposing timelines for deployment • Verifying broadband availability • Setting up reporting requirements • Create Mobility Fund providing one-time support to bring all states to 3G • Design new USF to minimize tax consequence

18. USF and ICC Reform – Stage 1 cont… Stage 1: continued… Shift $15.5B over 10yrs from current High-Cost program to broadband Implement Sprint and Vz wireless merger commitments Transition rate-of-return carriers to price cap regulations Freezing Interstate Common Line Support funding pending development of new method Redirect Interstate Common Line Support to broadband deployment Establish schedule to phase out legacy High-Cost support for Competitive Eligible Telecom Carriers over 5 yrs Split estimated $15.5B in savings between Connect America and Mobility Funds Adopt interim rules to reduce intercarrier compensation arbitrage

19. USF and ICC Reform – Stage 2 Stage 2: Accelerating Reform (2012 – 2016) • Begin distribution from CAF to areas with most unserved households or to states that provide matching funds • Broaden USF contribution base • Begin staged reduction of per-minute Intercarrier Compensation (ICC) rates to low, uniform levels; • reduce intrastate terminating access to interstate levels, then to reciprocal compensation levels; • reduce originating rates in equal increments • Implement interim ICC solutions to address arbitrage

20. USF and ICC Reform – Stage 3 Stage 3: Complete Transition (2017 – 2020) Manage total fund size to remain close to current levels (in 2010 dollars) Recognize that low-income component may continue to grow for reasons unrelated to the Plan Eliminate legacy high-cost USF program and provide support through CAP Set deadlines for providers to meet deployment goals Consider alternative methods, such as satellite broadband, to serve last 1% of households Phase out per-minute ICC compensation, monitor carrier behavior for exercise of market power Congress should consider providing optional public funding to CAF to accelerate and smooth the transition (ie several $B over 2-3yr period) Congress should consider other government actions to promote availability Expand RUS loan-grant programs and RUS Community Connect program

21. ADTRAN’s Broadband Advocacy Efforts Advocacy Summary Encourage a full tool box of broadband solutions to allow service providers to choose the best solution on a project by project basis Discourage any incremental regulatory obligations to enable maximum grant participation by our service provider customers Stimulate broadband demand and improve end-user experience Educate and update our customers and community anchor institutions on the latest stimulus and NBP developments Stimulus website, webinars, service provider conference, weekly blogs