Net Income 2001 Compared to 2000 Sales Cost of Sales Selling, General, and Administrative Expenses Research and Development Expenses 15 Financial Results Research and development expenses increased 16.4% from $50,628,000 in 2000 to $58,935,000 in 2001. This increase was due to increased engineering costs associated with new product introductions and feature enhancement activities. As a percentage of sales, research and development expenses increased from 10.9% in 2000 to 15.2% in 2001. ADTRAN continually evaluates new product opportunities and engages in intensive research and product development efforts. To date, ADTRAN has expensed all product research and development costs as incurred. Additionally, ADTRAN frequently invests heavily in up-front new product development efforts prior to the actual commencement of sales of a major new product. As a result, ADTRAN may incur significant research and development expenses prior to the receipt of revenues from a major new product group. ADTRAN is presently incurring research and development expenses in connection with its new products and its expansion into international markets. In today’s challenging industry environment, ADTRAN has maintained its level of investment in research and development. This has provided for continued  Selling, general, and administrative expenses increased 10.1% from $87,116,000 in 2000 to $95,954,000 in 2001. Beginning in mid-year 2000, we increased expenditures for the expansion of our infrastructure in both sales and  support personnel in an effort to expand our customer base and to support increased initiatives in the Enterprise Networks Division and international markets. As a result, selling, general, and administrative expenses as a percentage  of sales increased from 18.8% in 2000 to 24.8% in 2001. However, during the second half of 2001, selling, general, and  administrative expenses decreased 4.2% from the second half of 2000 due to a reduction in force and salary reductions. ADTRAN historically has experienced very little bad debt expense; however, during 2001, a telecom distributor experi- enced financial difficulties, causing us to increase our allowance for bad debt by $3,148,000. Selling, general, and  administrative expenses as a percentage of sales will fluctuate whenever there is a significant fluctuation in revenues  during the periods being compared. An important part of ADTRAN’s strategy is to reduce the product cost of each succeeding product generation  and then to lower the product’s price based on the cost savings achieved. This strategy sometimes results in variations  in ADTRAN’s gross profit margin due to timing differences between the lowering of product selling prices and the full  realization of cost reductions. In view of the rapid pace of new product introductions by ADTRAN, this strategy may result in variations in gross profit margins that, for any particular financial period, can be difficult to predict. Cost of sales decreased 8.4% from $233,429,000 in 2000 to $213,760,000 in 2001. As a percentage of sales, cost of sales increased from 50.4% in 2000 to 55.2% in 2001. This increase was due primarily to a rise in material cost as a percentage of sales. Carrier Networks cost of sales, as a percent of division sales, increased from 53.4% in 2000 to 60.7% in 2001. Enterprise Networks cost of sales, as a percent of division sales, increased from 44.1% in 2000 to 46.4% in 2001. ADTRAN’s sales decreased 16.4% from $462,949,000 in 2000 to $387,080,000 in 2001. The decrease in overall sales  is attributable to a decrease in sales for our Digital Business Transport (DBT)/Total Reach$^{®}$‚ and High-bit-rate Digital Subscriber Line (HDSL)/T1 products, partially offset by increased sales of our Systems products. Carrier Networks  sales decreased 24.4% from $314,228,000 in 2000 to $238,367,000 in 2001. The decrease in Carrier Networks sales result- ed from a downturn in the carrier access market. Carrier Networks sales as a percentage of total sales, decreased from 68.1% in 2000 to 61.6% in 2001. Enterprise Networks sales increased 0.7% from $147,721,000 in 2000 to $148,714,000  in 2001. Sales volume for Enterprise Networks products remained stable due to market acceptance of ADTRAN’s  Integrated Access Devices. As a percentage of total sales, Enterprise Networks sales increased from 31.9% in 2000  to 38.4% in 2001. As a result of the above factors, net income increased 43% from $17,329,000 in 2001 to $24,775,000 in 2002. As a  percentage of sales, net income increased from 4.5% in 2001 to 7.2% in 2002.