##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 WASHINGTON, D.C.
    20549
    FORM 10-K
  For the fiscal year ended December 31, 2006
  of
  ARRIS
    GROUP, INC.
  A
    Delaware Corporation
    IRS Employer Identification
    No. 58-2588724
    SEC File Number
    000-31254
  3871
    Lakefield Drive
    Suwanee, GA 30024(770) 473-2000
  
      Regulation S-K.




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##### 



TABLE OF
    CONTENTS
  PagePART IITEM 1.


Business


1ITEM 1A.


Risk
    Factors


13ITEM 1B.


Unresolved
    Comments


18ITEM 2.


Properties


18ITEM 3.


Legal
    Proceedings


18ITEM 4.


Submission of
    Matters to a Vote of Security Holders


19ITEM 4A.


Executive Officers
    and Board Committees


20PART IIITEM 5.


Market for
    Registrants Common Equity, Related Stockholder Matters,
    Issuer Purchases of Equity Securities, and Stock Performance
    Graph


22ITEM 6.


Selected
    Consolidated Historical Financial Data


24ITEM 7.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


25ITEM 7A.


Quantitative and
    Qualitative Disclosures About Market Risk


48ITEM 8.


Consolidated
    Financial Statements and Supplementary Data


48ITEM 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


48ITEM 9A.


Controls and
    Procedures


49ITEM 9B.


Other
    Information


49PART IIIITEM 10.


Directors,
    Executive Officers, and Corporate Governance


87ITEM 11.


Executive
    Compensation


87ITEM 12.


Security Ownership
    of Certain Beneficial Owners, Management and Related
    Stockholders Matters


87ITEM 13.


Certain
    Relationships, Related Transactions, and Director
    Independence


87ITEM 14.


Principal
    Accountant Fees and Services


87PART IVITEM 15.


Exhibits, and
    Financial Statement Schedules


88Signatures


92EX-21 SUBSIDIARIES OF THE REGISTRANTEX-23 CONSENT OF ERNST & YOUNG LLPEX-24 POWER OF ATTORNEYEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO   i




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##### Table of Contents



PART I  Item 1.
    Business    General
  (678) 473-2000.
  Glossary
    of Terms
    Acronym

TerminologyCable VoIP

PacketCabletmcertified Voice over IPCAM

Cable Access ModuleCBR

Constant Bit RateCLEC

Competitive Local Exchange CarrierCMTS

Cable Modem Termination SystemCPE

Customer Premises EquipmentDBS

Digital Broadcast SatelliteDMTS

Digital Multimedia Termination
    SystemDOCSIS®

Data Over Cable Service Interface
    SpecificationDSG

DOCSIS Set-Top GatewayDSL

Digital Subscriber LineEMTA

Embedded Multimedia Terminal
    AdaptersFMC

Fixed Mobile ConvergenceFPGA

Field Programmable Gate ArraysFTTH

Fiber to the HomeFTTP

Fiber to the PremisesGAAP

Generally Accepted Accounting
    PrinciplesGPA

General Purchase AgreementsHDT

Host Digital TerminalHDTV

High Definition TelevisionHFC

Hybrid Fiber-CoaxialIFRS

International Financial Reporting
    StandardsILEC

Incumbent Local Exchange CarrierIP

Internet ProtocolIPTV

Internet Protocol TelevisionMbps

Megabits per SecondMPEG-2

Moving Picture Experts Group,
    Standard No. 2MPEG-4

Moving Picture Experts Group,
    Standard No. 4 1




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##### Table of Contents



Acronym

TerminologyM-CMTS

Modular CMTSMSO

Multiple Systems OperatorMTA

Multimedia Terminal AdapterNGNA

Next Generation Network
    ArchitectureNIU

Network Interface UnitsPCT

Patent Convention TreatyPSTN

Public-Switched Telephone NetworkQAM

Quadrature Amplitude ModulationRF

Radio FrequencyVAR

Value-Added ResellerVoIP

Voice over Internet ProtocolVPN

Virtual Private Network   Overview
    Industry
       2




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tm tm
  ® ® ® ® ® tm
 3




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4




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Our
    Principal Products
    
    Headend.  The headend is a central point in the
    cable system where signals are received via satellite and other
    sources. Interfaces that connect the Internet and public
    switched telephony networks are located in the headend. The
    headend organizes, processes and retransmits those signals
    through the distribution network to subscribers.
    Distribution Network.  The distribution network
    consists of fiber optic and coaxial cables and associated
    optical and electronic equipment that allocates the combined
    signals from the headend and transmits them throughout the cable
    system to nodes.
    Subscriber Premises.  Cable drops extend from
    nodes to subscribers homes and connect to a
    subscribers television set, set-top box, telephony network
    interface device or high speed cable modem.      
    VoIP telephony products, including CMTS
    High-speed data products, including CMTS
    Video / IP headend products
    Constant Bit Rate telephony products    
    Infrastructure products for fiber optic or coaxial networks
    built under or above ground, including cable and strand, vaults,
    conduit, drop materials, tools, connectors, and test equipment
    VoIP telephony CPE, EMTA
    High-speed data CPE, cable modems  Video
    over IP and Data Products
  Headend ® ®
 5




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Subscribe Premises ® ®
  Video/IP
    Products
  Headend tm tm tm MPEG-2 tm ®
  Constant
    Bit Rate Products
  ® ®
  Cable
    Plant Infrastructure Products
    ® ® ®
    just-in-time channel-to-market
 6




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Sales and
    Marketing
        Customers
    Years ended December 31,2006


2005


2004(in millions)Comcast

$
344.2


$
163.3


$
126.2% of sales


38.6
%


24.0
%


25.8
%Cox Communications

$
88.0


$
116.7


$
106.3% of sales


9.9
%


17.2
%


21.7
%Liberty Media International

$
88.8


$
99.4


$
84.0% of sales


10.0
%


14.6
%


17.1
%Time Warner Cable

$
81.2


$
72.3


$
32.5% of sales


9.1
%


10.6
%


6.6
%      7




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##### Table of Contents



Comcast. ® ®
  Cox Communications. ®
  Liberty Media International.
  Time Warner Cable, Inc. ® ® ®
  International
    Opportunities
      Proposed
    Acquisition of Tandberg Television ASA
     8




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##### Table of Contents



Research
    and Development
  best-in-class time-to-market
  ® tm ® ® tm ® ® ® tm
    
    Continued development and acceptance of open standards for
    delivering voice, video and data;
    Widespread deployment of VoIP;
    Continued increase in
    peer-to-peer
    services accelerating demand for new services requiring
    intensive, high-touch processing and sophisticated management
    techniques;
    Increasing demand for higher speed broadband connections to the
    home;
    The rapid adoption of video on demand and switched digital video
    services;
    Expanded deployment of high definition video channels;
    Innovations in video encode/decode technology making possible
    very low bit rate, high quality video streaming; and
    Continued silicon integration and chip fabrication technology
    innovations are making possible very low cost, multi-functional
    broadband consumer devices, integrating not only telephony but
    wireless and video decompression and digital rights management
    functionality.    
    Rapid development and delivery of
    C4®
    and
    C3tm
    CMTS features, including
    DOCSIS®
    2.0 and 3.0, DOCSIS Set-top Gateway or DSG and
    PacketCabletm
    Multimedia support, Layer 3 routing enhancements, packet
    inspection and filtering features, security enhancements, and
    increased downstream/upstream density;
    Expanding the range of next-generation, lithium-ion-based
    Touchstone®
    Telephony Modem EMTAs to include formats to meet country and MSO
    specific performance and powering requirements; 9




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
    Product cost reductions;
    Development of network and client technologies to address the
    emerging worldwide market opportunities in next generation video
    and multimedia delivery (video over IP and PacketCable
    multimedia), as embodied in
    CableLabs®
    DOCSIS®
    3.0 and M-CMTS standards including 100Mbps wideband cable modem
    service;
    Development of switched digital video features on the
    D5tm
    Universal Edge QAM; and
    Development of Fixed Mobile Convergence application server for
    seamless call control handling.  Intellectual
    Property
    ® ®
      Product
    Sourcing and Distribution
    6-month 12-month 18-month
   10




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Components
    for Our CMTS Product Line  ® ®
  Components
    for Our Customer Premises Equipment Products    sub-systems,
    Backlog
      Competition
    
    Big Band Networks;
    Cisco Systems, Inc.;
    Motorola, Inc.; and
    TVC Communications, Inc.   11




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®
          Employees
   12




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Item 1A.
    Risk
    Factors  Our
    business is dependent on customers capital spending on
    broadband communication systems, and reductions by customers in
    capital spending would adversely affect our
    business.
    
    General economic conditions;
    Availability and cost of capital;
    Governmental regulation;
    Demands for network services;
    Competition from other providers of broadband and high speed
    services;
    Acceptance of new services offered by our customers; and
    Real or perceived trends or uncertainties in these factors.    The
    markets in which we operate are intensely competitive, and
    competitive pressures may adversely affect our results of
    operations.
    
    Big Band Networks;
    Cisco Systems, Inc.;
    Motorola, Inc.; and
    TVC Communications, Inc.  start-up
   13




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Consolidations
    in the telecommunications industry could result in delays or
    reductions in purchases of products, which would have a material
    adverse effect on our business.
      Acquisitions,
    including our proposed acquisition of TANDBERG Television, can
    involve significant risks.
    Our
    proposed acquisition of TANDBERG Television involves several
    accounting risks.
   14




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Following
    the TANDBERG Television acquisition we will have substantial
    indebtedness.
    Our
    business has primarily come from several key customers. The loss
    of one of these customers or a significant reduction in sales to
    one of these customers would have a material adverse effect on
    our business.
      The
    broadband products that we develop and sell are subject to
    technological change and a trend towards open standards, which
    may impact our future sales and margins.
   15




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Products
    currently under development may fail to realize anticipated
    benefits.
      
    Are not cost-effective;
    Are not brought to market in a timely manner;
    Fail to achieve market acceptance; or
    Fail to meet industry certification standards.    Our
    success depends in large part on our ability to attract and
    retain qualified personnel in all facets of our
    operations.
    We are
    substantially dependent on contract manufacturers, and an
    inability to obtain adequate and timely delivery of supplies
    could adversely affect our business.
    Our
    international operations may be adversely affected by any
    decline in the demand for broadband systems designs and
    equipment in international markets.
   16




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Our
    international operations may be adversely affected by changes in
    the foreign laws in the countries in which our manufacturers and
    assemblers have plants.
    We
    face risks relating to currency fluctuations and currency
    exchange.
      Our
    profitability has been, and may continue to be, volatile, which
    could adversely affect the price of our stock.
    We may
    face higher costs associated with protecting our intellectual
    property.
    We do
    not intend to pay cash dividends on our common stock in the
    foreseeable future.
   17




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We
    have anti-takeover defenses that could delay or prevent an
    acquisition of our company.
    We
    have the ability to issue preferred shares without stockholder
    approval.
    Item 1B.
    Unresolved
    Comments    Item 2.
    Properties    Location

Description

Area (sq. ft.)


Lease ExpirationOntario, California

Warehouse


59,269


January 31, 2009Ontario, California

Warehouse


24,246


December 31, 2007Suwanee, Georgia

Office space


129,403


April 14, 2012Englewood, Colorado

Office space


32,240


March 31, 2011Lisle, Illinois

Office space


56,008


November 1, 2013Ireland

Office space


11,135


October 28, 2020     Location

Description

Area (sq. ft.)Cary, North Carolina

Warehouse


151,500Chicago, Illinois

Warehouse/Office space


18,000   Item 3.
    Legal
    Proceedings     18




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right-of-first-refusal
    No. 2:05-CV-436 and/or
  No. 03-54533MM, No. 06-5098MM
  voice-over-internet, and/or
  Item 4.
    Submission
    of Matters to a Vote of Security Holders   19




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Item 4A.
    Executive
    Officers and Board Committees  Executive
    Officers of the Company
    Name

Age

PositionRobert J. Stanzione


58


Chief Executive Officer, Chairman
    of the BoardLawrence A. Margolis


59


Executive Vice President,
    Strategic Planning, Administration, Chief Counsel, and SecretaryDavid B. Potts


49


Executive Vice President, Chief
    Financial Officer and Chief Information OfficerRonald M. Coppock


52


President, ARRIS Worldwide SalesBryant K. Isaacs


47


President, New Business VenturesJames D. Lakin


63


President, BroadbandRobert Puccini


45


President, TeleWire SupplyMarc S. Geraci


53


Vice President, TreasurerDaniel Owens


36


Vice President, Controller   Robert J. Stanzione
  Lawrence A. Margolis
  David B. Potts
  Ronald M. Coppock
  Bryant K. Isaacs
 20




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James D. Lakin
  Robert Puccini
  Marc S. Geraci
  Daniel Owens
  Board
    Committees
   21




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PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities    High


Low2005First Quarter

$
7.27


$
5.45Second Quarter


9.18



6.28Third Quarter


12.17



8.50Fourth Quarter


12.79



7.122006First Quarter

$
14.30


$
9.50Second Quarter


14.22



10.66Third Quarter


13.12



9.25Fourth Quarter


13.80



10.84      22




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Stock
    Performance Graph  3600-3699),
  
  Cumulative Total Return12/01


12/02


12/03


12/04


12/05


12/06ARRIS Group
    Inc.



100.00




36.58




74.18




72.13




97.03




128.18S & P 500



100.00




77.90




100.24




111.15




116.61




135.03Peer Group



100.00




48.66




88.73




83.05




85.53




82.72Copyright
    ©
    2006 Standard & Poors, a division of The
    McGraw-Hill Companies, Inc. All rights reserved.www.researchdatagroup.com/S&P.htm  23




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##### Table of Contents



Item 6.
    Selected
    Consolidated Historical Financial Data    2006


2005


2004


2003


2002Consolidated Operating
    Data:Net sales

$
891,551


$
680,417


$
490,041


$
433,986


$
651,883Cost of sales


639,473



489,703



343,864



307,726



425,231Gross margin


252,078



190,714



146,177



126,260



226,652Selling, general, and
    administrative expenses


87,203



74,308



68,539



89,117



128,089Research and development expenses


66,040



60,135



63,373



62,863



72,485Impairment of goodwill


















70,209Amortization of intangibles


632



1,212



28,690



35,249



34,494Restructuring and other


2,210



1,331



7,648



891



7,113Operating income (loss)


95,993



53,728



(22,073
)


(61,860
)


(85,738
)Interest expense


976



2,101



5,006



10,443



8,383Membership interest














2,418



10,409Loss (gain) on debt retirement






2,372



4,406



(26,164
)


7,302Other expense (income), net


(12,266
)


(2,679
)


(2,403
)


(2,329
)


(5,513
)Loss on investments and notes
    receivable


29



146



1,320



1,436



14,894Income (loss) from continuing
    operations before income taxes


107,254



51,788



(30,402
)


(47,664
)


(121,213
)Income tax expense (benefit)


(34,812
)


513



108







(6,800
)Net income (loss) from continuing
    operations


142,066



51,275



(30,510
)


(47,664
)


(114,413
)Discontinued Operations:Income (loss) from discontinued
    operations


221



208



2,114



351



(18,794
)Income tax expense (benefit)


















Income (loss) from discontinued
    operations


221



208



2,114



351



(18,794
)Net income (loss) before
    cumulative effect of accounting change


142,287



51,483



(28,396
)


(47,313
)


(133,207
)Cumulative effect of accounting
    change


















57,960Net income (loss)

$
142,287


$
51,483


$
(28,396
)

$
(47,313
)

$
(191,167
) 24




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##### Table of Contents



2006


2005


2004


2003


2002Net income (loss) per common
    share:Basic:Income (loss) from continuing
    operations

$
1.32


$
0.53


$
(0.36
)

$
(0.62
)

$
(1.40
)Income (loss) from discontinued
    operations










0.02







(0.23
)Cumulative effect of accounting
    change


















(0.71
)Net income (loss)

$
1.33


$
0.53


$
(0.33
)

$
(0.62
)

$
(2.33
)Diluted:Income (loss) from continuing
    operations

$
1.30


$
0.52


$
(0.36
)

$
(0.62
)

$
(1.40
)Income (loss) from discontinued
    operations










0.02







(0.23
)Cumulative effect of accounting
    change


















(0.71
)Net income (loss)

$
1.30


$
0.52


$
(0.33
)

$
(0.62
)

$
(2.33
)Selected Balance Sheet
    Data:Total assets

$
1,013,557


$
529,403


$
450,678


$
451,859


$
563,412Long-term obligations

$
293,682


$
18,230


$
91,781


$
138,052


$
11,500   Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Overview
    Industry
    Conditions
    Increase
    in Spending by MSOs on New Revenue-Generating Services
   25




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Cable
    Operator Demand of Open Standards for Equipment and Services
    Related to High-Speed Data, Telephony and, Digital
    Video
    
    High-speed data was first offered, most significantly by ARRIS,
    Motorola and Terayon, using proprietary cable modem termination
    systems and cable modems. In the United States, the MSOs founded
    CableLabs®
    to create an open standard architecture for high-speed data
    defined in DOCSIS. The initial version of this architecture was
    introduced in 1999. Subsequently, a second version, DOCSIS 2.0,
    was introduced in 2001, which is todays standard. ARRIS
    and its competitors responded to the creation of these standards
    by replacing their proprietary high-speed data products with
    DOCSIS-compliant products. Similar open standards exist in
    Europe.
    Telephony was first offered, most significantly by ARRIS,
    Motorola, ADC and Tellabs, using proprietary constant bit rate
    (CBR) headend and network interface units. ARRIS continues to
    sell CBR equipment; however, we experienced a reduction in sales
    of this product in 2005 and 2006 as cable operators supplant CBR
    telephony with Voice over IP (VoIP) telephony technology. We
    anticipate that CBR product revenues will continue to decline as
    end of life purchase orders are expected to be completed in
    2007. The MSOs, through
    CableLabs®,
    have created an open architecture for VoIP telephony called
    PacketCable. We anticipate that the majority of new telephony
    deployments will use this open architecture. ARRIS and its
    competitors responded to the creation of this new standard with
    PacketCable-compliant products.
    Digital Video was first offered, most significantly by Motorola,
    Scientific-Atlanta and Pace, using proprietary set-top boxes. In
    1997,
    CableLabs®,
    at the direction of the MSOs, introduced a standard for open
    architecture, secure interactive digital television known as
    OpenCabletm.
    In 2005, certain MSOs, in particular Comcast, Time Warner and
    Cox Communications, began the development of standards for an
    NGNA, which, among other things, will drive an open standards
    architecture for IP Video. In the latter half of 2005, the NGNA
    initiative was transferred to
    CableLabs®.
    Subsequently,
    CableLabs®
    began the development of a third generation DOCSIS standard
    (DOCSIS 3.0) and a definition of a next generation cable modem
    termination architecture known as M-CMTS. Together DOCSIS 3.0
    and M-CMTS embody the concepts of the NGNA vision. We are
    actively participating in the development of the DOCSIS 3.0 and
    M-CMTS standards and are developing and marketing products based
    on these new standards.      
    Some MSOs have expressed interest in offering bundled wireless
    telephony as part of their product offering. This product known
    as Fixed Mobile Convergence (FMC) will allow cable subscribers
    to use mobile phones in their homes, connecting to the
    MSOs VoIP network in the home and roam from the home VoIP
    network to the cellular network outside of the home and back
    seamlessly. We are developing products and technologies to
    support this new offering.
    Some MSOs are increasing their focus on expanding their service
    offerings to businesses. We are exploring products and
    technologies to support the MSOs expansion into this market
    segment.  Consolidation
    of Our Customer Base
   26




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Decline
    in Spending by the MSOs on Two-Way Plant
    Upgrades
    Consolidation
    of Competitors
    Our
    Strategy and Key Highlights
    
    Transition to VoIP with an Everything IP, Everywhere
    philosophy and build on current market successes;
    Leverage our current voice and data business;
    Strengthen and grow our supplies infrastructure distribution
    channel;
    Expand our existing product/services portfolio through internal
    developments, partnerships and acquisitions; and
    Maintain and improve an already strong capital and expense
    structure.    Everything
    IP, Everywhere is taking hold as MSOs globally have
    embraced VoIP and are now rapidly deploying this key new
    service.
  
    Our sales, net income, cash from operating activities, and
    earnings per share have significantly improved sequentially as a
    result of the growth in the VoIP market and customer acceptance
    of our products.  Years Ended December 31,2006


2005


2004(in millions)Sales

$
891.6


$
680.4


$
490.0Net income (loss)

$
142.3


$
51.5


$
(28.4
)Cash provided by operating
    activities

$
144.2


$
26.7


$
22.1   
    We have successfully leveraged our existing market position and
    industry experience to increase sales of both EMTA and CMTS
    products. 27




---



##### Table of Contents




    We expect demand for CMTS products will continue to increase in
    future periods as new services and competition between our
    customers and their competitors intensifies the need to provide
    ever faster download speeds requiring added CMTS capacity and
    features. We expect demand for EMTAs to increase, however, the
    rate of future growth for EMTA sales is expected to be lower
    than what we have experienced to date as many of our customers
    have now passed through the initial launch stage. Our ultimate
    level of sales of EMTAs will be affected by, but not limited to,
    such factors as the success our customers have marketing IP
    telephony to their subscribers in the future, and the success
    our customers have retaining their IP telephony subscribers. We
    also anticipate increased competition for EMTAs in the future.
    In 2006, we further expanded our customer list as a result of
    the success of our CMTS and EMTA product lines. Of particular
    note are the commencement of C4 CMTS sales to Time Warner Cable
    in the third quarter of 2006 and the sale of EMTAs to several
    MSOs in Canada.
    Sales of our CBR products, consistent with the expectation that
    we previously disclosed, decreased significantly year over year
    as this product line nears the end of its life. We anticipate
    sales of CBR products to further decline in 2007 as end of life
    purchase orders are expected to be substantially fulfilled.  We
    continue to invest significantly in research and
    development.
  
    We have made significant investments through our research and
    development efforts in new products and expansion of our
    existing products. Our primary focus has been on products and
    services that will enable MSOs to build and operate
    high-availability, fault-tolerant networks, which allow them to
    generate greater revenue by offering high-speed data, IP
    telephony and digital video. This success-based
    capital expenditure is becoming an increasing portion of the
    cable operators total capital spending. In addition, some
    MSOs have expressed interest in offering bundled wireless
    telephony as part of their product offering. This product known
    as Fixed Mobile Convergence (FMC) will allow cable subscribers
    to use mobile phones in their homes, connecting to the
    MSOs VoIP network in the home and roam from the home VoIP
    network to the cellular network outside of the home and back
    seamlessly. We are developing products to support this new
    offering. In 2006, we spent approximately $66.0 million on
    research and development, or 7.4% of revenue. We expect to
    continue to spend similar levels on research and development in
    the future.
    Key research and development accomplishments in 2006 included:  
    Introduction of the fifth generation (500-series) of our EMTAs,
    including cost reduced versions.
    The
    500-series Touchstone®
    EMTAs achieved both DOCSIS and Euro DOCSIS 2.0 certification.
    Introduction of the
    TM508/TM512
    multiline EMTAs for commercial and multiple dwelling unit
    applications.
    Introduction of the TM552 wireless EMTA for high end home and
    office VoIP and high speed data services.
    Continued work on a session initiated protocol (SIP)
    based version of our EMTA for Eastern European and Asian
    customers.
    Introduction of our
    FlexPathtmwideband technology enabling delivery of over 100Mbps to
    the subscriber over standard cable plant.
    Continued work on our
    D5tm
    Universal Edge QAM product, which was made commercially
    available in the first half of 2006.
    The
    C4®
    CMTS achieved Euro-DOCSIS 2.0 certification.
    Introduction of new routing, management, and IP features as well
    as continued cost reductions within the CMTS product family.
    Through our work at
    CableLabs®
    on the
    DOCSIS®
    3.0 and Modular CMTS standards we have developed a Next
    Generation Network Architecture (NGNA). Based on the technology
    of our flagship
    C4®
    CMTS and
    D5®Universal
    Edge QAM, we began the development of components which, when
    added to the 28




---



##### Table of Contents



existing installed base should enable MSOs to cost effectively
    upgrade their networks to these new standards without the need
    to replace the existing equipment.  In
    November 2006, we issued Convertible Notes to supplement our
    cash position in anticipation of potential future
    acquisitions.
  
    In November 2006 we raised $276.0 million through the
    issuance of a 2% convertible note offering.
    We ended 2006 with $549.2 million of cash, cash equivalents
    and short-term investments.
    Proceeds from this offering will be used to fund the potential
    acquisitions, including the potential acquisition of TANDBERG
    Television.  In
    January 2007, we announced our intention to purchase TANDBERG
    Television
  
    In January 2007, we announced our intention to purchase the
    shares of TANDBERG Television for approximately
    $1.2 billion.
    The acquisition is expected to be funded by a combination of
    balance sheet cash, the issuance of common shares, and new term
    debt.
    On February 26, 2007, a third party announced its intent to
    make a competing all cash offer for all of TANDBERG
    Televisions outstanding shares at a higher price than our
    offer of NOK 96 per share of TANDBERGs common stock. As of
    the date of this report, we are evaluating the competing offer
    and our options with respect to the proposed transaction.  Results
    of Operations
  Overview
   29




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##### Table of Contents



Key
    Operating Data (as a percentage of net sales)
  Years Ended December 31,2006


2005


2004Net sales


100.0
%


100.0
%


100.0
%Cost of sales


71.7



72.0



70.2Gross margin


28.3



28.0



29.8Operating expenses:Selling, general, and
    administrative expenses


9.8



10.9



14.0Research and development expenses


7.4



8.8



12.9Restructuring and impairment
    charges


0.2



0.2



1.6Amortization of intangibles


0.1



0.2



5.9Operating income
    (loss)


10.8



7.9



(4.5
)Other (income)
    expense:Interest expense


0.1



0.3



1.0Loss (gain) on debt retirement






0.3



0.9Loss (gain) on investments










0.3Gain on foreign currency


(0.1
)






(0.3
)Interest income


(1.2
)


(0.5
)


(0.3
)Other expense (income), net






0.1



0.1Income (loss) from continuing
    operations before income taxes


12.0



7.7



(6.2
)Income tax expense (benefit)


(3.9
)


0.1



Net income (loss) from
    continuing operations


15.9



7.6



(6.2
)Gain (loss) from discontinued
    operations










0.4Net income (loss)


16.0
%


7.6
%


(5.8
)%   Comparison
    of Operations for the Three Years Ended December 31,
    2006
  Net
    Sales
  Form 10-K
  Increase (Decrease)Net Sales


Between PeriodsFor the Years Ended December 31,


2006 vs. 2005


2005 vs. 20042006


2005


2004


$


%


$


%Product Category:Broadband

$
364.3


$
315.1


$
300.2


$
49.2



15.6%


$
14.9



5.0%Supplies & CPE


527.3



365.3



189.8



162.0



44.3%



175.5



92.5%Total sales

$
891.6


$
680.4


$
490.0


$
211.2



31.0%


$
190.4



38.9%  30




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##### Table of Contents



Increase (Decrease)Net Sales


Between PeriodsFor the Years Ended December 31,


2006 vs. 2005


2005 vs. 20042006


2005


2004


$


%


$


%Domestic

$
668.1


$
495.8


$
366.4


$
172.3



34.8
%

$
129.4



35.3
%International:Asia Pacific


52.9



51.1



48.0



1.8



3.5



3.1



6.5Europe


75.0



67.4



46.2



7.6



11.3



21.2



45.9Latin America


41.7



25.0



18.2



16.7



66.8



6.8



37.4Canada


53.9



41.1



11.2



12.8



31.1



29.9



267.0Total International


223.5



184.6



123.6



38.9



21.1
%


61.0



49.4Total

$
891.6


$
680.4


$
490.0


$
211.2



31.0
%

$
190.4



38.9
%   Broadband
    Net Sales 2006 vs. 2005
    
    Sales of our CMTS product increased reflecting higher sales to
    Comcast and our success in capturing new customers, for example
    Time Warner Cable. Continued increased demand for bandwidth
    coupled with the launch of telephony has driven increased demand
    for our CMTS products from our customers.
    Sales of our CBR voice products declined year over year, in
    particular in the second half of 2006, as customers migrate to
    VoIP products. As previously disclosed, this product is now
    nearing end of life.  Supplies &
    CPE Net Sales 2006 vs. 2005
    
    Sales of our EMTA product increased as operators ramped up
    deployment of VoIP. In 2006, we shipped 4.8 million units
    as compared to 2.3 million units in 2005. Many of our
    customers are now through the initial launch stage of telephony,
    and as a result, we do not expect a similar growth rate in 2007.
    The increase in EMTA sales was broad-based and included sales to
    many new customers.
    Sales of the remaining products in the Supplies & CPE
    category were similar in 2006 as compared to 2005.  Broadband
    Net Sales 2005 vs. 2004
    
    Sales of our CMTS product line increased year over year. A
    significant portion of the increase relates to sales to new
    customers for this product line, most notably Charter
    Communications.
    As anticipated, sales of our CBR voice product declined year
    over year. Two factors led to the decline. First, the product
    line is approaching end of life and as a result our customers,
    in particular Cox Communications and JComm, have reduced their
    purchases as they transition to VoIP. Second, we reduced the
    price of the product in 2005. 31




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##### Table of Contents



Supplies &
    CPE Net Sales 2005 vs. 2004
    
    The increase reflects substantial growth in VoIP demand from our
    customers as they began to rollout VoIP in volume in 2005, and
    as a result, they purchased more EMTAs.
    The increase in sales was broad based and included sales to many
    new customers.  Gross
    Margin
    Gross Margin $


Increase (Decrease)For the Years Ended


Between PeriodsDecember 31,


2006 vs. 2005


2005 vs. 20042006


2005


2004


$


%


$


%Product Category:Broadband

$
167.6


$
122.1


$
120.7


$
45.5



37.3%


$
1.4



1.2%Supplies & CPE


84.5



68.6



25.5



15.9



23.2%



43.1



169.0%Total

$
252.1


$
190.7


$
146.2


$
61.4



32.2%


$
44.5



30.4%     Gross Margin %For the Years Ended


Percentage Point IncreaseDecember 31,


(Decrease) Between Periods2006


2005


2004


2006 vs. 2005


2005 vs. 2004Product Category:Broadband


46.0%



38.8%



40.2%



7.2



(1.4
)Supplies & CPE


16.0%



18.8%



13.4%



(2.8
)


5.4Total


28.3%



28.0%



29.8%



0.3



(1.8
)     Broadband
    Gross Margin 2006 vs. 2005
    
    The increase in gross margin dollars year over year is a result
    of the $49.2 million increase in sales and the improved
    gross margin percentage.
    The increase in the gross margin percentage year over year
    primarily reflects cost reductions achieved related to our C4
    CMTS.
    In 2006, we recorded $1.6 million of inventory reserves
    versus $2.9 million in 2005.  Supplies &
    CPE Gross Margin 2006 vs. 2005
    
    The increase in gross margin dollars year over year is a result
    of the $162.0 million increase in sales, partially offset
    by lower gross margin percentage. 32




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##### Table of Contents




    Gross margin percentage decreased 2.8% points year over year as
    a result of lower margins achieved on our EMTA product as we
    transitioned models. In order to secure market share we chose to
    reduce the price of our Model 4 EMTA in advance of introducing
    our cost reduced Model 5 EMTA. As a result our margins were
    lower than historical averages until the transition was
    completed in the fourth quarter 2006. In the fourth quarter 2006
    the Supplies and CPE gross margin percentage was 18.3% as
    compared to the full year average of 16.0%.
    In 2006, we recorded $1.3 million of inventory reserves
    versus $2.0 million in 2005.  Broadband
    Gross Margin 2005 vs. 2004
    
    The increase in gross margin dollars year over year is a result
    of the $14.9 million increase in sales.
    The decrease in the gross margin percentage year over year
    primarily reflects price reductions related to our CBR product
    line.
    In 2005, we recorded $2.9 million of inventory reserves
    versus $2.7 million in 2004.  Supplies &
    CPE Gross Margin 2005 vs. 2004
    
    The increase in gross margin dollars year over year is a result
    of the $175.5 million increase in sales.
    Product cost reductions positively impacted gross margin
    percentage year over year.
    In 2005, we recorded $2.0 million of inventory reserves
    versus $2.9 million in 2004.  Operating
    Expenses
    Increase (Decrease)Operating Expenses


Between PeriodsFor the Years Ended December 31,


2006 vs. 2005


2005 vs. 20042006


2005


2004


$


%


$


%Selling, general, &
    administrative

$
87.2


$
74.4


$
68.6


$
12.8



17.2
%

$
5.8



8.5Research & development


66.1



60.1



63.4



6.0



10.0
%


(3.3
)


(5.2
)Restructuring & impairment


2.2



1.3



7.6



0.9



69.2
%


(6.3
)


(82.9
)Amortization of intangibles


0.6



1.2



28.7



(0.6
)


(50.0
)%


(27.5
)


(95.8
)Total

$
156.1


$
137.0


$
168.3


$
19.1



13.9
%

$
(31.3
)


(18.6
)   Selling,
    General, and Administrative, or SG&A, Expenses
  2006 vs.
    2005
    
    Increased costs (salaries, fringe benefits, travel) of
    approximately $5.1 million associated with increased
    staffing levels, particularly in the sales organization, as a
    result of the growth in the business and the decision to further
    invest in the sales force.
    Variable compensation costs (bonuses, commissions) increased by
    approximately $2.8 million year over year reflecting the
    increase in staff and our strong business performance relative
    to targets established by our board of directors. 33




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##### Table of Contents




    An increase in compensation expense of approximately
    $1.5 million related to the full year impact of equity
    compensation expense recorded under the provisions of
    SFAS No. 123R, Share-Based Payment.
    Increase in other costs (net) of $3.4 million including
    higher health care costs, legal / accounting / professional fees
    and sales sample expenses, partially offset by lower bad debt
    expense.  2005 vs.
    2004
    
    In the third quarter of 2005, we chose to early adopt the
    provisions of SFAS No. 123R, Share-Based
    Payment.  Prior to adoption, we followed the
    provisions of APB Opinion No. 25 Accounting for Stock
    Issued to Employees, and recorded non-cash compensation
    expense related to restricted stock grants and stock options
    subject to variable accounting. Year over year non-cash
    compensation costs increased by $3.6 million, predominantly
    as a result of SFAS No. 123R, Share-Based
    Payment.
    Variable compensation costs (bonuses) increased by
    $2.1 million year over year reflecting our strong business
    performance relative to targets established by our board of
    directors.  Research &
    Development Expenses
    2006 vs.
    2005
    
    Variable compensation costs and equity compensation costs
    increased by approximately $0.9 million.
    In April 2006, we announced that we entered into a joint
    development, licensing and supply agreement with UTStarcom that
    will enable the fourth component of the quadruple play for cable
    MSOs worldwide. The joint solution will allow customers with
    Wi-Fi enabled handsets to seamlessly roam between their cellular
    and Wi-Fi connections, or a service commonly referred to as
    fixed mobile convergence, or FMC. In the second quarter of 2006,
    we recognized R&D expense of $2.4 million related to
    this agreement with the remaining license fees of approximately
    $2.6 million expected to be expensed in 2007 and 2008, of
    which $1.5 million will be recognized in the first quarter
    2007.
    Outside services related to research and development, such as
    testing and certifications, increased approximately
    $1.7 million year over year.  2005 vs.
    2004
    
    For the majority of 2004, we continued to invest in certain
    products related to our Atoga product line, including a R&D
    center in Fremont, California. In late 2004, we closed the
    facility and severed 28 employees. In 2005, there were no
    expenditures related to this facility and employees. The
    resulting year over year decrease was approximately
    $4.1 million.
    In the second quarter of 2005, there was a benefit of
    approximately $1.2 million representing funding received
    from a customer related to development work that ARRIS performed
    for it over an 18 month period. The expenses related to the
    project were charged to research and development in the periods
    in which they were performed. The customer provided progress
    payments over the respective time period. The receipt of the
    cash was recorded as a liability until we completed the work and
    the customer accepted it. The customer accepted the work in the
    second quarter of 2005, at which time the payments were offset
    against research and development expense. 34




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##### Table of Contents




    Partially offsetting the above decreases were year over year
    increases related to variable compensation (bonuses) and
    non-cash equity compensation expenses upon adoption of
    SFAS No. 123R, Share-Based Paymentof
    approximately $2.9 million.  Restructuring
    and Impairment Charges
      Impairment
    of Goodwill
    Amortization
    of Intangibles
    Other
    Expense (Income)
    Other Expense (Income)


Increase (Decrease)For the Years Ended December 31,


Between Periods2006


2005


2004


2006 vs. 2005


2005 vs. 2004Interest expense

$
1.0


$
2.1


$
5.0


$
(1.1
)

$
(2.9
)Loss (gain) on debt retirement






2.4



4.4



(2.4
)


(2.0
)Loss on investments and notes
    receivable






0.1



1.3



(0.1
)


(1.2
)Gain on foreign currency


(1.4
)


(0.1
)


(1.3
)


(1.3
)


1.2Interest income


(11.2
)


(3.1
)


(1.5
)


(8.1
)


(1.6
)Other expense (income)


0.3



0.5



0.4



(0.2
)


0.1Total expense (income)

$
(11.3
)

$
1.9


$
8.3


$
(13.2
)

$
(6.4
)  35




---



##### Table of Contents



Interest
    Expense
    Loss
    (Gain) on Debt Retirement
      Loss on
    Investments and Notes Receivable
      Loss
    (Gain) in Foreign Currency
    Income
    Tax Expense
       36




---



##### Table of Contents



Discontinued
    Operations
  Accounting for the
    Impairment or Disposal of Long-Lived Assets
      Financial
    Liquidity and Capital Resources
  Overview
    Liquidity &
    Capital Resources Data
  Year Ended December 31,2006


2005


2004(in millions, except DSO and Turns)Key Working Capital
    ItemsCash provided by operating
    activities

$
144.2


$
26.7


$
22.1Cash, cash equivalents, and
    short-term investments

$
549.2


$
129.5


$
103.1Accounts Receivable, net

$
115.3


$
83.5


$
55.7- Days Sales Outstanding
    (Full Year)


41



37



42Inventory

$
94.2


$
113.9


$
92.6- Turns (Full Year)


6.1



4.7



4.0Key Debt ItemsConvertible notes due
    2026

$
276.0


$



$
Convertible notes due 2008

$



$



$
75.0Capital Expenditures

$
12.7


$
9.6


$
10.2     
    Liquidity  ensure that we have sufficient cash
    resources or other short term liquidity to manage day to day
    operations
    2008 Notes  implement a plan to retire the notes;
    which was ultimately accomplished in 2005 and 2004 through
    redemptions
    Growth  implement a plan to ensure that we have
    adequate capital resources, or access thereto, to execute
    acquisitions    Inventory &
    Accounts Receivable Programs
   37




---



##### Table of Contents



Redemption
    of the 2008 Notes
      Issuance
    of the 2026 Notes
    Summary
    of Current Liquidity Position and Potential for Future Capital
    Raising
   38




---



##### Table of Contents



Contractual
    Obligations
    Payments due by periodContractual Obligations

Less than 1 Year


1-3 Years


3-5 Years


More than 5 Years


Total(in millions)Operating leases(1)

$
6.1


$
8.9


$
7.6


$
3.2


$
25.8Sublease income


(0.3
)














(0.3
)Purchase obligations(2)


137.7















137.7Total contractual obligations

$
143.5


$
8.9


$
7.6


$
3.2


$
163.2     (1)
    
    Includes leases which are reflected in restructuring accruals on
    the consolidated balance sheets.(2)
    
    Represents obligations under agreements with non-cancelable
    terms to purchase goods or services. The agreements are
    enforceable and legally binding, and specify terms, including
    quantities to be purchased and the timing of the purchase.  Off-Balance
    Sheet Arrangements
  Regulation S-K,
  Cash
    Flow
    2006


2005


2004Cash provided by operating
    activities

$
144.2


$
26.7


$
22.1Cash provided by (used in)
    investing

$
(45.8
)

$
13.9


$
(77.6
)Cash provided by (used in)
    financing

$
287.9


$
9.7


$
5.7Net increase (decrease) in cash

$
386.3


$
50.2


$
(49.8
)   Operating
    Activities:
    2006


2005


2004Net income after non-cash
    adjustments

$
121.8


$
72.9


$
17.5(Increase)/Decrease in accounts
    receivable


(32.2
)


(27.2
)


1.2(Increase)/Decrease in inventory


19.7



(20.9
)


(14.1
)(Increase)/Decrease in accounts
    payable and accrued liabilities


40.8



7.1



16.1Prepaids and other  net


(5.9
)


(5.2
)


1.4Cash provided by operating
    activities

$
144.2


$
26.7


$
22.1   
    As described above, our net income improved significantly year
    over year, resulting in an improvement in cash from operating
    activities.
    Our inventory increased in 2005 as a result of increased demand
    and some changes in target inventory planning of our customers.
    In 2006, our inventory decreased as we balanced inventory levels
    with our customers. Our inventory turns for 2006 were 6.1 as
    compared to 2005 turns of 4.7.
    Our accounts receivable increased in both 2005 and 2006 as a
    result of higher revenues. Our DSO in 2006 was 41 as compared to
    37 in 2005. 39




---



##### Table of Contents




    While we believe we may be able to further improve our working
    capital position, future cash flow from operating activities
    will be more dependent on net income after adjustment for
    non-cash items.  Investing
    Activities:
    2006


2005


2004Capital expenditures

$
(12.7
)

$
(9.6
)

$
(10.2
)Acquisitions/other


0.2



(0.2
)


Purchases of short-term investments


(129.5
)


(59.3
)


(107.8
)Disposals of short-term investments


96.2



83.0



39.8Proceeds from sale of investments










0.6Cash provided by (used in)
    investing activities

$
(45.8
)

$
13.9


$
(77.6
)           Financing
    Activities:
    2006


2005


2004Proceeds from issuance of 2026
    notes

$
276.0


$



$
Deferred financing fees paid


(7.8
)






Payments on notes payable










(1.2
)Repurchase of shares to satisfy
    employee tax withholdings


(2.0
)


(1.2
)


(0.5
)Proceeds from issuance of common
    stock


12.3



10.9



7.4Excess tax benefits from
    stock-based compensation plans


9.4







Cash provided by (used in)
    financing activities

$
287.9


$
9.7


$
5.7    40




---



##### Table of Contents



Interest
    Rates
    Foreign
    Currency
      Financial
    Instruments
  and/or
  Short-Term
    Investments
  available-for-sale,
  Investments
     41




---



##### Table of Contents



No. 97-14, Accounting for Deferred Compensation Arrangements Where
    Amounts Earned Are Held in a Rabbi Trust and Invested.
  Capital
    Expenditures
    Net
    Operating Loss Carryforwards and Research and Development Credit
    Carryforwards
  Accounting for Income Taxe
     42




---



##### Table of Contents



Defined
    Benefit Pension Plans
  Employers Accounting for Settlements and Curtailments
    of Defined Benefit Pension Plans and for Termination
    Benefits.
    Employers Accounting for Defined Benefit Pension and
    Other Postretirement Plans.
  
    fully recognize the funded status of defined benefit
    plans  an asset for an overfunded status or a
    liability for an underfunded status,
    measure a defined benefit plans assets and obligations
    that determine its funded status as of the end of the
    entitys fiscal year, and
    recognize changes in the funded status of a defined benefit plan
    in comprehensive earnings in the year in which the changes occur.      Prior to





AfterApplication of


Adoption


Application ofSFAS No. 158


Adjustments


SFAS No. 158Current liabilities

$
N/A


$
82


$
82Accrued pension liability


11,858



203



12,061Accumulated other comprehensive
    income


(4,177
)


(285
)


(4,462
)     2006


2005


2004Assumed discount rate for
    non-qualified plans participants


5.75%



5.50%



6.00%Assumed discount rate for
    qualified plan participants


5.75%



5.75%



6.00%Rates of compensation increase


3.75%



3.75%



5.94%     2006


2005


2004Assumed discount rate for
    non-qualified plans participants


5.50%



6.00%



6.00%Assumed discount rate for
    qualified plan participants


5.75%



6.00%



6.00%Rates of compensation increase


3.75%



5.94%



5.94%Expected long-term rate of return
    on plan assets


8.00%



8.00%



8.00%  43




---



##### Table of Contents



2007

$
6362008


8232009


8502010


1,2262011


1,2202012 - 2016


8,752   Adoption
    of SFAS No. 123R, Share-Based Payment
  Share-Based Payment Accounting for Stock-Based
    Compensation Accounting for Stock
    Issued to Employees, Statement of Cash Flows Accounting for Stock Issued to Employees
    out-of-the-money
   44




---



##### Table of Contents



Critical
    Accounting Policies
    a) Revenue
    Recognition
  Revenue
    Recognition in Financial Statements, Revenue Recognition
    No. 97-2, Software Revenue Recognition SOP No. 98-9, Software Recognition, With Respect to Certain
    Transactions
  Accounting for the Costs of Computer
    Software to be Sold, Leased, or Otherwise Marketed
   45




---



##### Table of Contents




    when undelivered products or services that are essential to the
    functionality of the delivered product, or are required under
    the terms of the contract to be delivered concurrently exist,
    revenue is deferred until such undelivered products or services
    are delivered, or
    when final acceptance of the product is specified by the
    customer, revenue is deferred until the acceptance criteria have
    been met.    (in thousands)2006


2005


Inc/(Dec)Deferred revenue

$
5,498


$
1,681


$
3,817Deferred cost


1,467



259



1,208   b) Allowance
    for Doubtful Accounts and Sales Returns
        c) Inventory
    Valuation
  first-in,
    2006


2005Gross inventory

$
107.5


$
129.1Reserves


(13.3
)


(15.2
)Net inventory

$
94.2


$
113.9  46




---



##### Table of Contents



d) Warranty
    2006


2005January 1,

$
8,479


$
5,453Accruals related to warranties
    (including changes in estimates)


4,026



6,881Settlements made (in cash or in
    kind)


(4,271
)


(3,855
)Balance at December 31,

$
8,234


$
8,479     e) Stock-Based
    Compensation
  Share-Based Payment
  Forward-Looking
    Statements
   47




---



##### Table of Contents



Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk    available-for-sale
        Item 8.
    Consolidated
    Financial Statements and Supplementary Data    Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure   48




---



##### Table of Contents



Item 9A.
    Controls
    and Procedures  Evaluation of Disclosure Controls and
    Procedures. Rule 13a-15(e)
  Changes in Internal Control over Financial
    Reporting.
  Item 9B.
    Other
    Information   49




---



##### Table of Contents



MANAGEMENTS
    REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
  Rule 13a-15(f).
  Internal
    Control  Integrated Framework
    
     
        50




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    ON INTERNAL CONTROL OVER FINANCIAL REPORTING
                     51




---



##### Table of Contents



INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
  PageReport of Independent Registered
    Public Accounting Firm


53Consolidated Balance Sheets at
    December 31, 2006 and 2005


54Consolidated Statements of
    Operations for the years ended December 31, 2006, 2005 and
    2004


55Consolidated Statements of Cash
    Flows for the years ended December 31, 2006, 2005 and 2004


56Consolidated Statements of
    Stockholders Equity for the years ended December 31,
    2006, 2005 and 2004


58Notes to the Consolidated
    Financial Statements


60  52




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Board
    of Directors and Stockholders ARRIS Group, Inc.
        Share-Based Payment Employers Accounting for Defined Benefit Pension and
    Other Postretirement Plans
        53




---



##### Table of Contents



ARRIS
    GROUP, INC.  CONSOLIDATED BALANCE SHEETS
  December 31,2006


2005(in thousands)ASSETSCurrent assets:Cash and cash equivalents

$
461,618


$
75,286Short-term investments, at fair
    value


87,575



54,250Total cash, cash equivalents and
    short-term investments


549,193



129,536Restricted cash


3,124



6,073Accounts receivable (net of
    allowances for doubtful accounts of $3,576 in 2006 and $3,729 in
    2005)


115,304



83,540Other receivables


2,556



286Inventories


94,226



113,909Prepaids


3,547



10,945Current deferred income tax assets


29,285



Other current assets


3,717



4,331Total current assets


800,952



348,620Property, plant and equipment (net
    of accumulated depreciation of $77,311 in 2006 and $69,309 in
    2005)


28,287



25,557Goodwill


150,569



150,569Intangibles (net of accumulated
    amortization of $106,832 in 2006 and $106,200 in 2005)


288



920Investments


3,520



3,321Noncurrent deferred income tax
    assets


20,874



Other assets


9,067



416$
1,013,557


$
529,403LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
60,853


$
35,920Accrued compensation, benefits and
    related taxes


23,269



20,424Accrued warranty


8,234



8,479Other accrued liabilities


32,098



20,633Total current liabilities


124,454



85,456Long-term debt, net of current
    portion


276,000



Accrued pension


12,061



12,636Other long-term liabilities


5,621



5,594Total liabilities


418,136



103,686Stockholders equity:Preferred stock, par value
    $1.00 per share, 5.0 million shares authorized; none
    issued and outstanding






Common stock, par value
    $0.01 per share, 320.0 million shares authorized;
    107.9 million and 105.6 million shares issued and
    outstanding in 2006 and 2005, respectively


1,089



1,069Capital in excess of par value


761,500



732,405Accumulated deficit


(163,268
)


(305,555
)Unrealized gain on marketable
    securities


1,297



1,077Unfunded pension losses


(4,462
)


(4,618
)Unrealized gain (loss) on
    derivatives


(551
)


1,523Cumulative translation adjustments


(184
)


(184
)Total stockholders equity


595,421



425,717$
1,013,557


$
529,403    54




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##### Table of Contents



ARRIS
    GROUP, INC.  CONSOLIDATED STATEMENTS OF OPERATIONS
  For the Years Ended December 31,2006


2005


2004(in thousands, except per share data)Net sales

$
891,551


$
680,417


$
490,041Cost of sales


639,473



489,703



343,864Gross margin


252,078



190,714



146,177Gross margin %


28.3
%


28.0
%


29.8
%Operating expenses:Selling, general, and
    administrative expenses


87,203



74,308



68,539Research and development expenses


66,040



60,135



63,373Restructuring and impairment
    charges


2,210



1,331



7,648Amortization of intangibles


632



1,212



28,690156,085



136,986



168,250Operating income (loss)


95,993



53,728



(22,073
)Other expense (income):Interest expense


976



2,101



5,006Loss (gain) on debt retirement






2,372



4,406Loss on investments and notes
    receivable


29



146



1,320Gain on foreign currency


(1,360
)


(65
)


(1,301
)Interest income


(11,174
)


(3,100
)


(1,525
)Other expense (income), net


268



486



423Income (loss) from continuing
    operations before income taxes


107,254



51,788



(30,402
)Income tax (benefit) expense


(34,812
)


513



108Net income (loss) from continuing
    operations


142,066



51,275



(30,510
)Discontinued Operations:Income from discontinued
    operations (including a net gain on disposals of
    $0.2 million and $0.2 million and $2.1 million
    for the years ended December 31, 2006, 2005, and 2004,
    respectively)


221



208



2,114Net income (loss)

$
142,287


$
51,483


$
(28,396
)Net income (loss) per common
    share  basic:Income (loss) from continuing
    operations

$
1.32


$
0.53


$
(0.36
)Income (loss) from discontinued
    operations










0.02Net income (loss)

$
1.33


$
0.53


$
(0.33
)Net income (loss) per common
    share  diluted:Income (loss) from continuing
    operations

$
1.30


$
0.52


$
(0.36
)Income (loss) from discontinued
    operations










0.02Net income (loss)

$
1.30


$
0.52


$
(0.33
)Weighted average common
    shares  basic


107,268



96,581



85,283Weighted average common
    shares  diluted


109,490



98,264



85,283    55




---



##### Table of Contents



ARRIS
    GROUP, INC.  CONSOLIDATED STATEMENTS OF CASH FLOWS
  Years Ended December 31,2006


2005


2004(in thousands)Operating activities:Net income (loss)

$
142,287


$
51,483


$
(28,396
)Adjustments to reconcile net
    (loss) income to net cash provided by (used in) operating
    activities:Depreciation


9,787



10,529



10,395Amortization of intangibles


632



1,212



28,690Amortization of deferred finance
    fees


139



305



690Deferred income taxes


(38,490
)






Stock compensation expense


9,423



6,915



2,826Provision for doubtful accounts


(174
)


(438
)


(543
)Gain related to previously written
    off receivables


(1,573
)






Loss on disposal of fixed assets


(61
)


202



182Loss on investments and notes
    receivable


32



206



1,320Impairment of long-lived assets






291



Loss on debt retirement






2,372



4,406Gain on discontinued product lines


(221
)


(208
)


(2,114
)Changes in operating assets and
    liabilities, net of effect of acquisitions and dispositions:Accounts receivable


(32,153
)


(27,191
)


1,226Other receivables


(2,270
)


134



860Inventories


19,683



(20,963
)


(14,074
)Accounts payable and accrued
    liabilities


40,755



7,107



16,029Other, net


(3,555
)


(5,290
)


554Net cash provided by operating
    activities


144,241



26,666



22,051Investing activities:Purchases of short-term investments


(129,475
)


(59,250
)


(107,750
)Sales of short-term investments


96,150



83,032



39,750Purchases of property, plant and
    equipment


(12,728
)


(9,617
)


(10,167
)Cash proceeds from sale of
    property, plant, and equipment


212



42



Cash paid for acquisition, net of
    cash acquired






(89
)


(50
)Cash proceeds from sale of
    investment










642Other






(259
)


Net cash provided by (used in)
    investing activities


(45,841
)


13,859



(77,575
)     56




---



##### Table of Contents



ARRIS
    GROUP, INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS  (Continued)
  Years Ended December 31,2006


2005


2004(in thousands)Financing activities:Proceeds from issuance of common
    stock

$
12,266


$
10,897


$
7,410Proceeds from issuance of debt


276,000







Excess tax benefits from
    stock-based compensation plans


9,445







Repurchase of shares to satisfy
    employee tax withholdings


(2,019
)


(1,208
)


(519
)Payments on capital lease
    obligations










(14
)Payments on debt obligations










(1,163
)Deferred financing costs paid


(7,760
)






Net cash provided by (used in)
    financing activities


287,932



9,689



5,714Net increase (decrease) in cash
    and cash equivalents


386,332



50,214



(49,810
)Cash and cash equivalents at
    beginning of year


75,286



25,072



74,882Cash and cash equivalents at end
    of year

$
461,618


$
75,286


$
25,072Noncash investing and financing
    activities:Net tangible assets acquired,
    excluding cash

$



$
799


$
Net liabilities assumed






(76
)


50Intangible assets acquired,
    including goodwill






691



Investment in acquired company






(1,325
)


Cash paid for acquisition, net of
    cash acquired

$



$
89


$
50Landlord funded leasehold
    improvements

$
242


$



$
785Equity issued in exchange for
    41/2% convertible
    subordinated notes due 2008

$



$
75,000


$
50,000Equity issued for make-whole
    interest payment 
    41/2% convertible
    subordinated notes due 2008

$



$
2,372


$
4,406Supplemental cash flow information:Interest paid during the year

$
87


$
2,766


$
4,642Income taxes paid during the year

$
2,482


$
859


$
335    57




---



##### Table of Contents



ARRIS
    GROUP, INC.  CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
  Unrealized(Loss)








UnrealizedCapital in





Gain on





Unfunded


Gain


CumulativeCommon


Excess of


Accumulated


Marketable


Unearned


Pension


(Loss) on


TranslationStock


Par Value


Deficit


Securities


Compensation


Losses


Derivatives


Adjustments


Total(in thousands)Balance, January 1,
    2004

$
773


$
586,008


$
(328,642
)

$
771


$
(8,104
)

$
(1,293
)





$
(132
)

$
249,381Comprehensive income (loss):Net income (loss)










(28,396
)






















(28,396
)Unrealized loss on marketable
    securities














(65
)


















(65
)Minimum liability on unfunded
    pension adjustment






















(2,052
)










(2,052
)Translation adjustment






























(51
)


(51
)Comprehensive income (loss):


































(30,564
)Shares granted under stock award
    plan


1



530











(531
)














Compensation under stock award plans


















2,826















2,826Forfeiture of restricted stock


(3
)


(1,237
)










1,240















Issuance of common stock in
    conversion of
    41/2% notes
    due 2008, net of write-off of associated deferred finance fees


105



52,662



























52,767Issuance of common stock and other


13



6,875











3















6,891Balance, December 31,
    2004

$
889


$
644,838


$
(357,038
)

$
706


$
(4,566
)

$
(3,345
)





$
(183
)

$
281,301Comprehensive income (loss):Net income (loss)










51,483























51,483Unrealized gain on marketable
    securities














371



















371Unrealized gain on derivative
    instruments


























1,523







1,523Minimum liability on unfunded
    pension adjustment






















(1,273
)










(1,273
)Translation adjustment






























(1
)


(1
)Comprehensive income (loss)


































52,103Shares granted under stock award
    plan


7



4,822











(4,829
)














Compensation under stock award plans






4,928











1,987















6,915Forfeiture of restricted stock






(174
)










174















Issuance of common stock in
    conversion of
    41/2% notes
    due 2008, net of write-off of associated deferred finance fees


153



75,561



























75,714Issuance of common stock and other


20



10,542











(878
)














9,684Adoption of SFAS No. 123R






(8,112
)










8,112















Balance, December 31,
    2005

$
1,069


$
732,405


$
(305,555
)

$
1,077


$



$
(4,618
)

$
1,523


$
(184
)

$
425,717    58




---



##### Table of Contents



ARRIS
    GROUP, INC.
  CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY
  Unrealized(Loss)








UnrealizedCapital in





Gain on





Unfunded


Gain


CumulativeCommon


Excess of


Accumulated


Marketable


Unearned


Pension


(Loss) on


TranslationStock


Par Value


Deficit


Securities


Compensation


Losses


Derivatives


Adjustments


Total(in thousands)Balance, December 31,
    2005

$
1,069


$
732,405


$
(305,555
)

$
1,077


$



$
(4,618
)

$
1,523


$
(184
)

$
425,717Comprehensive income (loss):Net income (loss)










142,287























142,287Unrealized gain on marketable
    securities














220



















220Unrealized gain on derivative
    instruments


























(2,074
)






(2,074
)Minimum liability on unfunded
    pension adjustment






















156











156Comprehensive income (loss)


































140,589Compensation under stock award plans






9,423



























9,423Tax benefit related to exercise of
    stock options in prior years






5,192



























5,192Tax benefit related to exercise of
    stock options  due to release of valuation allowance






4,253



























4,253Issuance of common stock and other


20



10,227



























10,247Balance, December 31,
    2006

$
1,089


$
761,500


$
(163,268
)

$
1,297


$



$
(4,462
)

$
(551
)

$
(184
)

$
595,421  59




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS  Note 1.
    Organization
    and Basis of Presentation    Note 2.
    Summary
    of Significant Accounting Policies  (a) Consolidation
    (b) Use
    of Estimates
    (c) Reclassifications
    (d) Cash
    and Cash Equivalents
    (e) Short-Term
    Investments
  available-for-sale available-for-sale
  (f) Inventories
  first-in,
 60




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   (g) Investments
          No. 97-14, Accounting for Deferred Compensation Arrangements Where
    Amounts Earned Are Held in a Rabbi Trust and
    Invested.
  (h)
    Revenue
    Recognition  Revenue Recognition in Financial Statements, Revenue Recognition
   61




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    No. 97-2, Software Revenue Recognition (SOP 97-2), SOP No. 98-9, Software Recognition, With Respect to Certain Transactions (SOP 98-9).
  Accounting for the Costs of Computer Software to be Sold,
    Leased, or Otherwise Marketed.
      
    when undelivered products or services that are essential to the
    functionality of the delivered product, or are required under
    the terms of the contract to be delivered concurrently exist,
    revenue is deferred until such undelivered products or services
    are delivered, or
    when final acceptance of the product is required by the
    customer, revenue is deferred until the acceptance criteria have
    been met.    As of December 31,


Increase2006


2005


(Decrease)Deferred Revenue

$
5,498


$
1,681


$
3,817Deferred Cost

$
1,467


$
259


$
1,208   (i) Shipping
    and Handling Fees
    (j) Depreciation
    of Property, Plant and Equipment
   62




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (k) Goodwill
    and Long-Lived Assets
      (l) Advertising
    and Sales Promotion
    (m) Research
    and Development
    (n) Warranty
    (o) Income
    Taxes
   63




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   (p) Foreign
    Currency
    Accounting for Derivative
    Instruments and Hedging Activities.
    (q) Stock-Based
    Compensation
  Share-Based Payment Accounting for Stock Issued to Employees
  (r) Concentrations
    of Credit Risk
   64




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       
    Cash, cash equivalents, and short-term investments: The carrying
    amount reported in the balance sheet for cash, cash equivalents,
    and short-term investments approximates their fair values.
    Accounts receivable and accounts payable: The carrying amounts
    reported in the balance sheet for accounts receivable and
    accounts payable approximate their fair values. The Company
    establishes a reserve for doubtful accounts based upon its
    historical experience in collecting accounts receivable.
    Marketable securities: The fair values for trading and
    available-for-sale
    equity securities are based on quoted market prices.
    Non-marketable securities: Non-marketable equity securities are
    subject to a periodic impairment review; however, there are no
    open-market valuations, and the impairment analysis requires
    significant judgment. This analysis includes assessment of the
    investees financial condition, the business outlook for
    its products and technology, its projected results and cash
    flow, recent rounds of financing, and the likelihood of
    obtaining subsequent rounds of financing.
    Long-term debt: The fair value of the Companys convertible
    subordinated debt is based on its quoted market price and
    totaled approximately $295.3 million and $0.0 million
    at December 31, 2006 and 2005, respectively.
    Foreign exchange contracts: The fair values of the
    Companys foreign currency contracts are estimated based on
    dealer quotes, quoted market prices of comparable contracts
    adjusted through interpolation where necessary, maturity
    differences or if there are no relevant comparable contracts on
    pricing models or formulas by using current assumptions. ARRIS
    had 23.6 million euros in option collars outstanding as of
    December 31, 2006. The fair value of these option collars
    was a liability/loss of $0.6 million. At the end of
    December 31, 2005 ARRIS had 31.5 million euros in
    option collars outstanding. The fair value of these option
    collars was an asset/ (gain) of $(1.5) million.  Note 3.
    Impact of
    Recently Issued Accounting Standards  The Fair
    Value Option for Financial Assets and Financial
    Liabilities  Including an amendment of FASB Statement
    No. 115.
 65




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Employers Accounting for Defined Benefit Pension and
    Other Postretirement Plans.
  Fair Value Measurements.
  Considering the Effects of Prior Year Misstatements when
    Quantifying Misstatements in Current Year Financial
    Statements
  Accounting for Uncertainty in Income
    Taxes  an interpretation of FASB Statement
    No. 109, Accounting for Income Taxes,
  Note 4.
    Guarantees  Warranty
   66




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       2006


2005January 1,

$
8,479


$
5,453Accruals related to warranties
    (including changes in estimates)


4,026



6,881Settlements made (in cash or in
    kind)


(4,271
)


(3,855
)Balance at December 31,

$
8,234


$
8,479   Note 5.
    Business
    Acquisitions  Acquisition
    of cXm Broadband
      Cash paid to other shareholder

$
67Acquisition costs


22Equity investment balance


1,325Assumption of certain liabilities
    of cXm Broadband


76Adjusted purchase price

$
1,490Allocation of purchase price:Net tangible assets acquired

$
799Existing technology and customer
    value (to be amortized over 3 years)


691Total allocated purchase price

$
1,490   Note 6.
    Discontinued
    Operations   67




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 7.
    Restructuring
    and Impairment Charges  Accounting for Costs Associated with Exit or
    Disposal Activities.
      Writedown ofLeasehold


LeaseImprovements


Commitments


TotalBalance as of December 31,
    2003

$



$



$
2004 Provision


1.1



5.1



6.2Non-cash expense


(1.1
)






(1.1
)2004 payments






(1.2
)


(1.2
)Adjustments to accrual






0.2



0.2Balance as of December 31,
    2004






4.1



4.12005 payments






(1.7
)


(1.7
)Adjustments to accrual






0.7



0.7Balance as of December 31,
    2005






3.1



3.12006 payments






(1.6
)


(1.6
)Adjustments to accrual






2.1



2.1Balance as of December 31,
    2006

$



$
3.6


$
3.6    68




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    LeaseCommitments


Employee& Other Costs


Severance


TotalBalance as of December 31,
    2003

$
4.5


$
0.1


$
4.62004 payments


(3.1
)






(3.1
)2004 adjustments to accrual


0.1



(0.1
)


Balance as of December 31,
    2004


1.5







1.52005 payments


(1.0
)






(1.0
)2005 adjustments to accrual


(0.1
)






(0.1
)Balance as of December 31,
    2005


0.4







0.42006 payments


(0.4
)






(0.4
)2006 adjustments to accrual










Balance as of December 31,
    2006

$



$



$
   Note 8.
    Inventories  first-in,
  December 31,2006


2005Raw material

$
341


$
788Finished goods


93,885



113,121Total inventories

$
94,226


$
113,909   Note 9.
    Property,
    Plant and Equipment    December 31,2006


2005Land

$
1,822


$
1,822Buildings and leasehold
    improvements


11,470



11,126Machinery and equipment


92,306



81,918105,598



94,866Less: Accumulated depreciation


(77,311
)


(69,309
)Total property, plant and
    equipment, net

$
28,287


$
25,557   Note 10.
    Goodwill
    and Intangible Assets   69




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Accounting for the
    Impairment or Disposal of Long-Lived Assets.
    December 31, 2006


December 31, 2005Gross


Accumulated


Net Book


Gross


Accumulated


Net BookAmount


Amortization


Value


Amount


Amortization


ValueExisting technology acquired:Arris Interactive L.L.C.

$
51,500


$
(51,500
)

$



$
51,500


$
(51,500
)

$
Cadant, Inc.


53,000



(53,000
)






53,000



(53,000
)


Atoga Systems






















Com21


1,929



(1,929
)






1,929



(1,527
)


402cXm Broadband


691



(403
)


288



691



(173
)


518Total

$
107,120


$
(106,832
)

$
288


$
107,120


$
(106,200
)

$
920     2007

$
2302008

$
582009 - 2011

$
   Note 11.
    Long-Term
    Obligations    December 31,2006


2005Other long-term liabilities

$
17,682


$
18,2302.00% convertible senior
    notes due 2026


276,000



Total long term debt, and other
    long-term liabilities

$
293,682


$
18,230    70




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Note 12.
    Earnings
    Per Share    For the Years Ended December 31,2006


2005


2004Basic:Income (loss) from continuing
    operations

$
142,066


$
51,275


$
(30,510
)Income (loss) from discontinued
    operations


221



208



2,114Net income (loss)

$
142,287


$
51,483


$
(28,396
)Weighted average shares outstanding


107,268



96,581



85,283Basic earnings (loss) per share

$
1.33


$
0.53


$
(0.33
)Diluted:Income (loss) from continuing
    operations

$
142,066


$
51,275


$
(30,510
)Income (loss) from discontinued
    operations


221



208



2,114Net income (loss)

$
142,287


$
51,483


$
(28,396
)Weighted average shares outstanding


107,268



96,581



85,283Net effect of dilutive stock
    options


2,222



1,683



Total


109,490



98,264



85,283Diluted earnings (loss) per share

$
1.30


$
0.52


$
(0.33
)   1 2
   71




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 13.
    Income
    Taxes    Years Ended December 31,2006


2005


2004Current  Federal

$
2,235


$
885


$
State


1,077



(163
)


Foreign


366



(209
)


1083,678



513



108Deferred  Federal


(32,785
)






State


(3,429
)






Foreign


(2,276
)






(38,490
)






$
(34,812
)

$
513


$
108     Years Ended December 31,2006


2005


2004Statutory federal income tax
    expense (benefit)


35.0
%


35.0
%


(35.0
)%Effects of:State income taxes, net of federal
    benefit


1.7
%


1.7
%


(3.3
)%Differences between U.S. and
    foreign income tax rates


(0.1
)%


(0.3
)%


0.4
%Meals and entertainment


0.2
%


0.4
%


0.8
%Increase (decrease) in valuation
    allowance


(62.3
)%


(36.3
)%


37.5
%Research and development tax
    credits


(7.2
)%


0.0
%


0.0
%Other, net


0.3
%


0.5
%


0.0
%(32.4
)%


1.0
%


0.4
%     December 31,2006


2005Current deferred income tax assets:Inventory costs

$
5,141


$
5,487Federal alternative minimum tax
    AMT credit


850



Federal research & development
    credits


13,817



Current portion net operating loss
    carryforwards






27,226Other, principally operating
    expenses


14,559



13,065Total current deferred tax assets


34,367



45,778 72




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  December 31,2006


2005Non-current deferred income tax
    assets:Federal/state net operating loss
    carryforwards

$
1,199


$
18,208Federal capital loss carryforwards


5,311



5,671Foreign net operating loss
    carryforwards


2,720



2,184Federal AMT credit






885Pension and deferred compensation


5,662



5,902Goodwill


813



1,047Other, principally operating
    expenses


7,231



5,754Property plant and equipment,
    depreciation and basis differences


2,364



2,114Total non-current deferred income
    tax assets


25,300



41,765Non-current deferred income tax
    liabilities:Purchased technology


(115
)


(341
)Total non-current deferred income
    tax liabilities


(115
)


(341
)Net deferred income tax assets


59,552



87,202Valuation allowance


(9,393
)


(87,202
)Net deferred income tax assets

$
50,159


$
        73




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            Note 14.
    Commitments    Operating Leases2007

$
6,0912008


5,0822009


3,8492010


3,0362011


2,846Thereafter


4,878Less sublease income


(294
)Total minimum lease payments

$
25,488      74




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 15. Stock-Based
    Compensation
             75




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Accounting for Stock Issued to Employees
  Accounting
    for Stock Issued to Employees
  2006


2005


2004Net income (loss), as reported

$
142,287


$
51,483


$
(28,396
)Add: Stock-based compensation
    included in reported net income, net of taxes


9,423



6,915



2,826Deduct: Total stock-based employee
    compensation expense determined under fair value based methods
    for all awards


(9,423
)


(16,812
)*


(13,547
)Net income (loss), pro forma

$
142,287


$
41,586


$
(39,117
)Net income (loss) per common share:Basic  as reported

$
1.33


$
0.53


$
(0.33
)Basic  pro forma

$
1.33


$
0.43


$
(0.46
)Diluted  as reported

$
1.30


$
0.52


$
(0.33
)Diluted  pro forma

$
1.30


$
0.42


$
(0.46
)     *
    Includes approximately $5.7 million of expense related to
    the acceleration of
    out-of-the-money
    options in the second quarter of 2005.  Stock
    Options
   76




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    out-of-the-money Share-Based Payment,
      Weighted


AggregateWeighted


Average


IntrinsicAverage


Remaining


ValueOptions


Exercise Price


Contractual Term


(in thousands)Beginning balance, January 1,
    2006


8,513,868


$
9.10Grants


997,974


$
13.10Exercised


(1,966,954
)

$
5.72Forfeited


(61,336
)

$
8.48Expired


(43,921
)

$
10.97Ending balance, December 31,
    2006


7,439,631


$
10.52



5.23


$
26,372Exercisable at December 31,
    2006


5,467,414


$
10.87



4.92


$
19,901    77




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Restricted
    Stock (Non-Performance) and Stock Units      Weighted AverageGrant DateShares


Fair ValueUnvested at January 1, 2006


1,016,785


$
5.69Granted


282,465


$
13.08Vested


(468,713
)

$
6.00Forfeited


(46,642
)

$
6.80Unvested at December 31, 2006


783,895


$
8.09   Performance-Related
    Restricted Shares        Weighted AverageGrant DateShares


Fair ValueUnvested at January 1, 2006


301,955


$
6.44Granted


180,723



13.28Vested


(100,663
)


6.44Forfeited






Unvested at December 31, 2006


382,015



9.68  78




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Employee
    Stock Purchase Plan (ESPP)  Accounting for Stock Issued to Employees,
  Unrecognized
    Compensation Cost    Note 16.
    Employee
    Benefit Plans  Employers Accounting for
    Settlements and Curtailments of Defined Benefit Pension Plans
    and for Termination Benefits.
     79




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Employers Accounting for Defined Benefit Pension and
    Other Postretirement Plans.
  
    fully recognize the funded status of defined benefit
    plans  an asset for an overfunded status or a
    liability for an underfunded status,
    measure a defined benefit plans assets and obligations
    that determine its funded status as of the end of the
    entitys fiscal year, and
    recognize changes in the funded status of a defined benefit plan
    in comprehensive earnings in the year in which the changes occur.      Prior to





AfterApplication of


Adoption


Application ofSFAS No. 158


Adjustments


SFAS No. 158Current liabilities

$
N/A


$
82


$
82Accrued pension liability


11,858



203



12,061Accumulated other comprehensive
    income


(4,177
)


(285
)


(4,462
)     Years Ended December 31,2006


2005(in thousands)Change in Projected Benefit
    Obligation:Projected benefit obligation at
    beginning of year

$
25,930


$
22,659Service cost


519



458Interest cost


1,478



1,413Actuarial loss (gain)(1)


938



1,889Benefit payments


(498
)


(489
)Projected benefit obligation at
    end of year

$
28,367


$
25,930Change in Plan Assets:Fair value of plan assets at
    beginning of year

$
13,769


$
12,103Actual return on plan assets


1,227



1,292Company contributions


1,706



863Expenses and benefits paid from
    plan assets


(498
)


(489
)Fair value of plan assets at end
    of year

$
16,204


$
13,769 80




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Years Ended December 31,2006


2005(in thousands)Funded Status:Funded status of plan

$
(12,162
)

$
(12,160
)Unrecognized actuarial loss


2,665



1,837Unamortized prior service cost


1,797



2,274Employer contributions,
    9/30 
    12/31


19



16Net amount recognized

$
(7,681
)

$
(8,033
)     (1)
    
    The actuarial loss in 2005 includes updated assumptions for
    mortality rates    Years Ended December 31,2006


2005(in thousands)Current liabilities

$
(82
)

$
Noncurrent liabilities


(12,061
)


(12,651
)Accumulated other comprehensive
    income(1)


4,462



4,618Total

$
(7,681
)

$
(8,033
)     (1)
    
    As of December 31, 2006, the accumulated other
    comprehensive income included $2,665 related to the net loss and
    $1,797 related to prior service cost.    Years Ended December 31,2006


2005(in thousands)Net (gain) loss

$
(1,945
)

$
1,420Amortization of net (loss) gain


(8
)


(146
)Prior service cost (credit)


2,274



Amortization of prior service cost


(477
)


Total recognized in other
    comprehensive income

$
(156
)

$
1,274       December 31,2006


2005(in thousands)Accumulated benefit obligation

$
26,496


$
25,521Projected benefit obligation

$
28,367


$
25,930Plan assets

$
16,204


$
13,769  81




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2006


2005


2004Service cost

$
519


$
458


$
484Interest cost


1,478



1,413



1,177Return on assets (expected)


(1,125
)


(1,045
)


(935
)Recognized net actuarial (gain)
    loss


8



(18
)


(323
)Amortization of prior service
    cost(1)


477



477



558Net periodic pension cost

$
1,357


$
1,285


$
961     (1)
    
    Prior service cost is amortized on a straight-line basis over
    the average remaining service period of employees expected to
    receive benefits under the plan.     2006


2005


2004Assumed discount rate for
    non-qualified plans participants


5.75%



5.50%



6.00%Assumed discount rate for
    qualified plan participants


5.75%



5.75%



6.00%Rates of compensation increase


3.75%



3.75%



5.94%     2006


2005


2004Assumed discount rate for
    non-qualified plans participants


5.50%



6.00%



6.00%Assumed discount rate for
    qualified plan participants


5.75%



6.00%



6.00%Rates of compensation increase


3.75%



5.94%



5.94%Expected long-term rate of return
    on plan assets


8.00%



8.00%



8.00%         2007

$
6362008


8232009


8502010


1,2262011


1,2202012 - 2016


8,752    82




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 17.
    Sales
    Information    Years Ended December 31,2006


2005


2004(in millions)Comcast and affiliates

$
344.2


$
163.3


$
126.2% of sales


38.6
%


24.0
%


25.8
%Cox Communications

$
88.0


$
116.7


$
106.3% of sales


9.9
%


17.2
%


21.7
%Liberty Media International and
    affiliates

$
88.8


$
99.4


$
84.0% of sales


10.0
%


15.3
%


17.3
%Time Warner Cable and affiliates

$
81.2


$
72.3


$
32.5% of sales


9.1
%


10.6
%


6.6
%       Broadband


Supplies & CPE


TotalYears Ended:December 31, 2006

$
364,238


$
527,313


$
891,551December 31, 2005

$
315,098


$
365,319


$
680,417December 31, 2004

$
300,198


$
189,843


$
490,041    83




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2006


2005


2004(in thousands)Asia Pacific

$
52,859


$
51,139


$
48,025Europe


74,991



67,374



46,213Latin America


41,730



24,979



18,205Canada


53,877



41,100



11,175Total

$
223,457


$
184,592


$
123,618     Note 18.
    Summary
    Quarterly Consolidated Financial Information
    (unaudited)    Quarters in 2006 EndedMarch 31,


June 30,


September 30,


December 31,Net sales

$
208,344


$
219,990


$
228,646


$
234,571Gross margin(1)


56,507



63,740



63,179



68,652Operating income (loss)(2)


19,609



22,465



25,447



28,472Income (loss) from continuing
    operations


20,702



24,662



26,547



70,155Income (loss) from discontinued
    operations(4)


21



88



15



97Net income (loss)(5)

$
20,723


$
24,750


$
26,562


$
70,252Net (loss) per basic share:Income (loss) from continuing
    operations

$
0.20


$
0.23


$
0.25


$
0.65Income (loss) from discontinued
    operations

$



$



$



$
Net income (loss)

$
0.20


$
0.23


$
0.25


$
0.65Net income (loss) per diluted
    share:Income (loss) from continuing
    operations

$
0.19


$
0.23


$
0.24


$
0.64Income (loss) from discontinued
    operations

$



$



$



$
Net income (loss)

$
0.19


$
0.23


$
0.24


$
0.64   84




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Quarters in 2005 EndedMarch 31,


June 30,


September 30,


December 31,Net sales

$
135,924


$
162,201


$
200,957


$
181,335Gross margin(1)


36,791



41,083



54,978



57,862Operating income (loss)(2)


4,716



9,117



18,702



21,193Income (loss) from continuing
    operations(3)


3,398



7,213



18,850



21,814Income (loss) from discontinued
    operations(4)


10



76



(30
)


152Net income (loss)

$
3,408


$
7,289


$
18,820


$
21,966Net (loss) per basic share:Income (loss) from continuing
    operations

$
0.04


$
0.08


$
0.18


$
0.21Income (loss) from discontinued
    operations

$



$



$



$
Net income (loss)

$
0.04


$
0.08


$
0.18


$
0.21Net income (loss) per diluted
    share:Income (loss) from continuing
    operations

$
0.04


$
0.08


$
0.18


$
0.20Income (loss) from discontinued
    operations

$



$



$



$
Net income (loss)

$
0.04


$
0.08


$
0.18


$
0.20     (1)
    
    During the first, second, third and fourth quarters of 2006, the
    Company recognized stock compensation expense of approximately
    $108 thousand, $112 thousand, $144 thousand and $142 thousand,
    respectively, in cost of goods sold which effected gross
    margins. During the first, second, third and fourth quarters of
    2005, the Company recognized stock compensation expense of
    approximately $31 thousand, $82 thousand, $136 thousand and $125
    thousand, respectively, in cost of goods sold which effected
    gross margins.(2)
    
    In addition to (1) above, the following items impacted
    operating income (loss) during 2006:  
    During the first, second, third and fourth quarters of 2006, the
    Company recognized stock compensation expense of approximately
    $2.1 million, $2.3 million, $2.3 million and
    $2.2 million, respectively, which related to both
    Research & Development and Selling, General, &
    Administrative expenses.
    During the first and fourth quarters of 2006, the Company
    recorded restructuring reserve adjustments of $0.3 million
    and $1.9 million, respectively, which predominantly related
    to changes in estimates related to real estate leases.
    During the first and second quarters of 2006, ARRIS recorded
    gains of $0.5 million and $1.1 million, respectively,
    related to previously written off receivables. This resulted in
    a reduction in bad debt expense for those quarters.    
    During the first, second, third and fourth quarters of 2005, the
    Company recognized stock compensation expense of approximately
    $0.5 million, $1.1 million, $2.5 million and
    $2.5 million, respectively, which related to both
    Research & Development and Selling, General, &
    Administrative expenses.
    During 2005, a decrease in expected future cash flows related to
    the Atoga product line indicated that the long-lived assets
    associated with these products may be impaired. As a result, we
    analyzed the fair value of those assets, using the expected cash
    flow approach, in accordance with SFAS No. 144,
    Accounting for the Impairment or Disposal of Long-Lived
    Assets. The resulting analysis indicated that the remaining
    intangibles of $0.2 million and fixed assets of
    $0.1 million were fully impaired and a charge of
    approximately $0.3 million was recorded in the first
    quarter of 2005. 85




---



##### Table of Contents



NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   
    During the fourth quarter of 2005, the Company recorded
    restructuring and impairment charges of $0.9 million which
    predominantly relates to changes in estimates related to real
    estate leases associated with previous consolidation of certain
    facilities.  (3)
    
    During the second quarter of 2005, ARRIS called the remaining
    $75.0 million of the Notes for redemption and the holders
    of the Notes elected to convert the notes into 15.0 million
    shares of common stock rather than have the Notes redeemed.
    Under the indentures terms for redemptions, the Company
    made a make-whole interest payment of approximately
    0.3 million shares resulting in a charge of
    $2.4 million during the quarter.(4)
    
    ARRIS routinely evaluates its accruals related to costs
    associated with the disposal of discontinued product lines. As a
    result of these reviews, the Company recorded income of
    $0.2 million for each of the years ended December 31,
    2006 and 2005.(5)
    
    During the fourth quarter of 2006, ARRIS reduced valuation
    allowances related to deferred income tax assets, based on the
    current judgment that the benefits will be realized, and also
    recorded a tax benefit related to research and development
    credits for the period from 2001 -2006. The net result of these
    items was a tax benefit of approximately $38.8 million
    during the quarter.  Note 19.
    Subsequent
    Events  Acquisition
    of TANDBERG Television
   86




---



##### Table of Contents



PART III  Item 10.
    Directors,
    Executive Officers, and Corporate Governance    www.arrisi.com
    Item 11.
    Executive
    Compensation  Change-In-Control
  Item 12.
    Security
    Ownership of Certain Beneficial Owners, Management and Related
    Stockholders Matters    Item 13.
    Certain
    Relationships, Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   87




---



##### Table of Contents



PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  (a)(1) Financial
    Statements
    PageReport of Independent Registered
    Public Accounting Firm


53Consolidated Balance Sheets at
    December 31, 2006 and 2005


54Consolidated Statements of
    Operations for the years ended December 31, 2006, 2005 and
    2004


55Consolidated Statements of Cash
    Flows for the years ended December 31, 2006, 2005 and 2004


56Consolidated Statements of
    Stockholders Equity for the years ended December 31,
    2006, 2005 and 2004


58Notes to the Consolidated
    Financial Statements


60  88




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##### Table of Contents



(a)(2) Financial
    Statement Schedules
        SCHEDULE II 
    VALUATION AND QUALIFYING ACCOUNTS
  Balance at








Balance atBeginning


Charge to





End ofDescription

of Period


Expenses


Deductions(1)


Period(in thousands)YEAR ENDED DECEMBER 31, 2006Reserves and allowance deducted
    from asset accounts:Allowance for doubtful accounts

$
3,729


$
(174
)

$
(21
)

$
3,576Reserve for obsolete and excess
    inventory(2)

$
15,151


$
2,880


$
4,786


$
13,245Income tax valuation allowance(3)

$
87,202


$



$
77,809


$
9,393YEAR ENDED DECEMBER 31, 2005Reserves and allowance deducted
    from asset accounts:Allowance for doubtful accounts

$
3,829


$
(438
)

$
(338
)

$
3,729Reserve for obsolete and excess
    inventory(2)

$
18,832


$
4,902


$
8,583


$
15,151Income tax valuation allowance(3)

$
101,933


$



$
14,731


$
87,202YEAR ENDED DECEMBER 31, 2004Reserves and allowance deducted
    from asset accounts:Allowance for doubtful accounts

$
4,446


$
(543
)

$
74


$
3,829Reserve for obsolete and excess
    inventory(2)

$
19,294


$
5,595


$
6,057


$
18,832Income tax valuation allowance(3)

$
91,322


$
10,611


$



$
101,933     (1)
    
    Represents: a) Uncollectible accounts written off, net of
    recoveries and write-offs, b) Net change in the sales
    return and allowance account, and c) Disposal of obsolete
    and excess inventory, and d) Release and correction of
    valuation allowances.(2)
    
    The reserve for obsolescence and excess inventory is included in
    inventories.(3)
    
    The income tax valuation allowance is included in current and
    noncurrent deferred income tax assets. 89




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##### Table of Contents



(a)
    (3) Exhibit List    The filings referenced forincorporation by reference areARRIS (formerly known asExhibit



Broadband Parent, Inc.) filingsNumber

Description of Exhibit

unless otherwise noted3
.1

Amended and Restated Certificate
    of Incorporation

Registration
    Statement #333-61524,
    Exhibit 3.1.3
.2

Certificate of Amendment to
    Amended and Restated Certificate of Incorporation

August 3, 2001
    Form 8-A,
    Exhibit 3.2.3
.3

By-laws

Registration
    Statement #333-61524,
    Exhibit 3.2, filed by Broadband Parent Corporation4
.1

Form of Certificate for Common
    Stock

Registration
    Statement #333-61524,
    Exhibit 4.1.4
.2

Rights Agreement dated
    October 3, 2002

October 3, 2002
    Form 8-K
    Exhibit 4.14
.3

Indenture dated November 13,
    2006

November 16, 2006
    Form 8-K,
    Exhibit 4.5.10
.1(a)*

Amended and Restated Employment
    Agreement with Robert J. Stanzione, dated August 6, 2001

September 30, 2001
    Form 10-Q,
    Exhibit 10.10(c).10
.1(b)*

Supplemental Executive Retirement
    Plan for Robert J. Stanzione, effective August 6, 2001

September 30, 2001
    Form 10-Q,
    Exhibit 10.10(d).10
.1(c)*

Amendment to Employment Agreement
    with Robert J. Stanzione, dated December 8, 2006

December 12, 2006
    Form 8-K,
    Exhibit 10.7.10
.2*

Amended and Restated Employment
    Agreement with Lawrence A. Margolis, dated April 29, 1999

June 30, 1999
    Form 10-Q,
    Exhibit 10.33, filed by ANTEC Corporation.10
.1(c)*

Amendment to Employment Agreement
    with Lawrence A. Margolis, dated December 8, 2006

December 12, 2006
    Form 8-K,
    Exhibit 10.6.10
.3*

2001 Stock Incentive Plan

July 2, 2001
    Appendix III of Proxy Statement filed as part of,
    Registration Statement
    #333-61524,
    filed by Broadband Parent Corporation. 90




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##### Table of Contents



The filings referenced forincorporation by reference areARRIS (formerly known asExhibit



Broadband Parent, Inc.) filingsNumber

Description of Exhibit

unless otherwise noted10
.4*

Management Incentive Plan

July 2, 2001 Appendix IV
    of Proxy Statement filed as part of Registration Statement
    #333-61524,
    filed by Broadband Parent Corporation.10
.5

Solectron Manufacturing Agreement
    and Addendum

December 31, 2001
    Form 10-K,
    Exhibit 10.15.10
.6

Mitsumi Agreement

December 31, 2001
    Form 10-K,
    Exhibit 10.16.10
.7*

Form of Employment Agreement with
    Ronald M. Coppock, dated December 8, 2006

December 12, 2006
    Form 8-K,
    Exhibit 10.1.10
.8*

Employment Agreement with James D.
    Lakin dated December 8, 2006

December 12, 2006
    Form 8-K,
    Exhibit 10.2.10
.9*

Employment Agreement with David B.
    Potts dated December 8, 2006

December 12, 2006
    Form 8-K,
    Exhibit 10.4.10
.10*

Employment Agreement with Bryant
    K. Isaacs, dated December 8, 2006

December 12, 2006
    Form 8-K,
    Exhibit 10.3.10
.10*

Employment Agreement with Robert
    Puccini, dated December 8, 2006

December 12, 2006
    Form 8-K,
    Exhibit 10.5.10
.11*

2004 Stock Incentive Plan

Appendix B of Proxy Statement
    filed on April 20, 200410
.12*

Employment Agreement with David B.
    Potts dated December 8, 2006

December 12, 2006
    Form 8-K,
    Exhibit 10.4.10
.13*

Form of Stock Options Grant under
    2001 and 2004 Stock Incentive Plans

March 31, 2005
    Form, 10-Q,
    Exhibit 10.20.10
.14*

Form of Restricted Stock Grant
    under 2001 and 2004 Stock Incentive Plans

March 31, 2005
    Form, 10-Q,
    Exhibit 10.21.21


Subsidiaries of the Registrant

Filed herewith.23


Consent of Ernst & Young
    LLP

Filed herewith.24


Powers of Attorney

Filed herewith.31
.1

Section 302 Certification of
    the Chief Executive Officer

Filed herewith.31
.2

Section 302 Certification of
    the Chief Financial Officer

Filed herewith.32
.1

Section 906 Certification of
    the Chief Executive Officer

Filed herewith.32
.2

Section 906 Certification of
    the Chief Financial Officer

Filed herewith.  91




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##### Table of Contents



SIGNATURES      David
    B. Potts
   Executive Vice President, Chief Financial Officer,
 Chief Accounting Officer, and
 Chief Information Officer
      /s/  Robert
    J.
    StanzioneRobert
    J. Stanzione

Chief Executive Officer and
    Chairman of the Board of Directors

February 28, 2007/s/  David
    B. PottsDavid
    B. Potts

Executive Vice President, Chief
    Financial Officer, Chief Accounting Officer, and Chief
    Information Officer

February 28, 2007/s/  Alex
    B. Best*Alex
    B. Best

Director

February 28, 2007/s/  Harry
    L. Bosco*Harry
    L. Bosco

Director

February 28, 2007/s/  John
    Anderson
    Craig*John
    Anderson Craig

Director

February 28, 2007/s/  Matthew
    B. Kearney*Matthew
    B. Kearney

Director

February 28, 2007/s/  William
    H. Lambert*William
    H. Lambert

Director

February 28, 2007/s/  John
    R. Petty*John
    R. Petty

Director

February 28, 2007*By:

/s/  Lawrence
    A. MargolisLawrence
    A. Margolis(as attorney in fact
    for each person indicated)  92