##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 For the quarter ended June 30, 2006
 of
 ARRIS GROUP, INC.
 
 3871 Lakefield Drive
Suwanee, GA 30024
(678) 473-2000




---



##### Table of Contents



ARRIS GROUP, INC.
FORM 10-Q
For the Three and Six Months Ended June 30, 2006
 INDEX
  
 PagePart I. Financial InformationItem 1.
    
    Financial Statementsa) Consolidated Balance Sheets
as of June 30, 2006 and December 31, 2005
    
    
    3b) Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2006 and 2005
    
    
    4c) Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2006 and 2005
    
    
    5d) Notes to the Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures on Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    25Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    27Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    31Item 6.
    
    Exhibits
    
    
    32Signatures
    
    
    33EX-21 ARRIS GROUP, INC. & SUBSIDIARIESEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
 2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 ARRIS GROUP, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share data)
 June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    167,174
    
    
    $
    75,286Short-term investments, at fair value
    
    
    30,000
    
    
    
    54,250Total cash, cash equivalents and short-term investments
    
    
    197,174
    
    
    
    129,536Restricted cash
    
    
    6,112
    
    
    
    6,073Accounts receivable (net of allowances for doubtful
accounts of $3,343 in 2006 and $3,729 in 2005)
    
    
    104,143
    
    
    
    83,540Other receivables
    
    
    4,621
    
    
    
    286Inventories, net
    
    
    91,764
    
    
    
    113,909Prepaid assets
    
    
    2,959
    
    
    
    10,945Other current assets
    
    
    4,119
    
    
    
    4,331Total current assets
    
    
    410,892
    
    
    
    348,620Property, plant and equipment (net of accumulated
depreciation of $73,773 in 2006 and $69,309 in 2005)
    
    
    24,423
    
    
    
    25,557Goodwill
    
    
    150,569
    
    
    
    150,569Intangibles (net of accumulated amortization of
$106,637 in 2006 and $106,200 in 2005)
    
    
    483
    
    
    
    920Investments
    
    
    3,410
    
    
    
    3,321Other assets
    
    
    408
    
    
    
    416$
    590,185
    
    
    $
    529,403LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    40,241
    
    
    $
    35,920Accrued compensation, benefits and related taxes
    
    
    14,648
    
    
    
    20,424Accrued warranty
    
    
    8,296
    
    
    
    8,479Other accrued liabilities
    
    
    27,012
    
    
    
    20,633Total current liabilities
    
    
    90,197
    
    
    
    85,456Accrued pension
    
    
    13,266
    
    
    
    12,636Other long-term liabilities
    
    
    5,644
    
    
    
    5,594Total liabilities
    
    
    109,107
    
    
    
    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; 107.3 million and 105.6
million shares issued and outstanding in 2006 and
2005, respectively
    
    
    1,083
    
    
    
    1,069Capital in excess of par value
    
    
    744,556
    
    
    
    732,405Accumulated deficit
    
    
    (260,081
    )
    
    
    (305,555
    )Unrealized gain on marketable securities
    
    
    1,165
    
    
    
    1,077Unfunded pension losses
    
    
    (4,618
    )
    
    
    (4,618
    )Unrealized gain (loss) on derivatives
    
    
    (843
    )
    
    
    1,523Cumulative translation adjustments
    
    
    (184
    )
    
    
    (184
    )Total stockholders equity
    
    
    481,078
    
    
    
    425,717$
    590,185
    
    
    $
    529,403
  3




---



##### Table of Contents



ARRIS GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited
 (in thousands, except per share data and percentages)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    219,990
    
    
    $
    162,201
    
    
    $
    428,334
    
    
    $
    298,125Cost of sales
    
    
    156,250
    
    
    
    121,118
    
    
    
    308,087
    
    
    
    220,251Gross margin
    
    
    63,740
    
    
    
    41,083
    
    
    
    120,247
    
    
    
    77,874Gross margin %
    
    
    29.0
    %
    
    
    25.3
    %
    
    
    28.1
    %
    
    
    26.1
    %Operating expenses:Selling, general and administrative expenses
    
    
    21,721
    
    
    
    17,214
    
    
    
    42,999
    
    
    
    33,733Research and development expenses
    
    
    19,320
    
    
    
    14,336
    
    
    
    34,394
    
    
    
    29,137Restructuring and impairment charges
    
    
    15
    
    
    
    198
    
    
    
    343
    
    
    
    396Amortization of intangibles
    
    
    219
    
    
    
    218
    
    
    
    437
    
    
    
    775Total operating expenses
    
    
    41,275
    
    
    
    31,966
    
    
    
    78,173
    
    
    
    64,041Operating income
    
    
    22,465
    
    
    
    9,117
    
    
    
    42,074
    
    
    
    13,833Other expense (income):Interest expense
    
    
    13
    
    
    
    1,004
    
    
    
    23
    
    
    
    2,022Loss on debt retirement
    
    
    
    
    
    
    2,372
    
    
    
    
    
    
    
    2,372Loss (gain) on investments
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )
    
    
    75Interest income
    
    
    (2,081
    )
    
    
    (713
    )
    
    
    (3,601
    )
    
    
    (1,322
    )Gain in foreign currency
    
    
    (827
    )
    
    
    (1,078
    )
    
    
    (1,144
    )
    
    
    (143
    )Other expense (income), net
    
    
    95
    
    
    
    232
    
    
    
    201
    
    
    
    283Income from continuing operations before income taxes
    
    
    25,268
    
    
    
    7,300
    
    
    
    46,598
    
    
    
    10,546Income tax expense (benefit)
    
    
    606
    
    
    
    87
    
    
    
    1,234
    
    
    
    (65
    )Net income from continuing operations
    
    
    24,662
    
    
    
    7,213
    
    
    
    45,364
    
    
    
    10,611Income from discontinued operations
    
    
    88
    
    
    
    76
    
    
    
    109
    
    
    
    86Net income
    
    $
    24,750
    
    
    $
    7,289
    
    
    $
    45,473
    
    
    $
    10,697Net income
per common share Basic:Income from continuing operations
    
    $
    0.23
    
    
    $
    0.08
    
    
    $
    0.43
    
    
    $
    0.12Income from discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Net income
    
    $
    0.23
    
    
    $
    0.08
    
    
    $
    0.43
    
    
    $
    0.12Diluted:Income from continuing operations
    
    $
    0.23
    
    
    $
    0.08
    
    
    $
    0.42
    
    
    $
    0.12Income from discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Net income
    
    $
    0.23
    
    
    $
    0.08
    
    
    $
    0.42
    
    
    $
    0.12Weighted average common shares:Basic
    
    
    107,099
    
    
    
    88,837
    
    
    
    106,665
    
    
    
    88,347Diluted
    
    
    109,670
    
    
    
    91,356
    
    
    
    109,294
    
    
    
    90,505
  4




---



##### Table of Contents



ARRIS GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited
 (in thousands)
 Six Months EndedJune 30,2006
    
    
    2005Operating activities:Net income
    
    $
    45,473
    
    
    $
    10,697Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation
    
    
    5,058
    
    
    
    5,370Amortization of intangibles
    
    
    437
    
    
    
    775Equity compensation expense
    
    
    4,641
    
    
    
    1,730Excess tax benefits from stock-based compensation plans
    
    
    (354
    )
    
    
    Amortization of deferred finance fees
    
    
    
    
    
    
    305Provision for doubtful accounts
    
    
    (214
    )
    
    
    (510
    )Gain related to previously written off receivables
    
    
    (1,573
    )
    
    
    Loss on disposal of fixed assets
    
    
    (4
    )
    
    
    131Loss on investments
    
    
    
    
    
    
    75Loss on debt retirement
    
    
    
    
    
    
    2,372Impairment of long-lived assets
    
    
    
    
    
    
    291Gain on discontinued product lines
    
    
    (109
    )
    
    
    (86
    )Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions:Accounts receivable
    
    
    (20,952
    )
    
    
    (31,479
    )Other receivables
    
    
    (4,335
    )
    
    
    132Inventory
    
    
    22,145
    
    
    
    12,077Accounts payable and accrued liabilities
    
    
    5,498
    
    
    
    (6,925
    )Other, net
    
    
    7,281
    
    
    
    2,894Net cash provided by (used in) operating activities
    
    
    62,992
    
    
    
    (2,151
    )Investing activities:Purchases of property, plant and equipment
    
    
    (3,942
    )
    
    
    (4,852
    )Cash proceeds from sale of property, plant and equipment
    
    
    20
    
    
    
    40Cash paid for acquisition, net of cash acquired
    
    
    
    
    
    
    (89
    )Purchases of short-term investments
    
    
    (51,900
    )
    
    
    (5,000
    )Disposals of short-term investments
    
    
    76,150
    
    
    
    83,000Purchases of equity investments
    
    
    
    
    
    
    (259
    )Net cash provided by investing activities
    
    
    20,328
    
    
    
    72,840Financing activities:Excess tax benefits from stock-based compensation plans
    
    
    354
    
    
    
    Proceeds from issuance of common stock and other
    
    
    8,214
    
    
    
    1,433Net cash provided by financing activities
    
    
    8,568
    
    
    
    1,433Net increase in cash and cash equivalents
    
    
    91,888
    
    
    
    72,122Cash and cash equivalents at beginning of period
    
    
    75,286
    
    
    
    25,072Cash and cash equivalents at end of period
    
    $
    167,174
    
    
    $
    97,194
  5




---



##### Table of Contents



ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited  (in thousands)
 Six Months EndedJune 30,2006
    
    
    2005Noncash investing and financing activities:Net tangible assets acquired, excluding cash
    
    $
    
    
    
    $
    799Investment in acquired company
    
    
    
    
    
    
    (1,325
    )Net liabilities assumed
    
    
    
    
    
    
    (76
    )Intangible assets acquired
    
    
    
    
    
    
    691Cash paid for acquisition, net of cash acquired
    
    $
    
    
    
    $
    89Equity issued in exchange for 41/2% convertible
subordinated notes due 2008
    
    $
    
    
    
    $
    75,000Equity issued for make-whole interest payment
 41/2% convertible subordinated notes due 2008
    
    $
    
    
    
    $
    2,372
  6




---



##### Table of Contents



ARRIS GROUP, INC.
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited
 Note 1. Organization and Basis of Presentation
   Note 2. Impact of Recently Issued Accounting Standards
 Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109,
Accounting for Income Taxes,
 Note 3. Stock-Based Compensation
 Share-Based Payments Accounting for Stock Issued to Employees
 7




---



##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,(in thousands, except per share data)(unaudited)2006
    
    
    2005
    
    
    2006
    
    
    2005Net income as reported
    
    $
    24,750
    
    
    $
    7,289
    
    
    $
    45,473
    
    
    $
    10,697Add: Stock-based employee
compensation included in reported
net income, net of taxes
    
    
    2,393
    
    
    
    1,188
    
    
    
    4,641
    
    
    
    1,730Deduct: Total stock-based
employee compensation expense
determined under fair value based
methods for all awards, net of
taxes
    
    
    (2,393
    )
    
    
    (8,945
    )
    
    
    (4,641
    )
    
    
    (11,627
    )Net income (loss), pro forma
    
    $
    24,750
    
    
    $
    (468
    )
    
    $
    45,473
    
    
    $
    800Net income (loss) per common share:Basic  as reported
    
    $
    0.23
    
    
    $
    0.08
    
    
    $
    0.43
    
    
    $
    0.12Basic  pro forma
    
    $
    0.23
    
    
    $
    (0.01
    )
    
    $
    0.43
    
    
    $
    0.01Diluted  as reported
    
    $
    0.23
    
    
    $
    0.08
    
    
    $
    0.42
    
    
    $
    0.12Diluted  pro forma
    
    $
    0.23
    
    
    $
    (0.01
    )
    
    $
    0.42
    
    
    $
    0.01
 Note 4. Pension Benefits
 Components of Net Periodic Pension Benefit Cost
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)(unaudited)Service cost
    
    $
    130
    
    
    $
    115
    
    
    $
    260
    
    
    $
    229Interest cost
    
    
    369
    
    
    
    353
    
    
    
    739
    
    
    
    707Expected gain on plan assets
    
    
    (281
    )
    
    
    (261
    )
    
    
    (563
    )
    
    
    (523
    )Amortization of prior service cost
    
    
    119
    
    
    
    119
    
    
    
    239
    
    
    
    239Amortization of net (gain) loss
    
    
    2
    
    
    
    (35
    )
    
    
    4
    
    
    
    (69
    )Net periodic pension cost
    
    $
    339
    
    
    $
    291
    
    
    $
    679
    
    
    $
    583
 Employer Contributions
  Note 5. Guarantees
 Warranty
  8




---



##### Table of Contents



Balance at December 31, 2005
    
    $
    8,479Accruals related to warranties (including changes in estimates)
    
    
    1,641Settlements made (in cash or in kind)
    
    
    (1,824
    )Balance at June 30, 2006 (unaudited)
    
    $
    8,296
 Note 6. Business Acquisition
 Acquisition of cXm Broadband
   Cash paid to other shareholder
    
    $
    67Acquisition costs (legal fees, valuation fees)
    
    
    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 7. Restructuring and Impairment Charges
   9




---



##### Table of Contents



(in thousands)Balance as of December 31, 2005
    
    $
    3,121First quarter payments
    
    
    (380
    )Adjustments to accrual
    
    
    228Second quarter payments
    
    
    (404
    )Adjustments to accrual
    
    
    (5
    )Balance as of June 30, 2006 (unaudited)
    
    $
    2,560
 Note 8. Provision for Doubtful Accounts
  Note 9. Inventories
   June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)Raw material
    
    $
    1,194
    
    
    $
    788Finished goods
    
    
    90,570
    
    
    
    113,121Total net inventories
    
    $
    91,764
    
    
    $
    113,909
 Note 10. Property, Plant and Equipment
  June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)Land
    
    $
    1,822
    
    
    $
    1,822Building and leasehold
improvements
    
    
    11,383
    
    
    
    11,126Machinery and
equipment
    
    
    84,991
    
    
    
    81,91898,196
    
    
    
    94,866Less: Accumulated
depreciation
    
    
    (73,773
    )
    
    
    (69,309
    )Total property,
plant and equipment,
net
    
    $
    24,423
    
    
    $
    25,557
 10




---



##### Table of Contents



Note 11. Goodwill and Intangible Assets
    June 30, 2006 (unaudited)
    
    December 31, 2005Net
    
    
    
    
    
    
    
    
    
    NetGross
    
    Accumulated
    
    Book
    
    Gross
    
    Accumulated
    
    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
    )
    
    
    Com21
    
    
    1,929
    
    
    
    (1,849
    )
    
    
    80
    
    
    
    1,929
    
    
    
    (1,527
    )
    
    
    402cXm Broadband
    
    
    691
    
    
    
    (288
    )
    
    
    403
    
    
    
    691
    
    
    
    (173
    )
    
    
    518Total
    
    $
    107,120
    
    
    $
    (106,637
    )
    
    $
    483
    
    
    $
    107,120
    
    
    $
    (106,200
    )
    
    $
    920
  2006
    
    $
    1952007
    
    $
    2302008
    
    $
    582009
    
    $
    2010
    
    $
    
 Note 12. Long-Term Obligations
 1 2
   11




---



##### Table of Contents



Note 13. Comprehensive Income
  Three Months Ended June 30,
    
    Six Months Ended June 30,(unaudited)2006
    
    2005
    
    2006
    
    2005Net income
    
    $
    24,750
    
    
    $
    7,289
    
    
    $
    45,473
    
    
    $
    10,697Changes in the following equity accounts:Unrealized gain on marketable securities
    
    
    51
    
    
    
    96
    
    
    
    89
    
    
    
    132Unrealized gain (loss) on derivative
instruments
    
    
    (1,375
    )
    
    
    
    
    
    
    (2,366
    )
    
    
    Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Comprehensive income
    
    $
    23,426
    
    
    $
    7,385
    
    
    $
    43,196
    
    
    $
    10,828
 Note 14. Sales Information
  Three Months Ended June 30,
    
    Six Months Ended June 30,(unaudited)2006
    
    2005
    
    2006
    
    2005Comcast
    
    $
    76,669
    
    
    $
    30,268
    
    
    $
    149,176
    
    
    $
    55,658% of sales
    
    
    34.9
    %
    
    
    18.7
    %
    
    
    34.8
    %
    
    
    18.7
    %Liberty Media International
    
    
    31,209
    
    
    
    25,543
    
    
    
    53,110
    
    
    
    50,510% of sales
    
    
    14.2
    %
    
    
    15.7
    %
    
    
    12.4
    %
    
    
    16.9
    %Cox Communications
    
    
    27,093
    
    
    
    25,589
    
    
    
    52,883
    
    
    
    54,375% of sales
    
    
    12.3
    %
    
    
    15.8
    %
    
    
    12.3
    %
    
    
    18.2
    %Time-Warner Cable
    
    
    17,743
    
    
    
    18,964
    
    
    
    40,678
    
    
    
    37,302% of sales
    
    
    8.1
    %
    
    
    11.7
    %
    
    
    9.5
    %
    
    
    12.5
    %
 12




---



##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,(unaudited)2006
    
    
    2005
    
    
    2006
    
    
    2005Broadband
    
    $
    98,797
    
    
    $
    71,233
    
    
    $
    184,187
    
    
    $
    140,885Supplies & CPE
    
    
    121,193
    
    
    
    90,968
    
    
    
    244,147
    
    
    
    157,240Total sales
    
    $
    219,990
    
    
    $
    162,201
    
    
    $
    428,334
    
    
    $
    298,125
   Note 15. Earnings Per Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,(unaudited)2006
    
    
    2005
    
    
    2006
    
    
    2005Basic:Income from continuing operations
    
    $
    24,662
    
    
    $
    7,213
    
    
    $
    45,364
    
    
    $
    10,611Income from discontinued operations
    
    
    88
    
    
    
    76
    
    
    
    109
    
    
    
    86Net income
    
    $
    24,750
    
    
    $
    7,289
    
    
    $
    45,473
    
    
    $
    10,697Weighted average shares outstanding
    
    
    107,099
    
    
    
    88,837
    
    
    
    106,665
    
    
    
    88,347Basic earnings per share
    
    $
    0.23
    
    
    $
    0.08
    
    
    $
    0.43
    
    
    $
    0.12Diluted:Income from continuing operations
    
    $
    24,662
    
    
    $
    7,213
    
    
    $
    45,364
    
    
    $
    10,611Income from discontinued operations
    
    
    88
    
    
    
    76
    
    
    
    109
    
    
    
    86Net income
    
    $
    24,750
    
    
    $
    7,289
    
    
    $
    45,473
    
    
    $
    10,697Weighted average shares outstanding
    
    
    107,099
    
    
    
    88,837
    
    
    
    106,665
    
    
    
    88,347Net effect of dilutive equity awards
    
    
    2,571
    
    
    
    2,519
    
    
    
    2,629
    
    
    
    2,158Total
    
    
    109,670
    
    
    
    91,356
    
    
    
    109,294
    
    
    
    90,505Diluted earnings per share
    
    $
    0.23
    
    
    $
    0.08
    
    
    $
    0.42
    
    
    $
    0.12
 13




---



##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
  
    
    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 structure and expense structure.
  
    
    The VoIP market continued to grow in first half of 2006 as MSOs continued their rollout
of telephony to their customers. We leveraged our existing market position and product
offerings to increase sales of both E-MTAs and CMTS products.
    
    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 for
ever faster download speeds and will require added CMTS capacity and features. .
    
    We have experienced substantial growth in E-MTA unit sales and revenues and anticipate
growth in the E-MTA revenue and unit sales in the third quarter of 2006.
    
    Sales of our CBR products increased slightly year over year. A portion of the sales in
2006 include last time buys by customers. As previously disclosed, we anticipate that sales
of our CBR products will decline in 2006 and beyond as our customers transition to VoIP.
We expect a significant decline in CBR sales in the third quarter of 2006.
    
    Gross margin percentage in the second quarter 2006 was 29.0%, which compares to 27.1% in
the first quarter 2006. This increase reflects gross margin improvements in both the
Broadband and Supplies & CPE product categories. It also reflects a change in product mix
as we sold proportionately more Broadband product (CMTS and CBR) which have margins higher
than the company average. We anticipate that our gross margins as a percent will decline
in the third quarter of 2006 as a result of an expected decline in CBR sales and a
potentially less favorable product mix. The ultimate result is dependent upon several
factors including but not limited to: product mix, attainment of cost reductions, and
competitive price pressure.
    
    Our order backlog was $149.2 million and our book to bill ratio was 0.91 in the second
quarter of 2006, both of which modestly declined from the first quarter. Two factors are
contributing to this decline. First, we are now fulfilling orders which span multiple
quarters for last time buys of CBR product. Second, we are beginning to observe a
shortening of the lead times for orders.
    
    We invested $19.3 million in research and development in the second quarter 2006
including certain license fees paid or accrued for UTStarcom described below. Key products
we expect to launch this year include: our Keystone D5 Digital Multimedia Termination
System, a wireless E-MTA gateway, a multiline E-MTA, a T1/E1 MTA, and our FlexPath wideband
products including a wideband modem. In the second quarter, we completed the introduction
of the 500-series E-MTAs, including versions that fully comply with European Union mandated hazardous
materials standards known as RoHS.
    
    In April 2006, we announced that we entered into a joint development, licensing and
supply agreement with UTStarcom that will enable the fourth leg 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.
 14




---



##### Table of Contents



As part of this agreement, we expect to
invest up to $5.0 million in license fees over three years to acquire certain technologies.
In the second quarter of 2006, as previously disclosed, we recognized R&D expense of
approximately $2.4 million related to this agreement; the remaining license fees are
expected to be expensed in 2007 and 2008.
    
    During first half of 2006, we generated $63.0 million of cash from operating activities.
Total cash, cash equivalents, and short-term investments increased approximately $91.9
million during the first six months of 2006.
 Significant Customers
  Three Months Ended June 30,
    
    Six Months Ended June 30,(unaudited)2006
    
    2005
    
    2006
    
    2005Comcast
    
    $
    76,669
    
    
    $
    30,268
    
    
    $
    149,176
    
    
    $
    55,658% of sales
    
    
    34.9
    %
    
    
    18.7
    %
    
    
    34.8
    %
    
    
    18.7
    %Liberty Media International
    
    
    31,209
    
    
    
    25,543
    
    
    
    53,110
    
    
    
    50,510% of sales
    
    
    14.2
    %
    
    
    15.7
    %
    
    
    12.4
    %
    
    
    16.9
    %Cox Communications
    
    
    27,093
    
    
    
    25,589
    
    
    
    52,883
    
    
    
    54,375% of sales
    
    
    12.3
    %
    
    
    15.8
    %
    
    
    12.3
    %
    
    
    18.2
    %Time-Warner Cable
    
    
    17,743
    
    
    
    18,964
    
    
    
    40,678
    
    
    
    37,302% of sales
    
    
    8.1
    %
    
    
    11.7
    %
    
    
    9.5
    %
    
    
    12.5
    %
  Comparison of Operations for the Three and Six Months Ended June 30, 2006 and 2005
 Net Sales
  Net Sales
    
    
    Increase Between 2006 and 2005For the Three Months
    
    
    For the Six Months
    
    
    For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,
    
    
    Ended June 30
    
    
    Ended June 302006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    $
    
    
    %
    
    
    $
    
    
    %Product Category:Broadband
    
    $
    98.8
    
    
    $
    71.2
    
    
    $
    184.2
    
    
    $
    140.9
    
    
    $
    27.6
    
    
    
    38.8
    
    
    $
    43.3
    
    
    
    30.7Supplies & CPE
    
    
    121.2
    
    
    
    91.0
    
    
    
    244.1
    
    
    
    157.2
    
    
    
    30.2
    
    
    
    33.2
    
    
    
    86.9
    
    
    
    55.3Total sales
    
    $
    220.0
    
    
    $
    162.2
    
    
    $
    428.3
    
    
    $
    298.1
    
    
    $
    57.8
    
    
    
    35.6
    
    
    $
    130.2
    
    
    
    43.7
 15




---



##### Table of Contents



Net Sales
    
    
    Increase Between 2006 and 2005For the Three Months
    
    
    For the Six Months
    
    
    For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,
    
    
    Ended June 30
    
    
    Ended June 302006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    $
    
    
    %
    
    
    $
    
    
    %Domestic
    
    $
    161.8
    
    
    $
    118.1
    
    
    $
    319.2
    
    
    $
    218.1
    
    
    $
    43.7
    
    
    
    37.0
    
    
    $
    101.1
    
    
    
    46.4International
    
    
    58.2
    
    
    
    44.1
    
    
    
    109.1
    
    
    
    80.0
    
    
    
    14.1
    
    
    
    32.0
    
    
    
    29.1
    
    
    
    36.4Total sales
    
    $
    220.0
    
    
    $
    162.2
    
    
    $
    428.3
    
    
    $
    298.1
    
    
    $
    57.8
    
    
    
    35.6
    
    
    $
    130.2
    
    
    
    43.7
 Broadband Net Sales 2006 vs. 2005
  
    
    Sales of our CMTS product increased in the three and six months ended June 30, 2006 as
compared to the same periods in 2005, as we recorded higher level of sales of our CMTS to
many customers, most notably Comcast.
    
    Sales of our CBR voice products were up slightly in the second quarter of 2006 as
compared to 2005 and were flat for the first six months of 2006 as compared to the same
period in 2005. A portion of the sales recorded in the first six months of 2006 were for
last time buys from certain customers. As previously disclosed, we believe that the sales
of these products will decline through 2006 as customers change to VoIP. We anticipate a
significant decline in CBR sales in the third quarter 2006.
 Supplies & CPE Net Sales 2006 vs. 2005
  
    
    Increased sales of our E-MTA product as operators ramped up deployment of VoIP. In the
three and six months ended June 30, 2006, we sold 1.1 million and 2.2 million E-MTAs,
respectively, in comparison to approximately 0.6 million and 0.9 million in the three and
six months 2005, respectively.
 Gross Margin
  Gross Margin $
    
    
    Increase Between 2006 and 2005For the Three Months
    
    
    For the Six Months
    
    
    For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,
    
    
    Ended June 30
    
    
    Ended June 302006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    $
    
    
    %
    
    
    $
    
    
    %Product Category:Broadband
    
    $
    45.4
    
    
    $
    27.4
    
    
    $
    84.3
    
    
    $
    53.5
    
    
    $
    18.0
    
    
    
    65.7
    
    
    $
    30.8
    
    
    
    57.6Supplies & CPE
    
    
    18.3
    
    
    
    13.7
    
    
    
    35.9
    
    
    
    24.4
    
    
    
    4.6
    
    
    
    33.6
    
    
    
    11.5
    
    
    
    47.1Total
    
    $
    63.7
    
    
    $
    41.1
    
    
    $
    120.2
    
    
    $
    77.9
    
    
    $
    22.6
    
    
    
    55.0
    
    
    $
    42.3
    
    
    
    54.3
 16




---



##### Table of Contents



Gross Margin %
    
    Increase (Decrease) Between 2006 and 2005For the Three Months
    
    For the Six Months
    
    For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,
    
    Ended June 30
    
    Ended June 302006
    
    2005
    
    2006
    
    2005
    
    Percentage PointsProduct Category:Broadband
    
    
    46.0
    %
    
    
    38.5
    %
    
    
    45.8
    %
    
    
    38.0
    %
    
    
    7.5
    
    
    
    7.8Supplies & CPE
    
    
    15.1
    %
    
    
    15.0
    %
    
    
    14.6
    %
    
    
    15.5
    %
    
    
    0.1
    
    
    
    (0.9
    )Total
    
    
    29.0
    %
    
    
    25.3
    %
    
    
    28.1
    %
    
    
    26.1
    %
    
    
    3.7
    
    
    
    2.0
 Broadband Gross Margin 2006 vs. 2005
  
    
    Gross margin dollars were impacted by the quarter-over-quarter and year-over-year
increase in Broadband revenue and the improvement in gross margin percent.
    
    In the first half of 2005, our next generation DOCSIS 2.0 CMTS was in the process of
being cost reduced. The initial margin percentages for this product were lower than
historical margins due to higher initial product costs. The cost reduction programs
successfully improved our margin on our CMTS products year-over-year.
 Supplies & CPE Gross Margin 2006 vs. 2005
  
    
    The increase in revenues for the three and six months ended June 30, 2006 as compared to
the same periods in 2005 significantly impacted gross margin dollars. This was
predominantly related to our increase in sales of E-MTAs.
    
    We implemented price reductions related to our E-MTA products at the beginning of 2006.
The reductions were primarily implemented in conjunction with agreements entered into with
customers that we believe will provide us with better market share and visibility. The
reductions were implemented as we were in the process of introducing a cost reduced version
of the product. Until the product is fully introduced, we will record lower gross margins
than in prior quarters. We sold proportionately more of the cost reduced version of the
product in the second quarter of 2006 than the first quarter 2006 resulting in an
improvement in gross margin percentage. We anticipate that we will sell sequentially more
of the cost reduced product in both the third and fourth quarters of 2006. As a result, we
believe that our Supplies & CPE margins will continue to improve in the second half of
2006, but the improvement is dependent upon the impact of, among other factors, achievement
of planned cost reductions, product mix, and price pressures.
 Operating Expenses
  Operating Expenses
    
    
    Increase (Decrease) Between 2006 and 2005For the Three Months
    
    
    For the Six Months
    
    
    For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,
    
    
    Ended June 30
    
    
    Ended June 302006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    $
    
    
    %
    
    
    $
    
    
    %SG&A
    
    $
    21.7
    
    
    $
    17.2
    
    
    $
    43.0
    
    
    $
    33.7
    
    
    $
    4.5
    
    
    
    26.2
    
    
    $
    9.3
    
    
    
    27.6Research &
development
    
    
    19.4
    
    
    
    14.4
    
    
    
    34.5
    
    
    
    29.1
    
    
    
    5.1
    
    
    
    35.7
    
    
    
    5.4
    
    
    
    18.6Restructuring &
impairment
    
    
    0.0
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    (0.2
    )
    
    
    (100.0
    )
    
    
    (0.1
    )
    
    
    (25.0
    )Amortization of
intangibles
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.4
    
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )
    
    
    (50.0
    )Total
    
    $
    41.3
    
    
    $
    32.0
    
    
    $
    78.2
    
    
    $
    64.0
    
    
    $
    9.4
    
    
    
    29.5
    
    
    $
    14.2
    
    
    
    22.2
 17




---



##### Table of Contents



Selling, General, and Administrative, or SG&A, Expenses
  
    
    Equity compensation expense associated with the adoption of SFAS No. 123R effective July 1, 2005.
    
    Higher variable compensation related to an increase in commissions, bonuses, slightly
higher staffing level, taxes and other fringe benefits.
    
    Partially offsetting these increases was a reduction in bad debt expense related to the
recovery of previously written off receivables. This resulted in a gain of $1.1 million
and $1.6 million for the three and six months ended June 30, 2006.
 Research & Development Expenses
   
    
    Previously disclosed technology licensing fees of $2.4 million. These fees are related
to a joint development project on Fixed Mobile Convergence with UTStarcom.
    
    Higher variable compensation related to an increase in bonuses, slightly higher staffing
level, taxes and other fringe benefits.
    
    Included in the second quarter 2005 expenses was a benefit of approximately $1.2 million
representing funding received from a customer related to development work that ARRIS
performed for the customer over the preceding 18 months. The expense incurred to perform
the work was charged to research and development in the periods it was performed. The
customer provided progress payments over the time period. The payments were recorded as a
liability until the work was completed and no contingency existed for the potential of the
return of the payments to the customer. This occurred in the second quarter 2005, at which
time the payments were recognized as an offset to research and development expense.
 Restructuring and Impairment Charges
  Amortization of Intangibles
  Other Expense (Income):
 Interest Expense
  18




---



##### Table of Contents



Loss on Debt Retirement
  Loss (Gain) in Foreign Currency
  Interest Income
  Other Expense (Income), Net
  Income Taxes
 Interim Financial
Reporting Accounting for Income Taxes in Interim Periods
 Accounting for Income Taxes
  19




---



##### Table of Contents



Financial Liquidity and Capital Resources
 Overview
  Liquidity & Capital Resources Data
 Six Months Ended June 30,2006
    
    
    2005(in millions, except DSO and turns)Key Working Capital ItemsCash provided by operating activities
    
    $
    63.0
    
    
    $
    (2.2
    )Cash, cash equivalents, and short-term
investments
    
    $
    197.2
    
    
    $
    97.2Accounts receivable, net
    
    $
    104.1
    
    
    $
    87.9Days Sales Outstanding (DSOs)
    
    
    40
    
    
    
    44Inventory
    
    $
    91.8
    
    
    $
    80.9Inventory turns
    
    
    6.0
    
    
    
    5.1
 Inventory & Accounts Receivable
   Full Redemption of the 2008 Notes
   20




---



##### Table of Contents



Summary of Current Liquidity Position and Potential for Future Capital Raising
  Commitments
  Cash Flow
  For the Six Months EndedJune 30,2006
    
    
    2005Cash provided by operating activities
    
    $
    63.0
    
    
    $
    (2.2
    )Cash provided by investing activities
    
    
    20.3
    
    
    
    72.8Cash provided by financing activities
    
    
    8.6
    
    
    
    1.4Net increase in cash
    
    $
    91.9
    
    
    $
    72.1
 Operating Activities:
  For the Six Months EndedJune 30,2006
    
    
    2005Net income after non-cash adjustments
    
    $
    53.4
    
    
    $
    21.2(Increase)/Decrease in accounts receivable
    
    
    (21.0
    )
    
    
    (31.5
    )(Increase)/Decrease in inventory
    
    
    22.1
    
    
    
    12.1All other  net
    
    
    8.5
    
    
    
    (3.9
    )Cash provided by operating activities
    
    $
    63.0
    
    
    $
    (2.1
    )
 
    
    Our inventory levels decreased in the first half of 2006 as we had fewer E-MTAs on hand
as compared to the end of 2005. Our customers modestly reduced their purchases in the
fourth quarter of 2005 leaving us with a higher than expected level of inventory at year
end. This corrected itself in the first half of 2006. Our inventory
turns for the first half of 2006 were 6.0, as compared to turns of
5.1 for the same period in 2005.
    
    Our accounts receivable level increased in both periods reflecting higher sales. We
continue to enjoy strong DSO performance. Our DSO was 40 days
for the first half of 2006 as
compared to DSO of 44 days for the same period in 2005.
 21




---



##### Table of Contents



Investing Activities:
  For the Six Months EndedJune
30,2006
    
    
    2005Capital expenditures
    
    $
    (3.9
    )
    
    $
    (4.9
    )Purchases of short-term investments
    
    
    (51.9
    )
    
    
    (5.0
    )Disposals of short-term investments
    
    
    76.2
    
    
    
    83.0Other
    
    
    
    
    
    
    (0.3
    )Cash provided by (used in) investing activities
    
    $
    20.3
    
    
    $
    72.8
 Capital Expenditures 
  Purchases/Disposals of Short-Term Investments 
  Other 
  Financing Activities:
  For the Six Months EndedJune
30,2006
    
    
    2005Excess tax benefits from stock-based
compensation plans
    
    $
    0.4
    
    
    $
    Proceeds from issuance of stock and other
    
    
    8.2
    
    
    
    1.4Cash provided by financing activities
    
    $
    8.6
    
    
    $
    1.4
  Interest Rates
  Foreign Currency
    22




---



##### Table of Contents



Financial Instruments
  Short-Term Investments
  Investments
 Accounting for
Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested
 Capital Expenditures
  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
  23




---



##### Table of Contents



Share-Based Payment,
  Critical Accounting Estimates
  Forward-Looking Statements
  24




---



##### Table of Contents



Item 3 . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
      
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control over Financial Reporting
 25




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
   Hybrid Patents, Inc. v. Charter Communications, Inc.
 ARRIS International, Inc. v. Hybrid Patents, Inc., Hybrid Networks, Inc., HYBR Wireless
Industries, Inc., London Pacific Life & Annuity Company, and Carol Wu, Trustee of the Estate of
Com21, Inc.
 26




---



##### Table of Contents



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;
    
    other demands and opportunities for capital;
    
    regulations;
    
    demands for network services;
    
    competition and technology;
    
    real or perceived trends or uncertainties in these factors; and
    
    acceptance of new services offered by our customers.
   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.
   27




---



##### Table of Contents



Acquisitions can involve significant risks.
  Our business has primarily come from several key customers. The loss of one of these customers or
a significant reduction in services 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.
  We have anti-takeover defenses that could delay or prevent an acquisition of our company.
  28




---



##### Table of Contents



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.
  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.
   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.
  29




---



##### Table of Contents



Our international operations may be adversely affected by any decline in the demand for broadband
systems designs and equipment in international markets.
  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.
  30




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
   Number of
    
    Number ofShares Voted For
    
    Shares WithheldAlex B. Best
    
    
    99,833,958
    
    
    
    901,458Harry L. Bosco
    
    
    99,832,932
    
    
    
    902,484John Anderson Craig
    
    
    100,065,327
    
    
    
    670,089Matthew B. Kearney
    
    
    100,063,627
    
    
    
    671,789William H. Lambert
    
    
    91,180,089
    
    
    
    9,555,327John R. Petty
    
    
    97,546,091
    
    
    
    3,189,325Robert J. Stanzione
    
    
    97,777,871
    
    
    
    2,957,545
  Number of Shares
    
    Number of Shares
    
    Number of SharesVoted For
    
    Voted Against
    
    AbstainApproval of
performance goals
with respect to the
2001 Stock
Incentive Plan
    
    
    94,894,365
    
    
    
    5,747,427
    
    
    
    93,624
  Number of Shares
    
    Number of Shares
    
    Number of SharesVoted For
    
    Voted Against
    
    AbstainApproval of
performance goals
with respect to the
2004 Stock
Incentive Plan
    
    
    95,326,767
    
    
    
    5,312,245
    
    
    
    96,404
  Number of Shares
    
    Number of Shares
    
    Number of SharesVoted For
    
    Voted Against
    
    AbstainApproval of
performance goals
with respect to the
Management Stock
Incentive Plan
    
    
    96,721,980
    
    
    
    3,913,195
    
    
    
    100,241
  Number of Shares
    
    Number of Shares
    
    Number of SharesVoted For
    
    Voted Against
    
    AbstainApproval of the
retention of Ernst
& Young LLP
    
    
    97,804,411
    
    
    
    2,851,749
    
    
    
    79,256
 31




---



##### Table of Contents



Item 6. EXHIBITS
 Exhibit No.
    
    Description of Exhibit21
    
    ARRIS Group Inc. & Subsidiaries31.1
    
    Section 302 Certification of Chief Executive Officer, filed herewith31.2
    
    Section 302 Certification of Chief Financial Officer, filed herewith32.1
    
    Section 906 Certification of Chief Executive Officer, filed herewith32.2
    
    Section 906 Certification of Chief Financial Officer, filed herewith
 32




---



##### Table of Contents



SIGNATURES
  ARRIS GROUP, INC./s/ David B. PottsDavid B. PottsExecutive Vice President, Chief Financial
Officer, Chief Accounting Officer, and
Chief Information Officer
  33