##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 For the quarter ended March 31, 2007
 of
 ARRIS GROUP, INC.
 
 3871 Lakefield Drive
Suwanee, GA 30024(770) 473-2000




---



##### 



ARRIS GROUP, INC.
FORM 10-Q
For the Three Months Ended March 31, 2007
 INDEX
 PagePart I.
    
    Financial InformationItem 1.
    
    Financial Statementsa) Consolidated Balance Sheets
as of March 31, 2007 and December 31, 2006
    
    
    2b) Consolidated Statements of Operations for the
Three Months Ended March 31, 2007 and 2006
    
    
    3c) Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2007 and 2006
    
    
    4d) Notes to the Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures on Market Risk
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    23Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    24Item 1A.
    
    Risk Factors
    
    
    25Item 6.
    
    Exhibits
    
    
    29Signatures
    
    
    
    
    30EX-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




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 ARRIS GROUP, INC.CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 March 31,
    
    
    December 31,2007
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    441,317
    
    
    $
    461,618Short-term investments, at fair value
    
    
    134,610
    
    
    
    87,575Total cash, cash equivalents and short-term investments
    
    
    575,927
    
    
    
    549,193Restricted cash
    
    
    3,128
    
    
    
    3,124Accounts receivable (net of allowances for doubtful
accounts of $2,814 in 2007 and $3,576 in 2006)
    
    
    125,756
    
    
    
    115,304Other receivables
    
    
    9,888
    
    
    
    2,556Inventories
    
    
    78,186
    
    
    
    94,226Prepaids
    
    
    3,500
    
    
    
    3,547Current deferred income tax assets
    
    
    26,818
    
    
    
    29,285Other current assets
    
    
    4,001
    
    
    
    3,717Total current assets
    
    
    827,204
    
    
    
    800,952Property, plant and equipment (net of accumulated
depreciation of $79,810 in 2007 and $77,311 in 2006)
    
    
    28,076
    
    
    
    28,287Goodwill
    
    
    150,569
    
    
    
    150,569Intangibles (net of accumulated amortization of $106,890 in
2007 and $106,832 in 2006)
    
    
    230
    
    
    
    288Investments
    
    
    3,569
    
    
    
    3,520Noncurrent deferred income tax assets
    
    
    18,639
    
    
    
    20,874Other assets
    
    
    7,790
    
    
    
    9,067$
    1,036,077
    
    
    $
    1,013,557LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    41,337
    
    
    $
    60,853Accrued compensation, benefits and related taxes
    
    
    9,991
    
    
    
    23,269Accrued warranty
    
    
    7,968
    
    
    
    8,234Other accrued liabilities
    
    
    32,411
    
    
    
    29,057Total current liabilities
    
    
    91,707
    
    
    
    121,413Long-term debt, net of current portion
    
    
    276,000
    
    
    
    276,000Accrued pension
    
    
    12,420
    
    
    
    12,061Noncurrent income tax payable
    
    
    4,334
    
    
    
    3,041Other long-term liabilities
    
    
    5,606
    
    
    
    5,621Total liabilities
    
    
    390,067
    
    
    
    418,136Stockholders 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; 108.6 million and 107.9 million
shares issued and outstanding in 2007 and 2006,
respectively
    
    
    1,096
    
    
    
    1,089Capital in excess of par value
    
    
    773,839
    
    
    
    761,500Accumulated deficit
    
    
    (125,624
    )
    
    
    (163,268
    )Unrealized gain on marketable securities
    
    
    1,345
    
    
    
    1,297Unfunded pension losses
    
    
    (4,462
    )
    
    
    (4,462
    )Unrealized loss on derivatives
    
    
    
    
    
    
    (551
    )Cumulative translation adjustments
    
    
    (184
    )
    
    
    (184
    )Total stockholders equity
    
    
    646,010
    
    
    
    595,421$
    1,036,077
    
    
    $
    1,013,557
  2




---



##### Table of Contents



ARRIS GROUP, INC.CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)(in thousands, except per share data and percentages)
 Three Months EndedMarch 31,2007
    
    
    2006Net sales
    
    $
    235,253
    
    
    $
    208,344Cost of sales
    
    
    166,506
    
    
    
    151,837Gross margin
    
    
    68,747
    
    
    
    56,507Gross margin %
    
    
    29.2
    %
    
    
    27.1
    %Operating expenses:Selling, general, and administrative expenses
    
    
    24,175
    
    
    
    21,278Research and development expenses
    
    
    18,096
    
    
    
    15,074Restructuring and impairment charges
    
    
    421
    
    
    
    328Amortization of intangibles
    
    
    58
    
    
    
    218Total operating expenses
    
    
    42,750
    
    
    
    36,898Operating income
    
    
    25,997
    
    
    
    19,609Other expense (income):Interest expense
    
    
    1,668
    
    
    
    10Loss on investments
    
    
    19
    
    
    
    Loss (gain) on foreign currency
    
    
    322
    
    
    
    (317
    )Interest income
    
    
    (6,483
    )
    
    
    (1,520
    )Gain related to terminated acquisition, net of expenses
    
    
    (22,835
    )
    
    
    Other expense (income), net
    
    
    65
    
    
    
    106Income from continuing operations before income taxes
    
    
    53,241
    
    
    
    21,330Income tax expense
    
    
    15,597
    
    
    
    628Net income from continuing operations
    
    
    37,644
    
    
    
    20,702Income from discontinued operations
    
    
    
    
    
    
    21Net income
    
    $
    37,644
    
    
    $
    20,723Net income per common share:Basic:Income from continuing operations
    
    $
    0.35
    
    
    $
    0.20Income from discontinued operations
    
    
    
    
    
    
    Net income
    
    $
    0.35
    
    
    $
    0.20Diluted:Income from continuing operations
    
    $
    0.34
    
    
    $
    0.19Income from discontinued operations
    
    
    
    
    
    
    Net income
    
    $
    0.34
    
    
    $
    0.19Weighted average common shares:Basic
    
    
    108,467
    
    
    
    106,227Diluted
    
    
    110,988
    
    
    
    109,345
  3




---



##### Table of Contents



ARRIS GROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited  (in thousands)
 Three Months EndedMarch 31,2007
    
    
    2006Operating activities:Net income
    
    $
    37,644
    
    
    $
    20,723Adjustments to reconcile net income to net cash provided by (used in) operating
activities:Depreciation
    
    
    2,497
    
    
    
    2,618Amortization of intangibles
    
    
    58
    
    
    
    218Stock compensation expense
    
    
    2,656
    
    
    
    2,248Deferred income tax provision
    
    
    4,702
    
    
    
    Amortization of deferred finance fees
    
    
    279
    
    
    
    Provision for doubtful accounts
    
    
    371
    
    
    
    (265
    )Gain related to previously written off receivables
    
    
    (377
    )
    
    
    (475
    )Loss on disposal of fixed assets
    
    
    
    
    
    
    2Loss on investments
    
    
    19
    
    
    
    Gain on discontinued product lines
    
    
    
    
    
    
    (21
    )Gain related to terminated acquisition, net of expenses
    
    
    (22,835
    )
    
    
    Changes in operating assets and liabilities, net of effect of acquisitions and
dispositions:Accounts receivable
    
    
    (10,823
    )
    
    
    (7,555
    )Other receivables
    
    
    (7,332
    )
    
    
    (3,852
    )Inventory
    
    
    16,040
    
    
    
    14,236Accounts payable and accrued liabilities
    
    
    (24,842
    )
    
    
    (3,639
    )Excess tax benefits from stock-based compensation plans
    
    
    (4,855
    )
    
    
    (169
    )Prepaids and other, net
    
    
    2,763
    
    
    
    7,280Net cash provided by (used in) operating activities
    
    
    (4,035
    )
    
    
    31,349Investing activities:Purchases of property, plant and equipment
    
    
    (2,287
    )
    
    
    (1,389
    )Cash received related to terminated acquisition, net of expenses paid
    
    
    10,881
    
    
    
    Cash paid for hedge related to terminated acquisition
    
    
    (26,469
    )
    
    
    Cash proceeds from hedge related to terminated acquisition
    
    
    38,750
    
    
    
    Purchases of short-term investments
    
    
    (128,135
    )
    
    
    Disposals of short-term investments
    
    
    81,100
    
    
    
    18,000Net cash provided by (used in) investing activities
    
    
    (26,160
    )
    
    
    16,611Financing activities:Excess tax benefits from stock-based compensation plans
    
    
    4,855
    
    
    
    169Employer repurchase of shares to satisfy minimum tax withholdings
    
    
    
    
    
    
    (27
    )Proceeds from issuance of stock
    
    
    5,039
    
    
    
    6,171Net cash provided by (used in) financing activities
    
    
    9,894
    
    
    
    6,313Net increase (decrease) in cash and cash equivalents
    
    
    (20,301
    )
    
    
    54,273Cash and cash equivalents at beginning of period
    
    
    461,618
    
    
    
    75,286Cash and cash equivalents at end of period
    
    $
    441,317
    
    
    $
    129,559
  4




---



##### 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. Pension Benefits
 Components of Net Periodic Pension Benefit Cost
 Three Months Ended March 31,2007
    
    
    2006(in thousands)(unaudited)Service cost
    
    $
    140
    
    
    $
    130Interest cost
    
    
    412
    
    
    
    369Expected return on plan assets
    
    
    (319
    )
    
    
    (281
    )Amortization of prior service cost
    
    
    119
    
    
    
    119Amortization of net (gain) loss
    
    
    25
    
    
    
    2Net periodic pension cost
    
    $
    377
    
    
    $
    339
 5




---



##### Table of Contents



Employer Contributions
  Note 4. Guarantees
 Warranty
    Balance at December 31, 2006
    
    $
    8,234Accruals related to warranties (including changes in estimates)
    
    
    872Settlements made (in cash or in kind)
    
    
    (1,138
    )Balance at March 31, 2007 (unaudited)
    
    $
    7,968
 Note 5. Restructuring and Impairment Charges
  (in millions)Balance as of December 31, 2006
    
    $
    3.6First quarter payments
    
    
    (0.5
    )Adjustments to accrual
    
    
    0.4Balance as of March 31, 2007 (unaudited)
    
    $
    3.5
 6




---



##### Table of Contents



Note 6. Inventories
  March 31,
    
    
    December 31,2007
    
    
    2006(unaudited)Raw material
    
    $
    2,601
    
    
    $
    341Finished goods
    
    
    75,585
    
    
    
    93,885Total net inventories
    
    $
    78,186
    
    
    $
    94,226
 Note 7. Property, Plant and Equipment
  March 31,
    
    
    December 31,2007
    
    
    2006(unaudited)Land
    
    $
    1,822
    
    
    $
    1,822Building and leasehold improvements
    
    
    12,846
    
    
    
    11,470Machinery and equipment
    
    
    93,218
    
    
    
    92,306107,886
    
    
    
    105,598Less: Accumulated depreciation
    
    
    (79,810
    )
    
    
    (77,311
    )Total property, plant and equipment, net
    
    $
    28,076
    
    
    $
    28,287
 Note 8. Long-Term Obligations
  March 31,
    
    
    December 31,2007
    
    
    2006Other long-term liabilities
    
    $
    22,360
    
    
    $
    20,7232.00 % convertible senior notes due 2026
    
    
    276,000
    
    
    
    276,000Total long term debt and other long-term liabilities
    
    $
    298,360
    
    
    $
    296,723
    7




---



##### Table of Contents



Note 9. Comprehensive Income
  Three Months Ended March 31,(unaudited)2007
    
    2006Net income
    
    $
    37,644
    
    
    $
    20,723Changes in the following equity accountsUnrealized gain (loss) on marketable securities
    
    
    48
    
    
    
    37Unrealized gain (loss) on derivative
instruments
    
    
    551
    
    
    
    (991
    )Translation adjustment
    
    
    
    
    
    
    Comprehensive income
    
    $
    38,243
    
    
    $
    19,769
  8




---



##### Table of Contents



Note 10. Sales Information
  Three Months EndedMarch 31,(unaudited)2007
    
    2006Comcast
    
    $
    91,568
    
    
    $
    72,541% of sales
    
    
    38.9
    %
    
    
    34.8
    %Cox Communications
    
    $
    14,846
    
    
    $
    25,718% of sales
    
    
    6.3
    %
    
    
    12.3
    %Liberty Media International
    
    $
    19,307
    
    
    $
    21,346% of sales
    
    
    8.2
    %
    
    
    10.2
    %TimeWarner Cable
    
    $
    22,380
    
    
    $
    22,486% of sales
    
    
    9.5
    %
    
    
    10.8
    %
   Three Months EndedMarch 31,(unaudited)2007
    
    
    2006Broadband
    
    $
    80,149
    
    
    $
    85,390Supplies and CPE
    
    
    155,104
    
    
    
    122,954Total sales
    
    $
    235,253
    
    
    $
    208,344
   9




---



##### Table of Contents



Note 11. Earnings Per Share
  Three Months EndedMarch 31,(unaudited)2007
    
    
    2006Basic:Income from continuing operations
    
    $
    37,644
    
    
    $
    20,702Income from discontinued operations
    
    
    
    
    
    
    21Net income
    
    $
    37,644
    
    
    $
    20,723Weighted average shares outstanding
    
    
    108,467
    
    
    
    106,227Basic earnings per share
    
    $
    0.35
    
    
    $
    0.20Diluted:Income from continuing operations
    
    $
    37,644
    
    
    $
    20,702Income from discontinued operations
    
    
    
    
    
    
    21Net income
    
    $
    37,644
    
    
    $
    20,723Weighted average shares outstanding
    
    
    108,467
    
    
    
    106,227Net effect of dilutive equity awards
    
    
    2,521
    
    
    
    3,118Total
    
    
    110,988
    
    
    
    109,345Diluted earnings per share
    
    $
    0.34
    
    
    $
    0.19
  Note 12. Income Taxes
 Adoption of FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109, Accounting for Income Taxes.
 Accounting for Uncertainty in
Income Taxesan Interpretation of FASB Statement No. 109, Accounting for Income Taxes. Accounting for Income Taxes
    10




---



##### Table of Contents



Income Tax Expense
  Three Months Ended March 31,2007
    
    
    2006Income Before Tax
    
    
    Income Tax Expense
    
    
    Effective Tax Rate
    
    
    Income Before Tax
    
    
    Income Tax Expense
    
    
    Effective Tax RateNon-Discrete Items
    
    $
    30.4
    
    
    $
    10.1
    
    
    
    33.3
    %
    
    $
    21.3
    
    
    $
    0.6
    
    
    
    2.8
    %Discrete Accounting
Events
    
    
    22.8
    
    
    
    8.7
    
    
    
    38.0
    %
    
    
    
    
    
    
    
    
    
    
    Discrete Tax Events  Valuation Allowances / FIN 48 Reserves
    
    
    
    
    
    
    (3.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    53.2
    
    
    $
    15.6
    
    
    
    29.3
    %
    
    $
    21.3
    
    
    $
    0.6
    
    
    
    2.8
    %
 
    
    In the first quarter of 2007, the Company considered the net gain related to the
termination of the TANDBERG Television acquisition to be discrete in nature in accordance
with the guidance of APB Opinion 28, Interim Financial Reportingand FIN 18, Accounting for
Income Taxes in Interim Periods. As a result, income tax expense was recorded at a
discrete rate of 38.0%.
    
    The termination fee, less expenses, associated with the terminated TANDBERG Television
acquisition is considered capital in nature. As a result, the Company reversed a net of
$4.0 million of valuation allowances associated with deferred tax assets related to net
capital loss carryforwards. Prior to the capital gain created by the terminated
acquisition, the Company considered it more-likely-than-not that capital loss carryforwards
would not be realizable. Additionally, we recorded an additional $0.8 million of discrete
income tax expense related to the TANDBERG transaction.
    
    In the first quarter of 2006, income tax expense was recorded at the federal AMT rate
and state rates, as applicable. Prior to the end of 2006, the Company was in a cumulative
loss position for the prior three fiscal years. As a result, it had recorded a valuation
allowance equivalent to its net deferred tax assets. At the end of 2006, the Company
reversed the majority of the valuation allowance. See the Companys Annual Report on Form
10-K for the year ended December 31, 2006, as filed with the SEC for further discussion.
  Note 13. Termination of Proposed Acquisition
   11




---



##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
  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 and operating income, improved year over year as a result of the growth in the
VoIP market and customer acceptance of our products.
 Three Months Ended March 31,(in thousands)2007
    
    2006Sales
    
    $
    235,253
    
    
    $
    208,344Operating income
    
    $
    25,997
    
    
    $
    19,609Cash, cash equivalents, and short-term
investments
    
    $
    575,927
    
    
    $
    165,809
 
    
    We have successfully leveraged our existing market position and industry experience to
increase sales of both EMTA 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 the need
to provide ever faster download speeds which require additional CMTS capacity and features.
    
    We expect demand for EMTAs to moderate as many of our customers have now passed through
the initial launch stage and have reached a sustainable level of deployments.
    
    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 continue to decline in 2007.
 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
 12




---



##### Table of Contents



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, which connects the MSOs VoIP network in the home to the cellular network outside of
the home and roams back and forth seamlessly. We are developing products to support this
new offering. In the first quarter of 2007, we spent approximately $18.1 million on research
and development, or 7.7% of revenue, which compares to $15.1 million or 7.2% of revenue in
the same period last year. We expect to continue to spend similar levels on research and
development in the future.
 
    
    Key research and development accomplishments in the first quarter 2007 included:
 
    
    Introduction of the TTM502C, a Japanese version of our industry leading
two line battery powered EMTA.
    
    Introduction of the TM552-series EMTA with an integrated 802.11G
wireless base station with wireless mesh networks and VLAN features to support
commercial services.
    
    C4 CMTS Release 5.0 with support for Flexpath wideband data services,
Layer-3 VLAN, lawful intercept, and dynamic load balancing in both the upstream and
downstream. During the first quarter, JComm, a major Japanese MSO, announced the
commercial launch of a 160 megabit data service in several cities using the C4 CMTS
with Flexpath. Layer-3 VLAN support is a major feature supporting business
services over cable. Dynamic load balancing enables the operators to efficiently
manage wide variations in data and VoIP traffic patterns across the day and the
week.
 In January 2007, we announced a bid to purchase TANDBERG Television that ultimately was not
accepted.
 
    
    In January 2007, we announced our intention to purchase the shares of TANDBERG
Television for approximately $1.2 billion.
    
    On February 26, 2007, a third party, Ericsson, 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. We examined the cost/benefit of
increasing our bid and concluded it was not in the best interest of our shareholders to do
so. Ultimately, the board of directors of TANDBERG Television recommended to their
shareholders that they accept the Ericsson bid and our bid lapsed without being accepted.
As part of our agreement with TANDBERG we received a break-up fee of $18.0 million. We
incurred expenses of approximately $7.5 million related to the deal. We also realized a
gain of approximately $12.3 million on the sale of foreign exchange contracts we purchased
to hedge the transaction purchase price.
    
    We continue to consider other acquisition opportunities in support of our long term
goals.
 At the end of the first quarter we had cash, cash equivalents and short term investments of
approximately $576 million.
 
    
    Through a combination of our cash resources, anticipated cash generation from operating
activities and our ability to access capital markets we continue to be well positioned to
execute on strategic opportunities.
 Our income statement reflects significantly higher income tax expense year over year and we have
essentially utilized the vast majority of our Net Operating Losses (NOLs).
 
    
    In the fourth quarter of 2006, given our recent history of cumulative profitability, we
concluded that it was more likely than not that we will generate sufficient income in the
future to utilize deferred tax assets, including NOLs. As a result we reversed a portion
of the valuation allowances that had been recorded related to those deferred tax assets.
Further, through the fourth quarter of 2006 we had sufficient NOLs to limit our actual cash
tax liabilities. Given these facts, we had minimal tax expense of $0.6 million in the
first quarter of 2006 which equated to an effective tax rate of 2.9%.
    
    In the first quarter of 2007 we recorded a tax expense of $15.6 million, which equates
to an effective tax rate of 29.3%. Included in the tax expense are discrete items, per the
guidance of Accounting Principles
 13




---



##### Table of Contents



Board (APB) Opinion 28, Interim Financial Reporting, related to the terminated TANDBERG
transaction. The foreign exchange gain, break-up fee and deal expenses were considered
discrete items and were recorded at a marginal tax rate of 38.0%. The break-up fee and
expenses are considered to be capital in nature versus ordinary income. As a result, we
reversed a net $3.2 million of deferred tax valuation allowances as we now view it as more
likely than not that we will be able to utilize the capital gain NOLs to offset the capital
gain recorded as a result of the TANDBERG break-up fee net of expenses.
 Significant Customers
  Three Months EndedMarch 31,(unaudited)2007
    
    2006Comcast
    
    $
    91,568
    
    
    $
    72,541% of sales
    
    
    38.9
    %
    
    
    34.8
    %Cox Communications
    
    $
    14,846
    
    
    $
    25,718% of sales
    
    
    6.3
    %
    
    
    12.3
    %Liberty Media International
    
    $
    19,307
    
    
    $
    21,346% of sales
    
    
    8.2
    %
    
    
    10.2
    %TimeWarner Cable
    
    $
    22,380
    
    
    $
    22,486% of sales
    
    
    9.5
    %
    
    
    10.8
    %
  Comparison of Operations for the Three Months Ended March 31, 2007 and 2006
 Net Sales
  Net SalesThree Months Ended
    
    
    Increase (decrease) March 31,
    
    
    2007 vs. 20062007
    
    
    2006
    
    
    $
    
    
    %Product Category:Broadband
    
    $
    80.2
    
    
    $
    85.4
    
    
    $
    (5.2
    )
    
    
    (6.1
    )%Supplies & CPE
    
    
    155.1
    
    
    
    122.9
    
    
    
    32.2
    
    
    
    26.2
    %Total sales
    
    $
    235.3
    
    
    $
    208.3
    
    
    $
    27.0
    
    
    
    13.0
    %
 14




---



##### Table of Contents



Net SalesThree Months EndedMarch 31,
    
    
    Increase  2007 vs. 20062007
    
    
    2006
    
    
    $
    
    
    %Domestic sales
    
    $
    174.8
    
    
    $
    157.4
    
    
    $
    17.4
    
    
    
    11.1
    %International sales
    
    
    60.5
    
    
    
    50.9
    
    
    
    9.6
    
    
    
    18.9
    %Total sales
    
    $
    235.3
    
    
    $
    208.3
    
    
    $
    27.0
    
    
    
    13.0
    %
 Broadband Net Sales 2007 vs. 2006
  
    
    As previously disclosed, sales of our CBR product decreased significantly year over year
as this product line nears the end of its life. In the first quarter 2007 we shipped 24
thousand voiceports as compared to 129 thousand in the same period last year. We
anticipate sales of CBR products to continue to decline in 2007.
    
    Sales of our CMTS product increased in the first quarter 2007 as compared to the same
quarter in 2006, partially offsetting the decline in CBR sales. In the first quarter 2007,
we shipped 6,048 downstreams as compared to 4,359 in the first quarter 2006.
 Supplies & CPE Net Sales 2007 vs. 2006
  
    
    Increased sales of our EMTA product provided the majority of the increase as operators
ramped up deployment of VoIP. In the first quarter of 2007, we sold approximately 1.6
million EMTAs in comparison to approximately 1.1 million in the first quarter of 2006.
 Gross Margin
  Gross Margin $Three Months Ended
    
    
    Increase (decrease)March 31,
    
    
    2007 vs. 20062007
    
    
    2006
    
    
    $
    
    
    %Product Category:Broadband
    
    $
    38.7
    
    
    $
    38.9
    
    
    $
    (0.2
    )
    
    
    (0.5
    )%Supplies & CPE
    
    
    30.1
    
    
    
    17.6
    
    
    
    12.5
    
    
    
    71.0
    %Total
    
    $
    68.8
    
    
    $
    56.5
    
    
    $
    12.3
    
    
    
    21.8
    %
 15




---



##### Table of Contents



Gross Margin %Three Months Ended
    
    Percentage PointMarch 31,
    
    Increase (Decrease)2007
    
    2006
    
    2007 vs. 2006Product Category:Broadband
    
    
    48.3
    %
    
    
    45.6
    %
    
    
    2.7Supplies & CPE
    
    
    19.4
    %
    
    
    14.3
    %
    
    
    5.1Total
    
    
    29.2
    %
    
    
    27.1
    %
    
    
    2.1
 Broadband Gross Margin 2007 vs. 2006
  
    
    Despite the decline in Broadband sales year over year, gross margin dollars were
essentially flat as a result of the improvement in gross margin percentage. This margin
percentage improvement was driven by cost reduction programs related to our CMTS product
line coupled with a change in product mix.
    
    In the second quarter of 2007, we anticipate a modest reduction in Broadband gross
margin dollars and percentage. Gross margins dollars are expected to decline as a result
of lower CBR sales. Gross margin percentage is expected to decline as a result of lower
price points for our CMTS product.
 Supplies & CPE Gross Margin 2007 vs. 2006
  
    
    The increase in revenues year-over-year significantly impacted gross margin dollars.
This was predominantly related to our increase in sales of EMTAs.
    
    Gross margin percentage improved 5.1 percentage points year over year to 19.4%. In
early 2006 we implemented price reductions related to our EMTA products in conjunction with
agreements entered into with customers that provided 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 was fully introduced in the first
quarter 2007, we recorded lower gross margins. We believe that our Supplies & CPE margins
will continue to improve in 2007, 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 ExpensesThree Months EndedMarch 31,
    
    
    Increase (Decrease)  2007 vs. 20062007
    
    
    2006
    
    
    $
    
    
    %SG&A
    
    $
    24.2
    
    
    $
    21.3
    
    
    $
    2.9
    
    
    
    13.6
    %R&D
    
    
    18.1
    
    
    
    15.1
    
    
    
    3.0
    
    
    
    19.9
    %Restructuring & impairment
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.1
    
    
    
    33.3
    %Amortization of intangibles
    
    
    0.1
    
    
    
    0.2
    
    
    
    (0.1
    )
    
    
    (50.0
    )%Total
    
    $
    42.8
    
    
    $
    36.9
    
    
    $
    5.9
    
    
    
    16.0
    %
 16




---



##### Table of Contents



Selling, General, and Administrative, or SG&A, Expenses
  
    
    Higher employee costs totaling $1.6 million related to higher staffing levels, salary
increases, taxes, other fringe benefits and travel. Over the past twelve months we made
the decision to supplement our staffing particularly in sales and marketing.
    
    We incurred higher bad debt expense and higher legal costs in the first quarter 2007 as
compared to the same period in 2006. The higher legal expenses relate primarily to ongoing
activities related to potential patent claims. See Legal Proceedings in Part II, Item 1
for further discussion.
 Research & Development Expenses
   
    
    In the first quarter of 2007, we incurred a $1.5 million expense for licensing fees
related to our Fixed Mobile Convergence development that did not occur in the first
quarter of 2006.
    
    We incurred higher employee costs totaling $1.5 million related to higher staffing
levels, salary increases, bonus accruals, taxes, other fringe benefits and travel and
living.
 Restructuring and Impairment Charges
  Amortization of Intangibles
  Other Expense (Income)
 Interest Expense
  Loss (Gain) in Foreign Currency
  Interest Income
  17




---



##### Table of Contents



Gains Related to Terminated Acquisition, Net of Expenses
  Other Expense (Income)
  Income Taxes
  Three Months Ended March 31,2007
    
    
    
    
    
    
    
    
    
    
    2006Income
    
    
    Income
    
    
    Effective
    
    
    Income
    
    
    Income
    
    
    EffectiveBefore Tax
    
    
    Tax Expense
    
    
    Tax Rate
    
    
    Before Tax
    
    
    Tax Expense
    
    
    Tax RateNon-Discrete Items
    
    $
    30.4
    
    
    $
    10.1
    
    
    
    33.3
    %
    
    $
    21.3
    
    
    $
    0.6
    
    
    
    2.8
    %Discrete Accounting
Events
    
    
    22.8
    
    
    
    8.7
    
    
    
    38.0
    %
    
    
    
    
    
    
    Discrete Tax Events  Valuation
Allowances / FIN 48 Reserves
    
    
    
    
    
    
    (3.2
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    53.2
    
    
    $
    15.6
    
    
    
    29.3
    %
    
    $
    21.3
    
    
    $
    0.6
    
    
    
    2.8
    %
 
    
    In the first quarter of 2007, we considered the net gain related to the termination of
the proposed TANDBERG Television acquisition to be discrete in nature in accordance with
the guidance of APB Opinion 28 and FIN 18 Accounting for Income Taxes in Interim Periods.
As a result, income tax expense was recorded at a discrete rate of 38.0%.
    
    The termination fee, less expenses, associated with the terminated TANDBERG Television
acquisition is considered capital in nature. As a result, we reversed a net of $4.0
million of valuation allowances associated with deferred tax assets related to net capital
loss carryforwards. Prior to the capital gain created by the terminated acquisition, we
considered it more-likely-than-not that capital loss carryforwards would not be realizable.
Additionally, we recorded an additional $0.8 million of discrete income tax expense
related to the TANDBERG transaction.
    
    In the first quarter of 2006, income tax expense was recorded at the federal AMT rate
and state rates, as applicable. Prior to the end of 2006, we were in a cumulative loss
position for the prior three fiscal years. As a result, we had recorded a valuation
allowance equivalent to our net deferred tax assets. At the end of 2006, we reversed the
majority of the valuation allowance. See our Annual Report on Form 10-K for the year ended
December 31, 2006, as filed with the SEC for further discussion.
  18




---



##### Table of Contents



Financial Liquidity and Capital Resources
 Overview
  Liquidity & Capital Resources Data
 Three Months Ended March 31,2007
    
    2006(in millions, except DSO and turns)Key Working Capital ItemsCash provided by (used in)
operating activities
    
    $
    (4.0
    )
    
    $
    31.3Cash, cash equivalents, and
short-term investments
    
    $
    575.9
    
    
    $
    165.8Accounts receivable, net
    
    $
    125.8
    
    
    $
    91.4Days Sales Outstanding (DSOs)
    
    
    47
    
    
    
    38Inventory
    
    $
    78.2
    
    
    $
    99.7Inventory turns
    
    
    7.7
    
    
    
    5.7
 Inventory & Accounts Receivable
  Summary of Current Liquidity Position and Potential for Future Capital Raising
  Commitments
  Cash Flow
  For the Three Months EndedMarch 31,2007
    
    2006Cash provided (used) by operating activities
    
    $
    (4.0
    )
    
    $
    31.3Cash provided (used) by investing activities
    
    $
    (26.2
    )
    
    $
    16.6Cash provided by financing activities
    
    $
    9.9
    
    
    $
    6.4Net increase (decrease) in cash
    
    $
    (20.3
    )
    
    $
    54.3
 19




---



##### Table of Contents



Operating Activities:
  For the Three Months EndedMarch 31,2007
    
    2006Net income after non-cash adjustments
    
    $
    25.0
    
    
    $
    25.0(Increase)/Decrease in accounts receivable
    
    
    (10.8
    )
    
    
    (7.6
    )(Increase)/Decrease in inventory
    
    
    16.0
    
    
    
    14.2(Increase)/Decrease in accounts payable
and accrued liabilities
    
    
    (24.8
    )
    
    
    (3.6
    )All other  net
    
    
    (9.4
    )
    
    
    3.3Cash provided by (used in) operating
activities
    
    $
    (4.0
    )
    
    $
    31.3
 
    
    Our inventory levels decreased in the first quarter of 2007 as compared to the same
period in 2006. We had less CBR inventory as this product nears end of life. We also had
less EMTA inventory due to timing. Our first quarter 2007 inventory turns were 7.7, as
compared to our first quarter 2006 turns of 5.7. We expect our inventory level to modestly
increase in 2007.
    
    Our accounts receivable level increased year over year reflecting higher sales. Our
first quarter 2007 DSO was 47 days as compared to our first quarter 2006 DSO of 38 days.
 Investing Activities:
  Three Months EndedMarch 31,2007
    
    2006Capital expenditures
    
    $
    (2.3
    )
    
    $
    (1.4
    )TANDBERG  break-up fee, net of expenses paid
    
    
    10.9
    
    
    
    Cash paid for hedge related to terminated
TANDBERG acquisition
    
    
    (26.5
    )
    
    
    Cash proceeds from hedge related to terminated
TANDBERG acquisition
    
    
    38.7
    
    
    
    Purchases of short-term investments
    
    
    (128.1
    )
    
    
    Disposals of short-term investments
    
    
    81.1
    
    
    
    18.0Cash provided by (used in) investing activities
    
    $
    (26.2
    )
    
    $
    16.6
 Capital Expenditures 
  Gains Related to Terminated TANDBERG Acquisition, Net of Expenses -
  Purchases/Disposals of Short-Term Investments 
  20




---



##### Table of Contents



Financing Activities:
  For the Three Months EndedMarch 31,2007
    
    
    2006Excess tax benefits from stock-based
compensation plans
    
    $
    4.9
    
    
    $
    0.2Proceeds from issuance of stock
    
    
    5.0
    
    
    
    6.2Cash provided by financing activities
    
    $
    9.9
    
    
    $
    6.4
  Interest Rates
  Foreign Currency
    Financial Instruments
  Cash and Short-Term Investments
  Investments
  21




---



##### Table of Contents



Accounting for
Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested
 Capital Expenditures
  Critical Accounting Estimates
  Income Taxes
 ,
Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109,
Accounting for Income Taxes
 22




---



##### Table of Contents



Forward-Looking Statements
  
 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
 23




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  , ,
     24




---



##### 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;
    
    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.
  25




---



##### Table of Contents



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.
   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 can involve significant risks.
  26




---



##### Table of Contents



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.
  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.
  27




---



##### Table of Contents



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.
  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.
  28




---



##### Table of Contents



We do not intend to pay cash dividends on our common stock in the foreseeable future.
  We have anti-takeover defenses that could delay or prevent an acquisition of our company.
  W e hav e th e abilit y t o issu e preferre d share s withou t stockholde r approval .
  
 Item 6. EXHIBITS
 Exhibit No.
    
    Description of Exhibit31.1
    
    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
 29




---



##### 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  30