##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 For the quarter ended September 30, 2007
 of
 ARRIS GROUP, INC.
 
 3871 Lakefield Drive
Suwanee, GA 30024
(678) 473-2000




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##### 



ARRIS GROUP, INC.
FORM 10-Q
For the Three and Nine Months Ended September 30, 2007
 INDEX
 PagePart I. Financial InformationItem 1. Financial Statementsa) Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006
    
    2b) Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006
    
    3c) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006
    
    4d) Notes to the Consolidated Financial Statements
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    14Item 3. Quantitative and Qualitative Disclosures on Market Risk
    
    27Item 4. Controls and Procedures
    
    27Part II. Other InformationItem 1. Legal Proceedings
    
    28Item 1A. Risk Factors
    
    30Item 6. Exhibits
    
    35Signatures
    
    36EX-10.1 FORM OF INCENTIVE STOCK OPTION AGREEMENTEX-10.2 FORM OF NONQUALIFIED STOCK OPTION AGREEMENTEX-10.3 FORM OF RESTRICTED STOCK AWARD AGREEMENTEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 ARRIS GROUP, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share data)
 September 30,
    
    
    December 31,2007
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    370,708
    
    
    $
    461,618Short-term investments, at fair value
    
    
    217,845
    
    
    
    87,575Total cash, cash equivalents and short-term investments
    
    
    588,553
    
    
    
    549,193Restricted cash
    
    
    3,142
    
    
    
    3,124Accounts receivable (net of allowances for doubtful
accounts of $2,877 in 2007 and $3,576 in 2006)
    
    
    130,216
    
    
    
    115,304Other receivables
    
    
    5,000
    
    
    
    2,556Inventories (net)
    
    
    118,227
    
    
    
    94,226Prepaids
    
    
    3,626
    
    
    
    3,547Current deferred income tax assets
    
    
    19,602
    
    
    
    29,285Other current assets
    
    
    13,703
    
    
    
    3,717Total current assets
    
    
    882,069
    
    
    
    800,952Property, plant and equipment (net of accumulated
depreciation of $83,583 in 2007 and $77,311 in 2006)
    
    
    31,251
    
    
    
    28,287Goodwill
    
    
    150,569
    
    
    
    150,569Intangibles (net of accumulated amortization of $107,005 in
2007 and $106,832 in 2006)
    
    
    115
    
    
    
    288Investments
    
    
    8,916
    
    
    
    3,520Noncurrent deferred income tax assets
    
    
    16,238
    
    
    
    20,874Other assets
    
    
    9,084
    
    
    
    9,067$
    1,098,242
    
    
    $
    1,013,557LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    35,540
    
    
    $
    60,853Accrued compensation, benefits and related taxes
    
    
    18,857
    
    
    
    23,269Accrued warranty
    
    
    7,346
    
    
    
    8,234Other accrued liabilities
    
    
    27,127
    
    
    
    29,057Total current liabilities
    
    
    88,870
    
    
    
    121,413Long-term debt, net of current portion
    
    
    276,000
    
    
    
    276,000Accrued pension
    
    
    11,810
    
    
    
    12,061Noncurrent income tax payable
    
    
    5,262
    
    
    
    3,041Other long-term liabilities
    
    
    5,143
    
    
    
    5,621Total liabilities
    
    
    387,085
    
    
    
    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; 110.1 million and 107.9 million
shares issued and outstanding in 2007 and 2006,
respectively
    
    
    1,104
    
    
    
    1,089Capital in excess of par value
    
    
    789,348
    
    
    
    761,500Accumulated deficit
    
    
    (74,498
    )
    
    
    (163,268
    )Unrealized gain (loss) on marketable securities
    
    
    (151
    )
    
    
    1,297Unfunded pension losses
    
    
    (4,462
    )
    
    
    (4,462
    )Unrealized loss on derivatives
    
    
    
    
    
    
    (551
    )Cumulative translation adjustments
    
    
    (184
    )
    
    
    (184
    )Total stockholders equity
    
    
    711,157
    
    
    
    595,421$
    1,098,242
    
    
    $
    1,013,557
  2




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ARRIS GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited  (in thousands, except per share data and percentages)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    254,662
    
    
    $
    228,646
    
    
    $
    742,633
    
    
    $
    656,980Cost of sales
    
    
    185,828
    
    
    
    165,467
    
    
    
    532,676
    
    
    
    473,554Gross margin
    
    
    68,834
    
    
    
    63,179
    
    
    
    209,957
    
    
    
    183,426Gross margin %
    
    
    27.0
    %
    
    
    27.6
    %
    
    
    28.3
    %
    
    
    27.9
    %Operating expenses:Selling, general and administrative expenses
    
    
    23,778
    
    
    
    21,524
    
    
    
    74,408
    
    
    
    64,523Research and development expenses
    
    
    17,797
    
    
    
    16,066
    
    
    
    53,684
    
    
    
    50,460Restructuring and impairment charges
    
    
    
    
    
    
    4
    
    
    
    421
    
    
    
    347Amortization of intangibles
    
    
    57
    
    
    
    138
    
    
    
    173
    
    
    
    575Total operating expenses
    
    
    41,632
    
    
    
    37,732
    
    
    
    128,686
    
    
    
    115,905Operating income
    
    
    27,202
    
    
    
    25,447
    
    
    
    81,271
    
    
    
    67,521Other expense (income):Interest expense
    
    
    1,683
    
    
    
    27
    
    
    
    5,003
    
    
    
    50Loss (gain) on investments
    
    
    (3,453
    )
    
    
    32
    
    
    
    (4,878
    )
    
    
    29Interest income
    
    
    (6,307
    )
    
    
    (2,756
    )
    
    
    (19,249
    )
    
    
    (6,357
    )Loss (gain) on foreign currency
    
    
    (112
    )
    
    
    201
    
    
    
    64
    
    
    
    (943
    )Gain related to terminated acquisition, net of expenses
    
    
    
    
    
    
    
    
    
    
    (22,835
    )
    
    
    Other expense, net
    
    
    215
    
    
    
    68
    
    
    
    331
    
    
    
    269Income from continuing operations before income taxes
    
    
    35,176
    
    
    
    27,875
    
    
    
    122,835
    
    
    
    74,473Income tax expense
    
    
    7,654
    
    
    
    1,328
    
    
    
    34,395
    
    
    
    2,562Net income from continuing operations
    
    
    27,522
    
    
    
    26,547
    
    
    
    88,440
    
    
    
    71,911Income from discontinued operations
    
    
    330
    
    
    
    15
    
    
    
    330
    
    
    
    124Net income
    
    $
    27,852
    
    
    $
    26,562
    
    
    $
    88,770
    
    
    $
    72,035Net income per common share -Basic:Income from continuing operations
    
    $
    0.25
    
    
    $
    0.25
    
    
    $
    0.81
    
    
    $
    0.67Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    0.25
    
    
    $
    0.25
    
    
    $
    0.81
    
    
    $
    0.67Diluted:Income from continuing operations
    
    $
    0.25
    
    
    $
    0.24
    
    
    $
    0.79
    
    
    $
    0.66Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    0.25
    
    
    $
    0.24
    
    
    $
    0.80
    
    
    $
    0.66Weighted average common shares:Basic
    
    
    110,178
    
    
    
    107,678
    
    
    
    109,354
    
    
    
    107,007Diluted
    
    
    112,085
    
    
    
    109,090
    
    
    
    111,595
    
    
    
    109,311
  3




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ARRIS GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited  (in thousands)
 Nine Months EndedSeptember 30,2007
    
    
    2006Operating activities:Net income
    
    $
    88,770
    
    
    $
    72,035Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    8,003
    
    
    
    7,235Amortization of intangibles
    
    
    173
    
    
    
    575Stock compensation expense
    
    
    8,710
    
    
    
    7,068Deferred income tax provision
    
    
    14,319
    
    
    
    Amortization of deferred finance fees
    
    
    836
    
    
    
    Provision for doubtful accounts
    
    
    484
    
    
    
    (248
    )Gain related to previously written off receivables
    
    
    (377
    )
    
    
    (1,573
    )Loss (gain) on disposal of fixed assets
    
    
    167
    
    
    
    (2
    )Loss (gain) on investments
    
    
    (4,878
    )
    
    
    32Gain on discontinued operations
    
    
    (330
    )
    
    
    (124
    )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
    
    
    (15,396
    )
    
    
    (37,515
    )Other receivables
    
    
    (2,444
    )
    
    
    (5,335
    )Inventory
    
    
    (24,001
    )
    
    
    12,847Accounts payable and accrued liabilities
    
    
    (24,385
    )
    
    
    17,609Excess tax benefits from stock-based compensation plans
    
    
    (8,269
    )
    
    
    (538
    )Prepaids and other, net
    
    
    (7,957
    )
    
    
    7,162Net cash provided by operating activities
    
    
    10,590
    
    
    
    79,228Investing activities:Purchases of property, plant and equipment
    
    
    (11,138
    )
    
    
    (7,080
    )Cash proceeds from sale of property, plant and equipment
    
    
    3
    
    
    
    22Cash received related to terminated acquisition, net of expenses paid
    
    
    10,554
    
    
    
    Cash paid for hedge related to terminated acquisition
    
    
    (26,469
    )
    
    
    Cash proceeds from hedge related to terminated acquisition
    
    
    38,750
    
    
    
    Purchases of available for-sale securities
    
    
    (295,626
    )
    
    
    (51,900
    )Disposals of available for-sale securities
    
    
    162,902
    
    
    
    76,150Net cash provided by (used in) investing activities
    
    
    (121,024
    )
    
    
    17,192Financing activities:Excess tax benefits from stock-based compensation plans
    
    
    8,269
    
    
    
    538Employer repurchase of shares to satisfy minimum tax withholdings
    
    
    (3,092
    )
    
    
    (2,019
    )Proceeds from issuance of stock
    
    
    14,347
    
    
    
    9,746Net cash provided by financing activities
    
    
    19,524
    
    
    
    8,265Net increase (decrease) in cash and cash equivalents
    
    
    (90,910
    )
    
    
    104,685Cash and cash equivalents at beginning of period
    
    
    461,618
    
    
    
    75,286Cash and cash equivalents at end of period
    
    $
    370,708
    
    
    $
    179,971
  4




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ARRIS GROUP, INC.
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited
 Note 1. Organization and Basis of Presentation
   Note 2. Pension Benefits
 Components of Net Periodic Pension Benefit Cost
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands)(unaudited)Service cost
    
    $
    140
    
    
    $
    130
    
    
    $
    419
    
    
    $
    390Interest cost
    
    
    412
    
    
    
    370
    
    
    
    1,236
    
    
    
    1,108Expected return on plan assets
    
    
    (319
    )
    
    
    (282
    )
    
    
    (958
    )
    
    
    (844
    )Amortization of prior service cost
    
    
    119
    
    
    
    120
    
    
    
    358
    
    
    
    358Amortization of net (gain) loss
    
    
    25
    
    
    
    2
    
    
    
    76
    
    
    
    6Net periodic pension cost
    
    $
    377
    
    
    $
    340
    
    
    $
    1,131
    
    
    $
    1,018
 Employer Contributions
  Note 3. Guarantees
 Warranty
  5




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##### Table of Contents



Balance at December 31, 2006
    
    $
    8,234Accruals related to warranties (including changes in estimates)
    
    
    2,345Settlements made (in cash or in kind)
    
    
    (3,233
    )Balance at September 30, 2007 (unaudited)
    
    $
    7,346
 Note 4. Restructuring and Impairment Charges
  (in thousands)Balance as of December 31, 2006
    
    $
    3,639First quarter payments
    
    
    (544
    )First quarter adjustments to accrual
    
    
    421Second quarter payments
    
    
    (410
    )Third quarter payments
    
    
    (369
    )Balance as of September 30, 2007 (unaudited)
    
    $
    2,737
 Note 5. Inventories
  September 30,
    
    
    December 31,2007
    
    
    2006(unaudited)Raw material
    
    $
    3,333
    
    
    $
    341Finished goods
    
    
    114,894
    
    
    
    93,885Total net inventories
    
    $
    118,227
    
    
    $
    94,226
 6




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##### Table of Contents



Note 6. Property, Plant and Equipment
  September 30,
    
    
    December 31,2007
    
    
    2006(unaudited)Land
    
    $
    1,822
    
    
    $
    1,822Building and leasehold improvements
    
    
    13,933
    
    
    
    11,470Machinery and equipment
    
    
    99,079
    
    
    
    92,306114,834
    
    
    
    105,598Less: Accumulated depreciation
    
    
    (83,583
    )
    
    
    (77,311
    )Total property, plant and equipment, net
    
    $
    31,251
    
    
    $
    28,287
 Note 7. Long-Term Obligations
  September 30,
    
    
    December 31,(unaudited)2007
    
    
    2006Other long-term liabilities
    
    $
    22,215
    
    
    $
    20,7232.00 % convertible senior notes due 2026
    
    
    276,000
    
    
    
    276,000Total long term debt and other long-term liabilities
    
    $
    298,215
    
    
    $
    296,723
     7




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##### Table of Contents



Note 8. Comprehensive Income
  Three Months Ended September 30,
    
    Nine Months Ended September 30,(unaudited)2007
    
    2006
    
    2007
    
    2006Net income
    
    $
    27,852
    
    
    $
    26,562
    
    
    $
    88,770
    
    
    $
    72,035Changes in the following equity accounts:Unrealized gain (loss) on marketable
securities
    
    
    (151
    )
    
    
    54
    
    
    
    (1,448
    )
    
    
    142Unrealized gain (loss) on derivative
instruments
    
    
    
    
    
    
    616
    
    
    
    551
    
    
    
    (1,750
    )Comprehensive income
    
    $
    27,701
    
    
    $
    27,232
    
    
    $
    87,873
    
    
    $
    70,427
   Note 9. Sales Information
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(unaudited)2007
    
    2006
    
    2007
    
    2006Comcast
    
    $
    106,140
    
    
    $
    99,212
    
    
    $
    299,887
    
    
    $
    249,221% of sales
    
    
    41.7
    %
    
    
    43.4
    %
    
    
    40.4
    %
    
    
    37.9
    %Time Warner Cable
    
    
    29,763
    
    
    
    16,994
    
    
    
    75,540
    
    
    
    57,509% of sales
    
    
    11.7
    %
    
    
    7.4
    %
    
    
    10.2
    %
    
    
    8.8
    %Liberty Media International
    
    
    13,289
    
    
    
    19,822
    
    
    
    49,118
    
    
    
    70,261% of sales
    
    
    5.2
    %
    
    
    8.7
    %
    
    
    6.6
    %
    
    
    10.7
    %Cox Communications
    
    
    12,458
    
    
    
    20,710
    
    
    
    40,120
    
    
    
    73,572% of sales
    
    
    4.9
    %
    
    
    9.1
    %
    
    
    5.4
    %
    
    
    11.2
    %
 8




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(unaudited)2007
    
    
    2006
    
    
    2007
    
    
    2006Broadband
    
    $
    72,613
    
    
    $
    87,633
    
    
    $
    230,195
    
    
    $
    271,820Supplies & CPE
    
    
    182,049
    
    
    
    141,013
    
    
    
    512,438
    
    
    
    385,160Total sales
    
    $
    254,662
    
    
    $
    228,646
    
    
    $
    742,633
    
    
    $
    656,980
   Note 10. Earnings Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(unaudited)2007
    
    
    2006
    
    
    2007
    
    
    2006Basic:Income from continuing operations
    
    $
    27,522
    
    
    $
    26,547
    
    
    $
    88,440
    
    
    $
    71,911Income from discontinued operations
    
    
    330
    
    
    
    15
    
    
    
    330
    
    
    
    124Net income
    
    $
    27,852
    
    
    $
    26,562
    
    
    $
    88,770
    
    
    $
    72,035Weighted average shares outstanding
    
    
    110,178
    
    
    
    107,678
    
    
    
    109,354
    
    
    
    107,007Basic earnings per share
    
    $
    0.25
    
    
    $
    0.25
    
    
    $
    0.81
    
    
    $
    0.67Diluted:Income from continuing operations
    
    $
    27,522
    
    
    $
    26,547
    
    
    $
    88,440
    
    
    $
    71,911Income from discontinued operations
    
    
    330
    
    
    
    15
    
    
    
    330
    
    
    
    124Net income
    
    $
    27,852
    
    
    $
    26,562
    
    
    $
    88,770
    
    
    $
    72,035Weighted average shares outstanding
    
    
    110,178
    
    
    
    107,678
    
    
    
    109,354
    
    
    
    107,007Net effect of dilutive equity awards
    
    
    1,907
    
    
    
    1,412
    
    
    
    2,241
    
    
    
    2,304Total
    
    
    112,085
    
    
    
    109,090
    
    
    
    111,595
    
    
    
    109,311Diluted earnings per share
    
    $
    0.25
    
    
    $
    0.24
    
    
    $
    0.80
    
    
    $
    0.66
  9




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##### Table of Contents



Note 11. 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




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##### Table of Contents



Income Tax Expense
  Nine Months Ended September 30,(unaudited)2007
    
    
    2006Income from
    
    
    
    
    
    
    
    
    
    
    Income fromContinuing
    
    
    Income
    
    
    
    
    
    
    Continuing
    
    
    IncomeOperations
    
    
    Tax
    
    
    Effective
    
    
    Operations
    
    
    Tax
    
    
    EffectiveBefore Tax
    
    
    Expense
    
    
    Tax Rate
    
    
    Before Tax
    
    
    Expense
    
    
    Tax RateNon-Discrete Items
    
    $
    96,481
    
    
    $
    31,105
    
    
    
    32.2
    %
    
    $
    74,473
    
    
    $
    2,562
    
    
    
    3.4
    %Discrete Accounting
Events
    
    
    26,354
    
    
    
    10,003
    
    
    
    38.0
    %
    
    
    
    
    
    
    Discrete Tax Events
- Valuation
Allowances / FIN 48
Reserves
    
    
    
    
    
    
    (6,713
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    122,835
    
    
    $
    34,395
    
    
    
    28.0
    %
    
    $
    74,473
    
    
    $
    2,562
    
    
    
    3.4
    %
 
    
    In the first quarter of 2007, the Company 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, 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%. There were no discrete events during the second
quarter of 2007. During the third quarter of 2007, the Company realized $3.5 million in
capital gains from the sale of investments. An income tax expense of 38.0% was also
recorded related to these third quarter capital gains.
    
    The termination fee, less expenses, associated with the terminated TANDBERG Television
acquisition was considered capital in nature. As a result, during the first quarter of
2007, 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, the Company recorded an
additional $0.8 million of first quarter discrete income tax expense related to the
terminated TANDBERG transaction. During the third quarter of 2007, the Company also
reversed an additional $1.2 million of valuation allowances associated with deferred tax
assets related to net capital loss carryforwards. The Company has no remaining capital
loss carryforwards as of the end of the third quarter of 2007.
    
    In the third quarter of 2007, the Company finalized its calculation of available
research and development tax credits for the tax years 2001 through 2006. The final
calculations resulted in an additional third quarter tax benefit of $3.7 million. The
Company also recorded $1.5 million which decreased their discrete tax benefit related to
these newly identified research and development tax credits.
    
    For the first nine months of 2006, income tax expense was recorded at the federal
Alternative Minimum Tax (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.
  11




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##### Table of Contents



Note 12. Termination of Proposed Acquisition
   Note 13. Pending Acquisition
  Note 14. Contingencies
  rd rd
   12




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13




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
  Our Strategy and Key Trends and Highlights
  
    
    Transition to VoIP with an Everything IP, Everywhere philosophy and build on current
market successes;
    
    Leverage our current voice and data business;
    
    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 primarily as a result of the
growth in the VoIP market and customer acceptance of our products.
 Nine Months Ended September 30,(in thousands)2007
    
    2006Sales
    
    $
    742.6
    
    
    $
    657.0Operating income
    
    $
    81.3
    
    
    $
    67.5Cash, cash equivalents, and
short-term investments
    
    $
    588.6
    
    
    $
    210.0
 
    
    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 faster download speeds which require additional CMTS capacity and features.
    
    We expect the demand in growth for residential EMTAs to moderate as many of our
customers have now passed through the initial launch stage and have reached a sustainable
level of deployments.
    
    In September 2007 we received our first orders from Comcast for the ARRIS D5 Next
Generation Edge QAM pursuant to having been selected as one of only two Universal Edge QAM
products for deployment in its switched digital video initiative. This is the successful
culmination of many years of research and development effort and represents a substantial
long term growth opportunity. We anticipate receiving additional orders under this award
in 2008. We expect margins on this product to be lower than the product category average
for several quarters until such time as the product is fully introduced and product cost
reduction actions are implemented.
    
    We believe we are gaining momentum in commercial services over cable with several large
U.S. cable operators. Our TM504, TM508, and TM512, four line, eight line, and twelve line
multi-line EMTAs are
 14




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##### Table of Contents



well suited to providing commercial telephone service over cable. We shipped over 21,000
units of these products in Q3 2007. This was a 300% increase from Q2 2007.
 
    
    Sales of our CBR products, consistent with our previously disclosed expectation,
decreased significantly year over year as this product line nears the end of its life. We
continue to anticipate minimal sales of this product through 2007 and 2008.
 We continue to invest significantly in research and development.
 
    
    We have made significant investments through our research and development efforts in new
products and expansion of our existing products. Our primary focus has been on products
and services that will enable MSOs to build and operate high-availability, fault-tolerant
networks, which allow them to generate greater revenue by offering high-speed data, IP
telephony and digital video. This success-based capital expenditure is becoming an
increasing portion of the cable operators total capital spending. In addition, some MSOs
have expressed interest in offering bundled wireless telephony as part of their product
offering. This product known as Fixed Mobile Convergence (FMC) will allow cable
subscribers to use mobile phones in their homes, 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 third quarter of 2007, we spent approximately $17.8 million in total on research
and development, or 7.0% of revenue, which compares to $16.1 million, or 7.0% 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 through the first nine months of 2007
included:
 o
    
    Introduction of the TTM502C, a Japanese version of our industry leading
two line battery powered EMTA.o
    
    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.o
    
    C4 CMTS 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.o
    
    A new CableLabs standard called DOCSIS 3.0 has been issued which will
enable cable operators to offer data services at 100Mbps and beyond to compete
effectively against telephone company fiber to the home services. We are
developing a new DOCSIS 3.0 compliant variant of the C4 CMTS and a new DOCSIS 3.0
compliant EMTA named the TM750. As part of the CMTS project we are developing a new
16-downstream port module, a new router control module and a new MAC processor
module. When commercially available, these products will enable currently
installed C4 CMTS to be efficiently upgraded to DOCSIS 3.0 and modular CMTS. The
companion TM750 EMTA will support wideband data services up to 160Mbps and
telephony service simultaneously. We plan to submit these new designs to CableLabs
for certification in Q4 2007.o
    
    D5 Universal Edge QAM Modulator provides the required protocols to
support switched digital video network. In July 2007, we were advised that we had
been selected by Comcast to provide the D5 for part of Comcasts switched digital
video network. In September 2007 we received our first orders pursuant to this
award. We are developing additional applications for this product including video
on demand and DOCSIS 3.0 modular CMTS capabilities. These new applications will
further expand the D5s addressable market.
 We will expand our products/services portfolio through the proposed acquisition of C-COR
  
    
    Under the terms of the definitive agreement, approved by the Boards of Directors of both
companies, each share of common stock of C-COR will be converted into the right to receive,
at the election of each
 15




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##### Table of Contents



of the individual holders of C-COR shares, either (i) a cash payment of $13.75 or (ii)
0.9642 shares of ARRIS, subject to pro ration if the elections exceed approximately 51% in
cash or 49% in stock. The stock component of the consideration is subject to a limited
adjustment if the average price of ARRIS stock for a ten trading day period ending three
days prior to closing is greater than $15.69 or less than $12.83. The agreement may be
terminated by either party if the average closing price during this period is less than
$11.41.
 
    
    C-COR is expected to provide us with product diversification in several key areas:
Access & Transmission (A&T) products including amplifiers, nodes and line extenders,
Video-on-Demand (VOD), Ad Insertion (AI) and Operational Support Software (OSS).
    
    The acquisition is expected to provide us with even stronger, complementary customer
relationships.
    
    With over 250 customers around the world, the merged company will be the largest
pure-play provider of equipment and solutions to the cable industry providing us with
greater scale to better compete.
    
    Subject to affirmative approval of both ARRIS and C-COR shareholders, and satisfaction
or waiver of the other conditions set forth in the definitive agreement, the transaction is
expected to close in December 2007.
 At the end of the third quarter we had cash, cash equivalents and short- term investments of
approximately $589 million.
 
    
    We anticipate using approximately $400 million of cash to complete the C-COR
acquisition.
    
    Through a combination of our cash resources, anticipated cash generation from operating
activities and our ability to access capital markets, following the C-COR acquisition we
believe we will continue to be well positioned to execute on strategic opportunities.
    
    At the end of the third quarter 2007, we had $118.2 million of inventory on hand. In
order to better meet our customer demand we planned on increasing our inventory of key
products but we expect that in the fourth quarter our inventory will decrease.
    
    Accounts receivable, net ended the third quarter 2007 at $130.2 million with annualized
DSOs of 45 days. We anticipate that our DSOs may increase in future periods.
 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 would 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 $2.6 million in the
first nine months of 2006, which equated to an effective tax rate of 3.4%.
    
    In the first nine months of 2007, we recorded a tax expense of $34.4 million, which
equates to an effective tax rate of 28.0%. Included in the tax expense are discrete items,
per the guidance of Accounting Principles Board (APB) Opinion 28, Interim Financial
Reporting. We anticipate a tax rate in the fourth quarter of 2007 of approximately 33%.
 16




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##### Table of Contents



Significant Customers
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(unaudited)2007
    
    2006
    
    2007
    
    2006Comcast
    
    $
    106,140
    
    
    $
    99,212
    
    
    $
    299,887
    
    
    $
    249,221% of sales
    
    
    41.7
    %
    
    
    43.4
    %
    
    
    40.4
    %
    
    
    37.9
    %Time Warner Cable
    
    
    29,763
    
    
    
    16,994
    
    
    
    75,540
    
    
    
    57,509% of sales
    
    
    11.7
    %
    
    
    7.4
    %
    
    
    10.2
    %
    
    
    8.8
    %Liberty Media International
    
    
    13,289
    
    
    
    19,822
    
    
    
    49,118
    
    
    
    70,261% of sales
    
    
    5.2
    %
    
    
    8.7
    %
    
    
    6.6
    %
    
    
    10.7
    %Cox Communications
    
    
    12,458
    
    
    
    20,710
    
    
    
    40,120
    
    
    
    73,572% of sales
    
    
    4.9
    %
    
    
    9.1
    %
    
    
    5.4
    %
    
    
    11.2
    %
  Comparison of Operations for the Three and Nine Months Ended September 30, 2007 and 2006
 Net Sales
  Net Sales
    
    
    Increase (Decrease) Between 2007 and 2006For the Three Months
    
    
    For the Nine Months
    
    
    For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,
    
    
    Ended September 30
    
    
    Ended September 302007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    $
    
    
    %Product Category:Broadband
    
    $
    72.6
    
    
    $
    87.6
    
    
    $
    230.2
    
    
    $
    271.8
    
    
    $
    (15.0
    )
    
    
    (17.1
    )
    
    $
    (41.6
    )
    
    
    (15.3
    )Supplies & CPE
    
    
    182.1
    
    
    
    141.0
    
    
    
    512.4
    
    
    
    385.2
    
    
    
    41.1
    
    
    
    29.2
    
    
    
    127.2
    
    
    
    33.0Total sales
    
    $
    254.7
    
    
    $
    228.6
    
    
    $
    742.6
    
    
    $
    657.0
    
    
    $
    26.1
    
    
    
    11.4
    
    
    $
    85.6
    
    
    
    13.0
  Net Sales
    
    
    Increase Between 2007 and 2006For the Three Months
    
    
    For the Nine Months
    
    
    For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,
    
    
    Ended September 30
    
    
    Ended September 302007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    $
    
    
    %Domestic
    
    $
    193.9
    
    
    $
    174.2
    
    
    $
    553.6
    
    
    $
    493.5
    
    
    $
    19.7
    
    
    
    11.3
    
    
    $
    60.1
    
    
    
    12.2International
    
    
    60.8
    
    
    
    54.4
    
    
    
    189.0
    
    
    
    163.5
    
    
    
    6.4
    
    
    
    11.8
    
    
    
    25.5
    
    
    
    15.6Total sales
    
    $
    254.7
    
    
    $
    228.6
    
    
    $
    742.6
    
    
    $
    657.0
    
    
    $
    26.1
    
    
    
    11.4
    
    
    $
    85.6
    
    
    
    13.0
 17




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##### Table of Contents



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 three and nine months ended
September 30, 2007 we sold $2.4 million and $14.3 million, respectively, of CBR product as
compared to $21.2 million and $92.4 million in the same periods last year, respectively.
We anticipate that sales of CBR products will be immaterial in future periods.
    
    The decline in CBR sales was partially offset with an increase in our CMTS product year
over year as operators continue to expand their capacity to handle new services and greater
bandwidth demand by their customers.
 Supplies & CPE Net Sales 2007 vs. 2006
  
    
    Increased sales of our EMTA product as operators ramped up deployment of VoIP. In the
third quarter of 2007, we sold approximately 1.9 million EMTAs in comparison to
approximately 1.3 million in the third quarter of 2006. In the first nine months of 2007
we sold 5.4 million EMTAs as compared to 3.5 million in the same period in 2006.
 Gross Margin
  Gross Margin $
    
    
    Increase (Decrease) Between 2007 and 2006For the Three Months
    
    
    For the Nine Months
    
    
    For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,
    
    
    Ended September 30
    
    
    Ended September 302007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    $
    
    
    %Product Category:Broadband
    
    $
    32.2
    
    
    $
    40.5
    
    
    $
    105.4
    
    
    $
    124.8
    
    
    $
    (8.3
    )
    
    
    (20.5
    )
    
    $
    (19.4
    )
    
    
    (15.5
    )Supplies & CPE
    
    
    36.6
    
    
    
    22.7
    
    
    
    104.6
    
    
    
    58.6
    
    
    
    13.9
    
    
    
    61.2
    
    
    
    46.0
    
    
    
    78.5Total
    
    $
    68.8
    
    
    $
    63.2
    
    
    $
    210.0
    
    
    $
    183.4
    
    
    $
    5.6
    
    
    
    8.9
    
    
    $
    26.6
    
    
    
    14.5
  Gross Margin %
    
    Increase (Decrease) Between 2007 and 2006For the Three Months
    
    For the Nine Months
    
    For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,
    
    Ended September 30
    
    Ended September 302007
    
    2006
    
    2007
    
    2006
    
    Percentage PointsProduct Category:Broadband
    
    
    44.3
    %
    
    
    46.2
    %
    
    
    45.8
    %
    
    
    45.9
    %
    
    
    (1.9
    )
    
    
    (0.1
    )Supplies & CPE
    
    
    20.1
    %
    
    
    16.1
    %
    
    
    20.4
    %
    
    
    15.2
    %
    
    
    4.0
    
    
    
    5.2Total
    
    
    27.0
    %
    
    
    27.6
    %
    
    
    28.3
    %
    
    
    27.9
    %
    
    
    (0.6
    )
    
    
    0.4
 Broadband Gross Margin 2007 vs. 2006
  
    
    Gross margin percentage declined 1.9 percentage points in the third quarter 2007 as
compared to the same period last year primarily as a result of lower price points for our
CMTS product, as previously disclosed. Gross margin dollars declined by $8.3 million, or
20.5%, as a result of lower sales of CBR
 18




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##### Table of Contents



product, lower margin percentages for CMTS product, partially offset by increased sales of
CMTS product.
 
    
    Gross margin dollars and percentage also decreased as a result of start-up costs
associated with the commencement of shipments of the D5 Universal Edge QAM. We expect
margins of this product to sequentially improve over the next several quarters as cost
reduction actions are implemented.
    
    For the first nine months of 2007, gross margin dollars declined by $19.4 million, or
15.5%, due to lower CBR sales, partially offset by higher sales of CMTS.
 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. The improvement in gross
margin percentage also contributed significantly to the increase in gross margin dollars.
    
    Gross margin percentage improved by 4.0 percentage points and 5.2 percentage points,
respectively, year over year for the three and nine month periods. The improvement was
primarily the result of cost reductions and new product introductions. 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.
    
    Gross margin percentage in the third quarter 2007 was also impacted by sales of first
generation Flexpath wideband modems. Sales of this product earn gross margins
significantly below the product category average. We expect this trend to continue for
several quarters until the DOCSIS wideband modem is introduced.
 Operating Expenses
  Operating Expenses
    
    
    Increase (Decrease) Between 2007 and 2006For the Three Months
    
    
    For the Nine Months
    
    
    For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,
    
    
    Ended September 30
    
    
    Ended September 302007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    $
    
    
    %Selling, general,
and administrative
    
    $
    23.8
    
    
    $
    21.5
    
    
    $
    74.4
    
    
    $
    64.5
    
    
    $
    2.3
    
    
    
    10.7
    
    
    $
    9.9
    
    
    
    15.4Research &
development
    
    
    17.8
    
    
    
    16.1
    
    
    
    53.7
    
    
    
    50.5
    
    
    
    1.7
    
    
    
    10.6
    
    
    
    3.2
    
    
    
    6.3Restructuring &
impairment
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.1
    
    
    
    33.3Amortization of
intangibles
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.6
    
    
    
    (0.1
    )
    
    
    (100.0
    )
    
    
    (0.4
    )
    
    
    (66.7
    )Total
    
    $
    41.6
    
    
    $
    37.7
    
    
    $
    128.7
    
    
    $
    115.9
    
    
    $
    3.9
    
    
    
    10.3
    
    
    $
    12.8
    
    
    
    11.0
 Selling, General, and Administrative, or SG&A, Expenses
  
    
    Employee-related costs increased $1.0 million and $3.2 million for both the three and
nine months ended September 30, 2007, respectively. Over the past twelve months, we made
the decision to supplement our staffing, particularly in sales and marketing.
    
    We incurred higher legal costs in the three and nine month periods ended September 30,
2007 as compared to the same periods 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.
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##### Table of Contents




    
    We incurred higher bad debt expense in the first nine months of 2007 as compared to the
same period in 2006. In the first nine months of 2006, we recorded a $1.6 million gain
related to previously written off accounts receivable. This did not reoccur in 2007.
 Research & Development, or R&D, Expenses
   
    
    We incurred higher employee-related costs of approximately $0.7 million and $3.2
million for the three and nine month periods, respectively.
    
    A decrease in licensing fees in 2007 partially offset the above increase in R&D
expense. In the first nine months of 2006, we incurred a $2.4 million expense for
licensing fees related to our Fixed Mobile Convergence development as compared to a $1.5
million expense in the first nine months of 2007.
 Restructuring and Impairment Charges
  Amortization of Intangibles
  Other Expense (Income)
 Interest Expense
  Interest Income
  Gain on Investments
  20




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##### Table of Contents



Loss (Gain) in Foreign Currency
  Gains Related to Terminated Acquisition, Net of Expenses
  Income Taxes
   Pending Acquisition
 Accounting for Business .
 21




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##### Table of Contents



Financial Liquidity and Capital Resources
 Overview
  Liquidity & Capital Resources Data
 Nine Months Ended September 30,2007
    
    2006(in millions, except DSO and turns)Key Working Capital ItemsCash provided by operating activities
    
    $
    10.6
    
    
    $
    79.2Cash, cash equivalents, and
short-term investments
    
    $
    588.6
    
    
    $
    210.0Accounts receivable, net
    
    $
    130.2
    
    
    $
    120.7Days Sales Outstanding (DSOs)
    
    
    45
    
    
    
    43Inventory, net
    
    $
    118.2
    
    
    $
    101.1Inventory turns
    
    
    6.7
    
    
    
    5.9
 Inventory & Accounts Receivable
  Summary of Current Liquidity Position and Potential for Future Capital Raising
  Commitments
  Cash Flow
  For the Nine Months EndedSeptember 30,2007
    
    2006Cash provided by operating activities
    
    $
    10.6
    
    
    $
    79.2Cash provided (used) by investing activities
    
    
    (121.0
    )
    
    
    17.2Cash provided by financing activities
    
    
    19.5
    
    
    
    8.3Net increase (decrease) in cash
    
    $
    (90.9
    )
    
    $
    104.7
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##### Table of Contents



Operating Activities:
  For the Nine Months EndedSeptember 30,2007
    
    2006Net income after non-cash adjustments
    
    $
    93.1
    
    
    $
    85.0(Increase)/Decrease in accounts receivable
    
    
    (15.4
    )
    
    
    (37.5
    )(Increase)/Decrease in inventory
    
    
    (24.0
    )
    
    
    12.8Increase/(Decrease) in accounts payable
and accrued liabilities
    
    
    (24.4
    )
    
    
    17.6All other  net
    
    
    (18.7
    )
    
    
    1.3Cash provided by operating activities
    
    $
    10.6
    
    
    $
    79.2
 
    
    Cash generated by our net income, after non-cash adjustments, increased by $8.1 million
reflecting increased sales and operating income.
    
    Our accounts receivable level increased in 2007 and 2006, predominantly reflecting
higher sales. Our DSO was 45 days for the first nine months of 2007 as compared to DSO of
43 days for the same period in 2006. We are presently and from time to time in discussions
with customers about various business terms and conditions including market share, payment
terms and other items. It is anticipated that such discussions could lead to an increase
in our DSOs in the future.
    
    Our inventory levels increased in the first nine months of 2007 as we consciously added
stock of key products to better serve customer needs. However, we expect our inventory
level to decrease in the fourth quarter of 2007. Inventory decreased in the first nine
months of 2006 as we had fewer EMTAs 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 nine months of 2007 were 6.7 as compared to turns
of 5.9 for the same period in 2006.
    
    Our accounts payable and accrued liabilities decreased in the first nine months of 2007
due to timing of purchases and payments.
    
    All other  net includes the changes in other receivables, excess tax benefits from
stock-based compensation plans, and prepaids and other, net. The other receivables
represent amounts due from our contract manufacturers for material used in the assembly of
our finished goods. The change in the excess tax benefits from stock-based compensation
represents the excess of the tax deduction over the cumulative amount of compensation cost
for awards which were exercised during the period. Also included is the change in our
income taxes recoverable account, which is a result of the timing of the actual estimated
tax payments during the year as compared to the actual tax liability for the year.
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Investing Activities:
  Nine Months EndedSeptember 30,2007
    
    2006Capital expenditures
    
    $
    (11.2
    )
    
    $
    (7.1
    )TANDBERG  break-up fee, net of expenses paid
    
    
    10.6
    
    
    
    Cash paid for hedge related to terminated
TANDBERG acquisition
    
    
    (26.5
    )
    
    
    Cash proceeds from hedge related to terminated
TANDBERG acquisition
    
    
    38.8
    
    
    
    Purchases of available-for-sale securities
    
    
    (295.6
    )
    
    
    (51.9
    )Disposals of available-for-sale securities
    
    
    162.9
    
    
    
    76.2Cash provided by (used in) investing activities
    
    $
    (121.0
    )
    
    $
    17.2
 Capital Expenditures 
 
    
    Capital expenditures are mainly for test equipment and computing equipment. As a result
of our recent success with respect to our D5 QAM product line, we anticipate that we will
have higher capital expenditures for lab equipment and test equipment in the fourth quarter
of 2007. Our forecast for capital expenditures for 2007 is $13 million to $15 million.
 Gains Related to Terminated TANDBERG Acquisition, Net of Expenses -
  Purchases/Disposals of Available-for-Sale Securities 
  Financing Activities:
  For the Nine Months EndedSeptember 30,2007
    
    
    2006Excess tax benefits from stock-based
compensation plans
    
    $
    8.3
    
    
    $
    0.5Employer repurchase of shares to satisfy
minimum tax withholdings
    
    
    (3.1
    )
    
    
    (2.0
    )Proceeds from issuance of stock
    
    
    14.3
    
    
    
    9.8Cash provided by financing activities
    
    $
    19.5
    
    
    $
    8.3
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##### Table of Contents



Interest Rates
  Potential Changes in Accounting Pronouncements
 Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement
 Foreign Currency
    Financial Instruments
   Cash, Short-Term Investments and Available-For-Sale Investments
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##### 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
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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
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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
   , ,
 Markman
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##### 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;
    
    Customer specific financial or stock market conditions;
    
    Availability and cost of capital;
    
    Governmental regulation;
    
    Demands for network services;
    
    Competition from other providers of broadband and high speed services;
    
    Acceptance of new services offered by our customers; and
    
    Real or perceived trends or uncertainties in these factors.
  The markets in which we operate are intensely competitive, and competitive pressures may adversely
affect our results of operations.
  
    
    Ambit Microsystems;
    
    Big Band Networks;
    
    Cisco Systems, Inc.;
    
    Ericsson;
    
    Harmonic, Inc.;
    
    Motorola, Inc.;
    
    Thomson; and
    
    TVC Communications, Inc.
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##### Table of Contents



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.
   We may fail to realize the anticipated revenue and earnings growth and other benefits expected from
the proposed acquisition of C-COR, which could adversely affect the value of our shares after the
merger.
    Purchase accounting adjustments required under GAAP will have a significant impact on our GAAP
earnings after the proposed C-COR acquisition, which could impact the trading price of our common
stock.
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Our results of operations after the proposed C-COR acquisition could be adversely affected as a
result of goodwill impairment.
 Accounting
for Business Combinations Goodwill and Other Intangible Assets
 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.
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##### Table of Contents



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



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 or obtaining access
necessary to intellectual property of others.
  Changes in accounting pronouncements can impact our business.
  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.
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##### Table of Contents



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 Exhibit10.1
    
    Form of Incentive Stock Option Agreement under 2007 Stock Incentive Plan10.2
    
    Form of Nonqualified Stock Option Agreement under 2007 Stock Incentive Plan10.3
    
    Form of Restricted Stock Award Agreement under 2007 Stock Incentive Plan31.1
    
    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
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SIGNATURES
  ARRIS GROUP, INC./s/ David B. PottsDavid B. PottsExecutive Vice President, Chief Financial 
Officer, Chief Accounting Officer, and 
Chief Information Officer  36