##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 For the quarter ended June 30, 2008
 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 Six Months Ended June 30, 2008
 INDEX
 PagePart I. Financial InformationItem 1. Financial Statementsa) Consolidated Balance Sheets
as of June 30, 2008 and December 31, 2007
    
    
    2b) Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2008 and 2007
    
    
    3c) Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2008 and 2007
    
    
    4d) Notes to the Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures on Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    31Part II. Other InformationItem 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    34Item 4. Submission of Matters to a Vote of Security Holders
    
    
    41Item 6. Exhibits
    
    
    41Signatures
    
    
    42EX-10.15 2008 STOCK INCENTIVE PLANEX-31.1 SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICEREX-31.2 SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICEREX-32.1 SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICEREX-32.2 SECTION 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER




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PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 ARRIS GROUP, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share data)
 June 30,
    
    
    December, 312008
    
    
    2007(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    290,266
    
    
    $
    323,797Short-term investments, at fair value
    
    
    7,503
    
    
    
    68,011Total cash, cash equivalents and short-term investments
    
    
    297,769
    
    
    
    391,808Restricted cash
    
    
    7,051
    
    
    
    6,977Accounts receivable (net of allowances for doubtful
accounts of $2,990 in 2008 and $2,826 in 2007)
    
    
    168,664
    
    
    
    166,953Other receivables
    
    
    9,067
    
    
    
    4,330Inventories (net)
    
    
    147,716
    
    
    
    131,792Prepaids
    
    
    5,305
    
    
    
    5,856Current deferred income tax assets
    
    
    43,749
    
    
    
    44,939Other current assets
    
    
    15,707
    
    
    
    4,841Total current assets
    
    
    695,028
    
    
    
    757,496Property, plant and equipment (net of accumulated
depreciation of $93,745 in 2008 and $83,644 in 2007)
    
    
    60,823
    
    
    
    59,156Goodwill
    
    
    452,398
    
    
    
    455,352Intangibles (net of accumulated amortization of $134,875 in
2008 and $109,167 in 2007)
    
    
    244,575
    
    
    
    269,893Investments
    
    
    9,937
    
    
    
    6,412Noncurrent deferred income tax assets
    
    
    3,547
    
    
    
    3,459Other assets
    
    
    11,383
    
    
    
    10,181$
    1,477,691
    
    
    $
    1,561,949LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    68,476
    
    
    $
    58,852Accrued compensation, benefits and related taxes
    
    
    18,072
    
    
    
    26,177Accrued warranty
    
    
    7,566
    
    
    
    8,298Deferred revenue
    
    
    28,100
    
    
    
    8,474Current portion of long-term debt
    
    
    314
    
    
    
    35,305Other accrued liabilities
    
    
    23,221
    
    
    
    42,121Total current liabilities
    
    
    145,749
    
    
    
    179,227Long-term debt, net of current portion
    
    
    276,606
    
    
    
    276,765Accrued pension
    
    
    11,362
    
    
    
    10,455Noncurrent income taxes payable
    
    
    6,250
    
    
    
    6,322Noncurrent deferred income tax liabilities
    
    
    48,725
    
    
    
    45,255Other long-term liabilities
    
    
    18,694
    
    
    
    18,158Total liabilities
    
    
    507,386
    
    
    
    536,182Stockholders 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; 122.7 million and 132.4 million shares issued
and outstanding in 2008 and 2007, respectively
    
    
    1,358
    
    
    
    1,356Capital in excess of par value
    
    
    1,098,581
    
    
    
    1,093,498Treasury stock at cost, 13 million shares in 2008 and 51
thousand shares in 2007
    
    
    (76,007
    )
    
    
    (572
    )Accumulated deficit
    
    
    (50,151
    )
    
    
    (64,993
    )Unrealized gain on marketable securities
    
    
    66
    
    
    
    20Unfunded pension losses
    
    
    (3,358
    )
    
    
    (3,358
    )Cumulative translation adjustments
    
    
    (184
    )
    
    
    (184
    )Total stockholders equity
    
    
    970,305
    
    
    
    1,025,767$
    1,477,691
    
    
    $
    1,561,949
  2




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ARRIS GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited
 (in thousands, except per share data and percentages)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    281,110
    
    
    $
    252,718
    
    
    $
    554,616
    
    
    $
    487,971Cost of sales
    
    
    188,226
    
    
    
    180,342
    
    
    
    376,484
    
    
    
    346,848Gross margin
    
    
    92,884
    
    
    
    72,376
    
    
    
    178,132
    
    
    
    141,123Gross margin %
    
    
    33.0
    %
    
    
    28.6
    %
    
    
    32.1
    %
    
    
    28.9
    %Operating expenses:Selling, general and administrative expenses
    
    
    37,046
    
    
    
    26,455
    
    
    
    74,028
    
    
    
    50,630Research and development expenses
    
    
    27,662
    
    
    
    17,791
    
    
    
    55,784
    
    
    
    35,887Restructuring and impairment charges
    
    
    175
    
    
    
    
    
    
    
    580
    
    
    
    421Amortization of intangibles
    
    
    12,454
    
    
    
    58
    
    
    
    25,708
    
    
    
    116Total operating expenses
    
    
    77,337
    
    
    
    44,304
    
    
    
    156,100
    
    
    
    87,054Operating income
    
    
    15,547
    
    
    
    28,072
    
    
    
    22,032
    
    
    
    54,069Other expense (income):Interest expense
    
    
    1,722
    
    
    
    1,652
    
    
    
    3,226
    
    
    
    3,320Loss (gain) on investments
    
    
    171
    
    
    
    (1,444
    )
    
    
    173
    
    
    
    (1,425
    )Interest income
    
    
    (1,702
    )
    
    
    (6,459
    )
    
    
    (4,387
    )
    
    
    (12,942
    )Loss (gain) on foreign currency
    
    
    350
    
    
    
    (146
    )
    
    
    (640
    )
    
    
    176Gain related to terminated acquisition, net of expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,835
    )Other expense, net
    
    
    65
    
    
    
    51
    
    
    
    29
    
    
    
    116Income from continuing operations before income taxes
    
    
    14,941
    
    
    
    34,418
    
    
    
    23,631
    
    
    
    87,659Income tax expense
    
    
    5,504
    
    
    
    11,144
    
    
    
    8,789
    
    
    
    26,741Net income
    
    $
    9,437
    
    
    $
    23,274
    
    
    $
    14,842
    
    
    $
    60,918Net income per common share -Basic
    
    $
    0.08
    
    
    $
    0.21
    
    
    $
    0.12
    
    
    $
    0.56Diluted
    
    $
    0.08
    
    
    $
    0.21
    
    
    $
    0.12
    
    
    $
    0.55Weighted average common shares:Basic
    
    
    122,741
    
    
    
    109,398
    
    
    
    126,752
    
    
    
    108,935Diluted
    
    
    124,651
    
    
    
    111,698
    
    
    
    128,190
    
    
    
    111,340
  3




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ARRIS GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited
 (in thousands)
 Six Months EndedJune 30,2008
    
    
    2007Operating activities:Net income
    
    $
    14,842
    
    
    $
    60,918Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    10,095
    
    
    
    5,145Amortization of intangibles
    
    
    25,708
    
    
    
    116Stock compensation expense
    
    
    5,391
    
    
    
    6,034Deferred income tax provision
    
    
    4,572
    
    
    
    9,626Amortization of deferred finance fees
    
    
    557
    
    
    
    557Provision for doubtful accounts
    
    
    214
    
    
    
    596Gain related to previously written off receivables
    
    
    
    
    
    
    (377
    )Gain on disposal of fixed assets
    
    
    (2
    )
    
    
    Loss (gain) on investments
    
    
    173
    
    
    
    (1,425
    )Gain related to terminated acquisition, net of expenses
    
    
    
    
    
    
    (22,835
    )Excess tax benefits from stock-based compensation plans
    
    
    
    
    
    
    (6,531
    )Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:Accounts receivable
    
    
    (770
    )
    
    
    (5,972
    )Other receivables
    
    
    (4,737
    )
    
    
    (4,289
    )Inventory
    
    
    (14,419
    )
    
    
    3,684Income taxes payable
    
    
    (2,997
    )
    
    
    (5,731
    )Accounts payable and accrued liabilities
    
    
    4,501
    
    
    
    (17,809
    )Prepaids and other, net
    
    
    (2,193
    )
    
    
    2,158Net cash provided by operating activities
    
    
    40,935
    
    
    
    23,865Investing activities:Purchases of property, plant and equipment
    
    
    (11,792
    )
    
    
    (7,055
    )Cash paid for acquisition, net of cash acquired
    
    
    (4,419
    )
    
    
    Cash proceeds from sale of property, plant and equipment
    
    
    237
    
    
    
    Cash proceeds from sale of short-term investments
    
    
    16
    
    
    
    Cash received related to terminated acquisition, net of expenses paid
    
    
    
    
    
    
    10,554Cash paid for hedge related to terminated acquisition
    
    
    
    
    
    
    (26,469
    )Cash proceeds from hedge related to terminated acquisition
    
    
    
    
    
    
    38,750Purchases of short-term investments
    
    
    (16,887
    )
    
    
    (197,850
    )Disposals of short-term investments
    
    
    72,464
    
    
    
    125,110Net cash provided by (used in) investing activities
    
    
    39,619
    
    
    
    (56,960
    )Financing activities:Payment of debt and capital lease obligations
    
    
    (35,196
    )
    
    
    Repurchase of common stock
    
    
    (75,960
    )
    
    
    Excess tax benefits from stock-based compensation plans
    
    
    
    
    
    
    6,531Employer repurchase of shares to satisfy minimum tax withholdings
    
    
    (1,035
    )
    
    
    (1,690
    )Fees and proceeds from issuance of common stock, net
    
    
    (1,894
    )
    
    
    10,656Net cash provided by (used in) financing activities
    
    
    (114,085
    )
    
    
    15,497Net decrease in cash and cash equivalents
    
    
    (33,531
    )
    
    
    (17,598
    )Cash and cash equivalents at beginning of period
    
    
    323,797
    
    
    
    461,618Cash and cash equivalents at end of period
    
    $
    290,266
    
    
    $
    444,020
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Six Months EndedJune 30,2008
    
    
    2007Net tangible assets acquired, excluding cash
    
    
    6,986
    
    
    
    Intangible assets acquired, including goodwill
    
    
    (2,567
    )
    
    
    Cash paid for acquisition, net of cash acquired
    
    $
    4,419
    
    
    
    
  5




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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 Convertible Debt Instruments That May be Settled in Cash Upon Conversion
(including Partial Cash Settlement)
 Disclosures about Derivative Instruments and Hedging
Activitiesan amendment of FASB Statement No. 133.
 Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans.
 6




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Fair Value Measurements Effective Date of FASB Statement
No. 157,
      7




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##### Table of Contents



Note 3. Investments
  Fair ValueAs of June 30,
    
    
    As of December 31,2008
    
    
    2007(Unaudited)Current Assets:Commercial paper
    
    $
    
    
    
    $
    11,833Auction rate securities
    
    
    
    
    
    
    30,270Certificates of deposit
    
    
    1,999
    
    
    
    9,807U.S. Government agency bonds
    
    
    4,502
    
    
    
    9,574Corporate obligations
    
    
    1,002
    
    
    
    3,447Asset-backed securities
    
    
    
    
    
    
    2,974Equity securities
    
    
    
    
    
    
    106Total classified as current assets
    
    
    7,503
    
    
    
    68,011Non-current Assets:Cash surrender value of company owned life insurance
    
    
    3,011
    
    
    
    3,075Auction rate securities
    
    
    4,667
    
    
    
    Mutual funds
    
    
    2,184
    
    
    
    3,230Money market funds
    
    
    38
    
    
    
    70Corporate obligations
    
    
    37
    
    
    
    37Total classified as non-current assets
    
    
    9,937
    
    
    
    6,412Total
    
    $
    17,440
    
    
    $
    74,423
  Fair Value Measurement
  June 30, 2008(unaudited)Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalCertificates of deposit
    
    $
    1,999
    
    
    $
    
    
    
    $
    
    
    
    $
    1,999U.S. government agency bonds
    
    
    
    
    
    
    4,502
    
    
    
    
    
    
    
    4,502Corporate obligations
    
    
    37
    
    
    
    1,002
    
    
    
    
    
    
    
    1,039Auction rate securities
    
    
    
    
    
    
    
    
    
    
    4,667
    
    
    
    4,667Cash surrender value of
company owned life
insurance
    
    
    
    
    
    
    3,011
    
    
    
    
    
    
    
    3,011Mutual funds
    
    
    2,184
    
    
    
    
    
    
    
    
    
    
    
    2,184Money market funds
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    38Total
    
    $
    4,258
    
    
    $
    8,515
    
    
    $
    4,667
    
    
    $
    17,440
  Level 3(Unaudited)Fair value January 1, 2008
    
    $
    5,000Impairment Charge
    
    
    333Fair value June 30, 2008
    
    
    4,667
  Accounting for Certain
Investments in Debt and Equity
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Securities
 Note 4. Pension Benefits
 Components of Net Periodic Pension Benefit Cost
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)(unaudited)Service cost
    
    $
    190
    
    
    $
    140
    
    
    $
    380
    
    
    $
    279Interest cost
    
    
    470
    
    
    
    412
    
    
    
    939
    
    
    
    824Expected gain on plan assets
    
    
    (354
    )
    
    
    (319
    )
    
    
    (709
    )
    
    
    (639
    )Amortization of prior service cost
    
    
    119
    
    
    
    119
    
    
    
    239
    
    
    
    239Amortization of net loss
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    51Net periodic pension cost
    
    $
    425
    
    
    $
    377
    
    
    $
    849
    
    
    $
    754
 Employer Contributions
  Note 5. Guarantees
 Warranty
    Balance at December 31, 2007
    
    $
    14,370Accruals related to warranties (including changes in estimates)
    
    
    2,986Settlements made (in cash or in kind)
    
    
    (4,758
    )Balance at June 30, 2008 (unaudited)
    
    $
    12,598
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Note 6. Business Acquisition
 Acquisition of C-COR Incorporated
   Supplemental Pro Forma Information
 (in millions, except per share data)
 Three Months Ended
    
    
    Six Months EndedJune 30, 2007
    
    
    June 30, 2007(unaudited)
    
    
    (unaudited)Net sales
    
    $
    327.1
    
    
    $
    635.4Net income from continuing operations
    
    
    18.4
    
    
    
    51.0Income from continuing operations per common share:Basic
    
    $
    0.14
    
    
    $
    0.38Diluted
    
    $
    0.13
    
    
    $
    0.36
 Preliminary Purchase Price Allocation
  Total purchase consideration  cash and equity
    
    $
    646.6Prior investment in acquired company
    
    
    6.0Fair value of assumed stock options
    
    
    22.8Acquisition-related transaction costs
    
    
    5.7Total preliminary purchase price
    
    $
    681.1Net tangible assets
    
    $
    100.9Identifiable intangible assets:Acquired technology
    
    
    38.8Order backlog
    
    
    7.9Customer relationships
    
    
    220.5Non-compete agreements
    
    
    5.1Acquired in-process research and development
    
    
    6.1Goodwill
    
    
    301.8Allocation of preliminary purchase price
    
    $
    681.1
 10




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Fair Value of Assets and Liabilities
  Note 7. Restructuring and Impairment Charges
  (in thousands)Balance as of December 31, 2007
    
    $
    2,121Q1 2008 payments
    
    
    (396
    )Q1 2008 adjustments to accrual
    
    
    159Q2 2008 payments
    
    
    (397
    )Balance as of June 30, 2008 (unaudited)
    
    $
    1,487
  (in thousands)Balance as of December 31, 2007
    
    $
    8,622Q1 2008 payments
    
    
    (6,663
    )Q1 2008 adjustments to accrual
    
    
    (44
    )Q2 2008 payments
    
    
    (1,682
    )Q2 2008 adjustments to accrual
    
    
    218Balance as of June 30, 2008 (unaudited)
    
    $
    451
  (in thousands)Balance as of December 31, 2007
    
    $
    642Q1 2008 payments
    
    
    (32
    )Q2 2008 payments
    
    
    (170
    )Q2 2008 adjustments to accrual
    
    
    95Balance as of June 30, 2008 (unaudited)
    
    $
    535
 11




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Note 8. Inventories
  June 30,
    
    
    December 31,2008
    
    
    2007(unaudited)Raw material
    
    $
    25,432
    
    
    $
    20,004Work in process
    
    
    1,146
    
    
    
    2,533Finished goods
    
    
    121,138
    
    
    
    109,255Total net inventories
    
    $
    147,716
    
    
    $
    131,792
 Note 9. Property, Plant and Equipment
  June 30,
    
    
    December 31,2008
    
    
    2007(unaudited)Land
    
    $
    2,612
    
    
    $
    2,612Building and leasehold improvements
    
    
    19,510
    
    
    
    19,432Machinery and equipment
    
    
    132,446
    
    
    
    120,756154,568
    
    
    
    142,800Less: Accumulated depreciation
    
    
    (93,745
    )
    
    
    (83,644
    )Total property, plant and equipment, net
    
    $
    60,823
    
    
    $
    59,156
 Note 10. Long-Term Obligations
  June 30,
    
    
    December 31,2008
    
    
    2007(unaudited)2.00% convertible senior notes due 2026
    
    $
    276,000
    
    
    $
    276,0002.00% Pennsylvania Industrial Development Authority debt, net of current portion
    
    
    198
    
    
    
    2719.26% equipment financing obligations, net of current portion
    
    
    408
    
    
    
    494Total long-term debt
    
    
    276,606
    
    
    
    276,765Other long-term liabilities:Deferred compensation
    
    
    7,069
    
    
    
    8,986Accrued warranty
    
    
    5,033
    
    
    
    6,072Deferred revenue
    
    
    3,805
    
    
    
    114Landlord funded leasehold improvements
    
    
    1,527
    
    
    
    1,747Other long-term liabilities
    
    
    1,260
    
    
    
    1,239Total other long-term liabilities
    
    
    18,694
    
    
    
    18,158Total long-term liabilities
    
    $
    295,300
    
    
    $
    294,923
  12




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Note 11. Comprehensive Income
  Three Months Ended June 30,
    
    Six Months Ended June 30,(unaudited)2008
    
    2007
    
    2008
    
    2007Net income
    
    $
    9,437
    
    
    $
    23,274
    
    
    $
    14,842
    
    
    $
    60,918Changes in the following equity accounts:Unrealized gain (loss) on marketable
securities
    
    
    85
    
    
    
    (1,345
    )
    
    
    216
    
    
    
    (1,297
    )Unrealized gain (loss) on derivative
instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    551Comprehensive income
    
    $
    9,522
    
    
    $
    21,929
    
    
    $
    15,058
    
    
    $
    60,172
  Note 12. Segment Information
 Disclosures About Segments of an Enterprise
and Related Information
  Broadband Communications Systems
 Access, Transport & Supplies
 13




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Media & Communications Systems
  BCS
    
    ATS
    
    MCS
    
    TotalThree Months Ended June 30, 2008Net sales
    
    $
    190,412
    
    
    $
    76,967
    
    
    $
    13,731
    
    
    $
    281,110Gross margin
    
    
    61,487
    
    
    
    23,870
    
    
    
    7,527
    
    
    
    92,884Amortization of intangible assets
    
    
    
    
    
    
    6,612
    
    
    
    5,842
    
    
    
    12,454Three Months Ended June 30, 2007Net sales
    
    $
    218,361
    
    
    $
    34,170
    
    
    $
    187
    
    
    $
    252,718Gross margin
    
    
    66,420
    
    
    
    6,060
    
    
    
    (104
    )
    
    
    72,376Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    58
    
    
    
    58Six Months Ended June 30, 2008Net sales
    
    $
    380,049
    
    
    $
    149,861
    
    
    $
    24,706
    
    
    $
    554,616Gross margin
    
    
    119,478
    
    
    
    45,746
    
    
    
    12,908
    
    
    
    178,132Amortization of intangible assets
    
    
    
    
    
    
    13,464
    
    
    
    12,244
    
    
    
    25,708Six Months Ended June 30, 2007Net sales
    
    $
    417,361
    
    
    $
    70,176
    
    
    $
    434
    
    
    $
    487,971Gross margin
    
    
    128,872
    
    
    
    12,486
    
    
    
    (235
    )
    
    
    141,123Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    116
    
    
    
    116
   (unaudited)2008
    
    2007
    
    2008
    
    2007Comcast
    
    
    46.7
    
    
    
    95.8
    
    
    
    80.9
    
    
    
    178.3% of sales
    
    
    16.6
    %
    
    
    37.9
    %
    
    
    14.6
    %
    
    
    36.5
    %Time Warner Cable
    
    
    75.2
    
    
    
    23.4
    
    
    
    146.2
    
    
    
    45.8% of sales
    
    
    26.8
    %
    
    
    9.3
    %
    
    
    26.4
    %
    
    
    9.4
    %
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Note 13. Earnings Per Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(unaudited)2008
    
    
    2007
    
    
    2008
    
    
    2007Basic:Net income
    
    $
    9,437
    
    
    $
    23,274
    
    
    $
    14,842
    
    
    $
    60,918Weighted average shares outstanding
    
    
    122,741
    
    
    
    109,398
    
    
    
    126,752
    
    
    
    108,935Basic earnings per share
    
    $
    0.08
    
    
    $
    0.21
    
    
    $
    0.12
    
    
    $
    0.56Diluted:Net income
    
    $
    9,437
    
    
    $
    23,274
    
    
    $
    14,842
    
    
    $
    60,918Weighted average shares outstanding
    
    
    122,741
    
    
    
    109,398
    
    
    
    126,752
    
    
    
    108,935Net effect of dilutive equity awards
    
    
    1,910
    
    
    
    2,300
    
    
    
    1,438
    
    
    
    2,405Total
    
    
    124,651
    
    
    
    111,698
    
    
    
    128,190
    
    
    
    111,340Diluted earnings per share
    
    $
    0.08
    
    
    $
    0.21
    
    
    $
    0.12
    
    
    $
    0.55
  Note 14. Income Taxes
  Six Months Ended June 30,(unaudited)2008
    
    2007Income
    
    
    
    
    
    
    
    
    
    IncomeTax
    
    Effective
    
    Income
    
    Tax
    
    EffectiveIncome Before Tax
    
    Expense
    
    Tax Rate
    
    Before Tax
    
    Expense
    
    Tax RateNon-Discrete Items
    
    $
    23,631
    
    
    $
    8,789
    
    
    
    37.2
    %
    
    $
    64,824
    
    
    $
    21,319
    
    
    
    32.9
    %Discrete Accounting
Events
    
    
    -0-
    
    
    
    -0-
    
    
    
    N/A
    
    
    
    22,835
    
    
    
    8,668
    
    
    
    38.0
    %Discrete Tax Events
- Valuation 

Allowances / FIN 48
Reserves
    
    
    -0-
    
    
    
    -0-
    
    
    
    
    
    
    
    
    
    
    
    (3,246
    )Total
    
    $
    23,631
    
    
    $
    8,789
    
    
    
    37.2
    %
    
    $
    87,659
    
    
    $
    26,741
    
    
    
    30.5
    %
 
    
    In the first six months of 2008, income tax expense was recorded at the applicable
federal rate and state rates. There were no discrete tax or accounting events during this
period.
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
    
    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.
    
    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 carry-forwards. Prior to the capital gain
created by the terminated acquisition, the Company considered it more-likely-than-not that
capital loss carry-forwards would not be realizable. Additionally, the Company recorded an
additional $0.8 million of discrete income tax expense related to the terminated TANDBERG
transaction.
 Note 15. Contingencies
   ®
 ® ® ®
  16




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
  Our Strategy and Key Highlights
  
    
    Transition to IP with an Everything IP, Everywhere philosophy and build on current
market successes;
    
    Leverage our current voice, video, and data businesses;
    
    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.
 
    
    We have successfully leveraged our existing market position and industry experience to
continue to generate robust demand for both EMTA and CMTS products. Further, we have
leveraged the market position we acquired as a result of the purchase of C-COR in December
2007 to increase sales of new products, notably Video on Demand, Operations Support
Software, Access, and Transport.
    
    As expected, sales to Comcast were down significantly in the first six months of 2008.
We expect sales to Comcast to increase in future quarters.
    
    We experienced increased sales to other customers, notably Time Warner, Charter and
certain international customers in the first six months of 2008.
    
    We expect strong demand for CMTS products to continue in future periods as new services
and competition between our customers and their competitors intensifies the need to provide
ever faster download speeds requiring added CMTS capacity and features. In the second half
of 2008, a new generation of CMTS products based upon the DOCSIS 3.0 standard is expected
to be introduced, leveraging the installed base of current ARRIS CMTS products by providing
an efficient upgrade to these systems. Modest shipments of this new product were made in
the second quarter but revenue was deferred pending customer acceptance. At the end of
second quarter, we had on hand significant orders for third quarter delivery. Assuming
customer acceptance, we anticipate significant revenues from the sale of DOCSIS 3.0 CMTS
products in the third quarter 2008.
    
    We introduced our Universal EdgeQAM D5 late in 2007. Our expectation, based on customer
input, was that demand for this product would be robust in the first quarter of 2008 driven
by Switched Digital Video (SDV) requirements. However, customers, in particular Comcast,
have since delayed purchasing decisions. We have expanded our marketing and development
efforts to include other applications including Modular CMTS, Broadcast and Video on Demand
(VOD). We expect that sales of this new
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product will continue through 2008, but at a slower rate than initially expected. Initial
margins on this product will be low until cost reductions can be implemented.
 
    
    We expect demand for EMTAs to remain robust; however, we do not anticipate the growth in
aggregate sales that we have enjoyed for the past few years. Many of our customers have
now passed through the initial launch stage, and are at steady state deployment rates and
may not continue to incrementally increase the rate of their purchases. While most of our
customers have a multi-vendor strategy, we enjoyed 100% market share with many customers
well into 2007. In late 2007, several of our customers awarded a portion of their business
to our competitors, which we expect will continue. Our ultimate level of sales of EMTAs
will be affected by, but not limited to, such factors as the success our customers have
marketing IP telephony to their subscribers, and the success our customers have retaining
their IP telephony subscribers as well as our ability to limit the impact of the
implementation of a multi-vendor strategy by our customers. We are encouraged by the
initial success we are having with our VoIP products in Central and Latin American
countries, as competition between large service providers such as Telmex and Telefonica
drive the deployment of competitive voice, video and data services. We also anticipate
ongoing competition for EMTAs in the future. The deployment of higher speed data service
tiers will require new DOCSIS 3.0 capable EMTAs and modems, providing opportunity for sales
of a new generation of CPE devices starting in the second half of 2008.
    
    Through our acquisition of C-COR in late 2007, we expanded our portfolio to include
several key new products that leverage the IP spending of our customers. The Access and
Transport products are expected to benefit from the plant upgrades MSOs will undertake to
expand the capacity they will require to offer new services to their subscribers. The
operations support system (OSS) and On-Demand products also are well positioned to
provide value added services and operational improvements to the MSOs.
 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 to both residential and business subscribers. This
success-based capital expenditure is becoming an increasing portion of the cable
operators total capital spending. In addition, some MSOs have expressed interest in
offering bundled wireless telephony as part of their product offering. This product, known
as Fixed Mobile Convergence (FMC), will allow cable subscribers to use mobile phones in
their homes, connecting to the MSOs VoIP network in the home, and to roam from the home
VoIP network to the cellular network outside of the home and back seamlessly. We are
developing products to support this new offering.
    
    With our late 2007 acquisition of C-COR,
our research and development was significantly expanded to include Access and Transport,
VOD, Ad Insertion and OSS products. During the first six months of 2008, we spent
approximately $55.8 million on research and development, or 10.1% of revenue, which
compares to $35.9 million, or 7.4% of revenue, in the same period last year. We expect to
continue to spend similar or slightly higher amounts on research and development in the
future. We anticipate we may modestly increase our development efforts on VOD and OSS
products.
    
    Key research and development accomplishments in the first six months of 2008 included:
 o
    
    We announced DOCSIS 3.0 certification of the WBM750 Data Modem and the
TM702 Voice over IP EMTA. The TM702 also received Packetcable1.5 certification.
These key milestones pave the way for operator DOCSIS 3.0 deployments starting in
second half of 2008.o
    
    The ARRIS C4 CMTS reached a critical milestone in releasing the new
DOCSIS 3.0 hardware and software for customer field trials.o
    
    A new release was made available in the second quarter for the ARRIS D5
UEQ platform increasing the density to 72 QAM channels per 2RU chassis, using Hex
channel bonding.o
    
    Access and Transport received formal qualification of the CORWave
multi-wavelength optical platform.o
    
    On-Demand introduced Start Over, a feature that allows a viewer to view
a program from the beginning even when they tune in a few minutes late.
 At the end of the second quarter, we had cash, cash equivalents and short term investments of
approximately $297.8 million.
 
    
    In the first quarter 2008, we announced a share buyback program of up to $100 million.
During the first quarter 2008, we repurchased 13 million shares at an average price of
$5.84 per share for an aggregate
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consideration of approximately $76 million. No additional shares were repurchased during
the second quarter of 2008.
 
    
    In the first quarter 2008 we redeemed, at par, $35 million of convertible notes we
assumed as part of the C-COR acquisition.
    
    We generated $40.9 million of cash from operating activities in the first six months of
2008.
    
    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 several significant items year-over- year
 
    
    As a result of the acquisition of C-COR in late 2007, sales, gross margin and operating
expenses significantly increased. Below is a table which compares second quarter 2008
results to the estimated ARRIS and C-COR results for the second quarter 2007:
 Results for ARRIS and C-COR   (unaudited)
 Three Months Ended June 30,ARRIS
    
    ARRIS
    
    C-COR2008
    
    2007
    
    2007 (1) (2)Sales
    
    
    281.1
    
    
    
    252.7
    
    
    
    74.4Gross margin
- $
    
    
    92.9
    
    
    
    72.3
    
    
    
    33.6Gross margin
- %
    
    
    33.0
    %
    
    
    28.6
    %
    
    
    45.2
    %SG&A
    
    
    37.0
    
    
    
    26.5
    
    
    
    16.3R&D
    
    
    27.7
    
    
    
    17.8
    
    
    
    8.3Restructuring &
impairment
    
    
    0.2
    
    
    
    0.0
    
    
    
    0.2Amortization of
intangibles
    
    
    12.4
    
    
    
    0.0
    
    
    
    0.8Operating income
    
    
    15.6
    
    
    
    28.0
    
    
    
    8.0
 Results for ARRIS and C-COR   (unaudited)
 Six Months Ended June 30,ARRIS
    
    ARRIS
    
    C-COR2008
    
    2007
    
    2007 (1) (2)Sales
    
    
    554.6
    
    
    
    488.0
    
    
    
    147.4Gross margin
- $
    
    
    178.1
    
    
    
    141.1
    
    
    
    66.3Gross margin
- %
    
    
    32.1
    %
    
    
    28.9
    %
    
    
    45.0
    %SG&A
    
    
    74.0
    
    
    
    50.7
    
    
    
    31.2R&D
    
    
    55.8
    
    
    
    35.9
    
    
    
    17.0Restructuring &
impairment
    
    
    0.6
    
    
    
    0.4
    
    
    
    0.4Amortization of
intangibles
    
    
    25.7
    
    
    
    0.1
    
    
    
    1.6Operating income
    
    
    22.0
    
    
    
    54.0
    
    
    
    16.1
 
 (1)
    
    See C-COR Form 8-K filed with the Securities and Exchange Commission on
August 27 2007.(2)
    
    C-COR gross margin and SG&A have been adjusted to conform to ARRIS
accounting policies with respect to freight billed to customers. 
    
    In the first quarter of 2007, we recorded a net gain of $22.8 million related to the
termination of the proposed TANDBERG acquisition. We did not experience a similar event in
2008.
    
    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 Board (APB) Opinion 28, Interim Financial Reporting,
related to the terminated TANDBERG
 20




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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 viewed it as more
likely than not that we would 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.
 
    
    In the first six months of 2008, we recorded a tax expense of $8.8 million which equates
to an effective tax rate of 37.2%. We did not have any discrete items in the first six
months of 2008. We anticipate that our average tax rate for 2008 will be approximately
35%. This rate is dependent on Congress enacting legislation, applied retroactively,
continuing tax credits relating to Qualified Research Expenditures. If such legislation is
not enacted or is not retroactively applied, we believe the effective tax rate will be
approximately 38%.
 Our outstanding share count has increased year over year reflecting several factors:
 
    
    We issued approximately 25 million shares as partial consideration for the purchase of
C-COR in 2007.
    
    Partially offsetting the increase was the repurchase of approximately 13 million shares
as part of our share buyback program in the first quarter of 2008.
 Significant Customers
  Three Months Ended June 30,
    
    Six Months Ended 
June 30,(unaudited)2008
    
    2007
    
    2008
    
    2007Comcast
    
    
    46.7
    
    
    
    95.8
    
    
    
    80.9
    
    
    
    178.3% of sales
    
    
    16.6
    %
    
    
    37.9
    %
    
    
    14.6
    %
    
    
    36.5
    %Time Warner Cable
    
    
    75.2
    
    
    
    23.4
    
    
    
    146.2
    
    
    
    45.8% of sales
    
    
    26.8
    %
    
    
    9.3
    %
    
    
    26.4
    %
    
    
    9.4
    %
  Comparison of Operations for the Three and Six Months Ended June 30, 2008 and 2007
  21




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Net Sales
  Net Sales
    
    
    Increase (Decrease) Between 2008 and 2007For the Three Months
    
    
    For the Six Months
    
    
    For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,
    
    
    Ended June 30
    
    
    Ended June 302008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %
    
    
    $
    
    
    %Business Segment:BCS
    
    $
    190.4
    
    
    
    218.3
    
    
    $
    380.0
    
    
    
    417.4
    
    
    $
    (27.9
    )
    
    
    (12.8
    )
    
    $
    (37.4
    )
    
    
    (9.0
    )ATS
    
    
    77.0
    
    
    
    34.2
    
    
    
    149.9
    
    
    
    70.2
    
    
    
    42.8
    
    
    
    125.1
    
    
    
    79.7
    
    
    
    113.5MCS
    
    
    13.7
    
    
    
    0.2
    
    
    
    24.7
    
    
    
    0.4
    
    
    
    13.5
    
    
    
    67.5
    
    
    
    24.3
    
    
    
    6075.0Total sales
    
    $
    281.1
    
    
    $
    252.7
    
    
    $
    554.6
    
    
    $
    488.0
    
    
    $
    28.4
    
    
    
    11.2
    
    
    $
    66.6
    
    
    
    13.6
  Net Sales
    
    
    Increase (Decrease) Between 2008 and 2007For the Three Months
    
    
    For the Six Months
    
    
    For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,
    
    
    Ended June 30
    
    
    Ended June 302008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %
    
    
    $
    
    
    %Domestic
    
    $
    194.1
    
    
    $
    184.9
    
    
    $
    382.9
    
    
    $
    359.7
    
    
    $
    9.2
    
    
    
    5.0
    
    
    $
    23.2
    
    
    
    6.4International
    
    
    87.0
    
    
    
    67.8
    
    
    
    171.7
    
    
    
    128.3
    
    
    
    19.2
    
    
    
    28.3
    
    
    
    43.4
    
    
    
    33.8Total sales
    
    $
    281.1
    
    
    $
    252.7
    
    
    $
    554.6
    
    
    $
    488.0
    
    
    $
    28.4
    
    
    
    11.2
    
    
    $
    66.6
    
    
    
    13.6
 Broadband Communication Systems (BCS) Net Sales 2008 vs. 2007
  
    
    We had lower sales to Comcast of both CMTS and EMTAs. Sales to Comcast of EMTAs were
immaterial in the first quarter and, as expected, increased in the second quarter 2008.
Sales of CMTS to Comcast in the second quarter 2008 were insignificant and are expected to
increase in conjunction with the launch of our DOCSIS 3.0 product in the third quarter of
2008.
    
    The declines associated with Comcast were partially offset by gains at several
customers, notably Time Warner, Charter and certain international customers.
 Access, Transport and Supplies (ATS) Net Sales 2008 vs. 2007
  
    
    The increase was the result of the acquisition of C-COR. In 2007, we estimate that
C-COR recorded sales associated with this segment of approximately $58.5 million and $116.0
million for the three and six month periods of 2007, respectively.
    
    Sales in 2007 in this segment consisted of sales of our Supplies products. Year over
year sales of these products have declined primarily as a result of lower purchases by MSOs
for new plant and extension equipment reflecting the softness in new home sales in the U.S.
 Media & Communication Systems (MCS) Net Sales 2008 vs. 2007
  22




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Gross Margin
  Gross Margin $
    
    
    Increase (Decrease) Between 2008 and 2007For the Three Months
    
    
    For the Six Months
    
    
    For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,
    
    
    Ended June 30
    
    
    Ended June 302008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %
    
    
    $
    
    
    %Business Segment:BCS
    
    $
    61.5
    
    
    $
    66.4
    
    
    $
    119.5
    
    
    $
    128.8
    
    
    $
    (4.9
    )
    
    
    7.4
    
    
    $
    (9.3
    )
    
    
    7.2ATS
    
    
    23.9
    
    
    
    6.1
    
    
    
    45.7
    
    
    
    12.5
    
    
    
    17.8
    
    
    
    291.8
    
    
    
    33.2
    
    
    
    265.6MCS
    
    
    7.5
    
    
    
    (0.1
    )
    
    
    12.9
    
    
    
    (0.2
    )
    
    
    7.6
    
    
    
    7600.0
    
    
    
    13.1
    
    
    
    6550.0Total
    
    $
    92.9
    
    
    $
    72.4
    
    
    
    178.1
    
    
    $
    141.1
    
    
    $
    20.5
    
    
    
    28.3
    
    
    $
    37.0
    
    
    
    26.2
  Gross Margin %
    
    Increase (Decrease) Between 2008 and 2007For the Three Months
    
    For the Six Months
    
    For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,
    
    Ended June 30
    
    Ended June 302008
    
    2007
    
    2008
    
    2007
    
    Percentage PointsBusiness Segment:BCS
    
    
    32.3
    %
    
    
    30.4
    %
    
    
    31.4
    %
    
    
    30.9
    %
    
    
    1.9
    
    
    
    0.5ATS
    
    
    31.0
    %
    
    
    17.7
    %
    
    
    30.5
    %
    
    
    17.8
    %
    
    
    13.3
    
    
    
    12.7MCS
    
    
    54.8
    %
    
    
    (56.5
    )%
    
    
    52.2
    %
    
    
    (54.3
    )%
    
    
    111.3
    
    
    
    106.5Total
    
    
    33.0
    %
    
    
    28.6
    %
    
    
    32.1
    %
    
    
    28.9
    %
    
    
    4.4
    
    
    
    3.2
 Broadband Communications Systems Gross Margin 2008 vs. 2007
  
    
    The reduction in gross margin dollars was the result of lower sales, primarily EMTAs.
    
    The increase in gross margin percentage reflects product mix and cost reductions. In
particular, in both the three and six month periods in 2008 we sold proportionately more
CMTSs than EMTAs. CMTS products have a higher gross margin percentage than EMTAs.
 Access, Transport and Supplies Gross Margin 2008 vs. 2007
  
    
    As a result of the C-COR acquisition, revenues and gross margin dollars increased
significantly year over year. The increase in gross margin percentage was the result of the
addition of higher margin Access and Transport products which we added to our portfolio as
part of the C-COR acquisition.
    
    Supplies gross margin dollars are lower in both the three and six month periods as a
result of lower sales.
 Media & Communications Systems Gross Margin 2008 vs. 2007
 e
 
    
    The increases are attributable to the VOD and OSS products we added to our portfolio as
a result of the C-COR acquisition.
 23




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##### Table of Contents



Operating Expenses
  Operating Expenses
    
    
    Increase (Decrease) Between 2008 and 2007For the Three Months
    
    
    For the Six Months
    
    
    For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,
    
    
    Ended June 30
    
    
    Ended June 302008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %
    
    
    $
    
    
    %SG&A
    
    $
    37.0
    
    
    $
    26.4
    
    
    $
    74.0
    
    
    $
    50.7
    
    
    $
    10.5
    
    
    
    39.6
    
    
    $
    23.3
    
    
    
    46.0Research &
development
    
    
    27.7
    
    
    
    17.8
    
    
    
    55.8
    
    
    
    35.9
    
    
    
    9.9
    
    
    
    55.6
    
    
    
    19.9
    
    
    
    55.4Restructuring &
impairment
    
    
    0.2
    
    
    
    0.0
    
    
    
    0.6
    
    
    
    0.4
    
    
    
    0.2
    
    
    
    0.0
    
    
    
    0.2
    
    
    
    50.0Amortization of
intangibles
    
    
    12.4
    
    
    
    0.1
    
    
    
    25.7
    
    
    
    0.1
    
    
    
    12.4
    
    
    
    0.0
    
    
    
    25.6
    
    
    
    25600.0Total
    
    $
    77.3
    
    
    $
    44.3
    
    
    $
    156.1
    
    
    $
    87.1
    
    
    $
    33.0
    
    
    
    74.5
    
    
    $
    69.0
    
    
    
    79.2
 Selling, General, and Administrative, or SG&A, Expenses
  
    
    The inclusion of expenses associated with the former C-COR.
    
    For the first six months of 2008, SG&A expenses declined by approximately $7.9 million
when compared to the combined expenses of ARRIS and the former C-COR for the first six
months of 2007. The decline predominately reflects synergies achieved as a result of the
combination of the two companies.
    
    Legal expenses increased by approximately $3.7 million year over year for the first six
months as a result increased costs associated with various matters (see Legal Proceedings).
We anticipate that this trend may continue.
 Research & Development Expenses
  
    
    The inclusion of expenses associated with the former C-COR.
    
    For the first six months research and development expenses increased by $2.9 million
when compared to the combined expenses of ARRIS and the former C-COR.
    
    We anticipate that we may modestly increase our R&D spending as a combined company,
particularly on Video on Demand and OSS products.
 Restructuring and Impairment Charges
  Amortization of Intangibles
  24




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Other Expense (Income)
 Interest Expense
  Loss (Gain) in Foreign Currency
  Interest Income
  Gains Related to Terminated Acquisition, Net of Expenses
  Other Expense
  Income Taxes
   25




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Financial Liquidity and Capital Resources
 Overview
  Liquidity & Capital Resources Data
 Six Months Ended June 30,2008
    
    2007(in millions, except DSO and turns)Key Working Capital ItemsCash provided by operating activities
    
    $
    40.9
    
    
    $
    23.9Cash, cash equivalents, and
short-term investments
    
    $
    297.8
    
    
    $
    604.3Accounts receivable, net
    
    $
    168.7
    
    
    $
    120.7Days Sales Outstanding (DSOs)
    
    
    55
    
    
    
    44Inventory, net
    
    $
    147.7
    
    
    $
    90.5Inventory turns
    
    
    5.4
    
    
    
    7.5
 Inventory & Accounts Receivable
   
    
    The 2008 accounts receivable includes sales associated with the former C-COR products,
which were not included in 2007.
    
    As part of ongoing commercial discussions with certain customers, we have in some
instances changed our standard business practice with respect to payment terms and, as result, our DSOs increased in the first half
of 2008 as compared to the same period in 2007.
    
    The growth in our international sales resulted in higher DSOs as international customers
typically have longer payment terms.
   
    
    We acquired approximately $28.1 million of inventory upon closing of the C-COR
transaction in December 2007.
    
    As a result of lower sales than anticipated, our inventory levels increased. We expect
to reduce these levels in future periods.
    
    Inventory turns decreased in 2008 as compared to 2007 as a result of higher inventory
levels and product mix.
  Summary of Current Liquidity Position and Potential for Future Capital Raising
  26




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Commitments
  Cash Flow
  For the Six Months EndedJune 30 (unaudited),2008
    
    2007Cash provided by operating activities
    
    $
    40.9
    
    
    $
    23.9Cash provided by (used in) investing activities
    
    
    39.6
    
    
    
    (57.0
    )Cash provided by (used in) financing activities
    
    
    (114.0
    )
    
    
    15.5Net (decrease) in cash
    
    $
    (33.5
    )
    
    $
    (17.6
    )
 Operating Activities:
  For the Six Months EndedJune 30, (unaudited)2008
    
    2007Net income
    
    $
    14.8
    
    
    $
    60.9Adjustments to reconcile net income to cash
provided by (used in ) operating activities
    
    
    46.7
    
    
    
    (9.1
    )Net income including adjustments
    
    
    61.5
    
    
    
    51.8Decrease/(Increase) in accounts receivable
    
    
    (0.7
    )
    
    
    (6.0
    )Decrease/ (Increase) in inventory
    
    
    (14.4
    )
    
    
    3.7Decrease /(Increase) in accounts payable
and accrued liabilities
    
    
    4.5
    
    
    
    (17.8
    )All other  net
    
    
    (10.0
    )
    
    
    (7.8
    )Cash provided by operating activities
    
    $
    40.9
    
    
    $
    23.9
    27




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##### Table of Contents



Investing Activities:
  Six Months EndedJune 30 (unaudited),2008
    
    2007Capital expenditures
    
    $
    (11.8
    )
    
    $
    (7.1
    )Proceeds from termination of TANDBERG Television
acquisition, net of payments
    
    
    
    
    
    
    22.9Cash paid for acquisition
    
    
    (4.4
    )
    
    
    Cash proceeds from sale of property, plant & equipment
    
    
    0.2
    
    
    
    Purchases of short-term investments
    
    
    (16.9
    )
    
    
    (197.9
    )Disposals of short-term investments
    
    
    72.5
    
    
    
    125.1Cash provided by (used in) investing activities
    
    $
    39.6
    
    
    $
    (57.0
    )
 Capital Expenditures 
  Proceeds
from Termination of TANDBERG Television Acquisition, Net of Payments

  Cash Paid for Acquisition 
  Purchases and Disposals of Short-Term Investments 
  Financing Activities:
  For the Six Months EndedJune 30 (unaudited),2008
    
    2007Payment of debt and capital lease obligations
    
    $
    (35.2
    )
    
    
    Repurchase of common stock
    
    
    (76.0
    )
    
    
    Excess tax benefits from stock-based compensation plans
    
    
    
    
    
    
    6.5Employer repurchase of shares to satisfy minimum tax
withholdings
    
    
    (1.0
    )
    
    
    (1.7
    )Fees and proceeds from issuance of common stock, net
    
    
    (1.8
    )
    
    
    10.7Cash provided by (used in) financing activities
    
    $
    (114.0
    )
    
    $
    15.5
 Payment of Debt and Capital Lease Obligation -
  28




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Repurchase of Common Stock -
  Employer Repurchase of Shares to Satisfy Minimum Tax Withholdings-
  Excess Tax Benefits from Stock-Based Compensation Plans
  Fees and Proceeds from Issuance of Common Stock, Net
  Interest Rates
  Foreign Currency
   Financial Instruments
   Cash, Short-Term Investments and Available-For-Sale Investments
  29




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Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust
and Invested
 Capital Expenditures
  Critical Accounting Estimates
  Forward-Looking Statements
  30




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##### Table of Contents



Item 3 . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
      
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control over Financial Reporting
 31




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PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
   ®
 ® ® ®
   32




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33




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Item 1A. RISK FACTORS
 Our business is dependent on customers capital spending on broadband communication systems, and
reductions by customers in capital spending 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;Aurora Networks;
    
    Big Band Networks;
    
    Cisco Systems, Inc.;
    
    Commscope, Inc;
    
    Concurrent Computer Corporation;
    
    Ericsson (TandbergTV);
    
    Harmonic, Inc.;
    
    Motorola, Inc.;
    
    SeaChange, Inc.;
    
    Thomson; and
    
    TVC Communications, Inc.
   34




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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 pursue acquisitions and investments that could adversely affect our business.
  We may fail to realize the anticipated revenue and earnings growth and other benefits expected from
our recently completed acquisition of C-COR, which could adversely affect the value of our shares.
   Purchase accounting adjustments required under GAAP with respect to our acquisition of C-COR will
have a significant impact on our GAAP earnings, which could impact the trading price of our common
stock.
  35




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##### Table of Contents



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.
  We may have difficulty in forecasting our sales.
  The broadband products that we develop and sell are subject to technological change and a trend
toward open standards, which may impact our future sales and margins.
  Failure to increase our Media & Communications Systems revenue would adversely affect our financial
results.
 36




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##### Table of Contents




    
    our customers may decide to continue to manage their networks by focusing on limited,
individual elements of the network rather than managing their entire network integrity and
service delivery processes using a suite of software application modules such as those we
offer;
    
    our software products may not perform as expected;
    
    new and better products may be developed by competitors;
    
    others may claim that our products infringe on their intellectual property;
    
    our customers may decide to use internally developed software tools to manage their
networks rather than license software from us;
    
    the software business is volatile and we may not be able to effectively utilize our
resources and meet the needs of our customers if we are unable to forecast the future
demands of such customers;
    
    if our customers increase the amount of spending on automated network, service, and
content and operations management tools, new suppliers of these tools may enter the market
and successfully capture market share; and
    
    we may be unable to hire and retain enough qualified technical and management personnel
to support our growth plans.
 Fluctuations in our Media & Communications Systems sales result in greater volatility in our
operating results.
 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.
  37




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##### Table of Contents



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 we and our manufacturers and assemblers have plants.
   
    
    changes in international trade laws, such as the North American Free Trade Agreement,
affecting our import and export activities;
    
    changes in, or expiration of, the Mexican governments Maquiladora program, which
provides economic benefits to us;
    
    changes in labor laws and regulations affecting our ability to hire and retain
employees;
    
    fluctuations of foreign currency and exchange controls;
    
    potential political instability and changes in the Mexican government;
    
    potential regulatory changes; and
    
    general economic conditions in Mexico.
  38




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##### Table of Contents



We face risks relating to currency fluctuations and currency exchange.
   We depend on channel partners to sell our products in certain regions and are subject to risks
associated with these arrangements.
  
    
    ability of our selected channel partners to effectively sell our products to end
customers;
    
    our ability to continue channel partner arrangements into the future since most are for
a limited term and subject to mutual agreement to extend;
    
    a reduction in gross margins realized on sale of our products; and
    
    diminution of contact with end customers which, over time, could adversely impact our
ability to develop new products that meet customers evolving requirements.
 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.
  39




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##### Table of Contents



We do not intend to pay cash dividends in the foreseeable future.
  We have anti-takeover defenses that could delay or prevent an acquisition of our company.
  We
have the ability to issue preferred shares without stockholder
approval.
  40




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
   Number of
    
    Number ofShares
    
    SharesVoted For
    
    WithheldAlex B. Best
    
    
    103,976,605
    
    
    
    6,640,570Harry L. Bosco
    
    
    109,331,827
    
    
    
    1,285,348John Anderson Craig
    
    
    103,972,962
    
    
    
    6,644,213Matthew B. Kearney
    
    
    109,332,119
    
    
    
    1,285,056William H. Lambert
    
    
    100,196,725
    
    
    
    10,420,450John R. Petty
    
    
    105,546,849
    
    
    
    5,070,326Robert J. Stanzione
    
    
    105,576,627
    
    
    
    5,040,548David A. Woodle
    
    
    105,577,737
    
    
    
    5,039,438
  Number ofNumber of
    
    
    
    
    
    Number of
    
    SharesShares
    
    Number of Shares
    
    Shares
    
    Broker Non-Voted For
    
    Voted Against
    
    Abstain
    
    voteApproval of the
2008 Stock
Incentive Plan
    
    
    68,885,790
    
    
    
    21,808,996
    
    
    
    359,460
    
    
    
    19,562,929
  Number of
    
    Number of Shares
    
    Number ofShares Voted For
    
    Voted Against
    
    Shares AbstainApproval of the
retention of Ernst
& Young LLP
    
    
    105,031,702
    
    
    
    5,521,710
    
    
    
    63,763
 
 Item 6. EXHIBITS
 Exhibit No.
    
    Description of Exhibit10.15
    
    2008 Stock Incentive Plan, filed herewith31.1
    
    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
 41




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##### Table of Contents



SIGNATURES
  ARRIS GROUP, INC./s/ David B. Potts

David B. Potts
Executive Vice President, Chief Financial Officer, 
Chief Accounting Officer, and Chief Information Officer
  42