##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 For the quarter ended June 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 Six Months Ended June 30, 2007
 INDEX
 PagePart I. Financial InformationItem 1.
    
    Financial Statementsa)  Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006
    
    2b)  Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2006
    
    3c)  Consolidated Statements of Cash Flows for the Six Months Ended June 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
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures on Market Risk
    
    24Item 4.
    
    Controls and Procedures
    
    24Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    25Item 1A.
    
    Risk Factors
    
    26Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    31Item 6.
    
    Exhibits
    
    31Signatures
    
    
    32




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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 31,2007
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    444,020
    
    
    $
    461,618Short-term investments, at fair value
    
    
    160,315
    
    
    
    87,575Total cash, cash equivalents and short-term investments
    
    
    604,335
    
    
    
    549,193Restricted cash
    
    
    3,136
    
    
    
    3,124Accounts receivable (net of allowances for doubtful
accounts of $2,835 in 2007 and $3,576 in 2006)
    
    
    120,680
    
    
    
    115,304Other receivables
    
    
    6,845
    
    
    
    2,556Inventories (net)
    
    
    90,542
    
    
    
    94,226Prepaids
    
    
    3,250
    
    
    
    3,547Current deferred income tax assets
    
    
    23,239
    
    
    
    29,285Other current assets
    
    
    10,773
    
    
    
    3,717Total current assets
    
    
    862,800
    
    
    
    800,952Property, plant and equipment (net of accumulated
depreciation of $82,458 in 2007 and $77,311 in 2006)
    
    
    30,196
    
    
    
    28,287Goodwill
    
    
    150,569
    
    
    
    150,569Intangibles (net of accumulated amortization of $106,947 in
2007 and $106,832 in 2006)
    
    
    172
    
    
    
    288Investments
    
    
    3,151
    
    
    
    3,520Noncurrent deferred income tax assets
    
    
    17,294
    
    
    
    20,874Other assets
    
    
    7,517
    
    
    
    9,067$
    1,071,699
    
    
    $
    1,013,557LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    46,015
    
    
    $
    60,853Accrued compensation, benefits and related taxes
    
    
    14,631
    
    
    
    23,269Accrued warranty
    
    
    7,829
    
    
    
    8,234Other accrued liabilities
    
    
    28,001
    
    
    
    29,057Total current liabilities
    
    
    96,476
    
    
    
    121,413Long-term debt, net of current portion
    
    
    276,000
    
    
    
    276,000Accrued pension
    
    
    12,778
    
    
    
    12,061Noncurrent income tax payable
    
    
    4,334
    
    
    
    3,041Other long-term liabilities
    
    
    5,288
    
    
    
    5,621Total liabilities
    
    
    394,876
    
    
    
    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; 109.5 million and 107.9 million
shares issued and outstanding in 2007 and 2006,
respectively
    
    
    1,102
    
    
    
    1,089Capital in excess of par value
    
    
    782,717
    
    
    
    761,500Accumulated deficit
    
    
    (102,350
    )
    
    
    (163,268
    )Unrealized gain on marketable securities
    
    
    
    
    
    
    1,297Unfunded pension losses
    
    
    (4,462
    )
    
    
    (4,462
    )Unrealized loss on derivatives
    
    
    
    
    
    
    (551
    )Cumulative translation adjustments
    
    
    (184
    )
    
    
    (184
    )Total stockholders equity
    
    
    676,823
    
    
    
    595,421$
    1,071,699
    
    
    $
    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 June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    252,718
    
    
    $
    219,990
    
    
    $
    487,971
    
    
    $
    428,334Cost of sales
    
    
    180,342
    
    
    
    156,250
    
    
    
    346,848
    
    
    
    308,087Gross margin
    
    
    72,376
    
    
    
    63,740
    
    
    
    141,123
    
    
    
    120,247Gross margin %
    
    
    28.6
    %
    
    
    29.0
    %
    
    
    28.9
    %
    
    
    28.1
    %Operating expenses:Selling, general and administrative expenses
    
    
    26,455
    
    
    
    21,721
    
    
    
    50,630
    
    
    
    42,999Research and development expenses
    
    
    17,791
    
    
    
    19,320
    
    
    
    35,887
    
    
    
    34,394Restructuring and impairment charges
    
    
    
    
    
    
    15
    
    
    
    421
    
    
    
    343Amortization of intangibles
    
    
    58
    
    
    
    219
    
    
    
    116
    
    
    
    437Total operating expenses
    
    
    44,304
    
    
    
    41,275
    
    
    
    87,054
    
    
    
    78,173Operating income
    
    
    28,072
    
    
    
    22,465
    
    
    
    54,069
    
    
    
    42,074Other expense (income):Interest expense
    
    
    1,652
    
    
    
    13
    
    
    
    3,320
    
    
    
    23Gain on investments
    
    
    (1,444
    )
    
    
    (3
    )
    
    
    (1,425
    )
    
    
    (3
    )Interest income
    
    
    (6,459
    )
    
    
    (2,081
    )
    
    
    (12,942
    )
    
    
    (3,601
    )Loss (gain) on foreign currency
    
    
    (146
    )
    
    
    (827
    )
    
    
    176
    
    
    
    (1,144
    )Gain related to terminated acquisition, net of expenses
    
    
    
    
    
    
    
    
    
    
    (22,835
    )
    
    
    Other expense, net
    
    
    51
    
    
    
    95
    
    
    
    116
    
    
    
    201Income from continuing operations before income taxes
    
    
    34,418
    
    
    
    25,268
    
    
    
    87,659
    
    
    
    46,598Income tax expense
    
    
    11,144
    
    
    
    606
    
    
    
    26,741
    
    
    
    1,234Net income from continuing operations
    
    
    23,274
    
    
    
    24,662
    
    
    
    60,918
    
    
    
    45,364Income from discontinued operations
    
    
    
    
    
    
    88
    
    
    
    
    
    
    
    109Net income
    
    $
    23,274
    
    
    $
    24,750
    
    
    $
    60,918
    
    
    $
    45,473Net income per common share -Basic:Income from continuing operations
    
    $
    0.21
    
    
    $
    0.23
    
    
    $
    0.56
    
    
    $
    0.43Income from discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Net income
    
    $
    0.21
    
    
    $
    0.23
    
    
    $
    0.56
    
    
    $
    0.43Diluted:Income from continuing operations
    
    $
    0.21
    
    
    $
    0.23
    
    
    $
    0.55
    
    
    $
    0.42Income from discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Net income
    
    $
    0.21
    
    
    $
    0.23
    
    
    $
    0.55
    
    
    $
    0.42Weighted average common shares:Basic
    
    
    109,398
    
    
    
    107,099
    
    
    
    108,935
    
    
    
    106,665Diluted
    
    
    111,698
    
    
    
    109,670
    
    
    
    111,340
    
    
    
    109,294
  3




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##### 



ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited  (in thousands)
 Six Months EndedJune 30,2007
    
    
    2006Operating activities:Net income
    
    $
    60,918
    
    
    $
    45,473Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    5,145
    
    
    
    5,058Amortization of intangibles
    
    
    116
    
    
    
    437Stock compensation expense
    
    
    6,034
    
    
    
    4,641Deferred income tax provision
    
    
    9,626
    
    
    
    Amortization of deferred finance fees
    
    
    557
    
    
    
    Provision for doubtful accounts
    
    
    596
    
    
    
    (214
    )Gain related to previously written off receivables
    
    
    (377
    )
    
    
    (1,573
    )Gain on disposal of fixed assets
    
    
    
    
    
    
    (4
    )Gain on investments
    
    
    (1,425
    )
    
    
    Gain on discontinued product lines
    
    
    
    
    
    
    (109
    )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
    
    
    (5,972
    )
    
    
    (20,952
    )Other receivables
    
    
    (4,289
    )
    
    
    (4,335
    )Inventory
    
    
    3,684
    
    
    
    22,145Accounts payable and accrued liabilities
    
    
    (17,809
    )
    
    
    6,542Excess tax benefits from stock-based compensation plans
    
    
    (6,531
    )
    
    
    (354
    )Prepaids and other, net
    
    
    (3,573
    )
    
    
    7,281Net cash provided by operating activities
    
    
    23,865
    
    
    
    64,036Investing activities:Purchases of property, plant and equipment
    
    
    (7,055
    )
    
    
    (3,942
    )Cash proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    20Cash 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 short-term investments
    
    
    (197,850
    )
    
    
    (51,900
    )Disposals of short-term investments
    
    
    125,110
    
    
    
    76,150Net cash provided by (used in) investing activities
    
    
    (56,960
    )
    
    
    20,328Financing activities:Excess tax benefits from stock-based compensation plans
    
    
    6,531
    
    
    
    354Employer repurchase of shares to satisfy minimum tax withholdings
    
    
    (1,690
    )
    
    
    (1,044
    )Proceeds from issuance of stock
    
    
    10,656
    
    
    
    8,214Net cash provided by financing activities
    
    
    15,497
    
    
    
    7,524Net increase (decrease) in cash and cash equivalents
    
    
    (17,598
    )
    
    
    91,888Cash and cash equivalents at beginning of period
    
    
    461,618
    
    
    
    75,286Cash and cash equivalents at end of period
    
    $
    444,020
    
    
    $
    167,174
  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 June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands)(unaudited)Service cost
    
    $
    140
    
    
    $
    130
    
    
    $
    279
    
    
    $
    260Interest cost
    
    
    412
    
    
    
    369
    
    
    
    824
    
    
    
    739Expected gain on plan assets
    
    
    (319
    )
    
    
    (281
    )
    
    
    (639
    )
    
    
    (563
    )Amortization of prior service cost
    
    
    119
    
    
    
    119
    
    
    
    239
    
    
    
    239Amortization of net (gain) loss
    
    
    25
    
    
    
    2
    
    
    
    51
    
    
    
    4Net periodic pension cost
    
    $
    377
    
    
    $
    339
    
    
    $
    754
    
    
    $
    679
 Employer Contributions
  Note 3. Guarantees
 Warranty
  5




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##### 



Balance at December 31, 2006
    
    $
    8,234Accruals related to warranties (including changes in estimates)
    
    
    2,078Settlements made (in cash or in kind)
    
    
    (2,483
    )Balance at June 30, 2007 (unaudited)
    
    $
    7,829
 Note 4. Restructuring and Impairment Charges
  (in millions)Balance as of December 31, 2006
    
    $
    3.6First quarter payments
    
    
    (0.5
    )Adjustments to accrual
    
    
    0.4Second quarter payments
    
    
    (0.4
    )Balance as of June 30, 2007 (unaudited)
    
    $
    3.1
 Note 5. Inventories
  June 30,
    
    
    December 31,2007
    
    
    2006(unaudited)Raw material
    
    $
    2,993
    
    
    $
    341Finished goods
    
    
    87,549
    
    
    
    93,885Total net inventories
    
    $
    90,542
    
    
    $
    94,226
 6




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##### 



Note 6. Property, Plant and Equipment
  June 30,
    
    
    December 31,2007
    
    
    2006(unaudited)Land
    
    $
    1,822
    
    
    $
    1,822Building and leasehold improvements
    
    
    13,177
    
    
    
    11,470Machinery and equipment
    
    
    97,655
    
    
    
    92,306112,654
    
    
    
    105,598Less: Accumulated depreciation
    
    
    (82,458
    )
    
    
    (77,311
    )Total property, plant and equipment, net
    
    $
    30,196
    
    
    $
    28,287
 Note 7. Long-Term Obligations
  June 30,(unaudited)
    
    
    December 31,2007
    
    
    2006Other long-term liabilities
    
    $
    22,400
    
    
    $
    20,7232.00 % convertible senior notes due 2026
    
    
    276,000
    
    
    
    276,000Total long term debt and other long-term liabilities
    
    $
    298,400
    
    
    $
    296,723
     7




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##### 



Note 8. Comprehensive Income
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,(unaudited)2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    23,274
    
    
    $
    24,750
    
    
    $
    60,918
    
    
    $
    45,473Changes in the following equity accounts:Unrealized gain (loss) on marketable
securities
    
    
    (1,345
    )
    
    
    51
    
    
    
    (1,297
    )
    
    
    89Unrealized gain (loss) on derivativeinstruments
    
    
    
    
    
    
    (1,375
    )
    
    
    551
    
    
    
    (2,366
    )Comprehensive income
    
    $
    21,929
    
    
    $
    23,426
    
    
    $
    60,172
    
    
    $
    43,196
   Note 9. Sales Information
  Three Months Ended June 30,
    
    Six Months Ended June 30,(unaudited)2007
    
    2006
    
    2007
    
    2006Comcast
    
    $
    102,179
    
    
    $
    77,076
    
    
    $
    193,747
    
    
    $
    150,009% of sales
    
    
    40.4
    %
    
    
    35.0
    %
    
    
    39.7
    %
    
    
    35.0
    %Time Warner Cable
    
    
    23,397
    
    
    
    17,663
    
    
    
    45,777
    
    
    
    40,515% of sales
    
    
    9.3
    %
    
    
    8.0
    %
    
    
    9.4
    %
    
    
    9.5
    %Liberty Media International
    
    
    16,522
    
    
    
    29,164
    
    
    
    35,829
    
    
    
    50,439% of sales
    
    
    6.5
    %
    
    
    13.3
    %
    
    
    7.3
    %
    
    
    11.8
    %Cox Communications
    
    
    12,816
    
    
    
    27,072
    
    
    
    27,661
    
    
    
    52,862% of sales
    
    
    5.1
    %
    
    
    12.3
    %
    
    
    5.7
    %
    
    
    12.3
    %
 8




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##### 



Three Months Ended June 30,
    
    
    Six Months Ended June 30,(unaudited)2007
    
    
    2006
    
    
    2007
    
    
    2006Broadband
    
    $
    77,433
    
    
    $
    98,797
    
    
    $
    157,583
    
    
    $
    184,187Supplies & CPE
    
    
    175,285
    
    
    
    121,193
    
    
    
    330,388
    
    
    
    244,147Total sales
    
    $
    252,718
    
    
    $
    219,990
    
    
    $
    487,971
    
    
    $
    428,334
   Note 10. Earnings Per Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,(unaudited)2007
    
    
    2006
    
    
    2007
    
    
    2006Basic:Income from continuing operations
    
    $
    23,274
    
    
    $
    24,662
    
    
    $
    60,918
    
    
    $
    45,364Income from discontinued operations
    
    
    
    
    
    
    88
    
    
    
    
    
    
    
    109Net income
    
    $
    23,274
    
    
    $
    24,750
    
    
    $
    60,918
    
    
    $
    45,473Weighted average shares outstanding
    
    
    109,398
    
    
    
    107,099
    
    
    
    108,935
    
    
    
    106,665Basic earnings per share
    
    $
    0.21
    
    
    $
    0.23
    
    
    $
    0.56
    
    
    $
    0.43Diluted:Income from continuing operations
    
    $
    23,274
    
    
    $
    24,662
    
    
    $
    60,918
    
    
    $
    45,364Income from discontinued operations
    
    
    
    
    
    
    88
    
    
    
    
    
    
    
    109Net income
    
    $
    23,274
    
    
    $
    24,750
    
    
    $
    60,918
    
    
    $
    45,473Weighted average shares outstanding
    
    
    109,398
    
    
    
    107,099
    
    
    
    108,935
    
    
    
    106,665Net effect of dilutive equity awards
    
    
    2,300
    
    
    
    2,571
    
    
    
    2,405
    
    
    
    2,629Total
    
    
    111,698
    
    
    
    109,670
    
    
    
    111,340
    
    
    
    109,294Diluted earnings per share
    
    $
    0.21
    
    
    $
    0.23
    
    
    $
    0.55
    
    
    $
    0.42
 9




---



##### 



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




---



##### 



Income Tax Expense
  Six Months Ended June 30,(unaudited)2007
    
    
    2006Income
    
    
    Income
    
    
    
    
    
    
    Income
    
    
    IncomeBefore
    
    
    Tax
    
    
    Effective
    
    
    Before
    
    
    Tax
    
    
    EffectiveTax
    
    
    Expense
    
    
    Tax Rate
    
    
    Tax
    
    
    Expense
    
    
    Tax RateNon-Discrete Items
    
    $
    64,824
    
    
    $
    21,319
    
    
    32.9%
    
    
    $
    46,598
    
    
    $
    1,234
    
    
    2.6%Discrete Accounting Events
    
    
    22,835
    
    
    
    8,668
    
    
    38.0%
    
    
    
    
    
    
    
    Discrete Tax Events -
Valuation Allowances /
FIN 48 Reserves
    
    
    
    
    
    
    (3,246
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    87,659
    
    
    $
    26,741
    
    
    30.5%
    
    
    $
    46,598
    
    
    $
    1,234
    
    
    2.6%
 
    
    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 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 discrete income tax expense related to the terminated TANDBERG
transaction.
    
    For the first six 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.
  Note 12. Termination of Proposed Acquisition
   Note 13.  Contingencies
      11




---



##### 



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;
    
    Strengthen and grow our supplies infrastructure distribution channel;
    
    Expand our existing product/services portfolio through internal developments,
partnerships and acquisitions; and
    
    Maintain and improve an already strong capital and expense structure.
  Everything IP, Everywhere is taking hold as MSOs globally have embraced VoIP and are now rapidly
deploying this key new service.
 
    
    Our sales and operating income, improved year over year primarily as a result of the
growth in the VoIP market and customer acceptance of our products.
 Six Months Ended June 30,(in thousands)2007
    
    2006Sales
    
    $
    488.0
    
    
    $
    428.3Operating income
    
    $
    54.1
    
    
    $
    42.1Cash, cash equivalents, and short-term
investments
    
    $
    604.3
    
    
    $
    197.2
 
    
    We have successfully leveraged our existing market position and industry experience to
increase sales of both EMTA and CMTS products.
    
    We expect demand for CMTS products will continue to increase in future periods as new
services and competition between our customers and their competitors intensifies the need
to provide ever faster download speeds which require additional CMTS capacity and features.
    
    We expect demand for 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 July 2007 we were advised by Comcast that the ARRIS D5 Next Generation Edge QAM had
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 are
currently anticipating receiving orders under this award in the second half of 2007.
    
    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 well suited to providing commercial telephone service over cable.
 12




---



##### 




    
    Sales of our CBR products, consistent with the expectation that we previously disclosed,
decreased significantly year over year as this product line nears the end of its life. We
anticipate minimal sales of this product in 2007.
 We continue to invest significantly in research and development.
 
    
    We have made significant investments through our research and development efforts in new
products and expansion of our existing products. Our primary focus has been on products
and services that will enable 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 second quarter of 2007, we
spent approximately $17.8 million on research and development, or 7.0% of revenue, which
compares to $19.3 million or 8.8% 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 six 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
    
    C4 CMTS which will support DOCSIS 3.0 and modular CMTS. A prototype
version of this product was demonstrated at the Society of Cable Telecommunications
Engineers conference in 2007. The demonstration included working versions of the
new C4 16-downstream port module and the new MAC processor module which are
currently under development. When commercially available, this product will enable
currently installed C4 CMTS to be efficiently upgraded to DOCSIS 3.0 and modular
CMTS.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.
 At the end of the second quarter we had cash, cash equivalents and short- term investments of
approximately $604 million.
 
    
    Through a combination of our cash resources, anticipated cash generation from operating
activities and our ability to access capital markets, we continue to be well positioned to
execute on strategic opportunities.
    
    At the end of the second quarter 2007, we had $90.5 million of inventory on hand. In
order to better meet our customer demand, we are planning on increasing our inventory of
key products by approximately $10 million in the third quarter 2007.
    
    Accounts receivable, net ended the second quarter 2007 at $120.7 million with annualized
DSOs of 44 days. We are presently in discussions with customers about various business
terms including payment terms. It is possible that these discussions may lead to an
increase in our DSOs in the future.
    
    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
second half of 2007. Our forecast for capital expenditures for 2007 is now $13 million to
$15 million.
 
 13




---



##### 



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 $1.2 million in the
first half of 2006, which equated to an effective tax rate of 2.6%.
    
    In the first six months of 2007, we recorded a tax expense of $26.7 million, which
equates to an effective tax rate of 30.5%. 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 second half of 2007 of approximately 33%.
 Significant Customers
  Three Months Ended June 30,
    
    Six Months Ended June 30,(unaudited)2007
    
    2006
    
    2007
    
    2006Comcast
    
    $
    102,179
    
    
    $
    77,076
    
    
    $
    193,747
    
    
    $
    150,009% of sales
    
    
    40.4
    %
    
    
    35.0
    %
    
    
    39.7
    %
    
    
    35.0
    %Time Warner Cable
    
    
    23,397
    
    
    
    17,663
    
    
    
    45,777
    
    
    
    40,515% of sales
    
    
    9.3
    %
    
    
    8.0
    %
    
    
    9.4
    %
    
    
    9.5
    %Liberty Media International
    
    
    16,522
    
    
    
    29,164
    
    
    
    35,829
    
    
    
    50,439% of sales
    
    
    6.5
    %
    
    
    13.3
    %
    
    
    7.3
    %
    
    
    11.8
    %Cox Communications
    
    
    12,816
    
    
    
    27,072
    
    
    
    27,661
    
    
    
    52,862% of sales
    
    
    5.1
    %
    
    
    12.3
    %
    
    
    5.7
    %
    
    
    12.3
    %
  Comparison of Operations for the Three and Six Months Ended June 30, 2007 and 2006
 Net Sales
  Net Sales
    
    
    Increase (Decrease) Between 2007 and 2006For 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 302007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    $
    
    
    %Product Category:Broadband
    
    $
    77.4
    
    
    $
    98.8
    
    
    $
    157.6
    
    
    $
    184.2
    
    
    $
    (21.4
    )
    
    (21.7)
    
    
    $
    (26.6
    )
    
    (14.4)Supplies & CPE
    
    
    175.3
    
    
    
    121.2
    
    
    
    330.4
    
    
    
    244.1
    
    
    
    54.1
    
    
    44.6
    
    
    
    86.3
    
    
    35.4Total sales
    
    $
    252.7
    
    
    $
    220.0
    
    
    $
    488.0
    
    
    $
    428.3
    
    
    $
    32.7
    
    
    14.9
    
    
    $
    59.7
    
    
    13.9
  14




---



##### 



Net Sales
    
    
    Increase (Decrease) Between 2007 and 2006For 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 302007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    $
    
    
    %Domestic
    
    $
    184.9
    
    
    $
    161.8
    
    
    $
    359.7
    
    
    $
    319.2
    
    
    $
    23.1
    
    
    14.3
    
    
    $
    40.5
    
    
    12.7International
    
    
    67.8
    
    
    
    58.2
    
    
    
    128.3
    
    
    
    109.1
    
    
    
    9.6
    
    
    16.5
    
    
    
    19.2
    
    
    17.6Total sales
    
    $
    252.7
    
    
    $
    220.0
    
    
    $
    488.0
    
    
    $
    428.3
    
    
    $
    32.7
    
    
    14.9
    
    
    $
    59.7
    
    
    13.9
 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 second quarter 2007, we sold $2.5
million of CBR product as compared to $38.1 million in the same period last year. 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
second quarter of 2007, we sold approximately 1.9 million EMTAs in comparison to
approximately 1.1 million in the second quarter of 2006.
 Gross Margin
  Gross Margin $
    
    
    Increase (Decrease) Between 2007 and 2006For 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 302007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    $
    
    
    %Product Category:Broadband
    
    $
    34.5
    
    
    $
    45.4
    
    
    $
    73.2
    
    
    $
    84.3
    
    
    $
    (10.9
    )
    
    (24.0)
    
    
    $
    (11.1
    )
    
    (13.2)Supplies & CPE
    
    
    37.9
    
    
    
    18.3
    
    
    
    67.9
    
    
    
    35.9
    
    
    
    19.6
    
    
    107.1
    
    
    
    32.0
    
    
    89.1Total
    
    $
    72.4
    
    
    $
    63.7
    
    
    $
    141.1
    
    
    $
    120.2
    
    
    $
    8.7
    
    
    13.7
    
    
    $
    20.9
    
    
    17.4
  Gross Margin %
    
    
    Increase (Decrease) Between 2007 and 2006For 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 302007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    Percentage PointsProduct Category:Broadband
    
    
    44.6
    %
    
    
    46.0
    %
    
    
    46.5
    %
    
    
    45.8
    %
    
    (1.4)
    
    
    0.7Supplies & CPE
    
    
    21.6
    %
    
    
    15.1
    %
    
    
    20.6
    %
    
    
    14.6
    %
    
    6.5
    
    
    6.0Total
    
    
    28.6
    %
    
    
    29.0
    %
    
    
    28.9
    %
    
    
    28.1
    %
    
    (0.4)
    
    
    0.8
 15




---



##### 



Broadband Gross Margin 2007 vs. 2006
  
    
    Gross margin percentage declined 1.4 percentage points in the second 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 $10.9 million, or
24%, as a result of lower sales of CBR product, lower margin percentages for CMTS product,
partially offset by increased sales of CMTS product.
    
    For the first half of 2007, gross margin dollars declined by $11.1 million, or 13%, 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 6.5 percentage points and 6.0 percentage points,
year over year for the three and six month periods. The improvement was 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.
 Operating Expenses
  Operating Expenses
    
    
    Increase (Decrease) Between 2007 and 2006For 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 302007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    $
    
    
    %SG&A
    
    $
    26.4
    
    
    $
    21.7
    
    
    $
    50.7
    
    
    $
    43.0
    
    
    $
    4.7
    
    
    21.7
    
    
    $
    7.7
    
    
    17.9Research &
development
    
    
    17.8
    
    
    
    19.4
    
    
    
    35.9
    
    
    
    34.5
    
    
    
    (1.6
    )
    
    (8.2)
    
    
    
    1.4
    
    
    4.1Restructuring &
impairment
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.0
    
    
    0.0
    
    
    
    0.1
    
    
   33.3Amortization of
intangibles
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    (0.1
    )
    
   (50.0)
    
    
    
    (0.3
    )
    
   (75.0)Total
    
    $
    44.3
    
    
    $
    41.3
    
    
    $
    87.1
    
    
    $
    78.2
    
    
    $
    3.0
    
    
   7.3
    
    
    $
    8.9
    
    
   11.4
 Selling, General, and Administrative, or SG&A, Expenses
  
    
    Employee costs increased $1.9 million and $3.6 million for both the three and six months
ended June 30, 2007, respectively. The increase in costs resulted from higher staffing
levels, salary increases, other fringe benefits, equity compensation and travel. Over the
past twelve months, we made the decision to supplement our staffing particularly in sales
and marketing. Further, annual salary increases were implemented in the second quarter.
    
    We incurred higher bad debt expense in the second quarter and first half of 2007 as
compared to the same periods in 2006. In the second quarter of 2006, we recorded a $1.1
million gain as compared to the
 16




---



##### 




    
    We incurred higher legal costs in the three and six month periods ended June 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.
 Research & Development Expenses
   
    
    In the second quarter of 2006, we incurred a $2.4 million expense for licensing fees
related to our Fixed Mobile Convergence development that did not reoccur in the second
quarter of 2007.
    
    Offsetting the above, we incurred higher employee costs of approximately $1.2 million
related to higher staffing levels, salary increases, taxes, other fringe benefits, equity
compensation and travel.
  
    
    We incurred higher employee costs of approximately $2.4 million related to higher
staffing levels, salary increases, bonus accruals, taxes, other fringe benefits, equity
compensation and travel.
    
    Partially offsetting the above, in the first half of 2006, we incurred a $2.5 million
expense for licensing fees related to our Fixed Mobile Convergence development as compared
to a $1.5 million expense in the first half of 2007.
 Restructuring and Impairment Charges
  Amortization of Intangibles
  Other Expense (Income)
 Interest Expense
  Gain on Investments
  17




---



##### 



Loss (Gain) in Foreign Currency
  Interest Income
  Gains Related to Terminated Acquisition, Net of Expenses
  Income Taxes
   Proxy Statement for Annual Meeting of Stockholders
  18




---



##### 



Financial Liquidity and Capital Resources
 Overview
  Liquidity & Capital Resources Data
 Six Months Ended June 30,2007
    
    2006(in millions, except DSO and turns)Key Working Capital ItemsCash provided by operating activities
    
    $
    23.9
    
    
    $
    64.0Cash, cash equivalents, and
short-term investments
    
    $
    604.3
    
    
    $
    197.2Accounts receivable, net
    
    $
    120.7
    
    
    $
    104.1Days Sales Outstanding (DSOs)
    
    
    44
    
    
    
    40Inventory, net
    
    $
    90.5
    
    
    $
    91.8Inventory turns
    
    
    7.5
    
    
    
    6.0
 Inventory & Accounts Receivable
  Summary of Current Liquidity Position and Potential for Future Capital Raising
  Commitments
  Cash Flow
  For the Six Months EndedJune 30,2007
    
    2006Cash provided by operating activities
    
    $
    23.9
    
    
    $
    64.0Cash provided (used) by investing activities
    
    $
    (57.0
    )
    
    $
    20.3Cash provided by financing activities
    
    $
    15.5
    
    
    $
    7.6Net increase (decrease) in cash
    
    $
    (17.6
    )
    
    $
    91.9
 19




---



##### 



Operating Activities:
  For the Six Months EndedJune 30,2007
    
    2006Net income after non-cash adjustments
    
    $
    58.4
    
    
    $
    53.7(Increase)/Decrease in accounts receivable
    
    
    (6.0
    )
    
    
    (20.9
    )(Increase)/Decrease in inventory
    
    
    3.7
    
    
    
    22.1Increase/(Decrease) in accounts payable and
accrued liabilities
    
    
    (17.8
    )
    
    
    6.5All other  net
    
    
    (14.4
    )
    
    
    2.6Cash provided by operating activities
    
    $
    23.9
    
    
    $
    64.0
 
    
    Our accounts receivable level increased in 2007 and 2006, predominantly reflecting
higher sales. Our DSO was 44 days for the first half of 2007 as compared to DSO of 40 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 modestly decreased in the first half of 2007. They also decreased
in the first half of 2006 as we had fewer E-MTAs on hand as compared to the end of 2005.
Our customers modestly reduced their purchases in the fourth quarter of 2005 leaving us
with a higher than expected level of inventory at year end. This corrected itself in the
first half of 2006. Our inventory turns for the first half of 2007 were 7.5 as compared to
turns of 6.0 for the same period in 2006. We expect our inventory level to modestly
increase in 2007. In order to better meet our customer demand, we are planning on
increasing our inventory of key products by approximately $10 million in the third quarter
of 2007.
    
    Our accounts payable and accrued liabilities decreased in the first half 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.
 Investing Activities:
  Six Months EndedJune 30,2007
    
    2006Capital expenditures
    
    $
    (7.1
    )
    
    $
    (3.9
    )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 short-term investments
    
    
    (197.9
    )
    
    
    (51.9
    )Disposals of short-term investments
    
    
    125.1
    
    
    
    76.1Cash provided by (used in) investing activities
    
    $
    (57.0
    )
    
    $
    20.3
 20




---



##### 



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 second half of
2007. Our forecast for capital expenditures for 2007 is now $13 million to $15 million.
 Gains Related to Terminated TANDBERG Acquisition, Net of Expenses -
  Purchases/Disposals of Short-Term Investments 
  Financing Activities:
  For the Six Months EndedJune 30,2007
    
    
    2006Excess tax benefits from stock-based
compensation plans
    
    $
    6.5
    
    
    $
    0.4Employer repurchase of shares to satisfy
minimum tax withholdings
    
    
    (1.7
    )
    
    
    (1.1
    )Proceeds from issuance of stock
    
    
    10.7
    
    
    
    8.2Cash provided by financing activities
    
    $
    15.5
    
    
    $
    7.5
    Interest Rates
  Potential Changes in Accounting Pronouncements
  Foreign Currency
  21




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Financial Instruments
   Cash and Short-Term Investments
  Investments
  Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust
and Invested
 Capital Expenditures
  22




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Critical Accounting Estimates
  Income Taxes
 ,
Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109,
Accounting for Income Taxes
 Forward-Looking Statements
  23




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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
 24




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PART II. OTHER INFORMATION
 Item 1. LEGAL PROCEEDINGS
  , ,
  Markman
   25




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Item 1A. RISK FACTORS
 Our business is dependent on customers capital spending on broadband communication systems, and
reductions by customers in capital spending would adversely affect our business.
  
    
    General economic conditions;
    
    Availability and cost of capital;
    
    Governmental regulation;
    
    Demands for network services;
    
    Competition from other providers of broadband and high speed services;
    
    Acceptance of new services offered by our customers; and
    
    Real or perceived trends or uncertainties in these factors.
  The markets in which we operate are intensely competitive, and competitive pressures may adversely
affect our results of operations.
  26




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
    
    Ambit Microsystems;
    
    Big Band Networks;
    
    Cisco Systems, Inc.;
    
    Ericsson;
    
    Harmonic, Inc.;
    
    Motorola, Inc.;
    
    Thomson; and
    
    TVC Communications, Inc.
   Consolidations in the telecommunications industry could result in delays or reductions in purchases
of products, which would have a material adverse effect on our business.
   Acquisitions can involve significant risks.
  27




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Our business has primarily come from several key customers. The loss of one of these customers or
a significant reduction in sales to one of these customers would have a material adverse effect on
our business.
  The broadband products that we develop and sell are subject to technological change and a trend
towards open standards, which may impact our future sales and margins.
  Products currently under development may fail to realize anticipated benefits.
  
    
    Are not cost-effective;
    
    Are not brought to market in a timely manner;
    
    Fail to achieve market acceptance; or
    
    Fail to meet industry certification standards.
  Our success depends in large part on our ability to attract and retain qualified personnel in all
facets of our operations.
  28




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We are substantially dependent on contract manufacturers, and an inability to obtain adequate and
timely delivery of supplies could adversely affect our business.
  Our international operations may be adversely affected by any decline in the demand for broadband
systems designs and equipment in international markets.
  Our international operations may be adversely affected by changes in the foreign laws in the
countries in which our manufacturers and assemblers have plants.
  We face risks relating to currency fluctuations and currency exchange.
   Our profitability has been, and may continue to be, volatile, which could adversely affect the
price of our stock.
  29




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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.
  W e hav e th e abilit y t o issu e preferre d share s withou t stockholde r approval .
  30




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Item 4. Submission of Matters to a Vote of Security Holders
   Number of
    
    Number ofShares
    
    SharesVoted For
    
    WithheldAlex B. Best
    
    
    98,154,450
    
    
    
    896,071Harry L. Bosco
    
    
    98,483,906
    
    
    
    566,615John Anderson Craig
    
    
    98,210,898
    
    
    
    839,623Matthew B. Kearney
    
    
    98,537,196
    
    
    
    513,325William H. Lambert
    
    
    97,274,995
    
    
    
    1,775,526John R. Petty
    
    
    95,027,263
    
    
    
    4,023,258Robert J. Stanzione
    
    
    95,919,395
    
    
    
    3,131,126
  Number ofNumber of
    
    
    
    
    
    Number of
    
    SharesShares Voted
    
    Number of Shares
    
    Shares
    
    Broker Non-For
    
    Voted Against
    
    Abstain
    
    voteApproval of the
2007 Stock
Incentive Plan
    
    
    66,644,112
    
    
    
    16,166,240
    
    
    
    251,171
    
    
    
    15,988,998
  Number of Shares
    
    Number of Shares
    
    Number ofVoted For
    
    Voted Against
    
    Shares AbstainApproval of the
retention of Ernst
& Young LLP
    
    
    95,527,096
    
    
    
    3,453,311
    
    
    
    70,114
 Item 6. EXHIBITS
 Exhibit No.
    
    Description of Exhibit10.15
    
    2007 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
 31




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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  32