##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 For the quarter ended September 30, 2008
  ARRIS GROUP, INC.
 
 3871 Lakefield Drive
Suwanee, GA 30024
(678) 473-2000




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##### 



ARRIS GROUP, INC.
FORM 10-Q
For the Three and Nine Months Ended September 30, 2008
 INDEX
 PagePart I.
    
    Financial InformationItem 1.
    
    Financial Statementsa)
    
    Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
    
    
    2b)
    
    Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007
    
    
    3c)
    
    Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007
    
    
    4d)
    
    Notes to the Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures on Market Risk
    
    
    29Item 4.
    
    Controls and Procedures
    
    
    30Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    31Item 1A.
    
    Risk Factors
    
    
    33Item 6.
    
    Exhibits
    
    
    40Signatures
    
    
    41EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 
 ARRIS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 September 30, 2008
    
    
    December 31, 2007(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    305,987
    
    
    $
    323,797Short-term investments, at fair value
    
    
    23,571
    
    
    
    68,011Total cash, cash equivalents and short-term investments
    
    
    329,558
    
    
    
    391,808Restricted cash
    
    
    5,768
    
    
    
    6,977Accounts receivable (net of allowances for doubtful
accounts of $3,132 in 2008 and $2,826 in 2007)
    
    
    168,121
    
    
    
    166,953Other receivables
    
    
    5,180
    
    
    
    4,330Inventories (net)
    
    
    141,564
    
    
    
    131,792Prepaids
    
    
    5,156
    
    
    
    5,856Current deferred income tax assets
    
    
    37,999
    
    
    
    44,939Other current assets
    
    
    20,167
    
    
    
    4,841Total current assets
    
    
    713,513
    
    
    
    757,496Property, plant and equipment (net of accumulated
depreciation of $99,137 in 2008 and $83,644 in 2007)
    
    
    60,268
    
    
    
    59,156Goodwill
    
    
    449,418
    
    
    
    455,352Intangibles (net of accumulated amortization of $144,021 in
2008 and $109,167 in 2007)
    
    
    236,689
    
    
    
    269,893Investments
    
    
    15,086
    
    
    
    8,592Noncurrent deferred income tax assets
    
    
    3,312
    
    
    
    3,459Other assets
    
    
    8,980
    
    
    
    8,001$
    1,487,266
    
    
    $
    1,561,949LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    54,304
    
    
    $
    58,852Accrued compensation, benefits and related taxes
    
    
    21,831
    
    
    
    26,177Accrued warranty
    
    
    7,554
    
    
    
    8,298Deferred revenue
    
    
    24,974
    
    
    
    8,474Current portion of long-term debt
    
    
    234
    
    
    
    35,305Other accrued liabilities
    
    
    25,490
    
    
    
    42,121Total current liabilities
    
    
    134,387
    
    
    
    179,227Long-term debt, net of current portion
    
    
    276,371
    
    
    
    276,765Accrued pension
    
    
    10,622
    
    
    
    10,455Noncurrent income taxes payable
    
    
    10,128
    
    
    
    6,322Noncurrent deferred income tax liabilities
    
    
    42,337
    
    
    
    45,255Other long-term liabilities
    
    
    15,655
    
    
    
    18,158Total liabilities
    
    
    489,500
    
    
    
    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; 122.8 million and 132.4 million shares issued
and outstanding in 2008 and 2007, respectively
    
    
    1,360
    
    
    
    1,356Capital in excess of par value
    
    
    1,102,112
    
    
    
    1,093,498Treasury stock at cost, 13 million shares in 2008 and 51
thousand shares in 2007
    
    
    (75,960
    )
    
    
    (572
    )Accumulated deficit
    
    
    (26,076
    )
    
    
    (64,993
    )Unrealized gain (loss) on marketable securities
    
    
    (128
    )
    
    
    20Unfunded pension losses
    
    
    (3,358
    )
    
    
    (3,358
    )Cumulative translation adjustments
    
    
    (184
    )
    
    
    (184
    )Total stockholders equity
    
    
    997,766
    
    
    
    1,025,767$
    1,487,266
    
    
    $
    1,561,949
  2




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##### Table of Contents



ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited  (in thousands, except per share data and percentages)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    297,551
    
    
    $
    254,662
    
    
    $
    852,167
    
    
    $
    742,633Cost of sales
    
    
    191,417
    
    
    
    185,828
    
    
    
    567,901
    
    
    
    532,676Gross margin
    
    
    106,134
    
    
    
    68,834
    
    
    
    284,266
    
    
    
    209,957Gross margin %
    
    
    35.7
    %
    
    
    27.0
    %
    
    
    33.4
    %
    
    
    28.3
    %Operating expenses:Selling, general and administrative expenses
    
    
    33,012
    
    
    
    23,778
    
    
    
    107,040
    
    
    
    74,408Research and development expenses
    
    
    27,473
    
    
    
    17,797
    
    
    
    83,257
    
    
    
    53,684Restructuring
    
    
    202
    
    
    
    
    
    
    
    782
    
    
    
    421Amortization of intangibles
    
    
    9,146
    
    
    
    57
    
    
    
    34,854
    
    
    
    173Total operating expenses
    
    
    69,833
    
    
    
    41,632
    
    
    
    225,933
    
    
    
    128,686Operating income
    
    
    36,301
    
    
    
    27,202
    
    
    
    58,333
    
    
    
    81,271Other expense (income):Interest expense
    
    
    1,738
    
    
    
    1,683
    
    
    
    4,964
    
    
    
    5,003Loss (gain) on investments
    
    
    37
    
    
    
    (3,453
    )
    
    
    210
    
    
    
    (4,878
    )Interest income
    
    
    (1,504
    )
    
    
    (6,307
    )
    
    
    (5,891
    )
    
    
    (19,249
    )Loss (gain) on foreign currency
    
    
    382
    
    
    
    (112
    )
    
    
    (258
    )
    
    
    64Gain related to terminated acquisition, net of
expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,835
    )Other expense (income), net
    
    
    (72
    )
    
    
    215
    
    
    
    (43
    )
    
    
    331Income from continuing operations before income taxes
    
    
    35,720
    
    
    
    35,176
    
    
    
    59,351
    
    
    
    122,835Income tax expense
    
    
    11,645
    
    
    
    7,654
    
    
    
    20,434
    
    
    
    34,395Net income from continuing operations
    
    
    24,075
    
    
    
    27,522
    
    
    
    38,917
    
    
    
    88,440Income from discontinued operations
    
    
    
    
    
    
    330
    
    
    
    
    
    
    
    330Net income
    
    $
    24,075
    
    
    $
    27,852
    
    
    $
    38,917
    
    
    $
    88,770Net income per common share -Basic:Income from continuing operations
    
    $
    0.20
    
    
    $
    0.25
    
    
    $
    0.31
    
    
    $
    0.81Income from discontinued operations
    
    
    
    
    
    
    0.00
    
    
    
    
    
    
    
    0.00Net income
    
    $
    0.20
    
    
    $
    0.25
    
    
    $
    0.31
    
    
    $
    0.81Diluted:Income from continuing operations
    
    $
    0.19
    
    
    $
    0.25
    
    
    $
    0.31
    
    
    $
    0.79Income from discontinued operations
    
    
    
    
    
    
    0.00
    
    
    
    
    
    
    
    0.00Net income
    
    $
    0.19
    
    
    $
    0.25
    
    
    $
    0.31
    
    
    $
    0.79Weighted average common shares:Basic
    
    
    122,922
    
    
    
    110,178
    
    
    
    125,466
    
    
    
    109,354Diluted
    
    
    125,420
    
    
    
    112,085
    
    
    
    127,249
    
    
    
    111,595
  3




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ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited  (in thousands)
 Nine Months Ended September 30,2008
    
    
    2007Operating activities:Net income
    
    $
    38,917
    
    
    $
    88,770Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    15,521
    
    
    
    8,003Amortization of intangibles
    
    
    34,854
    
    
    
    173Stock compensation expense
    
    
    8,286
    
    
    
    8,710Deferred income tax provision
    
    
    10,461
    
    
    
    14,319Amortization of deferred finance fees
    
    
    835
    
    
    
    836Provision for doubtful accounts
    
    
    365
    
    
    
    484Gain related to previously written off receivables
    
    
    
    
    
    
    (377
    )Gain on discontinued product line
    
    
    
    
    
    
    (330
    )Loss (gain) on disposal of fixed assets
    
    
    (15
    )
    
    
    167Loss (gain) on investments
    
    
    210
    
    
    
    (4,878
    )Gain related to terminated acquisition, net of expenses
    
    
    
    
    
    
    (22,835
    )Excess tax benefits from stock-based compensation plans
    
    
    (145
    )
    
    
    (8,269
    )Changes in operating assets and liabilities, net of effect of acquisitions:Accounts receivable
    
    
    143
    
    
    
    (15,396
    )Other receivables
    
    
    (4,001
    )
    
    
    (2,444
    )Inventory
    
    
    (7,994
    )
    
    
    (24,001
    )Income taxes payable/recoverable
    
    
    (657
    )
    
    
    (7,695
    )Accounts payable and accrued liabilities
    
    
    (5,985
    )
    
    
    (24,385
    )Prepaids and other, net
    
    
    (4,431
    )
    
    
    (262
    )Net cash provided by operating activities
    
    
    86,364
    
    
    
    10,590Investing activities:Purchases of property, plant and equipment
    
    
    (16,444
    )
    
    
    (11,138
    )Cash paid for acquisitions, net of cash acquired
    
    
    (10,066
    )
    
    
    Cash proceeds from sale of property, plant and equipment
    
    
    250
    
    
    
    3Cash 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
    
    
    (82,998
    )
    
    
    (295,626
    )Disposals of short-term investments
    
    
    122,470
    
    
    
    162,902Purchases of investment securities
    
    
    (4,000
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    9,228
    
    
    
    (121,024
    )Financing activities:Payment of debt and capital lease obligations
    
    
    (35,518
    )
    
    
    Repurchase of common stock
    
    
    (75,913
    )
    
    
    Excess tax benefits from stock-based compensation plans
    
    
    145
    
    
    
    8,269Employer repurchase of shares to satisfy minimum tax withholdings
    
    
    (1,035
    )
    
    
    (3,092
    )Fees and proceeds from issuance of common stock, net
    
    
    (1,081
    )
    
    
    14,347Net cash provided by (used in) financing activities
    
    
    (113,402
    )
    
    
    19,524Net decrease in cash and cash equivalents
    
    
    (17,810
    )
    
    
    (90,910
    )Cash and cash equivalents at beginning of period
    
    
    323,797
    
    
    
    461,618Cash and cash equivalents at end of period
    
    $
    305,987
    
    
    $
    370,708Noncash
investing and financing activities:Net tangible assets acquired, excluding cash
    
    
    14,238
    
    
    
    Intangible assets acquired, including goodwill
    
    
    (4,172
    )
    
    
    Cash paid for acquisitions, net of cash acquired
    
    $
    10,066
    
    
    $
    
  4




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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)
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles
 Disclosures about Derivative Instruments and Hedging
Activitiesan amendment of FASB Statement No. 133.
 5




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Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans.
 Fair Value Measurements Effective Date of FASB Statement No.
157,
 Note 3. Investments
  Fair ValueAs of September 30,
    
    
    As of December 31,2008
    
    
    2007(Unaudited)Current Assets:Commercial paper
    
    $
    19,974
    
    
    $
    11,833Auction rate securities
    
    
    
    
    
    
    30,270Certificates of deposit
    
    
    1,997
    
    
    
    9,807U.S. Government agency bonds
    
    
    
    
    
    
    9,574Corporate obligations
    
    
    
    
    
    
    3,447Asset-backed securities
    
    
    
    
    
    
    2,974Equity securities
    
    
    
    
    
    
    106Variable
rate demand notes
    
    
    1,600
    
    
    
    Total classified as current assets
    
    
    23,571
    
    
    
    68,011Non-Current Assets:Cash surrender value of company owned life insurance
    
    
    2,817
    
    
    
    3,075Auction rate securities
    
    
    4,789
    
    
    
    Mutual funds
    
    
    68
    
    
    
    3,230Money market funds
    
    
    45
    
    
    
    70Corporate obligations
    
    
    37
    
    
    
    37Investment in private company
    
    
    4,000
    
    
    
    SERP investment
    
    
    3,330
    
    
    
    2,180Total classified as non-current assets
    
    
    15,086
    
    
    
    8,592Total
    
    $
    38,657
    
    
    $
    76,603
  6




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Note 4. Fair Value Measurements
      Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalShort-term investments
    
    $
    19,974
    
    
    $
    3,597
    
    
    $
    
    
    
    $
    23,571Long-term investments
    
    
    150
    
    
    
    6,147
    
    
    
    
    
    
    
    6,297Auction rate securities
    
    
    
    
    
    
    
    
    
    
    4,789
    
    
    
    4,789Investment in private company
    
    
    
    
    
    
    4,000
    
    
    
    
    
    
    
    4,000Foreign Currency Contract
    
    
    1,235
    
    
    

    
    
    
    
    


    
    
    
    1,235Total
    
    $
    21,359
    
    
    $
    13,744
    
    
    $
    4,789
    
    
    $
    39,892
   Level 3(Unaudited)Estimated fair value January 1, 2008
    
    $
    5,000Second quarter change in fair value
    
    
    333Third quarter change in fair value
    
    
    (122
    )Estimated Fair value September 30, 2008
    
    $
    4,789
  7




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Note 5. Pension Benefits
 Components of Net Periodic Pension Benefit Cost
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)(unaudited)Service cost
    
    $
    190
    
    
    $
    140
    
    
    $
    570
    
    
    $
    419Interest cost
    
    
    472
    
    
    
    412
    
    
    
    1,412
    
    
    
    1,236Expected gain on plan assets
    
    
    (354
    )
    
    
    (319
    )
    
    
    (1,064
    )
    
    
    (958
    )Amortization of prior service cost
    
    
    119
    
    
    
    119
    
    
    
    358
    
    
    
    358Amortization of net loss
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    76Net periodic pension cost
    
    $
    427
    
    
    $
    377
    
    
    $
    1,276
    
    
    $
    1,131
 Employer Contributions
  Note 6. Guarantees
 Warranty
    Balance at December 31, 2007
    
    $
    14,370Accruals related to warranties (including changes in estimates)
    
    
    3,905Settlements made (in cash or in kind)
    
    
    (6,584
    )Balance at September 30, 2008 (unaudited)
    
    $
    11,691
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##### Table of Contents



Note 7. Business Acquisitions
 Acquisition of Auspice Corporation
 Accounting for Business Combinations
 Acquisition of C-COR Incorporated
   Supplemental Pro Forma Information
(in millions, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2007(unaudited)
    
    
    (unaudited)Net sales
    
    $
    326.6
    
    
    $
    962.0Net income from continuing operations
    
    
    23.4
    
    
    
    76.1Income from continuing operations per common share:Basic
    
    $
    0.17
    
    
    $
    0.57Diluted
    
    $
    0.17
    
    
    $
    0.54
 Preliminary
Purchase Price Allocation  C-COR Acquisition
  Total purchase consideration  cash and equity
    
    $
    646.6Prior investment in acquired company
    
    
    6.0Fair value of assumed stock options
    
    
    22.8Acquisition-related transaction costs
    
    
    6.3Total preliminary purchase price
    
    $
    681.7Net tangible assets
    
    $
    107.8Identifiable intangible assets:Acquired technology
    
    
    38.8Order backlog
    
    
    7.9Customer relationships
    
    
    220.5Non-compete agreements
    
    
    5.1Acquired in-process research and development
    
    
    6.1Goodwill
    
    
    295.5Allocation of preliminary purchase price
    
    $
    681.7
 9




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Fair
Value of Assets and Liabilities  C-COR Acquisition
  Note 8. Restructuring
  (in thousands)Balance as of December 31, 2007
    
    $
    2,121Q1 2008 payments
    
    
    (396
    )Q1 2008 adjustments to accrual
    
    
    159Q2 2008 payments
    
    
    (397
    )Q3 2008 payments
    
    
    (396
    )Balance as of September 30, 2008 (unaudited)
    
    $
    1,091
  (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
    
    
    218Q3 2008 payments
    
    
    (241
    )Q3 2008 adjustments to accrual
    
    
    52Balance as of September 30, 2008 (unaudited)
    
    $
    262
  10




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##### Table of Contents



(in thousands)Balance as of December 31, 2007
    
    $
    642Q1 2008 payments
    
    
    (32
    )Q2 2008 payments
    
    
    (170
    )Q2 2008 adjustments to accrual
    
    
    95Q3 2008 payments
    
    
    (20
    )Balance as of September 30, 2008 (unaudited)
    
    $
    515
 Note 9. Inventories
  September 30,
    
    
    December 31,2008
    
    
    2007(unaudited)Raw material
    
    $
    22,924
    
    
    $
    20,004Work in process
    
    
    5,923
    
    
    
    2,533Finished goods
    
    
    112,717
    
    
    
    109,255Total net inventories
    
    $
    141,564
    
    
    $
    131,792
 Note 10. Property, Plant and Equipment
  September 30,
    
    
    December 31,2008
    
    
    2007(unaudited)Land
    
    $
    2,612
    
    
    $
    2,612Building and leasehold improvements
    
    
    19,753
    
    
    
    19,432Machinery and equipment
    
    
    137,040
    
    
    
    120,756159,405
    
    
    
    142,800Less: Accumulated depreciation
    
    
    (99,137
    )
    
    
    (83,644
    )Total property, plant and equipment, net
    
    $
    60,268
    
    
    $
    59,156
 Note 11. Long-Term Obligations
  September 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
    
    
    175
    
    
    
    2719.26% equipment financing obligations, net of current portion
    
    
    196
    
    
    
    494Total long-term debt
    
    
    276,371
    
    
    
    276,765Other long-term liabilities:Deferred compensation
    
    
    5,698
    
    
    
    8,986Accrued warranty
    
    
    4,137
    
    
    
    6,072Deferred revenue
    
    
    2,830
    
    
    
    114Landlord funded leasehold improvements
    
    
    1,417
    
    
    
    1,747Other long-term liabilities
    
    
    1,573
    
    
    
    1,239Total other long-term liabilities
    
    
    15,655
    
    
    
    18,158Total long-term liabilities
    
    $
    292,026
    
    
    $
    294,923
  11




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##### Table of Contents



Note 12. Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(unaudited)2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    24,075
    
    
    $
    27,852
    
    
    $
    38,917
    
    
    $
    88,770Changes in the following equity accounts:Unrealized loss on marketable
securities
    
    
    (195
    )
    
    
    (151
    )
    
    
    (149
    )
    
    
    (1,448
    )Unrealized gain on derivative
instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    551Comprehensive income
    
    $
    23,880
    
    
    $
    27,701
    
    
    $
    38,768
    
    
    $
    87,873
  Note 13. Segment Information
 Disclosures About Segments of an Enterprise
and Related Information
  Broadband Communications Systems
 Access, Transport & Supplies
 12




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##### Table of Contents



Media & Communications Systems
  BCS
    
    
    ATS
    
    
    MCS
    
    
    TotalThree Months Ended September 30, 2008Net sales
    
    $
    217,729
    
    
    $
    62,100
    
    
    $
    17,722
    
    
    $
    297,551Gross margin
    
    
    79,278
    
    
    
    16,624
    
    
    
    10,232
    
    
    
    106,134Amortization of intangible assets
    
    
    
    
    
    
    5,654
    
    
    
    3,492
    
    
    
    9,146Three Months Ended September 30, 2007Net sales
    
    $
    224,902
    
    
    $
    29,546
    
    
    $
    214
    
    
    $
    254,662Gross margin
    
    
    63,717
    
    
    
    5,221
    
    
    
    (104
    )
    
    
    68,834Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    57Nine Months Ended September 30, 2008Net sales
    
    $
    597,777
    
    
    $
    211,961
    
    
    $
    42,429
    
    
    $
    852,167Gross margin
    
    
    198,756
    
    
    
    62,370
    
    
    
    23,140
    
    
    
    284,266Amortization of intangible assets
    
    
    
    
    
    
    19,118
    
    
    
    15,736
    
    
    
    34,854Nine Months Ended September 30, 2007Net sales
    
    $
    642,263
    
    
    $
    99,722
    
    
    $
    648
    
    
    $
    742,633Gross margin
    
    
    192,589
    
    
    
    17,707
    
    
    
    (339
    )
    
    
    209,957Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    173
    
    
    
    173
  Note 14. Sales Information
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(unaudited)2008
    
    
    2007
    
    
    2008
    
    
    2007Comcast
    
    $
    100.9
    
    
    $
    100.3
    
    
    $
    181.9
    
    
    $
    278.6% of sales
    
    
    33.9
    %
    
    
    39.4
    %
    
    
    21.3
    %
    
    
    37.5
    %Time Warner Cable
    
    $
    43.9
    
    
    $
    29.8
    
    
    $
    190.1
    
    
    $
    75.5% of sales
    
    
    14.7
    %
    
    
    11.7
    %
    
    
    22.3
    %
    
    
    10.2
    %
   13




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##### Table of Contents



Note 15. Earnings Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(unaudited)2008
    
    
    2007
    
    
    2008
    
    
    2007Basic:Income from continuing operations Income from
continuing operations
    
    $
    24,075
    
    
    $
    27,522
    
    
    $
    38,917
    
    
    $
    88,440Income from discontinued operations Income from
continuing operations
    
    
    
    
    
    
    330
    
    
    
    
    
    
    
    330Net income
    
    $
    24,075
    
    
    $
    27,522
    
    
    $
    38,917
    
    
    $
    88,770Weighted average shares outstanding
    
    
    122,922
    
    
    
    110,178
    
    
    
    125,466
    
    
    
    109,354Basic earnings per share
    
    $
    0.20
    
    
    $
    0.25
    
    
    $
    0.31
    
    
    $
    0.81Diluted:Income from continuing operations Income from
continuing operations
    
    $
    24,075
    
    
    $
    27,522
    
    
    $
    38,917
    
    
    $
    88,440Income from discontinued operations Income from
continuing operations
    
    
    
    
    
    
    330
    
    
    
    
    
    
    
    330Net income
    
    $
    24,075
    
    
    $
    27,522
    
    
    $
    38,917
    
    
    $
    88,770Weighted average shares outstanding
    
    
    122,922
    
    
    
    110,178
    
    
    
    125,466
    
    
    
    109,354Net effect of dilutive equity
awards
    
    
    2,498
    
    
    
    1,907
    
    
    
    1,783
    
    
    
    2,241Total
    
    
    125,420
    
    
    
    112,085
    
    
    
    127,249
    
    
    
    111,595Diluted earnings per share
    
    $
    0.19
    
    
    $
    0.25
    
    
    $
    0.31
    
    
    $
    0.80
  Note 16. Income Taxes
  Nine Months Ended September 30,2008
    
    
    2007Income
    
    
    Income
    
    
    Effective
    
    
    Income
    
    
    Income
    
    
    EffectiveBefore
    
    
    Tax
    
    
    Tax
    
    
    Before
    
    
    Tax
    
    
    TaxTax
    
    
    Expense
    
    
    Rate
    
    
    Tax
    
    
    Expense
    
    
    Rate(unaudited)Non-Discrete Items
    
    $
    59,351
    
    
    $
    21,964
    
    
    
    37.0
    %
    
    $
    96,481
    
    
    $
    31,105
    
    
    
    32.2
    %Discrete Accounting
Events
    
    
    
    
    
    
    
    
    
    
    N/A
    
    
    
    26,354
    
    
    
    10,003
    
    
    
    38.0
    %Discrete Tax Events
- Valuation
Allowances / FIN 48
Reserves
    
    
    
    
    
    
    (1,530
    )
    
    
    
    
    
    
    
    
    
    
    (6,713
    )Total
    
    $
    59,351
    
    
    $
    20,434
    
    
    
    34.4
    %
    
    $
    122,835
    
    
    $
    34,395
    
    
    
    28.0
    %
  14




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Interim Financial Reporting Accounting for Income Taxes in Interim
Periods
 
 Note 17. Contingencies
   ®
   15




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16




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##### Table of Contents



Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
  Our Strategy and Key Highlights
  
    
    Transition to 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 and 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 market position and industry experience and continue
to generate robust demand for both EMTA and CMTS products. Furthermore, 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 sales of Video on Demand, Operations Support
Software, Access, and Transport products.
    
    As expected, sales to Comcast increased significantly in the third quarter of 2008 as
they begin the rollout of DOCSIS3.0 capabilities
    
    We experienced increased sales to other customers, notably Time Warner, and certain
international customers in the first nine 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 third
quarter of 2008, a new generation of CMTS products based upon the DOCSIS 3.0 standard was
introduced, leveraging the installed base of current ARRIS CMTS products by providing an
efficient upgrade to these systems. Significant shipments of this new product were made
in the third quarter and, as expected, customer acceptance was achieved and revenue
deferred during the second quarter pending this acceptance was recognized.
    
    Cable operators, particularly in North America, are aggressively expanding their voice,
video and data services to attract commercial small and medium sized businesses. We provide
several products to address this opportunity, and in particular have seen substantial
growth of our DOCSIS multiline business service terminals.
    
    We introduced our Universal EdgeQAM D5 towards the end of 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 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.
 17




---



##### Table of Contents




    
    We expect demand for EMTAs to remain robust; however, we do not anticipate the growth in
aggregate sales that we have experienced for the past few years. Many of our customers now
have 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
will have in 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 capital 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. We
are beginning to get customer traction with our CORWave multi-wavelength optical platform
that provides four times transport capacity of traditional transport for a fraction of the
traditional infrastructure cost. We expect this trend to accelerate over time as a result
of increasing capacity demands on the networks and the increased scrutiny of new capital
investments. The operations support system (OSS) and On-Demand products also are well
positioned to provide value added services and operational improvements to the MSOs.
    
    Sales of our Access, Transport and Supplies products declined quarter-over-quarter and
year-over-year. The sale of these infrastructure products are in part dependent upon line
extensions resulting from new home starts. We believe that the slowdown of the US economy,
and in particular new housing construction, has and will have a near term impact on the
sale of these products.
 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 acquisition of C-COR in late 2007, our research and development effort was
significantly expanded to include Access and Transport, VOD, Ad Insertion and OSS products.
Further, in the third quarter 2008 we completed the purchase of certain assets of Auspice
which has and will increase our ongoing research and development investment in our OSS
products. During the first nine months of 2008, we spent approximately $83.3 million on
research and development, or 9.8% of revenue, which compares to $53.7 million, or 7.2% 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 nine months of 2008 included:
 o
    
    We announced DOCSIS 3.0 certification of the WBM750 Data Modem and the
TM702 Voice over IP EMTA. The ARRIS C4 CMTS reached a critical milestone in
releasing the new DOCSIS 3.0 hardware and software for general availability opening
a new era in ultra high speed communications.o
    
    A new release was made available in the second quarter for the ARRIS D5
Universal EdgeQAM platform increasing the density from 48 to 72 QAM channels per
2RU chassis, increasing its capacity by 50%.o
    
    Access and Transport received formal qualification of the CORWave
multi-wavelength optical platform doubling channel capacity and increasing range by
almost 40% over previous Coarse Wave Division Multiplexing (CWDM) solutions.o
    
    Access and Transport released to production a first of its kind, new
segmentable node (OM2100) targeted specifically at the European and MDU markets.
 18




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##### Table of Contents



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. We
released new features for our ServAssureTM and WorkAssureTM
products including an integrated house check feature that allows field
technicians to remotely check the network and multi-service health of an
end-customers installation, reducing the potential for a repeat truck roll.
 At the end of the third quarter, we had cash, cash equivalents and short term investments of
approximately $329.6 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 consideration of approximately
$76 million. No additional shares were repurchased during the second or third quarters 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 $86.4 million of cash from operating activities in the first nine 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 third quarter 2008
results to the estimated ARRIS and C-COR results for the third quarter 2007:
 Results for ARRIS and C-COR
 Three Months Ended September 30,ARRIS
    
    
    ARRIS
    
    
    C-COR2008
    
    
    2007
    
    
    2007(1)(2)Sales
    
    
    297.6
    
    
    
    254.7
    
    
    
    71.9Gross margin 
    
    $
    106.1
    
    
    
    68.8
    
    
    
    30.3Gross margin  %
    
    
    35.7
    %
    
    
    27.0
    %
    
    
    42.1
    %SG&A
    
    
    33.0
    
    
    
    23.8
    
    
    
    16.1R&D
    
    
    27.5
    
    
    
    17.8
    
    
    
    8.7Restructuring
    
    
    0.2
    
    
    
    0.0
    
    
    
    0.2Amortization of
intangibles
    
    
    9.1
    
    
    
    0.0
    
    
    
    0.6Operating income
    
    
    36.3
    
    
    
    27.2
    
    
    
    4.6
 Results for ARRIS and C-COR
 Nine Months Ended September 30,ARRIS
    
    
    ARRIS
    
    
    C-COR2008
    
    
    2007
    
    
    2007(1)(2)Sales
    
    
    852.2
    
    
    
    742.6
    
    
    
    219.4Gross margin 
    
    $
    284.3
    
    
    
    210.0
    
    
    
    96.6Gross margin
 %
    
    
    33.4
    %
    
    
    28.3
    %
    
    
    44.0
    %SG&A
    
    
    107.0
    
    
    
    74.4
    
    
    
    47.3R&D
    
    
    83.3
    
    
    
    53.7
    
    
    
    25.7Restructuring
    
    
    0.8
    
    
    
    0.4
    
    
    
    0.6Amortization of
intangibles
    
    
    34.9
    
    
    
    0.2
    
    
    
    2.2Operating income
    
    
    58.3
    
    
    
    81.3
    
    
    
    20.8
 
 (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. 19




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##### Table of Contents




    
    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 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 nine months of 2008, we recorded a tax expense of $20.4 million which
equates to an effective tax rate of 34.4%. In the third quarter 2008, we recorded a net
tax benefit of $1.5 million related to provision to return differences resulting from the
filling of the 2007 tax return. We anticipate that our average tax rate for 2008 will be
approximately 33%. In October 2008, Congress enacted legislation, which will be applied
retroactively, continuing tax credits relating to Qualified Research Expenditures. As a
result, in the fourth quarter 2008, we expect an effective tax rate of approximately 30%,
as we will record the cumulative 2008 impact resulting from these credits.
 Our outstanding share count has increased year over year reflecting two 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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(unaudited)2008
    
    
    2007
    
    
    2008
    
    
    2007Comcast
    
    
    100.9
    
    
    
    100.3
    
    
    
    181.9
    
    
    
    278.6% of sales
    
    
    33.9
    %
    
    
    39.4
    %
    
    
    21.3
    %
    
    
    37.5
    %Time Warner Cable
    
    
    43.9
    
    
    
    29.8
    
    
    
    190.1
    
    
    
    75.5% of sales
    
    
    14.7
    %
    
    
    11.7
    %
    
    
    22.3
    %
    
    
    10.2
    %
  Comparison of Operations for the Three and Nine Months Ended September 30, 2008 and 2007
  20




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##### Table of Contents



Net Sales
  Net Sales
    
    
    Increase (Decrease) Between 2008 and 2007For the Three Months
    
    
    For the Nine Months
    
    
    For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,
    
    
    Ended September 30
    
    
    Ended September 302008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %
    
    
    $
    
    
    %Business Segment:BCS
    
    $
    217.8
    
    
    
    224.9
    
    
    $
    597.8
    
    
    
    642.3
    
    
    $
    (7.1
    )
    
    
    (3.2
    )
    
    $
    (44.5
    )
    
    
    (6.9
    )ATS
    
    
    62.1
    
    
    
    29.6
    
    
    
    212.0
    
    
    
    99.7
    
    
    
    32.5
    
    
    
    109.8
    
    
    
    112.3
    
    
    
    112.6MCS
    
    
    17.7
    
    
    
    0.2
    
    
    
    42.4
    
    
    
    0.6
    
    
    
    17.5
    
    
    
    8750.0
    
    
    
    41.8
    
    
    
    6966.7Total sales
    
    $
    297.6
    
    
    $
    254.7
    
    
    $
    852.2
    
    
    $
    742.6
    
    
    $
    42.9
    
    
    
    16.8
    
    
    $
    109.6
    
    
    
    14.8
  Net Sales
    
    
    Increase (Decrease) Between 2008 and 2007For the Three Months
    
    
    For the Nine Months
    
    
    For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,
    
    
    Ended September 30
    
    
    Ended September 302008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %
    
    
    $
    
    
    %Domestic
    
    $
    220.1
    
    
    $
    193.9
    
    
    $
    603.0
    
    
    $
    553.6
    
    
    $
    26.2
    
    
    
    13.5
    
    
    $
    49.4
    
    
    
    8.9International
    
    
    77.5
    
    
    
    60.8
    
    
    
    249.2
    
    
    
    189.0
    
    
    
    16.7
    
    
    
    27.5
    
    
    
    60.2
    
    
    
    31.9Total sales
    
    $
    297.6
    
    
    $
    254.7
    
    
    $
    852.2
    
    
    $
    742.6
    
    
    $
    42.9
    
    
    
    16.8
    
    
    $
    109.6
    
    
    
    14.8
 Broadband Communication Systems (BCS) Net Sales 2008 vs. 2007
  
    
    In the third quarter of 2008, we had lower sales of EMTAs as compared to the third
quarter of 2007. The majority of the decrease in EMTA sales is due to lower sales to
Comcast. This decline was partially offset by higher sales of CMTSs in conjunction with the
launch of our DOCSIS 3.0 product in the third quarter of 2008.
    
    For the nine months ended September 30, 2008 sales of EMTAs decrease, especially with
respect to Comcast. This decline has been partially been offset by increased sales of
CMTSs, in particular, to Time Warner.
 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 $53.0 million and $168.9
million for the three and nine month periods of 2007, respectively.
    
    Sales in 2007 for this segment consisted of sales of our Supplies products. Year over
year sales of these products have declined as a result of lower purchases by MSOs for new
plant and extension equipment reflecting the decline in new home construction in the U.S.
 Media & Communication Systems (MCS) Net Sales 2008 vs. 2007
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Gross Margin
  Gross Margin $
    
    
    Increase (Decrease) Between 2008 and 2007For the Three Months
    
    
    For the Nine Months
    
    
    For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,
    
    
    Ended September 30
    
    
    Ended September 302008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %
    
    
    $
    
    
    %Business Segment:BCS
    
    $
    79.3
    
    
    $
    63.7
    
    
    $
    198.8
    
    
    $
    192.6
    
    
    $
    15.6
    
    
    
    24.5
    
    
    $
    6.2
    
    
    
    3.2ATS
    
    
    16.6
    
    
    
    5.2
    
    
    
    62.4
    
    
    
    17.7
    
    
    
    11.4
    
    
    
    219.2
    
    
    
    44.7
    
    
    
    252.5MCS
    
    
    10.2
    
    
    
    (0.1
    )
    
    
    23.1
    
    
    
    (0.3
    )
    
    
    10.3
    
    
    
    10300.0
    
    
    
    23.4
    
    
    
    7800.0Total
    
    $
    106.1
    
    
    $
    68.8
    
    
    
    284.3
    
    
    $
    210.0
    
    
    $
    37.3
    
    
    
    54.2
    
    
    $
    74.3
    
    
    
    35.4
  Gross Margin %
    
    
    Increase (Decrease) Between 2008 and 2007For the Three Months
    
    
    For the Nine Months
    
    
    For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,
    
    
    Ended September 30
    
    
    Ended September 302008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    Percentage PointsBusiness Segment:BCS
    
    
    36.4
    %
    
    
    28.3
    %
    
    
    33.2
    %
    
    
    30.0
    %
    
    
    8.1
    
    
    
    3.2ATS
    
    
    26.8
    %
    
    
    17.7
    %
    
    
    29.4
    %
    
    
    17.8
    %
    
    
    9.1
    
    
    
    11.6MCS
    
    
    57.7
    %
    
    
    (48.6
    )%
    
    
    54.5
    %
    
    
    (52.4
    )%
    
    
    106.3
    
    
    
    106.9Total
    
    
    35.7
    %
    
    
    27.0
    %
    
    
    33.4
    %
    
    
    28.3
    %
    
    
    8.7
    
    
    
    5.1
 Broadband Communications Systems Gross Margin 2008 vs. 2007
  
    
    The increase in gross margin dollars and percentage reflects increases due to sales
variations in product mix and increases achieved due to cost reductions. In particular, in
both the three and nine month periods in 2008 we sold proportionately more CMTSs than
EMTAs. CMTS products carry a higher gross margin percentage than the 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 a result of the
addition of C-CORs higher margin Access and Transport products. Supplies gross margin
dollars are lower in both the three and nine month periods as a result of lower sales.
 Media & Communications Systems Gross Margin 2008 vs. 2007
 e
 
    
    The increases are attributable to the higher margin VOD and OSS products wehave added
to our portfolio as a result of the C-COR acquisition.
 Operating Expenses
  Operating Expenses
    
    
    Increase (Decrease) Between 2008 and 2007For the Three Months
    
    
    For the Nine Months
    
    
    For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,
    
    
    Ended September 30
    
    
    Ended September 302008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %
    
    
    $
    
    
    %SG&A
    
    $
    33.0
    
    
    $
    23.8
    
    
    $
    107.0
    
    
    $
    74.4
    
    
    $
    9.2
    
    
    
    38.7
    
    
    $
    32.6
    
    
    
    43.8Research &
development
    
    
    27.5
    
    
    
    17.7
    
    
    
    83.2
    
    
    
    53.7
    
    
    
    9.8
    
    
    
    55.4
    
    
    
    29.5
    
    
    
    54.9Restructuring
    
    
    0.2
    
    
    
    0.0
    
    
    
    0.8
    
    
    
    0.4
    
    
    
    0.2
    
    
    
    0.0
    
    
    
    0.4
    
    
    
    100.0Amortization of
intangibles
    
    
    9.1
    
    
    
    0.1
    
    
    
    34.9
    
    
    
    0.2
    
    
    
    9.0
    
    
    
    9000.0
    
    
    
    34.7
    
    
    
    17350.0Total
    
    $
    69.8
    
    
    $
    41.6
    
    
    $
    225.9
    
    
    $
    128.7
    
    
    $
    28.2
    
    
    
    67.8
    
    
    $
    97.2
    
    
    
    75.5
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Selling, General, and Administrative, or SG&A, Expenses
  
    
    The inclusion of expenses associated with the former C-COR.
    
    For the first nine months of 2008, SG&A expenses declined by approximately $14.7 million
when compared to the combined expenses of ARRIS and the former C-COR for the first nine
months of 2007. The decline reflects synergies achieved as a result of the combination of
the two companies.
    
    Legal expenses increased by approximately $4.7 million year over year for the first nine
months as a result of increased costs associated with various litigation 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 nine months, research and development expenses increased by $3.9 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
  Amortization of Intangibles
  Impairment of Goodwill
  Other Expense (Income)
 Interest Expense
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Loss (Gain) in Foreign Currency
  Interest Income
  Gains Related to Terminated Acquisition, Net of Expenses
  Other (Income)/Expense
  Income Taxes
  Financial Liquidity and Capital Resources
 Overview
  Liquidity & Capital Resources Data
 Nine Months Ended September 30,2008
    
    
    2007(in millions, except DSO and turns)Key Working Capital ItemsCash provided by operating activities
    
    $
    86.4
    
    
    $
    10.6Cash, cash equivalents, and
short-term investments
    
    $
    329.6
    
    
    $
    588.6Accounts receivable, net
    
    $
    168.1
    
    
    $
    130.2Days Sales Outstanding (DSOs)
    
    
    54
    
    
    
    45Inventory, net
    
    $
    141.6
    
    
    $
    118.2Inventory turns
    
    
    5.5
    
    
    
    6.7
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Accounts Receivable & Inventory
   
    
    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 nine months 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.
   Summary of Current Liquidity Position and Potential for Future Capital Raising
  Commitments
  Cash Flow
  For the Nine Months EndedSeptember 30 (unaudited),2008
    
    
    2007Cash provided by operating activities
    
    $
    86.4
    
    
    $
    10.6Cash provided by (used in ) investing activities
    
    
    9.2
    
    
    
    (121.0
    )Cash provided by (used in) financing activities.
    
    
    (113.4
    )
    
    
    19.5Net decrease in cash
    
    $
    (17.8
    )
    
    $
    (90.9
    )
 Operating Activities:
  For the Nine Months EndedSeptember 30, (unaudited)2008
    
    
    2007Net income
    
    $
    38.9
    
    
    $
    88.8Adjustments to reconcile net income to
cash provided by (used in ) operating
activities
    
    
    70.4
    
    
    
    (4.0
    )Net income including adjustments
    
    
    109.3
    
    
    
    84.8Decrease/(Increase) in accounts receivable
    
    
    0.1
    
    
    
    (15.4
    )Decrease/ (Increase) in inventory
    
    
    (8.0
    )
    
    
    (24.0
    )(Decrease) /Increase in accounts payable
and accrued liabilities
    
    
    (5.9
    )
    
    
    (24.4
    )All other  net
    
    
    (9.1
    )
    
    
    (10.4
    )Cash provided by operating activities
    
    $
    86.4
    
    
    $
    10.6
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Investing Activities:
  Nine Months EndedSeptember 30 (unaudited),2008
    
    
    2007Capital expenditures
    
    $
    (16.4
    )
    
    $
    (11.2
    )Proceeds from termination of TANDBERG Television
acquisition, net of payments
    
    
    
    
    
    
    22.9Cash paid for acquisition
    
    
    (10.1
    )
    
    
    Cash proceeds from sale of property, plant & equipment
    
    
    0.3
    
    
    
    Purchases of short-term investments
    
    
    (83.0
    )
    
    
    (295.6
    )Disposals of short-term investments
    
    
    122.4
    
    
    
    162.9Purchases of investment in private company
    
    
    (4.0
    )
    
    
    Cash provided by (used in) investing activities
    
    $
    9.2
    
    
    $
    (121.0
    )
 Capital Expenditures 
  Proceeds from Termination of TANDBERG Television Acquisition, Net of Payments 
  Cash Paid for Acquisition 
  Purchases and Disposals of Short-Term Investments 
  Purchases of Investment in Private Company
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Financing Activities:
  For the Nine Months EndedSeptember 30 (unaudited),2008
    
    
    2007Payment of debt and capital lease obligations
    
    $
    (35.5
    )
    
    
    Repurchase of common stock
    
    
    (75.9
    )
    
    
    Excess tax benefits from stock-based compensation plans
    
    
    0.1
    
    
    
    8.3Employer repurchase of shares to satisfy minimum tax
withholdings
    
    
    (1.0
    )
    
    
    (3.1
    )Fees and proceeds from issuance of common stock, net
    
    
    (1.1
    )
    
    
    14.3Cash provided by (used in) financing activities
    
    $
    (113.4
    )
    
    $
    19.5
 Payment of Debt and Capital Lease Obligation -
  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
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Financial Instruments
   Cash, Short-Term Investments and Available-For-Sale Investments
   Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in
a Rabbi Trust and Invested
 Capital Expenditures
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Critical Accounting Estimates
  Forward-Looking Statements
  
 Item 3 . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     29




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Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control over Financial Reporting
 30




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PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
   ®
     31




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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.
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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.
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Our results of operations after the proposed C-COR acquisition could be adversely affected as a
result of goodwill impairment.
 Accounting for Business Combinations, Goodwill and Other Intangible Assets,
 Our business has primarily come from several key customers. The loss of one of these customers or
a significant reduction in sales to one of these customers would have a material adverse effect on
our business.
  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.
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Failure to increase our Media & Communications Systems revenue would adversely affect our financial
results.
  
    
    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.
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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.
  We face risks relating to currency fluctuations and currency exchange.
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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.
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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.
  W e hav e th e abilit y t o issu e preferre d share s withou t stockholde r approval .
  39




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Item 6. EXHIBITS
 Exhibit No.
    
    Description of Exhibit31.1
    
    Section 302 Certification of Chief Executive Officer, filed herewith31.2
    
    Section 302 Certification of Chief Financial Officer, filed herewith32.1
    
    Section 906 Certification of Chief Executive Officer, filed herewith32.2
    
    Section 906 Certification of Chief Financial Officer, filed herewith
 40




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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  41