Table of Contents

---

				Page
		PART I
ITEM 1.		Business			1
ITEM 2.		Properties			15
ITEM 3.		Legal Proceedings			16
ITEM 4.		Submission of Matters to a Vote of Security Holders			16
ITEM 4A.		Executive Officers and Board Committees			16
		PART II
ITEM 5.		Market for Registrant’s Common Equity and Related Stockholder Matters			18
ITEM 6.		Selected Consolidated Historical Financial Data			18
ITEM 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
ITEM 7A.		Quantitative and Qualitative Disclosures About Market Risk			54
ITEM 8.		Consolidated Financial Statements and Supplementary Data			55
ITEM 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			55
ITEM 9A.		Controls and Procedures			55
		PART III
ITEM 10.		Directors and Executive Officers of the Registrant			96
ITEM 11.		Executive Compensation			96
ITEM 12.		Security Ownership of Certain Beneficial Owners and Management			96
ITEM 13.		Certain Relationships and Related Transactions			96
ITEM 14.		Principal Accountant Fees and Services			96
		PART IV
ITEM 15.		Exhibits, Financial Statement Schedules and Reports on Form 8-K			97
ITEM 15(a).		Index to Consolidated Financial Statements and Financial Statement Schedules			97
		Signatures			101
EX-23 CONSENT OF ERNST & YOUNG LLP
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

i

---

Table of Contents

Item 1.	Business

Acronym		Terminology
CAM		Cable Access Module
CBR		Constant Bit Rate
CMTS		Cable Modem Termination System
CPE		Customer Premises Equipment
DBS		Digital Broadcast Satellite
DMTS		Digital Multimedia Termination System
DOCSIS		Data Over Cable Service Interface Specification
DSG		DOCSIS Set-Top Gateway
E-MTA		Embedded Multimedia Terminal Adapters
HDT		Host Digital Terminal
HFC		Hybrid Fiber-Coaxial
ILEC		Incumbent Local Exchange Carrier
IP		Internet Protocol
MSO		Multiple Systems Operator
NGNA		Next Generation Network Architecture
NIU		Network Interface Units
RF		Radio Frequency
VoIP		Voice over Internet Protocol
VPN		Virtual Private Network

1

---

Table of Contents

2

---

Table of Contents

3

---

Table of Contents

	•	Headend. The headend is a central point in the cable system where signals are received via satellite and other sources. Interfaces that connect the Internet and public switched telephony networks are located in the headend. The headend facility organizes, processes and retransmits those signals through the distribution network to subscribers.
	•	Distribution Network. The distribution network consists of fiber optic and coaxial cables and associated optical and electronic equipment that allocates the combined signals from the headend and transmits them throughout the cable system to nodes.
	•	Subscriber Premises. Cable drops extend from nodes to subscribers’ homes and connect to a subscriber’s television set, converter box, telephony network interface device or computer modem.

Broadband:		• CBR telephony products, including HDTs in the headend and NIUs at the subscriber premises
		• VoIP telephony products, including CMTS
		• High-speed data products, including CMTS
		• Operational support systems
		• System integration services
Supplies & CPE:		• Infrastructure products for fiber optic or coaxial networks built under or above ground, including cable and strand, vaults, conduit, drop materials, tools, connectors, and test equipment
		• Subscriber cable modems and E-MTAs

	Voice over IP and Data Products

4

---

Table of Contents

	•	The Cadant C4 CMTS is a high density, chassis-based product that provides flexible built-in redundancy to ensure carrier-grade performance. It is PacketCable 1.0, DOCSIS 2.0 and Euro-DOCSIS 2.0 qualified. Each chassis supports up to 32 downstream channels and 192 upstream channels. Three C4 chassis can be installed in a single seven foot tall cabinet, making it one of the highest density scalable headend products currently available. It can provide high-speed data and VoIP services in headends that service thousands to hundreds of thousands of subscribers. The C4 is deployed by cable operators in North America, Europe, Latin America, and Asia.
	•	The Cadant C3 CMTS is a rack mounted, single downstream-based product that provides high performance packet handling in an extremely compact package. It is DOCSIS 2.0 and Euro-DOCSIS 2.0 qualified. Each unit supports one downstream channel and up to 6 upstream channels with a selectable choice of modulation schemes. The C3 supports markets worldwide with DOCSIS, Euro-DOCSIS and Japanese DOCSIS parameters that are selectable via software. The C3 is in wide use in North America, Europe, and Asia.

	•	The Touchstone CM450A Cable Modem is DOCSIS 2.0 certified, which gives operators the potential to offer much higher upstream data rates. DOCSIS 2.0 is backward compatible with DOCSIS 1.0 and 1.1 headend systems. The Touchstone 450B Cable Modem provides the same features as the CM450A but is Euro-DOCSIS certified. The Touchstone 450C Cable Modem provides the same features as the CM450A but is compatible with Japanese standards. ARRIS also manufactures cable modems that have been homologated in other countries, including Chile, Argentina, Israel, Australia, Hong Kong, and Korea.
	•	The Touchstone TM402A is a PacketCable and DOCSIS 2.0 indoor E-MTA that supports enhanced services of high-speed data and up to two lines of IP telephony in a single unit. The TM402A’s innovative, compact design provides for easy installation. This product is also available in a Euro-DOCSIS version, the Touchstone TM402B, as well as one designed specifically for the unique frequency plan of Japanese cable systems, the Touchstone TM402C. The Touchstone TM402P is a PacketCable and DOCSIS 2.0 certified E-MTA that provides all of the features of the TM402A with the added benefit of an innovative, integrated lithium-ion battery back-up system enabling the service provider to guarantee service in the event of a power outage. This allows them to compete directly with the incumbent local exchange carrier, or ILEC. This is also available in a Euro-DOCSIS version, the Touchstone Telephony Modem 402Q. This line was the first product on the market to incorporate lithium-ion battery technology. The resulting product, the Touchstone TM402P, provides extended battery back-up time over older lead-acid battery designs.
	•	The Touchstone Telephony Port 302A/ 304A are rugged, environmentally-hardened outdoor E-MTAs that provides high-speed data access and two (TP302A) or four (TP304A) lines of carrier-grade VoIP for service providers wishing to maintain the demarcation point on the outside of the residence. This allows them to more closely parallel the deployment model used by ILECs, which makes service and maintenance easier over the long term.
	•	We expect to introduce the Touchstone Telephony Port 402A/ 404A in 2005. This is the next generation of the outdoor E-MTA line with DOCSIS 2.0 compatibility.

5

---

Table of Contents

	Constant Bit Rate Products

	Operational Support Systems

	System Integration Services

6

---

Table of Contents

	Cable Plant Infrastructure Products

7

---

Table of Contents

			Years Ended December 31,
			2004				2003				2002
			(in millions)
Comcast			$	108.2			$	136.6			$	250.2
	% of sales			22.1	%			31.5	%			38.4	%
Cox Communications			$	106.3			$	104.3			$	106.7
	% of sales			21.7	%			24.0	%			16.4	%
Liberty Media International and affiliates			$	81.7			$	46.9			$	67.4
	% of sales			16.7	%			10.8	%			10.3	%

	Comcast. We have non-exclusive agreements with Comcast to supply C4 CMTS units and parts and to sell cable television supplies for two-year terms expiring in March 2005. We are currently in negotiations with Comcast to renew or extend the contract; however, Comcast is expected to continue to buy on a purchase order basis in the interim. Commercial terms include a requirement to supply product based on Comcast forecasts (updated quarterly), most favorable pricing as compared to similarly-situated companies, and specific delivery lead times with penalties for late delivery and warranty terms ranging from one to five years depending on the product. Included in one of these purchase agreements is a service level agreement structured to provide Comcast service assurance by providing credits for any delinquent response to service needs with special escalation guidelines for the C4 CMTS. To date, no penalties have been incurred. Comcast is not obligated to make any purchases.
	Cox Communications. We have an exclusive agreement with Cox Communications to supply Cornerstone Voice and Touchstone Telephony products and services at favorable pricing based on volume commitments. The agreement has a five-year term ending on July 31, 2007. Commercial terms include payment and delivery terms, a five-year warranty, penalties for delivery shortfall and delinquent performance guarantees. To date, no penalties have been incurred. Cox Communications is not obligated to make any minimum purchase commitments. In January 2005, we entered into a letter of intent with Cox Communications in which Cox committed to purchase Cornerstone Voice Ports and agreed to purchase Touchstone E-MTAs exclusively from ARRIS for period of eighteen months in exchange for more favorable pricing.
	Liberty Media International. We have a non-exclusive agreement with Liberty Media International to supply our entire line of products for a three-year term expiring in April 2007. Commercial terms include a requirement to supply product based on Liberty’s forecasts (updated quarterly), most favorable

8

---

Table of Contents

	pricing as compared to similarly-situated companies, and specific delivery lead times with penalties for late delivery and warranty term of two years.

			Years Ended December 31,
			2004				2003				2002
			(in millions)
Adelphia Communications			$	14.8			$	14.1			$	25.9
	% of sales			3.0	%			3.2	%			4.0	%
Cabovisao			$	2.7			$	0.7			$	39.1
	% of sales			0.5	%			0.2	%			6.0	%

9

---

Table of Contents

	•	Continued development and acceptance of open standards for delivering voice, video and data;
	•	widespread deployment of VoIP;
	•	continued increase in peer-to-peer services are accelerating demand for new services requiring intensive, high-touch processing and sophisticated management techniques;
	•	innovations in video encode/decode technology are making possible very low bit rate, high quality video streaming; and
	•	continued silicon integration and chip fabrication technology innovations are making possible very low cost, multi-functional broadband consumer devices, integrating not only telephony but wireless and video decompression and digital rights management functionality.

	•	Rapid development and delivery of Cadant C4 and C3 CMTS features, including DOCSIS 2.0 and 3.0, DSG and PacketCable Multimedia support, Layer 3 routing enhancements, packet inspection and filtering features, security enhancements, and increased downstream/ upstream density;
	•	expanding the range of next-generation, Lithium-Ion-based, Touchstone Telephony Modem E-MTAs to include formats to meet country and MSO specific performance and powering requirements;
	•	product cost reductions; and
	•	development of network and client technologies to address the emerging worldwide market opportunities in next generation video and multimedia delivery (video over IP and PacketCable multimedia), as embodied in the NGNA.

10

---

Table of Contents

	Components for Our CMTS Product Line

	Components for Our Customer Premises Equipment Products

11

---

Table of Contents

	•	Big Band Networks;
	•	Cisco Systems, Inc.;
	•	Motorola, Inc.;
	•	Scientific-Atlanta, Inc.;
	•	Tellabs, Inc.; and
	•	TVC Communications, Inc.

12

---

Table of Contents

	•  1969 —	Anixter entered the cable industry.
	•  1987 —	Anixter acquired TeleWire Supply.
	•  1988 —	Anixter and AT&T developed the first analog video laser transmitter for the cable industry (Laser Link I).

13

---

Table of Contents

	•  1991 —	ANTEC was established.
	•  1993 —	ANTEC’s initial public offering.
	•  1994 —	ANTEC completed the acquisition of the following companies, which significantly expanded its product development and manufacturing capabilities:

	•	Electronic System Products, Inc., or ESP, an engineering consulting firm with core capabilities in digital design, RF design and application specific integrated circuit development for the broadband communications industry.
	•	Power Guard, Inc., a manufacturer of power supplies and high security enclosures for broadband communications networks.
	•	Keptel, Inc., a designer, manufacturer and marketer of outside plant telecommunications and transmission equipment for both residential and commercial use, primarily by telephone companies.

	•  1995 —	ANTEC and Nortel Networks formed Arris Interactive L.L.C., focused on the development, manufacture and sale of products that enable the provision of a broad range of telephone and data services over HFC architectures; ANTEC initially owned 25% and Nortel Networks owned 75% of the Arris Interactive L.L.C. joint venture.
	•  1997 —	ANTEC acquired TSX Corporation, which provided electronic manufacturing capabilities and expanded the Company’s product lines to include amplifiers and line extenders and enhanced laser transmitters and receivers and optical node product lines.
	•  1998 —	ANTEC introduced the industry’s first 1550 nm narrowcast transmitter and dense wavelength division multiplexing, or DWDM, optical transmission system.
	•  1999 —	The Broadband Technology Division of Nortel Networks, which is known as LANcity, was combined with Arris Interactive L.L.C., resulting in an increase in Nortel Networks’ interest in the joint venture to 81.25% while ANTEC’s interest was reduced to 18.75%.

		ANTEC introduced the industry’s first 18-band block converter and combined that with the DWDM allowing 144 bands on a single fiber.

	•  2001 —	ARRIS acquired all of Nortel Networks’ ownership interest in Arris Interactive L.L.C. in exchange for approximately 49% of the common stock of a newly formed holding company, ARRIS, and a Class B membership interest in Arris Interactive L.L.C.

		ARRIS sold substantially all of its power product lines. During 2000, sales in those product lines were approximately $18.0 million, and during 2001 (through the date of the sale), sales were approximately $8.1 million. ARRIS continued as an authorized distributor and representative for these power product lines.

	•  2002 —	ARRIS acquired substantially all of the assets of Cadant, Inc., a privately held designer and manufacturer of next-generation cable modem termination systems.

		ARRIS sold its Keptel product line. During 2001, sales in this product line to telecommunications companies were approximately $44.8 million, and during 2002 (through the date of the sale), sales were approximately $7.5 million.
		ARRIS sold its Actives product line. During 2001, sales in this product line were approximately $68.2 million, and during 2002 (through the date of the sale), sales were approximately $58.8 million.
		ARRIS closed its office in Andover, Massachusetts, which was primarily a product development and repair facility.

14

---

Table of Contents

		Nortel Networks sold 15 million shares of ARRIS through a public offering reducing their position to 22 million shares
		ARRIS redeemed, for cash and stock, $91.1 million of its convertible notes due May 2003.

	•  2003 —	ARRIS acquired certain assets of Atoga Systems, a Fremont, California-based developer of optical transport systems for metropolitan area networks.

		ARRIS completed the redemption of its convertible notes due May 2003.
		ARRIS raised $125 million through a private placement of convertible notes due 2008.
		ARRIS retired, at a discount, the Class B membership interest due to Nortel Networks for $88.4 million.
		ARRIS repurchased and retired 8 million shares from Nortel Networks for an aggregate purchase price of $30 million (taking into account the return of $2 million forgiven on the Class B membership interest), reducing Nortel’s position to 14 million shares.
		ARRIS sold ESP, its engineering services product line.
		ARRIS purchased certain assets of Com21 (including the stock of its Irish subsidiary), a designer and manufacturer of next generation cable modem termination systems.
		Nortel Networks sold 9 million shares of ARRIS through a public offering reducing their position to 5 million shares.
		ARRIS terminated its asset-based revolving bank credit facility.

	•  2004 —	ARRIS redeemed on March 8, 2004 $50 million of its convertible notes due 2008. In connection with the redemption, ARRIS made a make-whole interest payment that included the issuance of approximately 467 thousand common shares.

		ARRIS closed its Fremont, CA office.

Item 2.	Properties

Location		Description		Area (sq. ft.)				Lease Expiration
Ontario, California		Warehouse			57,269			January 31, 2009
Suwanee, Georgia		Office space			131,775			April 14, 2012
Englewood, Colorado		Office space			32,880			March 30, 2006
Lisle, Illinois		Office space			56,008			November 1, 2013
Philadelphia, Pennsylvania		Office space			1,007			January 31, 2008
Ireland		Office space			13,575			June 30, 2023
The Netherlands		Office space			3,660			September 15, 2009
Spain		Office space			1,916			June 1, 2007
Japan		Office space			2,833			January 14, 2006
Chile		Office space			645			December 31, 2005
Hong Kong		Office space			165			March 21, 2005

15

---

Table of Contents

Location		Description				Area (sq. ft.)
Cary, North Carolina			Warehouse				151,500
Chicago, Illinois			Warehouse/Office space				18,000

Item 3.	Legal Proceedings

Item 4.	Submission of Matters to a Vote of Security Holders

Item 4A.	Executive Officers and Board Committees

Name		Age				Position
Robert J. Stanzione			57			Chief Executive Officer, Chairman of the Board
Lawrence A. Margolis			57			Executive Vice President, Strategic Planning, Administration, Chief Counsel, and Secretary
David B. Potts			47			Executive Vice President, Chief Financial Officer and Chief Information Officer
Ronald M. Coppock			50			President, ARRIS Worldwide Sales
Bryant K. Isaacs			45			President, New Business Ventures
James D. Lakin			61			President, Broadband
Robert Puccini			43			President, TeleWire Supply
Marc S. Geraci			52			Vice President, Treasurer
Debbie L. Marry			45			Vice President, Controller

16

---

Table of Contents

17

---

Table of Contents

Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters

		High				Low
2003
First Quarter		$	5.73			$	3.23
Second Quarter			6.70				3.63
Third Quarter			6.59				4.10
Fourth Quarter			7.58				4.85
2004
First Quarter		$	11.40			$	7.28
Second Quarter			9.92				4.42
Third Quarter			6.04				3.73
Fourth Quarter			7.23				4.34

Item 6.	Selected Consolidated Historical Financial Data

18

---

Table of Contents

				Years Ended December 31,
				2004				2003				2002				2001				2000
				(in thousands, except per share data)
Consolidated Operating Data:
	Net sales			$	490,041			$	433,986			$	651,883			$	628,323			$	749,972
	Cost of sales(1)				343,864				307,726				425,231				479,663				624,720
	Gross margin				146,177				126,260				226,652				148,660				125,252
	Selling, general, administrative and development expenses(2)				131,912				151,980				200,574				129,743				86,721
	Impairment of goodwill(3)				—				—				70,209				—				—
	Amortization of goodwill				—				—				—				3,256				3,300
	Amortization of intangibles				28,690				35,249				34,494				7,012				—
	In-process R&D write-off(4)				—				—				—				18,800				—
	Restructuring and other(5)				7,648				891				7,113				11,602				—
	Operating income (loss)				(22,073	)			(61,860	)			(85,738	)			(21,753	)			35,231
	Interest expense				5,006				10,443				8,383				11,068				12,184
	Membership interest				—				2,418				10,409				4,110				—
	Loss (gain) on debt retirement(6)				4,406				(26,164	)			7,302				1,853				—
	Other expense (income), net				(2,403	)			(2,329	)			(5,513	)			8,120				(1,271	)
	Loss on investments and notes receivable(7)				1,320				1,436				14,894				767				773
	Income (loss) from continuing operations before income taxes				(30,402	)			(47,664	)			(121,213	)			(47,671	)			23,545
	Income tax expense (benefit)(8)				108				—				(6,800	)			35,588				9,622
	Net income (loss) from continuing operations				(30,510	)			(47,664	)			(114,413	)			(83,259	)			13,923
	Discontinued Operations:
		Income (loss) from discontinued operations (including a net gain on disposals of $2.1 million and $0.4 million and a net loss of $4.0 million for the years ended December 31, 2004, 2003 and 2002, respectively)(1)(2)(5)(9)			2,114				351				(18,794	)			(92,441	)			11,409
		Income tax expense (benefit)			—				—				—				(7,969	)			4,663
	Income (loss) from discontinued operations				2,114				351				(18,794	)			(84,472	)			6,746
	Net income (loss) before cumulative effect of accounting change				(28,396	)			(47,313	)			(133,207	)			(167,731	)			20,669
Cumulative effect of accounting change(10)					—				—				57,960				—				—
	Net income (loss)			$	(28,396	)		$	(47,313	)		$	(191,167	)		$	(167,731	)		$	20,669

19

---

Table of Contents

				Years Ended December 31,
				2004				2003				2002				2001				2000
				(in thousands, except per share data)
Net income (loss) per common share:
Basic:
		Income (loss) from continuing operations		$	(0.36	)		$	(0.62	)		$	(1.40	)		$	(1.55	)		$	0.37
		Income (loss) from discontinued operations			0.02				—				(0.23	)			(1.58	)			0.18
		Cumulative effect of accounting change			—				—				(0.71	)			—				—
		Net income (loss)		$	(0.33	)		$	(0.62	)		$	(2.33	)		$	(3.13	)		$	0.54
Diluted:
	Income (loss) from continuing operations			$	(0.36	)		$	(0.62	)		$	(1.40	)		$	(1.55	)		$	0.35
	Income (loss) from discontinued operations				0.02				—				(0.23	)			(1.58	)			0.17
	Cumulative effect of accounting change				—				—				(0.71	)			—				—
		Net income (loss)		$	(0.33	)		$	(0.62	)		$	(2.33	)		$	(3.13	)		$	0.52
Selected Balance Sheet Data:
	Total assets			$	450,678			$	451,859			$	563,412			$	752,115			$	731,495
	Long-term obligations			$	91,781			$	138,052			$	11,500			$	115,000			$	204,000

(1)	Cost of Sales and Discontinued Operations:

	During 2004, we recorded a gain of approximately $0.9 million related to the recovery of amounts due from a customer in Argentina, of which approximately $0.3 million related to and is classified in discontinued operations, and $0.6 million is reflected in cost of goods sold.
	During 2004, 2003, 2002, and 2001, we recorded severance costs related to reductions in force of $0.1 million, $0.4 million, $1.5 million, and $47 thousand, respectively, which was reflected in cost of sales.
	During 2002, we wrote off the remaining $2.1 million of power inventories that had not been transferred to the buyer. This charge is reflected in cost of goods sold.
	During 2001, we recorded pre-tax restructuring and impairment charges of approximately $66.2 million. Of this total charge, approximately $50.1 million is classified in discontinued operations, $8.5 million is reflected in cost of goods sold, and $7.6 million is reflected in restructuring. Of the $50.1 million classified in discontinued operations, approximately $25.1 million related to the write-down of inventories, $14.8 million related to the impairment of fixed assets, $4.5 million related to lease termination and other shutdown expenses, and $5.7 million related to severance and associated personnel costs. The remaining $16.1 million related to continuing operations, of which approximately $8.5 million related to the write-down of inventories and certain purchase order and warranty obligations and was charged to cost of goods sold, and approximately $7.6 million related to the impairment of goodwill and lease termination expenses and was reflected in restructuring. Due to unforeseen delays in exiting the facility after the shutdown, the Company increased its reserve by approximately $2.4 million (charged to discontinued operations) and $4.8 million ($4.4 million charged to discontinued operations and $0.4 million charged to continuing operations) during 2002 and 2003, respectively.
	During 2001, we recorded a write-off of $4.4 million related to unrecoverable inventory amounts due from a customer in Argentina (due to the economic disturbances in that region), of which approximately $1.6 million relates to and is classified in discontinued operations, and $2.8 million is reflected in cost of goods sold.
	During 2000, we recorded an additional $3.5 million pre-tax charge to cost of sales related to the discontinuance of certain products in 1999 as a result of additional inventory write-downs.

20

---

Table of Contents

(2)	SGA&D and Discontinued Operations:

	During 2004, 2003, 2002, and 2001, we recorded severance costs related to reductions in force of $0.4 million, $2.5 million, $3.9 million, and $1.4 million, respectively, which was reflected in selling, general, administrative and development expenses.
	During 2003, we recorded a charge of approximately $2.2 million related to the write-off of customer-relations software.
	During 2003 and 2002, we reserved $8.7 million and $3.6 million, respectively, for our Cabovisao receivable. Cabovisao is a Portugal-based customer who owed us approximately $20.6 million in accounts receivable at the end of the third quarter 2003, of which all was past due. Cabovisao and its parent company, Csii, have filed for court-supervised restructuring and recapitalization in Canada and are in the process of restructuring their financing. During the fourth quarter of 2003, we sold our accounts receivable to an unrelated third party for approximately $10.1 million, resulting in a gain of approximately $1.5 million.
	During 2003, we sold our engineering consulting services product line, known as ESP, to an unrelated third party. The transaction resulted in a loss of approximately $1.4 million.
	During 2003, we recorded a total of approximately $3.0 million related to potential patent litigation damages. The litigation involves our connector product, which is included in our Supplies & CPE product category. The litigation was ultimately settled in February 2004.
	During the first half of 2002, we established a reserve of $20.2 million in connection with our Adelphia receivables of which approximately $1.3 million relates to and is classified in discontinued operations, and approximately $18.9 million is reflected in selling, general, administrative and development expenses. Adelphia filed for bankruptcy in June 2002. During the third quarter of 2002, we sold a portion of our Adelphia accounts receivables to an unrelated third party, resulting in a net gain of approximately $4.3 million. Of this total gain, approximately $0.3 million relates to and is classified in discontinued operations, and $4.0 million is reflected in selling, general and administrative and development expense.
	In 2000, we recorded a pre-tax gain of $2.1 million as a result of the curtailment of our defined benefit pension plan.

(3)	Impairment of Goodwill

	During the fourth quarter of 2002, based upon management’s analysis including an independent valuation, we recorded a goodwill impairment charge of $70.2 million with respect to our Supplies & CPE product line.

(4)	In-process R&D write-off

	During 2001, we recorded a pre-tax write-off of in-process research and development of $18.8 million in connection with the Arris Interactive L.L.C. acquisition.

(5)	Restructuring and Impairment Charges and Discontinued Operations

	During 2004, we consolidated two facilities in Georgia, giving us the ability to house many of our core technology, marketing, and corporate headquarter functions in a single building. This consolidation resulted in a total restructuring charge of $6.4 million.
	During 2004, we closed our office in Fremont, CA. This resulted in a restructuring charge of approximately $0.3 million.
	During 2002, a restructuring charge of approximately $7.1 million was recorded in connection with the closure of our development and repair facility in Andover, Massachusetts, related to severance, lease termination, and other costs associated with closing the facility.
	During 2001, we closed a research and development facility in Raleigh, North Carolina and recorded a $4.0 million charge related to severance and other costs associated with closing that facility.

21

---

Table of Contents

During 2001, we recorded pre-tax restructuring and impairment charges of approximately $66.2 million. Of this total charge, approximately $50.1 million is classified in discontinued operations, $8.5 million is reflected in cost of goods sold, and $7.6 million is reflected in restructuring. Of the $50.1 million classified in discontinued operations, approximately $25.1 million related to the write-down of inventories, $14.8 million related to the impairment of fixed assets, $4.5 million related to lease termination and other shutdown expenses, and $5.7 million related to severance and associated personnel costs. The remaining $16.1 million related to continuing operations, of which approximately $8.5 million related to the write-down of inventories and certain purchase order and warranty obligations and was charged to cost of goods sold, and approximately $7.6 million related to the impairment of goodwill and lease termination expenses and was reflected in restructuring. Due to unforeseen delays in exiting the facility after the shutdown, the Company increased its reserve by approximately $2.4 million (charges to discontinued operations) and $4.8 million ($4.4 million charged to discontinued operations and $0.4 million charged to continuing operations) during 2002 and 2003, respectively. During 2004, the Company adjusted its reserves due to a change in estimates which resulted in income of $0.9 million (income of $1.8 million charged to discontinued operations and expense of $0.9 million charged to continuing operations).

(6)	Loss (Gain) on Debt Retirement

	During 2004, we called $50.0 million of the Notes due 2008 for redemption, and holders of the called notes elected to convert their notes into an aggregate of 10.0 million shares of common stock, rather than have the notes redeemed. Under the indenture’s terms for redemptions prior to March 18, 2006, we made a make-whole interest payment of approximately 0.5 million common shares, resulting in a charge of $4.4 million.
	During the fourth quarter 2003, we chose to cancel our credit facility, which was due to expire in August 2004. As a result, we wrote off approximately $2.3 million of unamortized finance fees related to the facility upon cancellation.
	During the first quarter 2003, ARRIS redeemed the entire Class B membership interest in Arris Interactive L.L.C. held by Nortel Networks for approximately $88.4 million. This discounted redemption resulted in a gain of approximately $28.5 million
	During 2002, we recorded a loss of $9.3 million associated with the 41/2% notes due 2003 exchanges, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 84, Induced Conversions of Convertible Debt. This loss was partially offset with a gain of approximately $2.0 million related to cash repurchases of the 41/2% notes due 2003 in accordance with SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
	During 2001, we recorded pre-tax charges of $1.9 million on the extinguishment of debt in accordance with EITF 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments. The amount reflected unamortized deferred finance fees related to a loan agreement, which was replaced in connection with the Arris Interactive L.L.C. acquisition. In 2003, this loss was reclassified to loss from continuing operations as a result of the gain on cash repurchases recognized in the fourth quarter of 2003 in accordance with SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.

(7)	Loss on Investments and Notes Receivable

We held certain investments in the common stock of publicly traded companies, some of which were classified as trading securities and some are classified as available for sale. In addition, we hold a number of non-marketable equity securities, which are also classified as available for sale. Changes in the market value of the trading securities and gains or losses on related sales of these securities are recognized in income. Changes in the market value of the available for sale securities are recorded in other comprehensive income. However, the available for sale securities are subject to a periodic impairment review and any “other than temporary” impairments are recognized through income.

22

---

Table of Contents

	We offer a deferred compensation arrangement, which allows certain employees to defer a portion of their earnings and defer the related income taxes. These deferred earnings are invested in a “rabbi trust”, and are accounted for in accordance with Emerging Issues Task Force Issue No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested. The investment in the rabbi trust is classified as an investment on our balance sheet.
	During the five-year periods of 2004, 2003, 2002, 2001, and 2000, we recognized total losses of $1.3 million, $1.4 million, $14.9 million, $0.8 million, and $0.8 million, respectively, on our investments discussed above.

(8)	Income Tax Expense (Benefit)

	During 2002, we recognized a $6.8 million income tax benefit as a result of a change in tax legislation, allowing us to carry back losses for five years versus the previous limit of two years.
	During 2001, as a result of the restructuring and impairment charges during that period, a valuation allowance of approximately $38.1 million against deferred tax assets was recorded in accordance with SFAS No. 109, Accounting for Income Taxes.

(9)	Income (Loss) from Discontinued Operations

	In addition to the comments within items 1, 2, and 5 above, the following items also impacted discontinued operations:

	—	During 2001, a one-time warranty expense relating to a specific product was recorded, resulting in a pre-tax charge of $4.7 million for the expected replacement cost of this product of which all relates to and is classified in discontinued operations. We do not anticipate any further warranty expenses to be incurred in connection with this product.
	—	During 2002, a loss of $6.2 million was recorded in connection with the sale of the Keptel product line. Additionally, during 2002, a gain of $2.2 million was recorded in connection with the sale of the Actives product line. The net loss of $4.0 million relates to and is classified in discontinued operations.
	—	In 2003, 2002, and 2001, we recorded severance costs related to reductions in force of $0.2 million, $1.3 million, and $4.6 million, respectively, which was reflected in discontinued operations.

(10)	Cumulative Effect of an Accounting Change

During 2002, we recognized a loss of approximately $58.0 million due to the cumulative effect of an accounting change. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, and upon management’s analysis of our intangibles including an independent valuation, we recorded a reduction in the value of our goodwill of approximately $58.0 million primarily related to our Keptel product line.

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

---

Table of Contents

	Increase in Spending by MSOs on New Revenue-Generating Services

	Cable Operator Demand of Open Standards for Equipment and Services Related to High-Speed Data, Telephony and, Digital Video

	•	High-speed data was offered, most significantly by ARRIS (LANcity), Motorola and Terayon, using proprietary cable modem termination systems and cable modems. In the United States, the MSOs created CableLabs to create an open standard architecture for high-speed data. This architecture was introduced in 1999 and remains the industry standard. ARRIS and its competitors responded to the creation of this standard, and, as a result, ARRIS has not sold proprietary high-speed data products since 2000. Similar open standards exist in Europe.
	•	Telephony was first offered, most significantly by ARRIS, Motorola, ADC and Tellabs, using proprietary constant bit rate, or CBR, headend and network interface units. ARRIS continues to sell significant volumes of CBR equipment. The MSOs, through CableLabs, have created an open architecture for VoIP telephony. We anticipate that the majority of new telephony deployments will use this open architecture. ARRIS and its competitors have responded to the creation of this new standard.
	•	Digital Video was first offered, most significantly by Motorola, Scientific-Atlanta and Pace, using proprietary set-top boxes. In 2005 certain MSOs, in particular Comcast, Time Warner and Cox Communications, began the development of standards, known as Next Generation Network Architecture, which, among other things, will drive an open standards architecture for IP Video. We are actively participating in the development of these standards and plan to develop and market products to enable them.

	Consolidation of Our Customer Base

24

---

Table of Contents

	Decline in Spending by the MSOs on “Two-Way Plant Upgrades”

	•	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
	•	Continually rationalize our product portfolio
	•	Maintain and improve an already strong capital structure and expense structure

	Acquisitions

	Acquisition of Assets of Cadant, Inc.

25

---

Table of Contents

	Acquisition of Certain Assets of Atoga Systems

	Acquisition of Certain Assets of Com21

	•	Resale agreements with respect to complementary products, for example, with C-Cor for their operational support systems software and with Ellacoya for their peer-to-peer flow control. Resale of these products produces a profit for the Company and enables us to better serve our customers with more integrated solutions.
	•	Interoperability testing with a wide variety of key components for other manufacturers, including call management servers, media gateways, central office switches, and cable modems. Such testing enables us to assure our customers of complete compatibility between our products and products produced by these other manufacturers.

26

---

Table of Contents

	•	TM402A/ B/ C — A low cost, non-battery unit principally targeted at the international market where power is not a requirement for primary line services and for second line applications in the U.S.
	•	TM402G/ H — A unit functionally the same as the TM402A/ B/ C but with one low cost unit lithium ion battery which provides up to 8 hours of back-up power. The TM402G/ H meets the economic needs of certain customers while providing modest protection from power outages.
	•	TM402P/ Q — Our flagship unit capable of up to 20 hours of back-up power for primary line services in the U.S.

27

---

Table of Contents

	Sale of Keptel Product Line

	Sale of Actives Product Line

	Sale of Electronic System Products (“ESP”) Product Line

	•	in conjunction with our acquisitions and product line divestitures we were left with duplicative and/or unnecessary costs that required rationalization
	•	as the “two-way” upgrades slowed and the general spending levels in the industry decreased, it was necessary to reduce our cost structure as we experienced lower revenues
	•	as a result of the Comcast purchase of AT&T Broadband we experienced a sharp decline in revenues in late 2002 and into 2003, as a result, it was necessary to reduce our cost structure

	Notes due 2003

28

---

Table of Contents

	Notes due 2008

	Nortel Class B Membership Interest

	Credit Facility

	Overview

29

---

Table of Contents

	Key Operating Data (as a percentage of net sales)

		Years Ended December 31,
		2004				2003				2002
Net sales			100.0	%			100.0	%			100.0	%
Cost of sales			70.2				70.9				65.2
Gross margin			29.8				29.1				34.8
Operating expenses:
Selling, general, and administrative expenses			14.1				19.1				15.9
Provision for doubtful accounts			(0.1	)			1.5				3.8
Research and development expenses			12.9				14.5				11.1
Restructuring and impairment charges			1.6				0.2				1.1
Impairment of goodwill			—				—				10.8
Amortization of intangibles			5.9				8.1				5.3
Operating income (loss)			(4.5	)			(14.3	)			(13.2	)
Other (income) expense:
Interest expense			1.0				2.4				1.3
Membership interest			—				0.6				1.6
Loss (gain) on debt retirement			0.9				(6.0	)			1.1
Loss (gain) on investments			0.3				0.3				2.3
Loss (gain) on foreign currency			(0.3	)			(0.5	)			(0.9	)
Other expense (income), net			(0.2	)			—				—
Income (loss) from continuing operations before income taxes			(6.2	)			(11.0	)			(18.6	)
Income tax expense (benefit)			—				—				(1.0	)
Net income (loss) from continuing operations			(6.2	)			(11.0	)			(17.6	)
Gain (loss) from discontinued operations			0.4				0.1				(2.9	)
Net income before cumulative effect of accounting change			(5.8	)			(10.9	)			(20.4	)
Cumulative effect of an accounting change			—				—				8.9
Net income (loss)			(5.8	)			(10.9	)			(29.3	)

	Net Sales

				Net Sales												Increase (Decrease) Between Periods
				For the Years Ended December 31,												2004 vs. 2003								2003 vs. 2002
				2004				2003				2002				$				%				$				%
Product Category:
	Broadband			$	300.2			$	289.6			$	448.9			$	10.6				3.7			$	(159.3	)			(35.5	)
	Supplies & CPE				189.8				144.4				203.0				45.4				31.4				(58.6	)			(28.9	)
		Total sales		$	490.0			$	434.0			$	651.9			$	56.0				12.9			$	(217.9	)			(33.4	)

30

---

Table of Contents

					Net Sales												Increase (Decrease) Between Periods
					For the Years Ended December 31,												2004 vs. 2003								2003 vs. 2002
					2004				2003				2002				$				%				$				%
Domestic					$	366.4			$	351.9			$	503.7			$	14.5				4.1			$	(151.8	)			(30.1	)
International:
	Asia Pacific					48.0				36.8				51.4				11.2				30.4				(14.6	)			(28.4	)
	Europe					46.2				27.2				67.9				19.0				69.9				(40.7	)			(59.9	)
	Latin America					18.2				8.0				20.4				10.2				127.5				(12.4	)			(60.8	)
	Canada					11.2				10.1				8.5				1.1				10.9				1.6				18.8
		Total International				123.6				82.1				148.2				41.5				50.5				(66.1	)			(44.6	)
			Total		$	490.0			$	434.0			$	651.9			$	56.0				12.9			$	(217.9	)			(33.4	)

	Broadband Net Sales 2004 vs. 2003

	•	Sales of our CMTS product increased year over year. A significant portion of this increase is attributable to an increase in sales to Liberty Media International (including its affiliates).
	•	As anticipated, sales of our CBR voice products in 2004 declined from 2003. However, we continued to have steady sales of CBR product to Cox Communications and Jupiter. We believe that ultimately the sales of these products will decline as Cox Communications and Jupiter complete their initial rollout of telephony and transition to VoIP. We are uncertain about the rate and timing of this decline.

	Supplies & CPE Net Sales 2004 vs. 2003

	•	Included in the Supplies & CPE product category is DOCSIS cable modems and E-MTAs. Sales of these products increased significantly in 2004. A significant portion of the increase is attributable to the ramp in sales of our E-MTAs, as operators begin to deploy VoIP.
	•	Supplies & CPE product revenue internationally increased by $23.5 million in 2004 as compared to 2003, primarily due to an increase in sales of cable modems and E-MTAs to our international customers.
	•	Domestically, sales of our Supplies & CPE products increased by $21.9 million. A substantial portion of this increase is related to sales of E-MTAs, most notably to Time Warner.
	•	The market for E-MTAs developed significantly in 2004 as operators began to deploy to VoIP. As this market developed we achieved significant market success worldwide. We anticipate robust sales of this product family in 2005.

	Broadband Net Sales 2003 vs. 2002

	•	Sales to Comcast for CBR telephony products declined by approximately $163.7 million year-over-year. AT&T Broadband had been our largest customer of CBR telephony products. In the fourth quarter 2002, Comcast completed its purchase of AT&T Broadband. Comcast had announced that its

31

---

Table of Contents

		initial priority after its acquisition of AT&T Broadband would be to emphasize video and high-speed data operations and focus on improving the profitability of its telephony operations rather than subscriber growth. As a result, our sales of CBR products to Comcast decreased significantly in 2003 and continued into 2004. This decline was partially offset by an increase in C4 sales to Comcast.
	•	In 2003, we began to achieve market traction for our new generation CMTS products. These new products included the C4, acquired as part of our Cadant acquisition, and the C3, acquired as part of our Com21 acquisition. In 2003, we had approximately $100 million of sales of these products. We believe we exited 2003 with a significant market share for these next generation CMTS products. Comcast was our most sizable customer; however, we shipped C3 and C4 products to 42 customers in 2003. We continued to achieve market success with the C3 and C4; however, with significant competition from, in particular Motorola, Cisco, Terayon, and ADC.
	•	We continued to have robust sales of our CBR product, particularly to Cox Communications and Jupiter. Both companies expanded their footprint of HDTs in 2003, a leading indicator of future voiceport volume.
	•	Broadband product revenue internationally declined by $69.4 million during 2003 as compared to 2002. A significant portion of this decline is attributable to the reduced purchases by Cabovisao as a result of its financing difficulties; Cabovisao accounted for approximately $39.0 million of the decrease in Broadband international revenue in 2003. Further, both Jupiter in Japan and VTR in Chile slowed their purchases of our CBR telephony equipment.

	Supplies & CPE Net Sales 2003 vs. 2002

	•	Sales of power supplies related to CBR products declined as a direct result of the significant decrease in Comcast’s purchases of telephony products, as described above. Consolidated power supply revenue for 2003 was $0.2 million, as compared to revenue of $14.4 million in 2002.
	•	Revenues were significantly impacted by the decline in shipments to Adelphia, which filed for bankruptcy during the second quarter of 2002. The bankruptcy filing by Adelphia and the resulting reduced sales to Adelphia accounted for approximately $6.5 million of the overall decrease in Supplies & CPE product revenue year-over-year.
	•	A general slowdown in MSOs infrastructure spending as a result of the tightened credit market and the decline in spending by some customers on “two-way” upgrades, contributed to the remaining decrease in Supplies & CPE revenue year-over-year.
	•	Included in the Supplies & CPE product category is DOCSIS cable modems and E-MTAs. Sales of these products increased modestly in 2003.

	Gross Margin

				Gross Margin $
																Increase (Decrease) Between Periods
				For the Years Ended
				December 31,												2004 vs. 2003								2003 vs. 2002
				2004				2003				2002				$				%				$				%
Product Category:
	Broadband			$	120.7			$	110.1			$	190.4			$	10.6				9.6			$	(80.3	)			(42.2	)
	Supplies & CPE				25.5				16.2				36.3				9.3				57.4				(20.1	)			(55.4	)
		Total		$	146.2			$	126.3			$	226.7			$	19.9				15.8			$	(100.4	)			(44.3	)

32

---

Table of Contents

				Gross Margin  %
				For the Years Ended												Percentage Point Increase
				December 31,												(Decrease) Between Periods
				2004				2003				2002				2004 vs. 2003				2003 vs. 2002
Product Category:
	Broadband				40.2				38.0				42.4				2.2				(4.4	)
	Supplies & CPE				13.4				11.2				17.9				2.2				(6.7	)
		Total			29.8				29.1				34.8				0.7				(5.7	)

	Broadband Gross Margin 2004 vs. 2003

	•	Gross margin dollars were impacted by year-over-year increases in revenues.
	•	Product cost reduction programs were implemented in the second half of 2003, which helped contribute to an increase in margins.
	•	In 2004, we recorded $2.7 million of inventory reserves versus $5.6 million in 2003.
	•	In the third and fourth quarters of 2004, our broadband gross margin percentages were 41.5% and 34.6%, respectively, reduced from the first half of 2004. The decrease is the result of costs associated with the introduction of our DOCSIS 2.0 CMTS, including higher initial product costs as we launch the product and a change in product mix, more specifically, lower sales of our higher margin CBR products. We believe that our broadband margins will improve in 2005 from the fourth quarter levels but the improvement is dependant upon the impact of, among other factors, achievement of planned cost reductions, product mix, and price reductions granted to customers, in particular for our CBR products. In early 2005, we announced that we had entered into a letter of intent with Cox, our largest CBR customer, in which we agreed to provide them with price reductions in return for volume commitments.

	Supplies & CPE Gross Margin 2004 vs. 2003

	•	The increase in revenues year-over-year significantly impacted gross margin dollars. This was predominantly related to our increase in sales of E-MTAs.
	•	In 2004, we recorded $2.9 million of inventory reserves versus $6.4 million in 2003.
	•	In the third and fourth quarter of 2004, our Supplies & CPE gross margin percentages were 10.6% and 13.4%, respectively. We believe that our Supplies & CPE margins will improve in 2005 from the second half 2004 levels, but the improvement is dependant upon the impact of, amongst other factors, achievement of planned cost reductions, product mix, and price reductions granted to customers.

	Broadband Gross Margin 2003 vs. 2002

	•	Gross margin dollars were significantly impacted by year-over-year declines in revenues.
	•	The reduced sales volume contributed to lower margin percentages, as there was a lower base to cover our fixed costs.

33

---

Table of Contents

	•	A shift within the Broadband product mix resulted in lower margins; specifically, we sold less CBR equipment in 2003 as compared to 2002.
	•	In 2003, we recorded $5.6 million of inventory reserves versus $2.1 million in 2002.
	•	Negatively impacting gross margin was $0.4 million and $0.7 million of employee severance for 2003 and 2002, respectively.

	Supplies & CPE Gross Margin 2003 vs. 2002

	•	The decrease in revenues year over year significantly impacted gross margin dollars.
	•	Product mix, specifically, reduced sales of higher margin power supplies in the CBR market, increased sales of lower margin cable modems, and relatively reduced sales of other proprietary products negatively impacted margin.
	•	Increased competition in a declining revenue environment caused price erosion, which also negatively impacted gross margins.
	•	Negatively impacting gross margin was $0.8 million of employee severance for 2002.
	•	Inventory reserves, impacted by the general downturn in the industry, the Comcast acquisition of AT&T Broadband and the related change in purchase patterns, and the decision to divest the powering product line. In 2003, we recorded $6.4 million of inventory reserves versus $10.8 million in 2002.

	Operating Expenses

			Operating Expenses												Increase (Decrease) Between Periods
			For the Years Ended December 31,												2004 vs. 2003								2003 vs. 2002
			2004				2003				2002				$				%				$				%
SG&A			$	69.1			$	82.7			$	103.4			$	(13.6	)			(16.4	)		$	(20.7	)			(20.0	)
Provision for doubtful accounts				(0.5	)			6.4				24.7				(6.9	)			(107.8	)			(18.3	)			(74.1	)
R&D				63.4				62.9				72.5				0.5				0.8				(9.6	)			(13.2	)
Restructuring & impairment				7.6				0.9				7.1				6.7				744.4				(6.2	)			(87.3	)
Impairment of goodwill				—				—				70.2				—				0.0				(70.2	)			(100.0	)
Amortization of intangibles				28.7				35.2				34.5				(6.5	)			(18.5	)			0.7				2.0
	Total		$	168.3			$	188.1			$	312.4			$	(19.8	)			(10.5	)		$	(124.3	)			(39.8	)

	Selling, General, and Administrative, or SG&A, Expenses and Provision for Doubtful Accounts

	2004 vs. 2003

	•	Legal fees and settlement costs decreased significantly in 2004. In 2003, we incurred approximately $5.0 million of settlement/legal expenses associated with patent litigation that ultimately was settled.
	•	In 2003, we recorded $2.2 million associated with the write-off of customer relations software.
	•	In 2003, we incurred $1.4 million of costs associated with the disposal of ESP.

34

---

Table of Contents

	•	The impact of previously implemented cost reduction programs led to lower operating expenses, offset by higher employee incentive accruals.
	•	Reserves for doubtful accounts decreased year over year primarily as a result of lower year over year requirements for Cabovisao of $4.9 million, net of a gain of $1.5 million from the sale of the receivable to a third party.
	•	Included in the SG&A expenses for 2004 and 2003 are severance costs of $0.4 million and $1.1 million, respectively.

	2003 vs. 2002

	•	The elimination of Nortel Networks’ agency fee accounted for approximately $11.7 million of the year-over-year decrease. The agreement with Nortel Networks for international agency fees terminated in December 2002.
	•	As we have highlighted elsewhere, we implemented several actions to reduce both SG&A and R&D costs. These actions include reductions in force, curtailment of certain employee benefits and reductions in bonuses.
	•	Included in the SG&A expenses for 2003 and 2002 are severance costs of $1.1 million and $2.9 million, respectively.
	•	In 2002, we incurred net charges of approximately $14.9 million related to the allowance for doubtful accounts for Adelphia (who entered in bankruptcy). In 2003, we recorded net charges of $4.9 million related to the allowance for doubtful accounts for Cabovisao (who also entered into bankruptcy).

	Research & Development Expenses

	2004 vs. 2003

	2003 vs. 2002

	•	The closure in November 2002 of our Andover, Massachusetts location, which was primarily a product development and repair facility. Following the purchase of Cadant, we were able to reduce duplicative effort and close this facility.
	•	As we have highlighted elsewhere, we implemented several actions to reduce both R&D and SG&A costs. These actions include reductions in force, curtailment of certain employee benefits and reductions in bonuses.
	•	Included in the R&D expenses for 2003 and 2002 are severance costs of $1.3 million and $1.0 million, respectively.
	•	Partially offsetting these decreases was the addition of expense related to the acquisition of Atoga in March 2003 and Com21 in August 2003.

35

---

Table of Contents

	Restructuring and Impairment Charges

	Impairment of Goodwill

	Amortization of Intangibles

36

---

Table of Contents

	Other Expense (Income)

			Other Expense (Income)												Increase (Decrease) Between Periods
			For the Years Ended December 31,												2004 vs. 2003				2003 vs. 2002
			2004				2003				2002
Interest expense			$	5.0			$	10.4			$	8.4			$	(5.4	)		$	2.0
Membership interest				—				2.4				10.4				(2.4	)			(8.0	)
Loss (gain) on debt retirement				4.4				(26.2	)			7.3				30.6				(33.5	)
Loss on investments and notes receivable				1.3				1.4				14.9				(0.1	)			(13.5	)
Gain on foreign currency				(1.3	)			(2.4	)			(5.7	)			1.1				3.3
Other expense (income)				(1.1	)			0.2				0.2				(1.3	)			—
	Total expense (income)		$	8.3			$	(14.2	)		$	35.5			$	(22.5	)		$	(49.7	)

	Interest Expense

	Membership Interest Expense

	Loss (Gain) on Debt Retirement

	•	During the first quarter 2003, we redeemed the entire Class B membership interest in Arris Interactive L.L.C. held by Nortel Networks for approximately $88.4 million. This discounted redemption resulted in a gain of approximately $28.5 million during the first quarter of 2003.
	•	During the fourth quarter 2003, we chose to cancel our credit facility, which was due to expire in August 2004. As a result, we wrote off approximately $2.3 million of unamortized finance fees related to the facility upon cancellation.

	•	During the second quarter 2002, we exchanged 1,593,789 shares of our common stock for approximately $15.4 million of the notes due 2003. The exchanges were recorded in accordance with SFAS No. 84, Induced Conversions of Convertible Debt, which requires the recognition of an expense equal to the fair value of additional shares of common stock issued in excess of the number of shares that would have been issued upon conversion under the original terms of the notes. As a result, in connection with these exchanges, we recorded a non-cash loss of approximately $8.7 million, based upon a weighted average common stock value of $9.10 (as compared with a common stock value of

37

---

Table of Contents

		$24.00 per share in the original conversion ratio for the notes). In connection with the exchanges, we also incurred associated fees of $0.6 million, resulting in an overall net loss of $9.3 million.
	•	During 2002, we redeemed $75.7 million of outstanding notes due 2003. The notes were redeemed at a discount, resulting in a gain on the debt retirement of $2.0 million which was recorded in accordance with SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.

	Loss on Investments and Notes Receivable

	Gain in Foreign Currency

	Income Tax Expense

	Discontinued Operations

38

---

Table of Contents

	Cumulative Effect of an Accounting Change — Goodwill

	Overview

	Liquidity & Capital Resources Data

			Year Ended December 31,
			2004				2003				2002
			(in millions, except DSO and Turns)
Key Working Capital Items
Cash provided by operating activities			$	21.5			$	14.9			$	117.4
Cash, cash equivalents, and short-term investments			$	103.1			$	84.9			$	98.4
Accounts Receivable, net			$	55.7			$	56.3			$	81.0
	– Days Sales Outstanding (Full Year)			42				58				55
Inventory			$	92.6			$	78.6			$	104.2
	– Turns (Full Year)			4.0				3.4				3.5
Key Debt Items
	Convertible Notes due 2003		$	—			$	—			$	23.9
	Convertible Notes due 2008		$	75.0			$	125.0			$	—
	Nortel Class B Membership Interest		$	—			$	—			$	114.5
Capital Expenditures			$	10.2			$	5.9			$	7.9
Shares Owned by Nortel				3.2				5.0				22.0
% Owned by Nortel				3.6	%			6.6	%			26.7	%

	•	Liquidity — ensure that we have sufficient cash resources or other short term liquidity to manage day to day operations
	•	2008 Notes — implement a plan to retire the notes; the first step was taken by means of a partial redemption ($50 million) in March 2004
	•	2003 Notes — implement a plan to retire the notes; which was ultimately accomplished in 2002 and 2003 through a combination of cash redemptions ($99.6 million) and a share exchange offer ($15.4 million)
	•	Nortel Class B Membership Interest in Arris Interactive L.L.C.  — implement a plan to retire the debt; which was ultimately accomplished in 2003 at a significant discount
	•	Growth — implement a plan to ensure that we have adequate capital resources, or access thereto, to execute acquisitions

39

---

Table of Contents

	•	Overhang — implement a plan to reduce the overhang on our stock caused by Nortel Networks holdings; at the end of 2004 Nortel’s holdings were down to 3.2 million shares (or approximately 3.6% of the shares outstanding)

	Asset-Based Credit Facility

	Inventory & Accounts Receivable Programs

	Divestiture of Product Lines

	2003 Notes Exchange Offer

	2008 Notes & Nortel Debt/ Shares

40

---

Table of Contents

	Redemption of the 2008 Notes

	Expense Management

	Summary of Current Liquidity Position and Potential for Future Capital Raising

	Contractual Obligations

		Payments due by period
Contractual Obligations		Less than 1 Year				1 - 3 Years				3 - 5 Years				More than 5 Years				Total
		(in millions)
Long-term debt		$	—			$	—			$	75.0			$	—			$	75.0
Operating leases(1)			7.7				11.4				7.8				10.2				37.1
Sublease income			(1.0	)			(0.8	)			—				—				(1.8	)
Purchase obligations(2)			53.1				—				—				—				53.1
Total contractual obligations(3)		$	59.8			$	10.6			$	82.8			$	10.2			$	163.4

(1)	Includes leases which are reflected in restructuring accruals on the consolidated balance sheets.
(2)	Represents obligations under agreements with non-cancelable terms to purchase goods or services. The agreements are enforceable and legally binding, and specify terms, including quantities to be purchased and the timing of the purchase.
(3)	In January 2005, ARRIS entered into two separate and unrelated agreements with certain vendors for future purchase commitments over the next three years in the aggregate amount of $4.5 million. These amounts are not included in the table above as they were entered into subsequent to December 31, 2004.

41

---

Table of Contents

	Cash Flow

			2004				2003				2002
Cash provided by operating activities			$	21.5			$	14.9			$	117.4
Cash provided by (used in) investing			$	(77.6	)		$	(17.3	)		$	51.2
Cash provided by (used in) financing			$	6.2			$	(21.1	)		$	(75.5	)
	Net increase (decrease) in cash		$	(49.8	)		$	(23.5	)		$	93.1

	Operating Activities:

			2004				2003				2002
Net income (loss) after non-cash adjustments			$	17.5			$	(4.8	)		$	48.6
(Increase)/ Decrease in accounts receivable				1.2				17.0				30.7
(Increase)/ Decrease in inventory				(14.1	)			26.2				53.4
All other — net				16.9				(23.5	)			(15.3	)
	Cash provided by operating activities		$	21.5			$	14.9			$	117.4

	•	As described above, our net loss improved significantly year over year, resulting in an improvement in cash from operating activities.
	•	Our inventory increased in 2004, as expected, primarily to accommodate a change in contract manufacturers in the fourth quarter of 2004 and to build a pipeline of E-MTAs. In 2003 and 2002, we generated significant cash flow from the reductions in inventory in 2003 and 2002. This was facilitated by the sale of non-core product lines and a strong management focus on reducing inventory levels that had been built up prior to the decline in the industry in 2000. Our inventory turns for 2004 were 4.0 as compared to 2003 turns of 3.4.
	•	We generated cash flow from reductions in accounts receivable in 2003. This was facilitated by the reduction in our overall sales volume (due in part to the sale of non-core product lines) and a strong management focus on collections. Our 2004 DSO was 42 days as compared to the 2003 DSO of 58 days.
	•	While we believe we may be able to further improve our working capital position, future cash flow from operating activities will be more dependent on net income after adjustment for non-cash items.

42

---

Table of Contents

	Investing Activities:

			2004				2003				2002
Capital expenditures			$	(10.2	)		$	(5.9	)		$	(7.9	)
Acquisitions/other				—				(3.2	)			(0.9	)
Purchases of short-term investments				(107.8	)			(10.0	)			—
Disposals of short-term investments				39.8				—				—
Proceeds from sale of investments				0.6				—				—
Proceeds from sale of product lines				—				1.8				60.0
	Cash provided by (used in) investing activities		$	(77.6	)		$	(17.3	)		$	51.2

	Financing Activities:

			2004				2003				2002
Retirement of 2003 notes			$	—			$	(23.9	)		$	(73.7	)
Payments on notes payable				(1.2	)			(0.7	)			—
Payments on capital leases				—				(2.1	)			(0.9	)
Redemption of preferred membership interest				—				(88.4	)			—
Borrowing under 2008 notes				—				125.0				—
Borrowing under notes payable				—				1.6				—
Sale of common stock				7.4				1.2				1.0
Repurchase of common stock and stock units				—				(28.0	)			(0.1	)
Deferred financing fees paid				—				(5.8	)			(1.8	)
	Cash provided by (used in) financing activities		$	6.2			$	(21.1	)		$	(75.5	)

43

---

Table of Contents

	Interest Rates

	Foreign Currency

	Financial Instruments

	Short-Term Investments

	Investments

44

---

Table of Contents

	Capital Expenditures

	Net Operating Loss Carryforwards

45

---

Table of Contents

	Defined Benefit Pension Plans

		2004				2003				2002
Assumed discount rate for active participants			6.00	%			6.00	%			6.75	%
Assumed discount rate for inactive participants			6.00	%			6.00	%			6.50	%
Rates of compensation increase			5.94	%			6.00	%			6.00	%

		2004				2003				2002
Assumed discount rate for active participants			6.00	%			6.75	%			7.25	%
Assumed discount rate for inactive participants			6.00	%			6.50	%			6.50	%
Rates of compensation increase			5.94	%			6.00	%			6.00	%
Expected long-term rate of return on plan assets			8.00	%			8.00	%			8.00	%

2005		$	484
2006			516
2007			634
2008			805
2009			864
2010 – 2014			8,292

46

---

Table of Contents

	Adoption of SFAS No. 123R, Share-Based Compensation

	Critical Accounting Estimates

(a)	Revenue Recognition

47

---

Table of Contents

	•	when undelivered products or services that are essential to the functionality of the delivered product, or are required under the terms of the contract to be delivered concurrently exist, revenue is deferred until such undelivered products or services are delivered, or
	•	when final acceptance of the product is specified by the customer, revenue is deferred until the acceptance criteria have been met.

(b)	Allowance for Doubtful Accounts and Sales Returns

(c)	Inventory Valuation

48

---

Table of Contents

		2004				2003
Gross inventory		$	111.4			$	97.9
Reserves			(18.8	)			(19.3	)
Net inventory		$	92.6			$	78.6

(d)	Warranty.

49

---

Table of Contents

	•	general economic conditions;
	•	availability and cost of capital;
	•	other demands and opportunities for capital;
	•	regulations;
	•	demands for network services;
	•	competition and technology; and
	•	real or perceived trends or uncertainties in these factors.

50

---

Table of Contents

	•	Big Band Networks;
	•	Cisco Systems, Inc.;
	•	Motorola, Inc.;
	•	Scientific-Atlanta, Inc.;
	•	Tellabs, Inc.; and
	•	TVC Communications, Inc.

51

---

Table of Contents

	•	the risk that acquisitions will not be integrated or otherwise perform as expected;
	•	the risk that we will not be able to find a buyer for a product line while product line sales and employee morale will have been damaged because of general awareness that the product line is for sale; and
	•	the risk that the purchase price obtained will not be equal to the book value of the assets for the product line that we sell.

	•	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.

52

---

Table of Contents

53

---

Table of Contents

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk

54

---

Table of Contents

Item 8.	Consolidated Financial Statements and Supplementary Data

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

55

---

Table of Contents

/s/ ROBERT J. STANZIONE
Robert J. Stanzione
Chief Executive Officer, Chairman
/s/ DAVID B. POTTS
David B. Potts
Executive Vice President, Chief Financial Officer,
and Chief Information Officer
March 30, 2005

56

---

Table of Contents

	/s/ ERNST & YOUNG LLP

57

---

Table of Contents

		Page
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm			59
Consolidated Balance Sheets at December 31, 2004 and 2003			60
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002			61
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002			62
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2004, 2003 and 2002			64
Notes to the Consolidated Financial Statements			65

58

---

Table of Contents

	/s/ ERNST & YOUNG LLP

59

---

Table of Contents

						December 31,
						2004				2003
						(in thousands)
ASSETS
Current assets:
	Cash and cash equivalents					$	25,072			$	74,882
	Short-term investments, at fair value						78,000				10,000
			Total cash, cash equivalents and short-term investments				103,072				84,882
	Restricted cash						4,017				6,135
	Accounts receivable (net of allowances for doubtful accounts of $3,829 in 2004 and $4,446 in 2003)						55,661				56,344
	Other receivables						420				1,280
	Inventories						92,636				78,562
	Other current assets						9,416				7,900
			Total current assets				265,222				235,103
Property, plant and equipment (net of accumulated depreciation of $61,146 in 2004 and $53,823 in 2003)							27,125				25,376
Goodwill							150,569				150,569
Intangibles (net of accumulated amortization of $105,446 in 2004 and $76,756 in 2003)							1,672				30,362
Investments							3,620				5,504
Other assets							2,470				4,945
						$	450,678			$	451,859
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable					$	30,640			$	24,389
	Accrued compensation, benefits and related taxes						14,845				4,267
	Current portion of long-term debt						—				1,073
	Current portion of capital lease obligations						—				14
	Other accrued liabilities						32,111				34,683
				Total current liabilities			77,596				64,426
Long-term debt, net of current portion							75,000				125,092
Other long-term liabilities							16,781				12,960
				Total liabilities			169,377				202,478
Stockholders’ 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; 87.7 million and 75.4 million shares issued and outstanding in 2004 and 2003, respectively					889				773
		Capital in excess of par value					644,838				586,008
		Accumulated deficit					(357,038	)			(328,642	)
		Unrealized gain on marketable securities					706				771
		Unearned compensation					(4,566	)			(8,104	)
		Unfunded pension losses					(3,345	)			(1,293	)
		Cumulative translation adjustments					(183	)			(132	)
				Total stockholders’ equity			281,301				249,381
						$	450,678			$	451,859

60

---

Table of Contents

						For the Years Ended December 31,
						2004				2003				2002
						(in thousands, except per share data)
Net sales						$	490,041			$	433,986			$	651,883
Cost of sales							343,864				307,726				425,231
		Gross margin					146,177				126,260				226,652
		Gross margin %					29.8	%			29.1	%			34.8	%
Operating expenses:
		Selling, general, and administrative expenses					69,082				82,688				103,422
		Provision for doubtful accounts					(543	)			6,429				24,667
		Research and development expenses					63,373				62,863				72,485
		Restructuring and impairment charges					7,648				891				7,113
		Impairment of goodwill					—				—				70,209
		Amortization of intangibles					28,690				35,249				34,494
							168,250				188,120				312,390
Operating income (loss)							(22,073	)			(61,860	)			(85,738	)
Other expense (income):
		Interest expense					5,006				10,443				8,383
		Membership interest					—				2,418				10,409
		Loss (gain) on debt retirement					4,406				(26,164	)			7,302
		Loss on investments and notes receivable					1,320				1,436				14,894
		Gain on foreign currency					(1,301	)			(2,383	)			(5,739	)
		Other expense (income), net					(1,102	)			54				226
Income (loss) from continuing operations before income taxes							(30,402	)			(47,664	)			(121,213	)
Income tax expense (benefit)							108				—				(6,800	)
Net income (loss) from continuing operations							(30,510	)			(47,664	)			(114,413	)
Discontinued Operations:
		Income (loss) from discontinued operations (including a net gain on disposals of $2.1 million and $0.4 million and a net loss of $4.0 million for the years ended December 31, 2004, 2003, and 2002, respectively)					2,114				351				(18,794	)
Net income (loss) before cumulative effect of an accounting change							(28,396	)			(47,313	)			(133,207	)
Cumulative effect of an accounting change — goodwill							—				—				57,960
				Net income (loss)		$	(28,396	)		$	(47,313	)		$	(191,167	)
Net income (loss) per common share — basic and diluted:
			Income (loss) from continuing operations			$	(0.36	)		$	(0.62	)		$	(1.40	)
			Income (loss) from discontinued operations				0.02				—				(0.23	)
			Cumulative effect of an accounting change				—				—				(0.71	)
				Net income (loss)		$	(0.33	)		$	(0.62	)		$	(2.33	)
	Weighted average common shares — basic and diluted						85,283				76,839				81,934

61

---

Table of Contents

			Years Ended December 31,
			2004				2003				2002
			(in thousands)
Operating activities:
Net (loss) income			$	(28,396	)		$	(47,313	)		$	(191,167	)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
	Depreciation			10,395				16,145				20,400
	Amortization of intangibles			28,690				35,249				34,494
	Amortization of deferred finance fees			690				4,621				2,859
	Amortization of unearned compensation			2,826				3,370				1,850
	Provision for doubtful accounts			(543	)			7,906				29,744
	Gain on sale of Adelphia receivable			—				—				(4,277	)
	Gain on sale of Cabovisao receivable			—				(1,477	)			—
	Loss (gain) on disposal of fixed assets			182				252				322
	Loss on investments and notes receivable			1,320				1,436				14,894
	Cash proceeds from sale of trading securities			—				226				60
	Impairment of goodwill			—				—				70,209
	Loss (gain) on debt retirement			4,406				(26,164	)			7,302
	Loss on sale of ESP product line			—				1,365				—
	Loss (gain) on discontinued product lines			(2,114	)			(351	)			3,959
	Cumulative effect of an accounting change — goodwill			—				—				57,960
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:
	Accounts receivable			1,226				16,992				30,699
	Other receivables			860				1,874				6,895
	Inventories			(14,074	)			26,210				53,431
	Income taxes recoverable			—				—				5,066
	Accounts payable and accrued liabilities			15,510				(24,156	)			(36,820	)
	Accrued membership interest			—				2,418				10,409
	Other, net			554				(3,708	)			(897	)
Net cash provided by (used in) operating activities				21,532				14,895				117,392
Investing activities:
	Purchases of property, plant and equipment			(10,167	)			(5,916	)			(7,923	)
	Cash proceeds from sale of Keptel product line			—				—				30,000
	Cash proceeds from sale of Actives product line			—				1,800				30,000
	Cash paid for acquisition, net of cash acquired			(50	)			(3,005	)			(874	)
	Cash paid for disposal of product line			—				(231	)			—
	Purchases of short-term investments			(107,750	)			(10,000	)			—
	Disposals of short-term investments			39,750				—				—
	Cash proceeds from sale of investment			642				—				—
	Other			—				26				(50	)
Net cash provided by (used in) investing activities				(77,575	)			(17,326	)			51,153

62

---

Table of Contents

				Years Ended December 31,
				2004				2003				2002
				(in thousands)
Financing activities:
	Proceeds from issuance of debt			$	—			$	126,597			$	—
	Redemption of preferred membership interest				—				(88,430	)			—
	Repurchase and retirement of common stock				—				(28,000	)			—
	Payments on capital lease obligations				(14	)			(2,130	)			(903	)
	Payments on debt obligations				(1,163	)			(24,585	)			(73,737	)
	Deferred financing costs paid				—				(5,797	)			(1,725	)
	Repurchase of stock units				—				—				(115	)
	Proceeds from issuance of common stock				7,410				1,249				1,007
Net cash provided by (used in) financing activities					6,233				(21,096	)			(75,473	)
Net increase (decrease) in cash and cash equivalents					(49,810	)			(23,527	)			93,072
Cash and cash equivalents at beginning of year					74,882				98,409				5,337
Cash and cash equivalents at end of year				$	25,072			$	74,882			$	98,409
Noncash investing and financing activities:
	Net tangible assets acquired, excluding cash			$	—			$	2,267			$	5,063
	Net liabilities assumed				50				(1,903	)			(14,955	)
	Intangible assets acquired, including goodwill				—				2,641				79,339
	Noncash purchase price, including 5,250,000 shares of common stock in 2002				—				—				(68,573	)
		Cash paid for acquisition, net of cash acquired		$	50			$	3,005			$	874
Landlord funded leasehold improvements				$	785			$	2,314			$	—
Equity issued in exchange for 41/2% convertible subordinated notes due 2008				$	50,000			$	—			$	—
Equity issued for make-whole interest payment — 41/2% convertible subordinated notes due 2008				$	4,406			$	—			$	—
Equity issued in exchange for 41/2% convertible subordinated notes due 2003				$	—			$	—			$	14,497
Supplemental cash flow information:
	Interest paid during the year			$	4,642			$	4,387			$	5,949
	Income taxes paid during the year			$	335			$	293			$	2,865

63

---

Table of Contents

															Unrealized
							Capital in								(Loss)
							Excess of								Gain on								Unfunded				Cumulative
			Common				Par				Accumulated				Marketable				Unearned				Pension				Translation
			Stock				Value				Deficit				Securities				Compensation				Losses				Adjustments				Total
			(in thousands)
Balance, January 1, 2002			$	755			$	507,650			$	(90,162	)		$	(3,211	)		$	(577	)		$	—			$	88			$	414,543
Comprehensive income (loss):
	Net income (loss)			—				—				(191,167	)			—				—				—				—				(191,167	)
	Unrealized loss on marketable securities			—				—				—				(86	)			—				—				—				(86	)
	Recognized unrealized loss on marketable securities			—				—				—				3,524				—				—				—				3,524
	Minimum liability on unfunded pension			—				—				—				—				—				(1,219	)			—				(1,219	)
	Translation adjustment			—				—				—				—				—				—				(122	)			(122	)
Comprehensive income (loss)																																(189,070	)
Shares granted under stock award plan				1				3,139				—				—				(3,140	)			—				—				—
Compensation under stock award plan				—				—				—				—				1,850				—				—				1,850
Repurchase of stock units				—				(237	)			—				—				122				—				—				(115	)
Forfeiture of restricted stock				—				(96	)			—				—				96				—				—				—
Issuance of common stock in acquisition of Cadant, Inc.				53				55,760				—				—				—				—				—				55,813
Issuance of stock options in acquisition of Cadant, Inc.				—				12,760				—				—				—				—				—				12,760
Issuance of common stock in conversion of 41/2% notes				16				24,042				—				—				—				—				—				24,058
Issuance of common stock and other				6				545				—				—				—				—				—				551
Balance, December 31, 2002			$	831			$	603,563			$	(281,329	)		$	227			$	(1,649	)		$	(1,219	)		$	(34	)		$	320,390
Comprehensive income (loss):
	Net income (loss)			—				—				(47,313	)			—				—				—				—				(47,313	)
	Unrealized gain on marketable securities			—				—				—				544				—				—				—				544
	Minimum liability on unfunded pension			—				—				—				—				—				(74	)			—				(74	)
	Translation adjustment			—				—				—				—				—				—				(98	)			(98	)
Comprehensive income (loss)																																(46,941	)
Shares granted under option exchange program				14				7,623				—				—				(7,637	)			—				—				—
Shares granted under stock award plan				2				706				—				—				(708	)			—				—				—
Compensation under stock award plan				—				—				—				—				3,370				—				—				3,370
Repurchase of Nortel shares				(80	)			(27,920	)			—				—				—				—				—				(28,000	)
Forfeiture of restricted stock				(1	)			(674	)			—				—				675				—				—				—
Issuance of restricted stock — Atoga				5				2,150				—				—				(2,155	)			—				—				—
Common stock returned — Cadant				(1	)			(683	)			—				—				—				—				—				(684	)
Issuance of common stock and other				3				1,243				—				—				—				—				—				1,246
Balance, December 31, 2003			$	773			$	586,008			$	(328,642	)		$	771			$	(8,104	)		$	(1,293	)		$	(132	)		$	249,381
Comprehensive income (loss):
	Net income (loss)			—				—				(28,396	)			—				—				—				—				(28,396	)
	Unrealized loss on marketable securities			—				—				—				(65	)			—				—				—				(65	)
	Minimum liability on unfunded pension adjustment			—				—				—				—				—				(2,052	)			—				(2,052	)
	Translation adjustment			—				—				—				—				—				—				(51	)			(51	)
Comprehensive income (loss)																																(30,564	)
Shares granted under stock award plan				1				530				—				—				(531	)			—				—				—
Compensation under stock award plan				—				—				—				—				2,826				—				—				2,826
Forfeiture of restricted stock				(3	)			(1,237	)			—				—				1,240				—				—				—
Issuance of common stock in conversion of 41/2% notes due 2008, net of write-off of associated deferred finance fees				105				52,662				—				—				—				—				—				52,767
Issuance of common stock and other				13				6,875				—				—				3				—				—				6,891
Balance, December 31, 2004			$	889			$	644,838			$	(357,038	)		$	706			$	(4,566	)		$	(3,345	)		$	(183	)		$	281,301

64

---

Table of Contents

	(a) Consolidation

	(b) Use of Estimates

	(c) Reclassifications

	(d) Cash and Cash Equivalents

	(e) Short-Term Investments

65

---

Table of Contents

	(f) Inventories

	(g) Investments

66

---

Table of Contents

	(h) Revenue Recognition

67

---

Table of Contents

	•	when undelivered products or services that are essential to the functionality of the delivered product, or are required under the terms of the contract to be delivered concurrently exist, revenue is deferred until such undelivered products or services are delivered, or
	•	when final acceptance of the product is required by the customer, revenue is deferred until the acceptance criteria have been met.

	(i) Shipping and Handling Fees

	(j) Depreciation of Property, Plant and Equipment

	(k) Goodwill and Long-Lived Assets

68

---

Table of Contents

	(l) Advertising and Sales Promotion

	(m) Research and Development

	(n) Warranty

	(o) Income Taxes

	(p) Foreign Currency

	(q) Stock-Based Compensation

69

---

Table of Contents

			2004				2003				2002
Net income (loss), as reported			$	(28,396	)		$	(47,313	)		$	(191,167	)
Add: Stock-based compensation related to restricted stock awards and stock units included in reported net income, net of taxes				2,826				3,370				1,850
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of taxes				(13,547	)			(21,513	)			(26,770	)
Net income (loss), pro forma			$	(39,117	)		$	(65,456	)		$	(216,087	)
Net income (loss) per common share:
	Basic and diluted — as reported		$	(0.33	)		$	(0.62	)		$	(2.33	)
	Basic and diluted — pro forma		$	(0.46	)		$	(0.85	)		$	(2.64	)

	(r) Interest Rate Agreements

	(s) Concentrations of Credit Risk

70

---

Table of Contents

	•	Cash, cash equivalents, and short-term investments: The carrying amount reported in the balance sheet for cash, cash equivalents, and short-term investments approximates their fair values.
	•	Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate their fair values. The Company establishes a reserve for doubtful accounts based upon its historical experience in collecting accounts receivable.
	•	Marketable securities: The fair values for trading and available-for-sale equity securities are based on quoted market prices.
	•	Non-marketable securities: Non-marketable equity securities are subject to a periodic impairment review; however, there are no open-market valuations, and the impairment analysis requires significant judgment. This analysis includes assessment of the investee’s financial condition, the business outlook for its products and technology, its projected results and cash flow, recent rounds of financing, and the likelihood of obtaining subsequent rounds of financing.
	•	Long-term debt: The fair value of the Company’s convertible subordinated debt is based on its quoted market price and totaled approximately $117.0 million and $200.0 million at December 31, 2004 and 2003, respectively.
	•	Foreign exchange contracts and interest rate swaps: The fair values of the Company’s foreign currency contracts and interest rate swaps are estimated based on dealer quotes, quoted market prices of comparable contracts adjusted through interpolation where necessary, maturity differences or if there are no relevant comparable contracts on pricing models or formulas by using current assumptions. As of December 31, 2004, no forward contracts were outstanding. As of December 31, 2003, the Company had one put option contract outstanding; however, the market value of the contract was $0.0 million. The Company had no interest rate swap agreements outstanding as of December 31, 2004 and 2003.

	(t) Accounting for Derivative Instruments

71

---

Table of Contents

	Warranty

72

---

Table of Contents

January 1, 2004		$	4,633
Accruals related to warranties (including changes in estimates)			5,343
Settlements made (in cash or in kind)			(4,523	)
Balance at December 31, 2004		$	5,453

	(1) a decrease in the estimate of the future costs of repairs as a result of ARRIS’ decision to return a greater number of products to the manufacturer for repair rather than arranging for the repair domestically at a higher expense,
	(2) an increase reflecting that, historically, ARRIS calculated the warranty reserve using warranty lengths and rates of repair experience that were, on average, less than those actually experienced by the Company, and
	(3) routine adjustments reflecting sales volume, warranty terms, changes in return experience, and the other factors that the Company uses to determine the warranty reserve.

73

---

Table of Contents

	Acquisition of Certain Assets of Com21

			(in thousands)
Cash paid to Com21			$	2,213
Cash retainer				115
Acquisition costs				163
Assumption of certain liabilities of Com21				691
	Adjusted purchase price		$	3,182
Allocation of purchase price:
	Net tangible assets acquired		$	1,253
	Existing technology (to be amortized over 3 years)			1,929
	Total allocated purchase price		$	3,182

	Acquisition of Certain Assets of Atoga Systems

74

---

Table of Contents

			(in thousands)
Cash paid to Atoga Systems			$	434
Acquisition costs (legal fees)				106
Assumption of certain liabilities of Atoga Systems				1,162
	Adjusted purchase price		$	1,702
Allocation of purchase price:
	Net tangible assets acquired		$	1,013
	Existing technology (to be amortized over 3 years)			689
	Total allocated purchase price		$	1,702

	Acquisition of the Assets of Cadant, Inc.

	•	ARRIS issued 5,250,000 shares of ARRIS common stock for the purchase of substantially all of Cadant’s assets and certain liabilities.
	•	During the second quarter of 2003, 64,350 shares of ARRIS common stock were returned to ARRIS and retired, pursuant to the terms of a settlement agreement between ARRIS and the trustee in the liquidation of CDX Corporation (formerly known as Cadant).
	•	ARRIS agreed to pay up to 2.0 million shares based upon future sales of the CMTS product through January 8, 2003. These targets were not met as of January 8, 2003, and therefore, no further shares were issued.

			(in thousands)
5,250,000 shares of ARRIS Group, Inc.’s $0.01 par value common stock at $10.631 per common share			$	55,813
64,350 returned shares of ARRIS Group, Inc.’s $0.01 par value common stock at $10.631 per common share				(684	)
Acquisition costs (banking fees, legal and accounting fees, printing costs)				897
Fair value of stock options to Cadant, Inc. employees				12,760
Assumption of certain liabilities of Cadant, Inc.				14,858
	Adjusted purchase price		$	83,644
Allocation of Purchase Price:
	Net tangible assets acquired		$	5,001
	Existing technology (to be amortized over 3 years)			53,000
	Goodwill (not deductible for income tax purposes)			25,643
	Total allocated purchase price		$	83,644

75

---

Table of Contents

	Supplemental Pro Forma Information

			Year Ended December 31,
			2004				2003
			(unaudited)
			(in thousands, except for
			per share data)
Net sales			$	490,041			$	433,986
Gross margin				146,177				126,260
Operating income (loss)				(22,073	)			(67,462	)
Income (loss) before income taxes				(30,402	)			(53,482	)
Income (loss) from continuing operations				(30,510	)			(53,482	)
Income (loss) from discontinued operations				2,114				351
Net income (loss)				(28,396	)			(53,131	)
Net income (loss) per common share:
	Basic and diluted		$	(0.33	)		$	(0.69	)
Weighted average common shares:
	Basic and diluted			85,283				76,839

		As of Acquisition Date
		Com21				Atoga Systems				Cadant, Inc.
		(in thousands)
Total current assets		$	273			$	330			$	782
Property, plant and equipment, net		$	980			$	683			$	4,219
Goodwill		$	—			$	—			$	25,643
Intangible assets (existing technology)		$	1,929			$	689			$	53,000
Total assets		$	3,182			$	1,702			$	83,644
Total current and long-term liabilities		$	691			$	1,162			$	14,858

76

---

Table of Contents

		Writedown of
		Leasehold				Lease
		Improvements				Commitments				Total
Balance as of December 31, 2003		$	—			$	—			$	—
2004 Provision			1.1				5.1				6.2
Non-cash expense			(1.1	)			—				(1.1	)
2004 payments			—				(1.2	)			(1.2	)
Adjustments to accrual			—				0.2				0.2
Balance as of December 31, 2004		$	—			$	4.1			$	4.1

77

---

Table of Contents

		Lease				Employee				Other
		Commitments				Severance				Costs				Total
Balance as of December 31, 2002		$	2.2			$	2.1			$	0.5			$	4.8
2003 payments			(1.2	)			(1.9	)			—				(3.1	)
Adjustments to accrual			—				(0.2	)			(0.5	)			(0.7	)
Balance as of December 31, 2003			1.0				—				—				1.0
2004 payments			(0.7	)			—				—				(0.7	)
Balance as of December 31, 2004		$	0.3			$	—			$	—			$	0.3

		Lease
		Commitments				Employee
		& Other Costs				Severance				Total
Balance as of December 31, 2002		$	2.0			$	0.8			$	2.8
2003 payments			(2.5	)			(0.5	)			(3.0	)
2003 adjustments to accrual			5.0				(0.2	)			4.8
Balance as of December 31, 2003			4.5				0.1				4.6
2004 payments			(3.1	)			—				(3.1	)
2004 adjustments to accrual			0.1				(0.1	)			—
Balance as of December 31, 2004		$	1.5			$	—			$	1.5

78

---

Table of Contents

			December 31,
			2004				2003
Raw material			$	1,456			$	3,707
Finished goods				91,180				74,855
	Total inventories		$	92,636			$	78,562

Note 11.	Property, Plant and Equipment

			December 31,
			2004				2003
Land			$	1,822			$	1,822
Buildings and leasehold improvements				11,828				8,033
Machinery and equipment				74,621				69,344
				88,271				79,199
Less: Accumulated depreciation				(61,146	)			(53,823	)
	Total property, plant and equipment, net		$	27,125			$	25,376

79

---

Table of Contents

			December 31, 2004												December 31, 2003
			Gross				Accumulated				Net Book				Gross				Accumulated				Net Book
			Amount				Amortization				Value				Amount				Amortization				Value
Existing technology acquired:
	Arris Interactive L.L.C.		$	51,500			$	(51,500	)		$	—			$	51,500			$	(41,345	)		$	10,155
	Cadant, Inc.			53,000				(52,661	)			339				53,000				(34,995	)			18,005
	Atoga Systems			689				(401	)			288				689				(170	)			519
	Com21			1,929				(884	)			1,045				1,929				(246	)			1,683
	Total		$	107,118			$	(105,446	)		$	1,672			$	107,118			$	(76,756	)		$	30,362

2005		$	1,212
2006		$	460
2007		$	—
2008		$	—
2009		$	—

			December 31,
			2004				2003
Capital lease obligations			$	—			$	14
Machinery and equipment notes payable				—				1,165
Other long-term liabilities				16,781				12,960
41/2% convertible subordinated notes due 2008				75,000				125,000
	Total debt, capital lease obligations, membership interest, and other liabilities			91,781				139,139
	Less current portion			—				(1,087	)
	Total long term debt, capital lease obligations, membership interest, and other long-term liabilities		$	91,781			$	138,052

80

---

Table of Contents

81

---

Table of Contents

			December 31,
			2004				2003				2002
Convertible subordinated notes				15,000,000				25,000,000				995,292
Stock options, stock units, and restricted stock				17,393,845				15,080,470				16,545,445
Employee stock purchase plan				865,994				1,049,312				419,841
Liberty Media options				302,076				854,341				854,341
	Total			33,561,915				41,984,123				18,814,919

					For the Years Ended December 31,
					2004				2003				2002
Basic and diluted:
	Income (loss) from continuing operations				$	(30,510	)		$	(47,664	)		$	(114,413	)
	Income (loss) from discontinued operations					2,114				351				(18,794	)
	Cumulative effect of an accounting change					—				—				(57,960	)
		Net income (loss)			$	(28,396	)		$	(47,313	)		$	(191,167	)
			Weighted average shares outstanding			85,283				76,839				81,934
			Basic and diluted earnings (loss) per share		$	(0.33	)		$	(0.62	)		$	(2.33	)

		Years Ended December 31,
		2004				2003				2002
Current — Federal		$	—			$	—			$	(6,800	)
State			—				—				—
Foreign			108				—				—
			108				—				(6,800	)
Deferred — Federal			—				—				—
State			—				—				—
			—				—				—
		$	108			$	—			$	(6,800	)

82

---

Table of Contents

			Years Ended December 31,
			2004				2003				2002
Statutory federal income tax expense (benefit)				(35.0	)%			(35.0	)%			(35.0	)%
Effects of:
	Foreign tax liability			0.4	%			0.0	%			0.0	%
	Goodwill impairment			0.0	%			0.0	%			23.3	%
	State income taxes, net of federal benefit			(3.3	)%			(3.3	)%			(3.3	)%
	Meals and entertainment			0.8	%			0.5	%			0.2	%
	Change in valuation allowance			37.5	%			59.0	%			11.3	%
	Gain on retirement of debt			0.0	%			(21.1	)%			0.0	%
	Other, net			0.0	%			(0.1	)%			(0.1	)%
				0.4	%			0.0	%			(3.6	)%

				December 31,
				2004				2003
Current deferred tax assets:
	Inventory costs			$	8,162			$	7,746
	Merger, disposal, and restructuring related reserves				1,348				3,585
	Allowance for doubtful accounts				943				2,126
	Other, principally operating expenses				15,661				14,326
		Total current deferred tax assets			26,114				27,783
Non-current deferred tax assets:
	Federal/state net operating loss carryforwards				56,509				56,794
	Federal capital loss carryforwards				5,316				2,735
	Foreign net operating loss carryforwards				5,191				5,221
	Pension and deferred compensation				5,344				4,403
Goodwill					1,334				3,663
	Plant and equipment, depreciation and basis differences				2,763				2,336
		Total non-current deferred tax assets			76,457				75,152
Non-current deferred tax liabilities:
	Purchased technology				(638	)			(11,613	)
		Total non-current deferred tax liabilities			(638	)			(11,613	)
Net deferred tax assets					101,933				91,322
	Valuation allowance on deferred tax assets				(101,933	)			(91,322	)
		Net deferred tax assets		$	—			$	—

83

---

Table of Contents

		U.S.				Foreign
Expiration in Calendar Year		Amount				Amount
2005-2008		$	6,818			$	6,935
2021-2024			144,978				—
Indefinite			—				22,660
		$	151,796			$	29,595

		Operating Leases
2005		$	7,710
2006			6,271
2007			5,146
2008			4,492
2009			3,330
Thereafter			10,200
Less sublease income			(1,847	)
Total minimum lease payments		$	35,302

84

---

Table of Contents

85

---

Table of Contents

86

---

Table of Contents

		2004								2003								2002
						Weighted								Weighted								Weighted
						Average								Average								Average
		Options				Exercise Price				Options				Exercise Price				Options				Exercise Price
Beginning balance			9,636,968			$	8.83				14,433,213			$	10.24				8,912,226			$	13.34
Grants			2,372,862			$	7.69				1,452,200			$	4.83				7,359,432			$	6.76
Exercises			(922,651	)		$	7.11				(32,943	)		$	2.52				(11,925	)		$	8.00
Terminations			(236,641	)		$	6.70				(653,687	)		$	7.58				(1,421,471	)		$	9.38
Cancelled — option exchange program			—			$	—				(4,722,816	)		$	11.16				—			$	—
Expirations			(925,135	)		$	11.80				(838,999	)		$	14.30				(405,049	)		$	18.43
Ending balance			9,925,403			$	8.48				9,636,968			$	8.83				14,433,213			$	10.24
Vested at period end			5,421,940			$	10.20				5,219,105			$	11.39				4,929,486			$	13.40
Weighted average fair value of options granted during year		$	5.83							$	3.69							$	4.64

87

---

Table of Contents

		Options Outstanding												Options Exercisable
						Weighted
		Number				Average				Weighted				Number				Weighted
		Outstanding				Remaining				Average				Exercisable				Average
Range of Exercise Prices		at 12/31/04				Contractual Life				Exercise Price				at 12/31/04				Exercise Price
$2.00 to $2.99			1,718,903				7.95 years			$	2.43				1,084,596			$	2.43
$3.00 to $4.99			2,306,810				8.77 years			$	4.81				524,721			$	4.75
$5.00 to $9.99			2,903,542				7.97 years			$	8.56				1,004,962			$	8.05
$10.00 to $14.99			2,113,682				6.62 years			$	10.21				1,925,320			$	10.21
$15.00 to $19.99			65,366				0.69 years			$	16.50				65,241			$	16.50
$20.00 to $53.13			817,100				4.48 years			$	26.16				817,100			$	26.16
$2.00 to $53.13			9,925,403				7.53 years			$	8.48				5,421,940			$	10.20

88

---

Table of Contents

89

---

Table of Contents

			Years Ended
			December 31,
			2004				2003
			(in thousands)
Change in Projected Benefit Obligation:
	Projected benefit obligation at beginning of year		$	21,114			$	20,757
	Service cost			484				724
	Interest cost			1,177				1,338
	Actuarial loss (gain)(1)			342				(177	)
	Benefit payments			(458	)			(584	)
	Curtailment			—				(944	)
	Projected benefit obligation at end of year		$	22,659			$	21,114
Change in Plan Assets:
	Fair value of plan assets at beginning of year		$	11,102			$	9,559
	Actual return on plan assets			644				1,501
	Company contributions			855				626
	Expenses and benefits paid from plan assets			(498	)			(584	)
	Fair value of plan assets at end of year		$	12,103			$	11,102
Funded Status:
	Funded status of plan		$	(10,556	)		$	(10,012	)
	Unrecognized actuarial (gain) loss			176				(818	)
	Unamortized prior service cost			2,752				3,310
	Employer contributions, 9/30 — 12/31			15				13
	Net amount recognized		$	(7,613	)		$	(7,507	)

(1)	The actuarial loss in 2004 includes updated assumptions for mortality rates

		Years Ended
		December 31,
		2004				2003
		(in thousands)
Accrued benefit cost		$	(10,958	)		$	(8,800	)
Accumulated other comprehensive income			3,345				1,293
Net amount recognized		$	(7,613	)		$	(7,507	)

		December 31,
		2004				2003
		(in thousands)
Accumulated benefit obligation		$	21,621			$	19,722
Projected benefit obligation			22,659				21,114
Plan assets			12,103				11,102

90

---

Table of Contents

		2004				2003				2002
Service cost		$	484			$	724			$	898
Interest cost			1,177				1,338				1,587
Return on assets (expected)			(935	)			(768	)			(882	)
Recognized net actuarial (gain) loss			(323	)			—				(198	)
Amortization of prior service cost(1)			558				553				550
Net periodic pension cost			961				1,847				1,955
Additional pension (income) expense due to curtailment			—				(944	)			(483	)
Net periodic pension cost		$	961			$	903			$	1,472

(1)	Prior service cost is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan.

		2004				2003				2002
Assumed discount rate for active participants			6.00%				6.00%				6.75%
Assumed discount rate for inactive participants			6.00%				6.00%				6.50%
Rates of compensation increase			5.94%				6.00%				6.00%

		2004				2003				2002
Assumed discount rate for active participants			6.00%				6.75%				7.25%
Assumed discount rate for inactive participants			6.00%				6.50%				6.50%
Rates of compensation increase			5.94%				6.00%				6.00%
Expected long-term rate of return on plan assets			8.00%				8.00%				8.00%

2005		$	484
2006			516
2007			634
2008			805
2009			864
2010-2014			8,292

91

---

Table of Contents

		Years Ended December 31,
		2004				2003				2002
		(in millions)
Comcast		$	108.2			$	136.6			$	250.2
% of sales			22.1	%			31.5	%			38.4	%
Cox Communications		$	106.3			$	104.3			$	106.7
% of sales			21.7	%			24.0	%			16.4	%
Liberty Media International and affiliates		$	81.7			$	46.9			$	67.4
% of sales			16.7	%			10.8	%			10.3	%

			Broadband				Supplies & CPE				Total
Years Ended:
	December 31, 2004		$	300,198			$	189,843			$	490,041
	December 31, 2003		$	289,637			$	144,349			$	433,986
	December 31, 2002		$	448,925			$	202,958			$	651,883

			Years Ended December 31
			2004				2003				2002
			(in thousands)
Asia Pacific			$	48,025			$	36,781			$	51,382
	Europe			46,213				27,186				67,856
	Latin America			18,205				8,052				20,400
	Canada			11,175				10,091				8,522
Total			$	123,618			$	82,110			$	148,160

92

---

Table of Contents

		Quarters in 2004 Ended
		March 31,				June 30,				September 30,				December 31,
Net sales		$	111,628			$	120,537			$	128,409			$	129,467
Gross margin(1)			36,294				40,352				35,746				33,785
Operating income (loss)(2)			(12,568	)			(4,521	)			(3,098	)			(1,886	)
Income (loss) from continuing operations(3)			(18,995	)			(6,260	)			(3,748	)			(1,507	)
Income (loss) from discontinued operations(1)(4)			339				832				42				901
Net income (loss)		$	(18,656	)		$	(5,428	)		$	(3,706	)		$	(606	)
Net (loss) per basic and diluted share:
Income (loss) from continuing operations		$	(0.24	)		$	(0.07	)		$	(0.04	)		$	(0.02	)
Income (loss) from discontinued operations		$	—			$	0.01			$	—			$	0.01
Net income (loss)		$	(0.24	)		$	(0.06	)		$	(0.04	)		$	(0.01	)

		Quarters in 2003 Ended
		March 31,				June 30,				September 30,				December 31,
Net sales		$	91,343			$	101,710			$	113,111			$	127,822
Gross margin(5)			24,744				27,185				31,842				42,489
Operating income (loss)(6)			(21,540	)			(25,260	)			(12,028	)			(3,032	)
Income (loss) from continuing operations(7)			3,446				(27,769	)			(14,593	)			(8,748	)
Income (loss) from discontinued operations(8)			—				—				—				351
Net income (loss)		$	3,446			$	(27,769	)		$	(14,593	)		$	(8,397	)
Net (loss) per basic and diluted share:
Income (loss) from continuing operations		$	0.04			$	(0.37	)		$	(0.19	)		$	(0.12	)
Income (loss) from discontinued operations		$	—			$	—			$	—			$	—
Net income (loss)		$	0.04			$	(0.37	)		$	(0.19	)		$	(0.11	)

(1)	During Q1 2004, the Company recognized a partial recovery with respect to inventory previously written off associated with an Argentinean customer. Of this total gain of $0.9 million, approximately $0.6 million is reflected in cost of sales, and $0.3 million is reflected in discontinued operations.
(2)	In addition to (1) above, the following items impacted operating income (loss) during 2004:

	—	During the first quarter of 2004, ARRIS consolidated two facilities in Georgia, giving the Company the ability to house many of its core technology, marketing, and headquarter functions in a single building. This consolidation resulted in a restructuring charge of $6.2 million in the first quarter of 2004 related to lease commitments and the write-off of leasehold improvements.
	—	During the first quarter of 2004, the Company recorded severance charges of $0.5 million, which were charged to operating expenses. These charges were related to general reductions in force.
	—	During the fourth quarter of 2004, the Company announced that it would close its office in Fremont, California, which previously housed Atoga Systems. The marketing and support for certain products

93

---

Table of Contents

		acquired as part of the Atoga Systems acquisition were transferred to other locations. The closure resulted in a restructuring charge of $0.3 million related to lease commitments and severance charges.
	—	During 2004, ARRIS evaluated the restructuring accruals related to previously closed facilities. Upon final review, the Company recorded additional restructuring charges of approximately $0.9 million, $0.1 million, and $0.1 million during the second, third, and fourth quarters, respectively, as a result of a change to the initial estimates used.

(3)	In addition to the items in (1) and (2) above, the following items impacted income (loss) from continuing operations in 2004:

	—	During the first quarter 2004, the Company called $50.0 million of the Notes due 2008 for redemption, and holders of the called notes elected to convert their notes into an aggregate of 10.0 million shares of common stock, rather than have the notes redeemed. Under the indenture’s terms for redemptions prior to March 18, 2006, we made a make-whole interest payment of approximately 0.5 million common shares, resulting in a charge of $4.4 million.
	—	During the first, second and third quarters of 2004, the Company recognized losses of approximately $0.9 million, $0.6 million, and $0.1 million, respectively, related to its investments and notes receivable.

(4)	During 2004, ARRIS evaluated its accruals related to costs associated with the disposal of discontinued product lines and costs associated with restructuring charges from previously closed facilities. As a result of these reviews, the Company recorded reductions to its accruals of approximately $0.8 million and $0.9 million during the second and fourth quarters of 2004, respectively, as a result of a change to the initial estimates used and the settlement of certain liabilities.
(5)	The Company recorded severance charges to cost of sales of approximately $0.3 million and $0.1 million during the second and third quarters of 2003, respectively. These charges were related to general reductions in force. During the first quarter of 2003, the Company recorded income of approximately $0.1 million related to an overaccrual of severance expense.
(6)	In addition to (5) above, the following items impacted operating income (loss) during 2003:

	—	During the first quarter of 2003, ARRIS recorded a charge of approximately $2.2 million related to the write-off of customer-relations software.
	—	During the second, third, and fourth quarters of 2003, the Company recorded severance charges of $1.2 million, $1.3 million, and $0.2 million, respectively, which were charged to operating expenses. These charges were related to general reductions in force. During the first quarter of 2003, the Company recorded income of approximately $0.3 million related to an overaccrual of severance expense.
	—	During the first and second quarters of 2003, ARRIS reserved approximately $2.3 million and $6.4 million, respectively, for its Cabovisao receivable. During the fourth quarter of 2003, the Company sold its accounts receivable to an unrelated third party for approximately $10.1 million, resulting in a reduction in its provision for doubtful accounts of approximately $1.5 million.
	—	During the fourth quarter of 2003, the Company recorded a total of approximately $3.0 million related to potential patent litigation damages. The litigation involves the Company’s connector products, which are included in the Supplies & CPE product category. The litigation was ultimately settled in February 2004.
	—	During 2003, ARRIS evaluated the restructuring accruals related to previously closed facilities. Upon final review, the Company recorded additional restructuring charges of approximately $0.3 million and $0.6 million during the first and fourth quarters, respectively, as a result of a change to the initial estimates used.

94

---

Table of Contents

	—	During the third quarter of 2003, the Company sold its engineering consulting services product line, known as ESP, to an unrelated third party. The transaction resulted in a loss of approximately $1.4 million.
	—	During the fourth quarter of 2003, ARRIS recorded a charge of approximately $0.2 million related to an early termination fee associated with a lease.

(7)	In addition to the items in (5) and (6) above, the following items impacted income (loss) from continuing operations in 2003:

	—	During the first quarter 2003, ARRIS redeemed the entire Class B membership interest in Arris Interactive L.L.C. held by Nortel Networks for approximately $88.4 million. This discounted redemption resulted in a gain of approximately $28.5 million.
	—	During the fourth quarter 2003, the Company chose to cancel its credit facility, which was due to expire in August 2004. As a result, ARRIS wrote off approximately $2.3 million of unamortized finance fees related to the facility upon cancellation.
	—	During the second and fourth quarters of 2003, the Company recognized losses of approximately $1.0 million and $0.4 million, respectively, related to its investments.

(8)

During the fourth quarter of 2003, ARRIS evaluated its accruals related to costs associated with the disposal of discontinued product lines and costs associated with restructuring charges from previously closed facilities. Upon final review, the Company recorded a net reduction to its accrual of approximately $0.4 million as a result of a change to the initial estimates used and the settlement of certain liabilities.

95

---

Table of Contents

96

---

Table of Contents

Item 15.	Exhibits and Financial Statement Schedules

		Page
Report of Independent Registered Public Accounting Firm			59
Consolidated Balance Sheets at December 31, 2004 and 2003			60
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002			61
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002			62
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2004, 2003 and 2002			64
Notes to the Consolidated Financial Statements			65

97

---

Table of Contents

				Balance at												Balance at
				Beginning				Charge to								End of
Description				of Period				Expenses				Deductions(1)				Period
				(in thousands)
YEAR ENDED DECEMBER 31, 2004
	Reserves and allowance deducted from asset accounts:
		Allowance for doubtful accounts		$	4,446			$	(543	)		$	74			$	3,829
		Reserve for obsolete and excess inventory(2)		$	19,294			$	5,595			$	6,057			$	18,832
YEAR ENDED DECEMBER 31, 2003
	Reserves and allowance deducted from asset accounts:
		Allowance for doubtful accounts		$	10,698			$	7,906			$	14,158			$	4,446
		Reserve for obsolete and excess inventory(2)		$	14,285			$	12,031			$	7,022			$	19,294
YEAR ENDED DECEMBER 31, 2002
	Reserves and allowance deducted from asset accounts:
		Allowance for doubtful accounts		$	9,409			$	29,744			$	28,455			$	10,698
		Reserve for obsolete and excess inventory(2)		$	25,439			$	12,861			$	24,015			$	14,285

(1)	Represents: a) Uncollectible accounts written off, net of recoveries and write-offs, b) Net change in the sales return and allowance account, and c) Disposal of obsolete inventory.
(2)	The reserve for obsolescence and excess inventory is included in inventories.

98

---

Table of Contents

Item 15(a)3.	Exhibit List

						The filings referenced for
						incorporation by reference are
						ARRIS (formerly known as Broadband
Exhibit						Parent, Inc.) filings
Number				Description of Exhibit		unless otherwise noted
	3	.1		Amended and Restated Certificate of Incorporation		Registration Statement #333-61524, Exhibit 3.1.
	3	.2		Certificate of Amendment to Amended and Restated Certificate of Incorporation		August 3, 2001 Form 8-A, Exhibit 3.2.
	3	.3		By-laws		Registration Statement #333-61524, Exhibit 3.2, filed by Broadband Parent Corporation
	4	.1		Form of Certificate for Common Stock		Registration Statement #333-61524, Exhibit 4.1.
	4	.2		Rights Agreement dated October 3, 2002		October 3, 2002 Form 8-K Exhibit 4.1
	4	.3		Indenture dated March 18, 2003		December 31, 2002 Form 10-K, Exhibit 4.3.
	4	.4		41/2% Notes Registration Rights Agreement dated March 18, 2003		March 31, 2003 Form 10-Q, Exhibit 10.5.
	10	.1(a)*		Agreement with Robert J. Stanzione for the conversion of special 2001 bonus to stock units		December 31, 1999 Form 10-K, Exhibit 10.10(b), filed by ANTEC Corporation.
	10	.1(b)*		Amended and Restated Employment Agreement with Robert J. Stanzione, dated August 6, 2001		September 30, 2001 Form 10-Q, Exhibit 10.10(c).
	10	.1(c)*		Supplemental Executive Retirement Plan for Robert J. Stanzione, effective August 6, 2001		September 30, 2001 Form 10-Q, Exhibit 10.10(d).
	10	.2*		Amended and Restated Employment Agreement with Lawrence A. Margolis, dated April 29, 1999		June 30, 1999 Form 10-Q, Exhibit 10.33, filed by ANTEC Corporation.
	10	.3*		Form of Employment Agreement with Gordon E. Halverson, dated January 21, 2002		March 31, 2002 Form 10-Q, Exhibit 10.9.
	10	.4*		Consulting Agreement dated February 1, 1998 for James L. Faust		December 31, 1998 Form 10-K, Exhibit 10.14, filed by ANTEC Corporation.
	10	.5*		2001 Stock Incentive Plan		July 2, 2001 Appendix III of Proxy Statement filed as part of, Registration Statement #333-61524, filed by Broadband Parent Corporation.

99

---

Table of Contents

						The filings referenced for
						incorporation by reference are
						ARRIS (formerly known as Broadband
Exhibit						Parent, Inc.) filings
Number				Description of Exhibit		unless otherwise noted
	10	.6*		Management Incentive Plan		July 2, 2001 Appendix IV of Proxy Statement filed as part of Registration Statement #333-61524, filed by Broadband Parent Corporation.
	10	.7		Solectron Manufacturing Agreement and Addendum		December 31, 2001 Form 10-K, Exhibit 10.15.
	10	.8		Mitsumi Agreement		December 31, 2001 Form 10-K, Exhibit 10.16.
	10	.9*		Form of Employment Agreement with Ronald M. Coppock		December 31, 2001 Form 10-K, Exhibit 10.17.
	10	.10*		Employment Agreement and Supplement with James D. Lakin dated August 5, 2001		December 31, 2002 Form 10-K, Exhibit 10.19.
	10	.11*		Employment Agreement with David B. Potts dated August 5, 2001		December 31, 2002 Form 10-K, Exhibit 10.20.
	21			Subsidiaries of the Registrant		December 31, 2003 Form 10-K, Exhibit 21.
	23			Consent of Ernst & Young LLP		Filed herewith.
	24			Powers of Attorney		Included on signature page hereof.
	31	.1		Section 302 Certification of the Chief Executive Officer		Filed herewith.
	31	.2		Section 302 Certification of the Chief Financial Officer		Filed herewith.
	32	.1		Section 906 Certification of the Chief Executive Officer		Filed herewith.
	32	.2		Section 906 Certification of the Chief Financial Officer		Filed herewith.

100

---

Table of Contents

	ARRIS GROUP, INC.
	/s/ David B. Potts
	David B. Potts
	Executive Vice President, Chief Financial Officer, and Chief Information Officer

/s/ Robert J. Stanzione   Robert J. Stanzione				Chief Executive Officer, and Chairman of the Board of Directors		March 30, 2005
/s/ David B. Potts   David B. Potts				Executive Vice President, Chief Financial Officer, and Chief Information Officer		March 30, 2005
/s/ Alex B. Best*   Alex B. Best				Director		March 30, 2005
/s/ Harry L. Bosco*   Harry L. Bosco				Director		March 30, 2005
/s/ John Anderson Craig*   John Anderson Craig				Director		March 30, 2005
/s/ Matthew B. Kearney*   Matthew B. Kearney				Director		March 30, 2005
/s/ William H. Lambert*   William H. Lambert				Director		March 30, 2005
/s/ John R. Petty*   John R. Petty				Director		March 30, 2005
*By:		/s/ Lawrence A. Margolis   Lawrence A. Margolis (as attorney in fact for each person indicated)

101