UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarter ended September 30, 2008

of

ARRIS GROUP, INC.

A Delaware Corporation
IRS Employer Identification No. 58-2588724
SEC File Number 000-31254

3871 Lakefield Drive
Suwanee, GA 30024
(678) 473-2000

ARRIS Group, Inc. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

ARRIS Group, Inc. is a large accelerated filer and is not a shell company.

As of October 31, 2008, 122,847,451 shares of the registrant’s Common Stock, $0.01 par value, were outstanding.

 

 

ARRIS GROUP, INC.
FORM 10-Q
For the Three and Nine Months Ended September 30, 2008

INDEX

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

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

ARRIS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

		September 30, 2008				December 31, 2007
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	305,987			$	323,797
Short-term investments, at fair value			23,571				68,011
Total cash, cash equivalents and short-term investments			329,558				391,808
Restricted cash			5,768				6,977
Accounts receivable (net of allowances for doubtful accounts of $3,132 in 2008 and $2,826 in 2007)			168,121				166,953
Other receivables			5,180				4,330
Inventories (net)			141,564				131,792
Prepaids			5,156				5,856
Current deferred income tax assets			37,999				44,939
Other current assets			20,167				4,841
Total current assets			713,513				757,496
Property, plant and equipment (net of accumulated depreciation of $99,137 in 2008 and $83,644 in 2007)			60,268				59,156
Goodwill			449,418				455,352
Intangibles (net of accumulated amortization of $144,021 in 2008 and $109,167 in 2007)			236,689				269,893
Investments			15,086				8,592
Noncurrent deferred income tax assets			3,312				3,459
Other assets			8,980				8,001
		$	1,487,266			$	1,561,949
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	54,304			$	58,852
Accrued compensation, benefits and related taxes			21,831				26,177
Accrued warranty			7,554				8,298
Deferred revenue			24,974				8,474
Current portion of long-term debt			234				35,305
Other accrued liabilities			25,490				42,121
Total current liabilities			134,387				179,227
Long-term debt, net of current portion			276,371				276,765
Accrued pension			10,622				10,455
Noncurrent income taxes payable			10,128				6,322
Noncurrent deferred income tax liabilities			42,337				45,255
Other long-term liabilities			15,655				18,158
Total liabilities			489,500				536,182
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; 122.8 million and 132.4 million shares issued and outstanding in 2008 and 2007, respectively			1,360				1,356
Capital in excess of par value			1,102,112				1,093,498
Treasury stock at cost, 13 million shares in 2008 and 51 thousand shares in 2007			(75,960	)			(572	)
Accumulated deficit			(26,076	)			(64,993	)
Unrealized gain (loss) on marketable securities			(128	)			20
Unfunded pension losses			(3,358	)			(3,358	)
Cumulative translation adjustments			(184	)			(184	)
Total stockholders’ equity			997,766				1,025,767
		$	1,487,266			$	1,561,949

See accompanying notes to the consolidated financial statements.

ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data and percentages)

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

See accompanying notes to the consolidated financial statements.

ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

		Nine Months Ended September 30,
		2008				2007
Operating activities:
Net income		$	38,917			$	88,770
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			15,521				8,003
Amortization of intangibles			34,854				173
Stock compensation expense			8,286				8,710
Deferred income tax provision			10,461				14,319
Amortization of deferred finance fees			835				836
Provision for doubtful accounts			365				484
Gain related to previously written off receivables			—				(377	)
Gain on discontinued product line			—				(330	)
Loss (gain) on disposal of fixed assets			(15	)			167
Loss (gain) on investments			210				(4,878	)
Gain related to terminated acquisition, net of expenses			—				(22,835	)
Excess tax benefits from stock-based compensation plans			(145	)			(8,269	)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable			143				(15,396	)
Other receivables			(4,001	)			(2,444	)
Inventory			(7,994	)			(24,001	)
Income taxes payable/recoverable			(657	)			(7,695	)
Accounts payable and accrued liabilities			(5,985	)			(24,385	)
Prepaids and other, net			(4,431	)			(262	)
Net cash provided by operating activities			86,364				10,590
Investing activities:
Purchases of property, plant and equipment			(16,444	)			(11,138	)
Cash paid for acquisitions, net of cash acquired			(10,066	)			—
Cash proceeds from sale of property, plant and equipment			250				3
Cash proceeds from sale of short-term investments			16				—
Cash received related to terminated acquisition, net of expenses paid			—				10,554
Cash paid for hedge related to terminated acquisition			—				(26,469	)
Cash proceeds from hedge related to terminated acquisition			—				38,750
Purchases of short-term investments			(82,998	)			(295,626	)
Disposals of short-term investments			122,470				162,902
Purchases of investment securities			(4,000	)			—
Net cash provided by (used in) investing activities			9,228				(121,024	)
Financing activities:
Payment of debt and capital lease obligations			(35,518	)			—
Repurchase of common stock			(75,913	)			—
Excess tax benefits from stock-based compensation plans			145				8,269
Employer repurchase of shares to satisfy minimum tax withholdings			(1,035	)			(3,092	)
Fees and proceeds from issuance of common stock, net			(1,081	)			14,347
Net cash provided by (used in) financing activities			(113,402	)			19,524
Net decrease in cash and cash equivalents			(17,810	)			(90,910	)
Cash and cash equivalents at beginning of period			323,797				461,618
Cash and cash equivalents at end of period		$	305,987			$	370,708
Noncash investing and financing activities:
Net tangible assets acquired, excluding cash			14,238				—
Intangible assets acquired, including goodwill			(4,172	)			—
Cash paid for acquisitions, net of cash acquired		$	10,066			$	—

See accompanying notes to the consolidated financial statements.

ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

ARRIS Group, Inc. (together with its consolidated subsidiaries, except as the context otherwise indicates, “ARRIS” or the “Company”), is an international communications technology company, headquartered in Suwanee, Georgia. ARRIS operates in three business segments, Broadband Communications Systems, Access, Transport & Supplies, and Media & Communications Systems, specializing in integrated broadband network solutions that include products, systems and software for content and operations management (including video on demand, or VOD), and professional services. ARRIS is a leading developer, manufacturer and supplier of telephony, data, video, construction, rebuild and maintenance equipment for the broadband communications industry. In addition, ARRIS is a leading supplier of infrastructure products used by cable system operators to build-out and maintain hybrid fiber-coaxial (“HFC”) networks. The Company provides its customers with products and services that enable reliable, high-speed, two-way broadband transmission of video, telephony, and data.

The consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, necessary for a fair presentation of the consolidated financial statements for the periods shown. Additionally, certain prior period amounts have been reclassified to conform to the 2008 financial statement presentation. Interim results of operations are not necessarily indicative of results to be expected from a twelve-month period. These financial statements should be read in conjunction with the Company’s most recently audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the United States Securities and Exchange Commission (“SEC”).

In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB 14-1, Accounting for Convertible Debt Instruments That May be Settled in Cash Upon Conversion (including Partial Cash Settlement). The FSP requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), commonly referred to as an Instrument C under Emerging Issues Task Force (“EITF”) Issue No. 90-19, “Convertible Bonds with Issuer Options to Settle for Cash Upon Conversion,” to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and is to be applied retrospectively to all periods presented (retroactive restatement) pursuant to the guidance in Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections.” The FSP will impact the accounting treatment of the Company’s 2% convertible senior subordinated notes due 2026 by (1) shifting a portion of the convertible notes balances to capital in excess of par value, (2) creating a discount on the convertible notes that would be amortized through interest expense over the life of the convertible notes, thus significantly increasing interest expense and (3) therefore, reducing net income and basic and diluted earnings per shares within the Company’s consolidated statements of operations. The Company will adopt the requirements of the FSP on January 1, 2009. The Company is currently evaluating the impact that the adoption of FSP APB14-1 will have on its consolidated financial statements.

Also in May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States (the GAAP hierarchy). SFAS No. 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not expect the adoption of SFAS No. 162 to have a material impact on its financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. SFAS No. 161 is effective for our Company as of January 1, 2009. SFAS No. 161 amends SFAS No. 133 to change the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Based on the Company’s initial analysis, SFAS No. 161 will not have a material effect on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. Effective for the fiscal year ending 2006, the Company was required to fully recognize the funded status of its defined benefit plans and provide required disclosures. Effective for the fiscal year ending 2008, the Company will be required to measure each plan’s assets and liabilities as of the end of the fiscal year instead of the Company’s current measurement date of September 30. Based on the initial analysis, the Company estimates that the impact of changing the measurement date for plan assets and liabilities from September 30 to December 31 will be a one-time addition to annual net periodic expense of approximately $0.4 million for 2008 which will be charged directly to retained earnings in the fourth quarter of 2008.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 was effective for the Company on January 1, 2008. However, in February 2008, the FASB released FASB Staff Position FSP FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of SFAS No. 157 for ARRIS’ financial assets and liabilities did not have a material impact on its consolidated financial statements. ARRIS does not expect the adoption of SFAS No. 157 for its non-financial assets and liabilities on January 1, 2009 to have a material impact on the consolidated financial statements.

Investments classified as available for sale securities as of September 30, 2008 and December 31, 2007 consisted of the following (in thousands):

		Fair Value
		As of September 30,				As of December 31,
		2008				2007
		(Unaudited)
Current Assets:
Commercial paper		$	19,974			$	11,833
Auction rate securities			—				30,270
Certificates of deposit			1,997				9,807
U.S. Government agency bonds			—				9,574
Corporate obligations			—				3,447
Asset-backed securities			—				2,974
Equity securities			—				106
Variable rate demand notes			1,600				—
Total classified as current assets			23,571				68,011
Non-Current Assets:
Cash surrender value of company owned life insurance			2,817				3,075
Auction rate securities			4,789				—
Mutual funds			68				3,230
Money market funds			45				70
Corporate obligations			37				37
Investment in private company			4,000				—
SERP investment			3,330				2,180
Total classified as non-current assets			15,086				8,592
Total		$	38,657			$	76,603

The unrealized gains and losses at September 30, 2008 and December 31, 2007 were not material.

As defined in SFAS No. 157, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

The following table presents the Company’s assets measured at fair value on a recurring basis subject to the disclosure requirements of SFAS 157 (in thousands):

		Level 1				Level 2				Level 3				Total
Short-term investments		$	19,974			$	3,597			$	—			$	23,571
Long-term investments			150				6,147				—				6,297
Auction rate securities			—				—				4,789				4,789
Investment in private company			—				4,000				—				4,000
Foreign Currency Contract			1,235				—				—				1,235
Total		$	21,359			$	13,744			$	4,789			$	39,892

Substantially all of the Company’s short-term investment and long-term investments instruments are classified within Level 1 or Level 2 of the fair value hierarchy as they are valued using quoted market prices, market prices for similar securities, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include the Company’s investments in money market funds and commercial paper. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on other observable inputs include the Company’s variable rate demand notes, corporate obligations, certificates of deposits and cash surrender value of company owned life insurance. Such instruments are classified within Level 2 of the fair value hierarchy. See Note 3 for further information on the Company’s investments.

The table below includes a roll-forward of the Company’s Auction rate securities that have been classified as a level 3 in the fair value hierarchy (in thousands):

		Level 3
		(Unaudited)
Estimated fair value January 1, 2008		$	5,000
Second quarter change in fair value			333
Third quarter change in fair value			(122	)
Estimated Fair value September 30, 2008		$	4,789

At December 31, 2007 and September 30, 2008 ARRIS had $30.3 million and $5.0 million invested in auction rate securities, respectively. During the first nine months of 2008, the Company successfully liquidated, at par, a net of $25.3 million of its auction rate securities. However, one auction rate security of approximately $5.0 million face value has continued to fail at auction, resulting in ARRIS continuing to hold this security. Due to the current market conditions and the failure of the auction rate security to reprice, beginning in the second quarter of 2008, the Company has recorded changes in the fair value of the instrument as an impairment charge, in the Statement of Operations in the Gain Loss on investment line. The security was held as of September 30, 2008 as a long-term investment with a fair market value of $4.8 million. The Company may not be able to liquidate this security until a successful auction occurs, or alternatively, the Company has been provided the option to sell (which it is evaluating) the security to a major financial institution at par on June 30, 2010. This security is a single student loan issue rated AAA and is substantially guaranteed by the federal government. ARRIS will continue to evaluate the fair value of its investment in this auction rate security for any further impairment. As of September 30, 2008, there was no active market for this auction rate security or comparable securities due to current market conditions. Therefore, until such a market becomes active, the auction rate security is classified as Level 3 within the fair value hierarchy.

All of the Company’s foreign currency contracts are over-the-counter instruments. There is an active market for these instruments, and therefore, they are classified as Level 1 in the fair value hierarchy. ARRIS does not enter into currency contracts for trading purposes. The Company has a master netting agreement with the primary counterparty to the derivative instruments. This agreement allows for the net settlement of assets and liabilities arising from different transactions with the same counterparty.

Note 5. Pension Benefits

Components of Net Periodic Pension Benefit Cost

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
		(in thousands)
		(unaudited)
Service cost		$	190			$	140			$	570			$	419
Interest cost			472				412				1,412				1,236
Expected gain on plan assets			(354	)			(319	)			(1,064	)			(958	)
Amortization of prior service cost			119				119				358				358
Amortization of net loss			—				25				—				76
Net periodic pension cost		$	427			$	377			$	1,276			$	1,131

Employer Contributions

No minimum funding contributions are required in 2008 under the Company’s defined benefit plan. However, the Company made voluntary contributions to the plan of approximately $1.0 million and $1.1 million for the three and nine months ended September 30, 2008, respectively. During the three and nine months ended September 30, 2007, the Company made voluntary contributions to the plan of approximately $1.3 million and $1.4 million, respectively.

Note 6. Guarantees

Warranty

ARRIS provides warranties of various lengths to customers based on the specific product and the terms of individual agreements. The Company provides for the estimated cost of product warranties based on historical trends, the embedded base of product in the field, failure rates, and repair costs at the time revenue is recognized. Expenses related to product defects and unusual product warranty problems are recorded in the period that the problem is identified. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its suppliers, the estimated warranty obligation could be affected by changes in ongoing product failure rates, material usage and service delivery costs incurred in correcting a product failure, as well as specific product failures outside of ARRIS’ baseline experience. If actual product failure rates, material usage or service delivery costs differ from estimates, revisions (which could be material) would be recorded to the warranty liability. ARRIS evaluates its warranty obligations on an individual product basis.

The Company offers extended warranties and support service agreements on certain products. Revenue from these agreements is deferred at the time of the sale and recognized on a straight-line basis over the contract period. Costs of services performed under these types of contracts are charged to expense as incurred, which approximates the timing of the revenue stream.

Information regarding the changes in ARRIS’ aggregate product warranty liabilities (including short-term and long-term) for the nine months ended September 30, 2008 was as follows (in thousands):

Balance at December 31, 2007		$	14,370
Accruals related to warranties (including changes in estimates)			3,905
Settlements made (in cash or in kind)			(6,584	)
Balance at September 30, 2008 (unaudited)		$	11,691

Note 7. Business Acquisitions

Acquisition of Auspice Corporation

On August 12, 2008, ARRIS acquired certain assets of Auspice Corporation (“Auspice”) for $5.0 million. In accordance with SFAS No. 141 Accounting for Business Combinations, this transaction was accounted for as a business combination. The Company completed this transaction to enhance its offerings for Service Assurance software and to gain market share in the industry.

Acquisition of C-COR Incorporated

On December 14, 2007, ARRIS completed its acquisition of 100% of the outstanding shares of C-COR Incorporated (“C-COR”). Pursuant to the Agreement and Plan of Merger, each issued and outstanding share of C-COR common stock, other than shares held in treasury or by ARRIS, was converted into the right to receive either (i) $13.75 in cash or (ii) 1.0245 shares of ARRIS common stock and $0.688 in cash. ARRIS paid approximately $366 million in cash and issued 25.1 million shares of common stock valued at $281 million in the merger. In addition, all outstanding options to acquire shares of C-COR common stock were converted into options to acquire shares of ARRIS common stock and the number of shares underlying such options and the exercise price thereof were adjusted accordingly. The C-COR options became fully vested as a result of the merger.

Presented below is unaudited supplemental pro forma information for the Company and C-COR to give effect to the transaction. This summary unaudited information is derived from the historical financial statements of the Company and C-COR. This information assumes the transactions were consummated at the beginning of the applicable period. This information is presented for illustrative purposes only and does not purport to represent what the financial position or results of operations of the Company and C-COR or the combined entity would actually have been had the transactions occurred at the applicable date, or to project the Company’s, C-COR’s, or the combined entity’s results of operations for any future period or date. Pro forma results are not presented for the three and nine months ended September 30, 2008, as the actual results of C-COR are included in the Company’s operations from January 1, 2008 to September 30, 2008.

Supplemental Pro Forma Information
(in millions, except per share data)

		Three Months Ended				Nine Months Ended
		September 30, 2007				September 30, 2007
		(unaudited)				(unaudited)
Net sales		$	326.6			$	962.0
Net income from continuing operations			23.4				76.1
Income from continuing operations per common share:
Basic		$	0.17			$	0.57
Diluted		$	0.17			$	0.54

Preliminary Purchase Price Allocation — C-COR Acquisition

The following is a summary of the total preliminary purchase price of the C-COR transaction and allocation of the preliminary purchase price (in millions) (unaudited):

Total purchase consideration — cash and equity		$	646.6
Prior investment in acquired company			6.0
Fair value of assumed stock options			22.8
Acquisition-related transaction costs			6.3
Total preliminary purchase price		$	681.7
Net tangible assets		$	107.8
Identifiable intangible assets:
Acquired technology			38.8
Order backlog			7.9
Customer relationships			220.5
Non-compete agreements			5.1
Acquired in-process research and development			6.1
Goodwill			295.5
Allocation of preliminary purchase price		$	681.7

Fair Value of Assets and Liabilities — C-COR Acquisition

Under the purchase method of accounting, the purchase price, as shown in the table above, is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price was allocated using the information currently available, and ARRIS may adjust the purchase price allocation after obtaining more information regarding, among other things, asset valuations, liabilities assumed, and revisions of estimates. The purchase price allocation will be finalized within one year of the acquisition date. The excess of the total purchase price over the net of the amounts assigned to tangible and identifiable intangible assets acquired and liabilities assumed is recognized as goodwill.

Note 8. Restructuring

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 corporate headquarters functions in a single building. This consolidation resulted in a restructuring charge of approximately $6.2 million in 2004 related to lease commitments and the write-off of leasehold improvements and other fixed assets. ARRIS expects the remaining payments to be made by the second quarter of 2009, which is the end of the lease.

		(in thousands)
Balance as of December 31, 2007		$	2,121
Q1 2008 payments			(396	)
Q1 2008 adjustments to accrual			159
Q2 2008 payments			(397	)
Q3 2008 payments			(396	)
Balance as of September 30, 2008 (unaudited)		$	1,091

In the fourth quarter of 2007, the Company initiated a restructuring plan related to its acquisition of C-COR. The plan focuses on the rationalization of personnel, facilities and systems across the entire organization. The restructuring affected approximately 60 employees. The plan also included contractual obligations related to change of control provisions included in certain C-COR employment contracts. The total estimated cost of this restructuring plan was approximately $8.6 million, of which approximately $0.5 million was recorded as severance expense during the fourth quarter of 2007 and $8.1 million was assumed liabilities related to employee severance and termination benefits that were accounted for as an adjustment to the allocation of the original purchase price for C-COR upon acquisition. The majority of the expenses are expected to be paid in 2008.

		(in thousands)
Balance as of December 31, 2007		$	8,622
Q1 2008 payments			(6,663	)
Q1 2008 adjustments to accrual			(44	)
Q2 2008 payments			(1,682	)
Q2 2008 adjustments to accrual			218
Q3 2008 payments			(241	)
Q3 2008 adjustments to accrual			52
Balance as of September 30, 2008 (unaudited)		$	262

Additionally, ARRIS acquired remaining restructuring accruals of approximately $0.7 million representing C-COR contractual obligations that related to excess leased facilities. These payments will be paid over their remaining lease terms through 2014, unless terminated earlier.

		(in thousands)
Balance as of December 31, 2007		$	642
Q1 2008 payments			(32	)
Q2 2008 payments			(170	)
Q2 2008 adjustments to accrual			95
Q3 2008 payments			(20	)
Balance as of September 30, 2008 (unaudited)		$	515

Note 9. Inventories

The components of inventory were as follows, net of reserves (in thousands):

		September 30,				December 31,
		2008				2007
		(unaudited)
Raw material		$	22,924			$	20,004
Work in process			5,923				2,533
Finished goods			112,717				109,255
Total net inventories		$	141,564			$	131,792

Note 10. Property, Plant and Equipment

Property, plant and equipment, at cost, consisted of the following (in thousands):

		September 30,				December 31,
		2008				2007
		(unaudited)
Land		$	2,612			$	2,612
Building and leasehold improvements			19,753				19,432
Machinery and equipment			137,040				120,756
			159,405				142,800
Less: Accumulated depreciation			(99,137	)			(83,644	)
Total property, plant and equipment, net		$	60,268			$	59,156

Note 11. Long-Term Obligations

Debt, capital lease obligations and other long-term liabilities consist of the following (in thousands):

		September 30,				December 31,
		2008				2007
		(unaudited)
2.00% convertible senior notes due 2026		$	276,000			$	276,000
2.00% Pennsylvania Industrial Development Authority debt, net of current portion			175				271
9.26% equipment financing obligations, net of current portion			196				494
Total long-term debt			276,371				276,765
Other long-term liabilities:
Deferred compensation			5,698				8,986
Accrued warranty			4,137				6,072
Deferred revenue			2,830				114
Landlord funded leasehold improvements			1,417				1,747
Other long-term liabilities			1,573				1,239
Total other long-term liabilities			15,655				18,158
Total long-term liabilities		$	292,026			$	294,923

On November 6, 2006, the Company issued $276.0 million of 2% convertible senior notes due 2026. The notes are convertible, at the option of the holder, based on an initial conversion rate, subject to adjustment, of 62.1504 shares per $1,000 principal amount (which represents an initial conversion price of approximately $16.09 per share of our common stock), into cash up to the principal amount and, if applicable, shares of the Company’s common stock, cash or a combination thereof. The notes may be converted during any calendar quarter in which the closing price

of ARRIS’ common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 120% of the conversion price in effect at that time (which, based on the current conversion price, would be $19.31) and upon the occurrence of certain other events. Upon conversion, the holder will receive the principal amount in cash and an additional payment, in either cash or stock at the option of the Company. The additional payment will be based on a formula which calculates the difference between the initial conversion rate ($16.09) and the market price at the date of the conversion. As of November 6, 2008, the notes could not be converted by the holders thereof. Interest is payable on May 15 and November 15 of each year. The Company may redeem the notes at any time on or after November 15, 2013, subject to certain conditions. As of September 30, 2008 and December 31, 2007, there were $276.0 million of the notes outstanding. Additionally, we paid approximately $7.8 million of finance fees related to the issuance of the notes. These costs are being amortized over seven years. The remaining balance of unamortized financing costs from these notes as of September 30, 2008, and 2007 was $5.7 million, and $6.8 million, respectively. See Note 2 above with respect to the impact of the adoption on January 1, 2009 of FSP ABP 14-1 with respect to these notes.

The Company has not paid cash dividends on its common stock since its inception.

Note 12. Comprehensive Income

Total comprehensive income represents the net change in stockholders’ equity during a period from sources other than transactions with stockholders. For ARRIS, the components of total comprehensive income include the unrealized gain (loss) on marketable securities and unrealized gain (loss) on derivative instruments qualifying for hedge accounting. The components of comprehensive income for the three and nine months ended September 30, 2008 and 2007 are as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		(unaudited)
		2008				2007				2008				2007
Net income		$	24,075			$	27,852			$	38,917			$	88,770
Changes in the following equity accounts:
Unrealized loss on marketable securities			(195	)			(151	)			(149	)			(1,448	)
Unrealized gain on derivative instruments			—				—				—				551
Comprehensive income		$	23,880			$	27,701			$	38,768			$	87,873

In the second quarter of 2007, ARRIS reclassified the accumulated gain of approximately $1.3 million related to its deferred compensation plan, resulting in a gain on investments.

Note 13. Segment Information

The “management approach” required under SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, has been followed in order to present our segment information. This approach is based upon the way the management of the Company organizes segments within an enterprise for making operating decisions and assessing performance. Financial information is reported on the basis that it is used internally by the chief operating decision maker for evaluating segment performance and deciding how to allocate resources to segments.

Prior to fiscal year 2007, the Company reported its results of operations as one operating segment. In connection with the acquisition of C-COR on December 14, 2007, the Company realigned its organizational structure for the new combined business. Under the new organizational structure, the Company manages its business under three segments: Broadband Communications Systems (“BCS”), Access, Transport & Supplies (“ATS”), and Media & Communications Systems (“MCS”). A detailed description of each segment is contained in our December 31, 2007 Form 10-K under Item 1 in “Our Principal Products.”

The Broadband Communications Systems segment’s product solutions include Headend and Subscriber Premises equipment that enable cable operators to provide Voice over IP, Video over IP and high-speed data services to residential and business subscribers.

The Access, Transport & Supplies segment’s product lines cover all components of a hybrid fiber coax network, including managed and scalable headend and hub equipment, optical nodes, radio frequency products, transport products and supplies.

The Media & Communications Systems segment provides content and operations management systems, including products for Video on Demand, Ad Insertion, Digital Advertising, Service Assurance, Service Fulfillment and Mobile Workforce Management.

The table below presents information about the Company’s reporting segments for the three and nine month periods ended September 30, 2008 and 2007 (in thousands) (unaudited):

		BCS				ATS				MCS				Total
Three Months Ended September 30, 2008
Net sales		$	217,729			$	62,100			$	17,722			$	297,551
Gross margin			79,278				16,624				10,232				106,134
Amortization of intangible assets			—				5,654				3,492				9,146
Three Months Ended September 30, 2007
Net sales		$	224,902			$	29,546			$	214			$	254,662
Gross margin			63,717				5,221				(104	)			68,834
Amortization of intangible assets			—				—				57				57
Nine Months Ended September 30, 2008
Net sales		$	597,777			$	211,961			$	42,429			$	852,167
Gross margin			198,756				62,370				23,140				284,266
Amortization of intangible assets			—				19,118				15,736				34,854
Nine Months Ended September 30, 2007
Net sales		$	642,263			$	99,722			$	648			$	742,633
Gross margin			192,589				17,707				(339	)			209,957
Amortization of intangible assets			—				—				173				173

The Company’s goodwill by reportable segment as of September 30, 2008 did not materially change from December 31, 2007.

Note 14. Sales Information

The Company’s two largest customers (including their affiliates, as applicable) are Comcast and Time Warner Cable. Over the past year, certain customers’ beneficial ownership may have changed as a result of mergers and acquisitions. Therefore, the revenue for ARRIS’ customers for prior periods has been adjusted to include the affiliates under current common control. A summary of sales to these customers for the three and nine month periods ended September 30, 2008 and 2007 are set forth below (in millions):

		Three Months Ended September 30,								Nine Months Ended September 30,
		(unaudited)
		2008				2007				2008				2007
Comcast		$	100.9			$	100.3			$	181.9			$	278.6
% of sales			33.9	%			39.4	%			21.3	%			37.5	%
Time Warner Cable		$	43.9			$	29.8			$	190.1			$	75.5
% of sales			14.7	%			11.7	%			22.3	%			10.2	%

No other customer provided more than 10% of total sales for the three and nine months ended September 30, 2008 or 2007.

ARRIS sells its products worldwide, with its domestic revenue generated primarily from customers within the United States. The Company’s international revenue is generated from Asia Pacific, Europe, Latin America and Canada. The Asia Pacific market primarily includes China, Hong Kong, Japan, Korea, Singapore and Taiwan. The European market primarily includes Austria, Belgium, France, Germany, the Netherlands, Poland, Portugal, Russia, Spain and Switzerland. The Latin American market primarily includes Argentina, Brazil, Chile, Columbia, Mexico, and Puerto Rico. Sales to international customers were approximately $77.5 million, or 26.0% of total sales, for the three months ended September 30, 2008. International sales during the same period in 2007 were $60.8 million, or 23.9% of total sales. For the nine months ended September 30, 2008 and 2007 sales to international customers were $249.2 million and $189.0 million, or 29.2% and 25.5%, respectively.

Note 15. Earnings Per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (“EPS”) computations for the periods indicated (in thousands except per share data):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		(unaudited)
		2008				2007				2008				2007
Basic:
Income from continuing operations Income from continuing operations		$	24,075			$	27,522			$	38,917			$	88,440
Income from discontinued operations Income from continuing operations			—				330				—				330
Net income		$	24,075			$	27,522			$	38,917			$	88,770
Weighted average shares outstanding			122,922				110,178				125,466				109,354
Basic earnings per share		$	0.20			$	0.25			$	0.31			$	0.81
Diluted:
Income from continuing operations Income from continuing operations		$	24,075			$	27,522			$	38,917			$	88,440
Income from discontinued operations Income from continuing operations			—				330				—				330
Net income		$	24,075			$	27,522			$	38,917			$	88,770
Weighted average shares outstanding			122,922				110,178				125,466				109,354
Net effect of dilutive equity awards			2,498				1,907				1,783				2,241
Total			125,420				112,085				127,249				111,595
Diluted earnings per share		$	0.19			$	0.25			$	0.31			$	0.80

Excluded from the dilutive securities described above are employee stock options to acquire approximately 6.1 million shares and 7.1 million shares, for the three and nine months ended September 30, 2008, respectively. During the same periods in 2007, approximately 2.9 million shares and 2.6 million shares, respectively, were excluded from the dilutive securities above. These exclusions were made because, as a result of the exercise price of such securities, they were antidilutive.

Note 16. Income Taxes

In the nine months ended September 30, 2008 and 2007, the Company recorded income tax expense of $20.4 million and $34.4 million, respectively. Below is a summary of the components of the income tax expense in each period (in thousands, except for percentages):

		Nine Months Ended September 30,
		2008												2007
		Income				Income				Effective				Income				Income				Effective
		Before				Tax				Tax				Before				Tax				Tax
		Tax				Expense				Rate				Tax				Expense				Rate
		(unaudited)
Non-Discrete Items		$	59,351			$	21,964				37.0	%		$	96,481			$	31,105				32.2	%
Discrete Accounting Events			—				—				N/A				26,354				10,003				38.0	%
Discrete Tax Events - Valuation Allowances / FIN 48 Reserves			—				(1,530	)							—				(6,713	)
Total		$	59,351			$	20,434				34.4	%		$	122,835			$	34,395				28.0	%

During the third quarter of 2008, the Company recorded a discrete tax benefit of $1.5 million relating primarily to the 2007 provision-to-return adjustment from the U.S. Federal income tax return filed on September 15, 2008. There were no tax or accounting discrete events during the first two quarters of 2008.

In the first quarter of 2007, the Company considered the net gain related to the termination of the proposed TANDBERG Television acquisition to be discrete in nature in accordance with the guidance of APB Opinion 28, Interim Financial Reporting and FIN 18, Accounting for Income Taxes in Interim Periods. As a result, income tax expense was recorded at a discrete rate of 38.0%. There were no discrete events during the second quarter of 2007. During the third quarter of 2007, the Company realized $3.5 million in capital gains from the sale of investments. An income tax expense of 38.0% was also recorded related to these third quarter capital gains.

The termination fee, less expenses, associated with the terminated TANDBERG Television acquisition was considered capital in nature. As a result, during the first quarter of 2007, the Company reversed a net of $4.0 million of valuation allowances associated with deferred tax assets related to net capital loss carry-forwards. Prior to the capital gain created by the terminated acquisition, the Company considered it more-likely-than-not that capital loss carry-forwards would not be realizable. Additionally, the Company recorded an additional $0.8 million of discrete income tax expense related to the terminated TANDBERG transaction. During the third quarter of 2007, the Company also reversed an additional $1.2 million of valuation allowances associated with deferred tax assets related to net capital loss carryforwards. The Company has no remaining capital loss carryforwards as of the end of the third quarter of 2007.
In the third quarter of 2007, the Company finalized its calculation of available research and development tax credits for the tax years 2001 through 2006. The final calculations resulted in an additional third quarter tax benefit of $2.2 million.

Note 17. Contingencies

From time to time, ARRIS is involved in claims, disputes, litigation or legal proceedings incident to the ordinary course of its business, such as employment matters, environmental proceedings, contractual disputes and intellectual property disputes. Except as described below, ARRIS is not party to any proceedings that are, or reasonably could be expected to be, material to its business, results of operations or financial condition.

The three previously reported Hybrid Patents, Inc. cases have been settled. ARRIS’ settlement costs were included in operating expenses for the quarter ended March 31, 2008.

Commencing in 2005, Rembrandt Technologies, LP filed a series of lawsuits against Charter Communications, Inc, Time Warner Cable, Inc., Comcast Corporation and others alleging patent infringement related to the cable systems operators’ use of data transmission, video, cable modem, voice-over-internet, and other technologies and applications. Although ARRIS is not a defendant in any of these lawsuits, its customers are, and its customers either have requested indemnification from, or may request indemnification or cooperation with the defense costs from, ARRIS and the other manufacturers of the equipment that is alleged to infringe. ARRIS is party to a joint defense agreement with respect to one of the lawsuits and has various understandings with the defendants in the remaining lawsuits with respect to cost sharing. In June 2007, the Judicial Panel of multi district litigation issued an order centralizing the litigation for administrative purposes in the District Court for Delaware. In November 2007 ARRIS, Cisco, Motorola and other suppliers filed a declaratory judgment action in the District Court of Delaware seeking to have the court declare the patents invalid and not infringed. It is premature to assess the likelihood of a favorable outcome. In the event of an adverse outcome, ARRIS could be required to indemnify its customers, pay royalties, and/or cease using certain technology. Also, an adverse outcome may require a change in the DOCSIS^® standards to avoid using the patented technology.

The previously reported GPNE Corp. (“GPNE”) cases have been settled. ARRIS’ settlement costs were included in operating expense for the quarter ended September 30, 2008.

In connection with the Company’s acquisition of C-COR, Inc., the Company on October 31, 2007, was named as the defendant in a suit entitled CIBC World Market Corp. vs. ARRIS Group, Inc., Action No. 603605/2007, in the Supreme Court of the State of New York, New York County. In the suit, CIBC asserts that it is entitled to a $4.0 million fee plus expenses (“fee”) at the closing of the proposed acquisition. The Company does not believe that any fee is due to CIBC in connection with this acquisition. The Company’s position is that its June 1, 2005, engagement with CIBC, pursuant to which CIBC asserts its claim, was terminated and that no fee is due under the engagement. Independent of that termination, CIBC was conflicted from representing the Company in the transaction, provided no services to the Company in connection with the transaction, and otherwise is estopped from asserting that it is entitled to a fee. The Company is contesting the entitlement to a fee asserted by CIBC vigorously.

In 2007, the Company received correspondence from attorneys for the Adelphia Recovery Trust (“Trust”), that the Company may have received transfers from Adelphia Cablevision, LLC (“Cablevision”), one of the Adelphia debtors, during the year prior to its filing of a Chapter 11 petition on June 25, 2002 (the “Petition Date”). The correspondence further asserts that information obtained during the course of the Adelphia Chapter 11 proceedings indicates that Cablevision was insolvent during the year prior to the Petition Date, and, accordingly, the Trust intends to assert that the payments made to the Company were fraudulent transfers under section 548 (a) of the Bankruptcy Code that may be recovered for the benefit of Cablevision’s bankruptcy estate pursuant to section 550 of the Bankruptcy Code. Prior to its acquisition by ARRIS, C-COR received a similar correspondence making the same claims. The Company understands that similar letters were received by other Adelphia suppliers and the Company may seek to enter into a joint defense agreement to share legal expenses if a suit is commenced. To date, no suit has been commenced by the Trust. In the event suit is commenced, the Company intends to contest the case vigorously. No estimate can be made of the possible range of loss, if any, associated with a resolution of these assertions.

In January and February 2008, Verizon Services Corp. filed separate lawsuits against various affiliates of Cox and Charter, in the District Courts for the Eastern District of Virginia and for the Eastern District of Texas, respectively, alleging infringement of eight patents. In the Verizon v. Cox suit, the jury issued a verdict in favor of Cox, finding non-infringement in all patents and invalidating two of Verizon’s patents. It is anticipated that Verizon may appeal. It is premature to assess the likelihood of a favorable outcome of either the Charter or Cox cases. In the event of an unfavorable outcome, ARRIS may be required to indemnify Charter and Cox, pay royalties and/or cease utilizing certain technology.

As a result of the Company’s acquisition of C-COR Incorporated, ARRIS is now involved in the following patent infringement cases.

In June 2007, USA Video Technology Corp. brought a suit in the U.S. District Court of the Eastern District of Texas against Time Warner Cable, Cox, Charter and Comcast (Civil Action 2:06-CV-239) alleging infringement of U.S. Patent No. 5,130.792. One or more of the defendants asked C-COR and other suppliers to participate in the defense under the indemnification provisions of their respective purchase agreements. On December 10, 2007, the District Court granted Defendants’ Summary judgment motion. USA Video has filed notice of appeal.

Acacia Media Technologies Corp. has sued Charter and Time Warner Cable, Inc. for allegedly infringing U.S. Patent Nos. 5,132,992; 5,253,275; 5,550,863; and 6,144,702. Both customers requested C-COR’s, as well as other vendors’, support under the indemnity provisions of the purchase agreements (related to video-on-demand products). We are reviewing the patents and analyzing the extent to which these patents may relate to our products. It is premature to assess the likelihood of a favorable outcome. In the event of an unfavorable outcome, ARRIS may be required to indemnify the defendants, pay royalties and /or cease using certain technology.

V-Tran Media Technologies has filed a number of lawsuits against 21 different parties, including suits against Comcast, Charter, Verizon, Time Warner and numerous smaller MSOs for infringement on two patents related to television broadcast systems for selective transmission. Both patents expired in June of this year. ARRIS is reviewing the patents and our products and analyzing the extent to which these patents may relate to our products. It is premature to assess the likelihood of a favorable outcome. In the event of an unfavorable outcome, ARRIS may be required to indemnify the defendants, or pay royalties. Given that the patents expire soon, it is unlikely that the case will result in injunctions or ceasing the use of the technology.

In February 2008, Brasfield and 21 other named plaintiffs, all current or former installers or technicians servicing cable TV customers in Memphis, Tennessee, filed a Fair Labor Standards Act suit against Source Broadband and C-COR alleging that the plaintiffs were not properly paid for overtime. Source Broadband purchased C-COR’s installation business in June 2007. Plaintiffs are attempting to certify this case as a class action. ARRIS is contesting the class certification and the suit.

An unfavorable outcome to any of the above described proceedings could have a material adverse effect on the Company’s business, financial condition and results of operations.

Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a global communications technology company specializing in integrated broadband network solutions. We develop, manufacture and supply cable telephony, video and high-speed data equipment. In addition, we are a leading supplier of infrastructure products used by cable system operators to build-out and maintain HFC networks. We provide products and services principally to cable system operators and, more specifically, to Multiple System Operators (MSOs). Our products enable MSOs and other broadband service providers to deliver a full range of integrated voice, video and high-speed data services to their subscribers.

Our Strategy and Key Highlights

Our long-term business strategy includes the following key elements:

	•		Transition to IP with an “Everything IP, Everywhere” philosophy and build on current market successes;
	•		Leverage our current voice, video, and data businesses;
	•		Expand our existing product and services portfolio through internal developments, partnerships and acquisitions; and
	•		Maintain and improve an already strong capital and expense structure.

Our mission is to simplify technology, facilitate its implementation, and enable operators to put their subscribers in control of their entertainment, information, and communication needs. Through a set of business solutions that respond to specific market needs, we are integrating our products, software, and services solutions to work with our customers as they address Internet Protocol telephony deployment, high speed data deployment and network capacity expansion, on demand video rollout, operations management, network integration, and business services opportunities.

Below is a summary of some of our key trends, actions and highlights relative to these strategies:

“Everything IP, Everywhere” is taking hold as MSOs globally have embraced VoIP and are now rapidly deploying this key new service.

	•		We have successfully leveraged our market position and industry experience and continue to generate robust demand for both EMTA and CMTS products. Furthermore, we have leveraged the market position we acquired as a result of the purchase of C-COR in December 2007 to increase sales of new products, notably sales of Video on Demand, Operations Support Software, Access, and Transport products.
	•		As expected, sales to Comcast increased significantly in the third quarter of 2008 as they begin the rollout of DOCSIS3.0 capabilities
	•		We experienced increased sales to other customers, notably Time Warner, and certain international customers in the first nine months of 2008.
	•		We expect strong demand for CMTS products to continue in future periods as new services and competition between our customers and their competitors intensifies the need to provide ever faster download speeds requiring added CMTS capacity and features. In the third quarter of 2008, a new generation of CMTS products based upon the DOCSIS 3.0 standard was introduced, leveraging the installed base of current ARRIS CMTS products by providing an efficient upgrade to these systems. Significant shipments of this new product were made in the third quarter and, as expected, customer acceptance was achieved and revenue deferred during the second quarter pending this acceptance was recognized.
	•		Cable operators, particularly in North America, are aggressively expanding their voice, video and data services to attract commercial small and medium sized businesses. We provide several products to address this opportunity, and in particular have seen substantial growth of our DOCSIS multiline business service terminals.
	•		We introduced our Universal EdgeQAM D5 towards the end of 2007. Our expectation, based on customer input, was that demand for this product would be robust in the first quarter of 2008 driven by Switched Digital Video (“SDV”) requirements. However, customers, in particular Comcast, have since delayed purchasing decisions. We have expanded our marketing and development efforts to include other applications including Modular CMTS, Broadcast and Video on Demand (“VOD”). We expect that sales of this new product will continue through 2008, but at a slower rate than initially expected. Initial margins on this product will be low until cost reductions can be implemented.

	•		We expect demand for EMTAs to remain robust; however, we do not anticipate the growth in aggregate sales that we have experienced for the past few years. Many of our customers now have passed through the initial launch stage, and are at “steady state” deployment rates and may not continue to incrementally increase the rate of their purchases. While most of our customers have a multi-vendor strategy, we enjoyed 100% market share with many customers well into 2007. In late 2007, several of our customers awarded a portion of their business to our competitors, which we expect will continue. Our ultimate level of sales of EMTAs will be affected by, but not limited to, such factors as the success our customers have marketing IP telephony to their subscribers, and the success our customers will have in retaining their IP telephony subscribers as well as our ability to limit the impact of the implementation of a multi-vendor strategy by our customers. We are encouraged by the initial success we are having with our VoIP products in Central and Latin American countries, as competition between large service providers such as Telmex and Telefonica drive the deployment of competitive voice, video and data services. We also anticipate ongoing competition for EMTAs in the future. The deployment of higher speed data service tiers will require new DOCSIS 3.0 capable EMTAs and modems, providing opportunity for sales of a new generation of CPE devices starting in the second half of 2008.
	•		Through our acquisition of C-COR in late 2007, we expanded our portfolio to include several key new products that leverage the capital spending of our customers. The Access and Transport products are expected to benefit from the plant upgrades MSOs will undertake to expand the capacity they will require to offer new services to their subscribers. We are beginning to get customer traction with our CORWave™ multi-wavelength optical platform that provides four times transport capacity of traditional transport for a fraction of the traditional infrastructure cost. We expect this trend to accelerate over time as a result of increasing capacity demands on the networks and the increased scrutiny of new capital investments. The operations support system (“OSS”) and On-Demand products also are well positioned to provide value added services and operational improvements to the MSOs.
	•		Sales of our Access, Transport and Supplies products declined quarter-over-quarter and year-over-year. The sale of these infrastructure products are in part dependent upon line extensions resulting from new home starts. We believe that the slowdown of the US economy, and in particular new housing construction, has and will have a near term impact on the sale of these products.

We continue to invest significantly in research and development.

	•		We have made significant investments through our research and development efforts in new products and expansion of our existing products. Our primary focus has been on products and services that will enable MSOs to build and operate high-availability, fault-tolerant networks, which allow them to generate greater revenue by offering high-speed data, IP telephony and digital video to both residential and business subscribers. This “success-based” capital expenditure is becoming an increasing portion of the cable operators’ total capital spending. In addition, some MSOs have expressed interest in offering bundled wireless telephony as part of their product offering. This product, known as Fixed Mobile Convergence (FMC), will allow cable subscribers to use mobile phones in their homes, connecting to the MSOs’ VoIP network in the home, and to roam from the home VoIP network to the cellular network outside of the home and back seamlessly. We are developing products to support this new offering.
	•		With our acquisition of C-COR in late 2007, our research and development effort was significantly expanded to include Access and Transport, VOD, Ad Insertion and OSS products. Further, in the third quarter 2008 we completed the purchase of certain assets of Auspice which has and will increase our ongoing research and development investment in our OSS products. During the first nine months of 2008, we spent approximately $83.3 million on research and development, or 9.8% of revenue, which compares to $53.7 million, or 7.2% of revenue, in the same period last year. We expect to continue to spend similar or slightly higher amounts on research and development in the future. We anticipate we may modestly increase our development efforts on VOD and OSS products.
	•		Key research and development accomplishments in the first nine months of 2008 included:

	o		We announced DOCSIS 3.0 certification of the WBM750 Data Modem and the TM702 Voice over IP EMTA. The ARRIS C4 CMTS reached a critical milestone in releasing the new DOCSIS 3.0 hardware and software for general availability opening a new era in ultra high speed communications.
	o		A new release was made available in the second quarter for the ARRIS D5 Universal EdgeQAM platform increasing the density from 48 to 72 QAM channels per 2RU chassis, increasing its capacity by 50%.
	o		Access and Transport received formal qualification of the CORWave multi-wavelength optical platform doubling channel capacity and increasing range by almost 40% over previous Coarse Wave Division Multiplexing (CWDM) solutions.
	o		Access and Transport released to production a first of its kind, new segmentable node (OM2100) targeted specifically at the European and MDU markets.

o

On-Demand introduced Start Over, a feature that allows a viewer to view a program from the beginning even when they tune in a few minutes late. We released new features for our ServAssureTM and WorkAssureTM products including an integrated “house check” feature that allows field technicians to remotely check the network and multi-service health of an end-customer’s installation, reducing the potential for a repeat truck roll.

At the end of the third quarter, we had cash, cash equivalents and short term investments of approximately $329.6 million.

	•		In the first quarter 2008, we announced a share buyback program of up to $100 million. During the first quarter 2008, we repurchased 13 million shares at an average price of $5.84 per share for an aggregate consideration of approximately $76 million. No additional shares were repurchased during the second or third quarters of 2008.
	•		In the first quarter 2008, we redeemed, at par, $35 million of convertible notes we assumed as part of the C-COR acquisition.
	•		We generated $86.4 million of cash from operating activities in the first nine months of 2008.
	•		Through a combination of our cash resources, anticipated cash generation from operating activities and our ability to access capital markets, we continue to be well positioned to execute on strategic opportunities.

Our income statement reflects several significant items year-over- year

•

As a result of the acquisition of C-COR in late 2007, sales, gross margin and operating expenses significantly increased. Below is a table which compares third quarter 2008 results to the estimated ARRIS and C-COR results for the third quarter 2007:

Results for ARRIS and C-COR
(in millions, except gross margin percentages)
(unaudited)

		Three Months Ended September 30,
		ARRIS				ARRIS				C-COR
		2008				2007				2007(1)(2)
Sales			297.6				254.7				71.9
Gross margin –		$	106.1				68.8				30.3
Gross margin – %			35.7	%			27.0	%			42.1	%
SG&A			33.0				23.8				16.1
R&D			27.5				17.8				8.7
Restructuring			0.2				0.0				0.2
Amortization of intangibles			9.1				0.0				0.6
Operating income			36.3				27.2				4.6

Results for ARRIS and C-COR
(in millions, except gross margin percentages)
(unaudited)

		Nine Months Ended September 30,
		ARRIS				ARRIS				C-COR
		2008				2007				2007(1)(2)
Sales			852.2				742.6				219.4
Gross margin –		$	284.3				210.0				96.6
Gross margin – %			33.4	%			28.3	%			44.0	%
SG&A			107.0				74.4				47.3
R&D			83.3				53.7				25.7
Restructuring			0.8				0.4				0.6
Amortization of intangibles			34.9				0.2				2.2
Operating income			58.3				81.3				20.8

	•		In the first quarter of 2007, we recorded a net gain of $22.8 million related to the termination of the proposed TANDBERG acquisition. We did not experience a similar event in 2008.
	•		In the first quarter of 2007, we recorded a tax expense of $15.6 million, which equates to an effective tax rate of 29.3%. Included in the tax expense are discrete items, per the guidance of Accounting Principles Board (“APB”) Opinion 28, Interim Financial Reporting, related to the terminated TANDBERG transaction. The foreign exchange gain, break-up fee and deal expenses were considered discrete items and were recorded at a marginal tax rate of 38.0%. The break-up fee and expenses are considered to be capital in nature versus ordinary income. As a result, we reversed a net $3.2 million of deferred tax valuation allowances as we viewed it as more likely than not that we would be able to utilize the capital gain NOLs to offset the capital gain recorded as a result of the TANDBERG break-up fee net of expenses.
	•		In the first nine months of 2008, we recorded a tax expense of $20.4 million which equates to an effective tax rate of 34.4%. In the third quarter 2008, we recorded a net tax benefit of $1.5 million related to provision to return differences resulting from the filling of the 2007 tax return. We anticipate that our average tax rate for 2008 will be approximately 33%. In October 2008, Congress enacted legislation, which will be applied retroactively, continuing tax credits relating to Qualified Research Expenditures. As a result, in the fourth quarter 2008, we expect an effective tax rate of approximately 30%, as we will record the cumulative 2008 impact resulting from these credits.

Our outstanding share count has increased year over year reflecting two factors:

	•		We issued approximately 25 million shares as partial consideration for the purchase of C-COR in 2007.
	•		Partially offsetting the increase was the repurchase of approximately 13 million shares as part of our share buyback program in the first quarter of 2008.

Significant Customers

The vast majority of our sales are to cable system operators worldwide. As the U.S. cable industry continued a trend toward consolidation, the six largest MSOs controlled approximately 90.1% of the revenue generating units (“RGUs”) within the U.S. cable market (according to Dataxis in the second quarter 2008), thereby making our sales to those MSOs critical to our success. Our sales are substantially dependent upon a system operator’s selection of ARRIS’ network equipment, demand for increased broadband services by subscribers, and general capital expenditure levels by system operators. Our two largest customers (including their affiliates, as applicable) are Comcast and Time Warner Cable. From time-to-time, the affiliates included in our revenues from these customers have changed as a result of mergers and acquisitions. Therefore, the revenue for our customers for prior periods has been adjusted to include, on a comparable basis for all periods presented, the affiliates currently understood to be under common control. A summary of sales to these customers for the nine month periods ended September 30, 2008 and 2007 are set forth below (in millions):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		(unaudited)
		2008				2007				2008				2007
Comcast			100.9				100.3				181.9				278.6
% of sales			33.9	%			39.4	%			21.3	%			37.5	%
Time Warner Cable			43.9				29.8				190.1				75.5
% of sales			14.7	%			11.7	%			22.3	%			10.2	%

No other customer provided more than 10% of total sales for the three or nine months ended September 30, 2008.

Comparison of Operations for the Three and Nine Months Ended September 30, 2008 and 2007

In general, most comparisons of the period results of 2008 to 2007 will show an increase in amounts due to the incremental impact of the C-COR acquisition in December 2007.

Net Sales

The table below sets forth our net sales for the three and nine months ended September 30, 2008 and 2007, for each of our reporting segments (in millions):

		Net Sales																Increase (Decrease) Between 2008 and 2007
		For the Three Months								For the Nine Months								For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,								Ended September 30								Ended September 30
		2008				2007				2008				2007				$				%				$				%
Business Segment:
BCS		$	217.8				224.9			$	597.8				642.3			$	(7.1	)			(3.2	)		$	(44.5	)			(6.9	)
ATS			62.1				29.6				212.0				99.7				32.5				109.8				112.3				112.6
MCS			17.7				0.2				42.4				0.6				17.5				8750.0				41.8				6966.7
Total sales		$	297.6			$	254.7			$	852.2			$	742.6			$	42.9				16.8			$	109.6				14.8

The table below sets forth our domestic and international sales for the three and nine months ended September 30, 2008 and 2007 (in millions):

		Net Sales																Increase (Decrease) Between 2008 and 2007
		For the Three Months								For the Nine Months								For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,								Ended September 30								Ended September 30
		2008				2007				2008				2007				$				%				$				%
Domestic		$	220.1			$	193.9			$	603.0			$	553.6			$	26.2				13.5			$	49.4				8.9
International			77.5				60.8				249.2				189.0				16.7				27.5				60.2				31.9
Total sales		$	297.6			$	254.7			$	852.2			$	742.6			$	42.9				16.8			$	109.6				14.8

Broadband Communication Systems (“BCS”) Net Sales 2008 vs. 2007

During the three and nine months ended September 30, 2008, sales of our BCS segment products decreased by approximately 3.2% and 6.9%, respectively, as compared to the same periods in 2007. The following factors contributed to the decrease in sales:

	•		In the third quarter of 2008, we had lower sales of EMTAs as compared to the third quarter of 2007. The majority of the decrease in EMTA sales is due to lower sales to Comcast. This decline was partially offset by higher sales of CMTSs in conjunction with the launch of our DOCSIS 3.0 product in the third quarter of 2008.
	•		For the nine months ended September 30, 2008 sales of EMTAs decrease, especially with respect to Comcast. This decline has been partially been offset by increased sales of CMTSs, in particular, to Time Warner.

Access, Transport and Supplies (“ATS”) Net Sales 2008 vs. 2007

Access, Transport and Supplies segment revenue increased by approximately 109.8% and 112.6%, respectively, as compared to the same periods in 2007:

	•		The increase was the result of the acquisition of C-COR. In 2007, we estimate that C-COR recorded sales associated with this segment of approximately $53.0 million and $168.9 million for the three and nine month periods of 2007, respectively.
	•		Sales in 2007 for this segment consisted of sales of our Supplies products. Year over year sales of these products have declined as a result of lower purchases by MSOs for new plant and extension equipment reflecting the decline in new home construction in the U.S.

Media & Communication Systems (“MCS”) Net Sales 2008 vs. 2007

Media & Communication Systems revenue increased in the third quarter of 2008 and the first nine months of the year, as compared to the same periods in 2007. This revenue increase is primarily attributable to the C-COR acquisition.

Gross Margin

The table below sets forth our gross margin for the three and nine months ended September 30, 2008 and 2007, for each of our reporting segments (in millions):

		Gross Margin $																Increase (Decrease) Between 2008 and 2007
		For the Three Months								For the Nine Months								For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,								Ended September 30								Ended September 30
		2008				2007				2008				2007				$				%				$				%
Business Segment:
BCS		$	79.3			$	63.7			$	198.8			$	192.6			$	15.6				24.5			$	6.2				3.2
ATS			16.6				5.2				62.4				17.7				11.4				219.2				44.7				252.5
MCS			10.2				(0.1	)			23.1				(0.3	)			10.3				10300.0				23.4				7800.0
Total		$	106.1			$	68.8				284.3			$	210.0			$	37.3				54.2			$	74.3				35.4