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Article by DailyStocks_admin    (12-09-08 01:53 AM)

Filed with the SEC from Nov 27 to Dec 03:

Arris Group (ARRS)
Shamrock Activist Value Fund suggests Arris improve corporate governance by implementing a majority-voting standard for electing directors, separating the chairman and CEO posts, and removing its "poison pill" rights plan. Shamrock, run by Roy E. Disney, owns 7,020,514 shares (5.72%).


BUSINESS OVERVIEW

General

Our principal executive offices are located at 3871 Lakefield Drive, Suwanee, Georgia 30024, and our telephone number is (678) 473-2000. We also maintain a website at www.arrisi.com. On our website we provide links to copies of the annual, quarterly and current reports that we file with the Securities and Exchange Commission, any amendments to those reports, and all Company press releases. Investor presentations also frequently are posted on our website. Copies of our code of ethics and the charters of our board committees also are available on our website. We will provide investors copies of these documents in electronic or paper form upon request, free of charge.

Overview

We are a global communications technology company specializing in integrated broadband network solutions that include products, systems and software for content and operations management, and professional services. 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 equipment principally to cable system operators and, more specifically, to MSOs. Our products allow MSOs and other broadband service providers to deliver a full range of integrated voice, video and high-speed data services to their subscribers. Our core strategy is to lead network operators through the transition to Internet Protocol-based networks by leveraging our extensive global installed base of products and experienced workforce to deliver network solutions that meet the business needs of our customers.

We operate in three segments:

1) Broadband Communications Systems (“BCS”)

2) Access, Transport and Supplies (“ATS”)

3) Media & Communications Systems (“MCS”)

A detailed description of each segment is contained below in “Our Principal Products.”

Industry Overview

In recent years, the technology offered by cable system operators has evolved significantly. Historically, cable system operators offered only one-way analog video service. In order to increase revenues and better position themselves competitively, MSOs have aggressively upgraded their networks, spending over 100 billion dollars during the past decade, to cost-effectively support and deliver enhanced voice, digital video and data services, such as high-speed data, telephony, digital video and video on demand.

By offering bundled packages of broadband services, these MSOs are seeking to gain a competitive edge over telephone companies and DBS providers, and to create additional revenue streams. Delivery of enhanced services also has helped MSOs offset slowing basic video subscriber growth and reduce their subscriber churn. To compete effectively against the DBS providers, MSOs have been upgrading and rebuilding their networks to offer digital video, which enables them to provide more channels and better picture quality than analog video. These upgrades to digital video also allow MSOs to roll out HDTV and new interactive services such as VOD. VOD services require video storage equipment and servers, systems to manage increasing amounts of different content and complementary devices capable of transporting, multiplexing and modulating signals to individual subscribers over a network. Additionally, the delivery of HDTV channels requires significantly more bandwidth than the equivalent number of standard definition channels. This demand for additional bandwidth is the key driver behind many of the changes being made to the cable operators’ network, and the investment in the products provided by ARRIS. One of the most significant changes that will occur over the next several years is a steady transition to an “all-digital” network. This is being done to reduce the amount of channel capacity dedicated to inefficient analog video by using digitized signals on the HFC plant. In most cases, this transition is being implemented in several steps by starting “digital simulcasting,” Digital simulcasting makes all channels available in digital format, in addition to simultaneously broadcasting the same channels in analog format for analog-only cable subscribers. This has further necessitated the growth and improvement in the transmission network to handle increased complexity and growth of network traffic. We are a leading provider of equipment enabling transmission of voice, video and data traffic within the MSO. We also are a leading provider of VOD server hardware and management software.

Another method being used by operators to more efficiently utilize the existing HFC capacity is to deploy a Switched Digital Video (“SDV”) capability. SDV provides the ability to transition from a Broadcast video paradigm to a Narrowcast video paradigm, in which a portion of the digital video broadcast programs are over-subscribed across a set of downstream channels. Only the channels being actively watched by consumers are ‘switched’ onto the HFC network by a smart EdgeQAM such as the D5 Universal EdgeQAM. This is a very cost-effective mechanism to reduce the number of channels required for Broadcast digital video, freeing up capacity for other services such as more HDTV or DOCSIS3.0 data services.

Demand for bandwidth capacity of cable systems is increasing as content providers (such as Google, Yahoo, YouTube, ABC, CBS, NBC, movie and music studios, and gaming vendors) are offering personalized content across multiple venues. For example, broadcast network shows and user-generated (“UG”) content, such as video downloads, personalized web pages, and video and photo sharing, have become commonplace on the Internet. Likewise, certain cable operators are experimenting with offering more content through the use of network personal video recorders (“nPVRs”) which, once copyright issues are resolved, are expected to add more traffic to the networks. Another bandwidth intensive service being offered by a major cable operator allows cable video subscribers to re-start programs on demand if they miss the beginning of a television show (time-shifted television). Television today has thus become more interactive and customized, thereby increasing the demands on the network. Further, the Internet has raised the bar on personalization with viewers increasingly looking for “similar” experience across screens — television, PC and phone, further increasing the challenges in delivering broadband content.

Cable operators are offering enhanced broadband services, including high definition television, digital video, interactive and on demand video services, high-speed Internet and voice over Internet Protocol. As these enhanced broadband services continue to attract new subscribers, we expect that cable operators will be required to invest in their networks to expand network capacity and support increased customer demand for personalized services. In the access portion, or “last-mile,” of the network, operators will need to upgrade headends, hubs, nodes, and radio frequency distribution equipment. While many domestic cable operators have substantially completed the initial network upgrades necessary to provide enhanced broadband services, they will need to take a scalable approach to continue upgrades as new services are deployed. In addition, many international cable operators have not yet completed the initial upgrades necessary to offer such enhanced broadband services and are expected to continue purchasing equipment to complete these upgrades.

Data and VoIP services provided by the MSOs are governed by a set of technical specifications promulgated by CableLabs ® in North America and tComLabs ® in Europe. While the specifications developed by these two bodies necessarily differ in a few details in order to accommodate the differences in HFC network architectures between North America and Europe, a significant feature set is common. The primary data standard specification for cable operators in North America is entitled DOCSIS ® . Release 2.0 of DOCSIS ® is the current governing standard for data services in North America. The parallel release for European operators is Euro-DOCSIS ® Release 2.0. DOCSIS ® 2.0 builds upon the capabilities of DOCSIS ® 1.1 and adds additional throughput in the upstream portion of the cable plant — from the consumer out to the Internet. In addition to the DOCSIS ® standards that govern data transmission, CableLabs ® has defined the PacketCable tm specifications for VoIP. These specifications define the interfaces between network elements such as cable modem termination systems, or CMTSs, multimedia terminal adapters, or MTAs, gateways and call management servers to provide high quality IP telephony service over the HFC network.

MSOs have benefited from the use of standard technologies like DOCSIS ® 1.1 and 2.0 and PacketCable tm . One of the fastest growing services, based on DOCSIS ® and PacketCable tm standards, offered by the MSOs is cable telephony. Cable telephony allows MSOs to offer their customers local and long distance residential telephone service. Constant bit rate, or CBR, technology was the technology of choice for telephone services until late 2004. Rapid maturation of voice over Internet protocol (“VoIP”) technology in 2003 and 2004 resulted in PacketCable tm certified Internet protocol technology as the technology of choice for offering next-generation cable IP telephony services and, as a result, 2005 became a breakout year for the deployment of IP based voice services in the cable market. PacketCable tm certified Voice over IP, or Cable VoIP, permits cable operators to utilize the ubiquitous IP protocol to deliver toll-quality cable telephony services. The broad adoption of Cable VoIP by the MSOs could potentially cannibalize the deployment of data-only cable modems, as the customer premises devices that support VoIP also offer high-speed data access on the same equipment. We are a leading supplier of both head-end and customer premises equipment for VoIP services over cable. The demand for single family residential Voice over IP subscriber devices (“EMTA”) has continued to grow at a steady rate since the technology was first introduced in 2003. Cable operators worldwide have adopted VoIP as the primary method to offer voice services, and deployments have started in almost all major cities. Price pressures are strong in this market and therefore revenue growth is lower than unit growth. However, because of our current leadership position in this market, we expect to be able to maintain cost leadership and to lead in innovations which could expand the size of the market by creating demand in commercial enterprise and multiple-dwelling unit applications.

The growing market strength of telecommunications service providers’ fiber-to-the-home (“FTTH”) services is mounting a significant threat to cable MSOs. As a competitive response, a new standard, DOCSIS 3.0 has been developed and commercial deployments are expected starting in 2008. DOCSIS 3.0 will allow MSOs to provide higher data rates to compete with fiber’s capability. DOCSIS 3.0 is also a key enabler of Video over IP where multiple channels can now be used to deliver video over a common network infrastructure. MSOs are beginning to investigate Video over IP as an alternative and are engaging the vendor community, including ARRIS, in discussions. ARRIS is actively developing DOCSIS 3.0 products.

Our Strategy

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/services portfolio through internal developments, partnerships and acquisitions; and

• Maintain and improve an already strong capital and expense structure.

To fulfill our strategy, we develop 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, high definition television content expansion, on demand video rollout, operations management, network integration, and business services opportunities.

Specific aspects of our strategy include, through both internal development effort and acquisitions:

Providing a Comprehensive Line of Broadband Products. We offer a full range of high speed data, voice and video products including fiber optic transmission and radio frequency products with up to one gigahertz bandwidth capacity to transmit both radio frequency and optical signals in both directions over hybrid fiber coax networks between “the headend and the curb.”

Offering a Unified Video Platform for On Demand Services. We offer a Unified Video Delivery Platform that allows network operators to offer a full line of on demand services such as switched digital video, video on demand, dynamic digital advertising, and network based-personal video recorders, from a single server and software management system. Using open industry standards, we help network operators build new systems and transition existing facilities.

Providing Integrated Software Solutions to Enhance Content and Operations Management. Our applications-oriented Internet Protocol software allows cable operators to automate and proactively manage their networks to maximize quality of service and return on investment. Cable operators need enhanced network visibility, flexibility, and scalability to provide the latest services to their customers. Our modular, interoperable applications provide network operators with the subscriber management, content management, and network optimization and service assurance tools needed to capture revenue-generating opportunities.

Integrating Products, Content and Operations Management Systems, and Services for End-to-End Solutions. We integrate our expertise in products, content and operations management systems, and professional services to offer customer-focused applications for expanding network capacity, combining video on demand programming with dynamic advertisements, coordinating management of network devices and services with technicians in the field, controlling network traffic and verifying subscriber usage levels, and managing the full lifecycle for deploying voice over Internet services.

Expansion via Strategic Acquisitions. To further our strategy we recently acquired C-COR Incorporated., in a cash and stock transaction valued at approximately $680.4 million. The transaction closed on December 14, 2007. As a result of this acquisition, we now have substantially greater scale and critical mass, as well as greater product breadth and enhanced customer diversity. As the cable system industry has continued to consolidate, supplier scale and product breadth have become increasingly important. On a combined basis, we expect our increased product breadth and greater scale to be strategically relevant to our customers, thereby giving us an opportunity to capture a larger share of their spending. The combination of our industry-leading voice, data and video products together with leading access, transmission, video and software solutions better position the combined business than either company individually. Our new organization has an impressive global footprint with excellent customer and product line diversity and an even stronger international presence both in terms of sales and staff presence. The ability to offer end-to-end solutions should enable us to optimize customer relationships and derive greater product pull through.

Our Principal Products

A broadband cable system consists of three principal components:


• 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 organizes processes and retransmits those signals through the distribution network to subscribers. Larger networks include both primary headends and a series of secondary headends or hubs.

• Distribution Network. The distribution network consists of fiber optic and coaxial cables and associated optical and electronic equipment that take the combined signals from the headend and transmits them throughout the cable system to optical nodes and ultimately the subscriber premises. The Distribution Network also collects requests and transmissions from subscribers and moves them back to the headend for processing.


• Subscriber Premises. Cable drops extend from multi taps to subscribers’ homes and connect to a subscriber’s television set, set-top box, telephony network interface device or high speed cable modem.

We provide cable system operators with a comprehensive product offering for the headend, distribution network and subscriber premises. We divide our product offerings into three segments:

Broadband Communications Systems (“BCS”):


• VoIP and High Speed Data products


• CMTS

• 2-Line Residential E-MTA

• Multi-line E-MTA for Residential and Commercial Services

• Wireless Gateway E-MTA

• High-speed data Cable Modems


• Video / IP headend products


• CMTS

• Universal EdgeQAM


• Constant Bit Rate telephony products

Access, Transport and Supplies (“ATS”):


• HFC plant equipment products, including


• Headend and hub products

• Optical nodes

• Radio frequency products and

• Transport products


• 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

Media & Communications Systems (“MCS”):


• Content and Operations management systems, including products for


• Video on Demand

• Ad Insertion and

• Digital Advertising

• Operations management systems, including products for


• Service Assurance

• Service Fulfillment and

• Mobile Workforce Management


• Fixed Mobile Convergence Network, including product for


• A Mobility Application Server (“MAS”) for continuity of services across wireless and Packetcable Networks

• A Voice Call Continuity (“VCC”) Application Server for continuity of services in IP Multimedia Subsystem (“IMS”) Networks

Broadband Communication Systems

Voice over IP and Data Products

Headend — The heart of a Voice over IP headend is a CMTS. A CMTS, along with a call agent, a gateway, and provisioning systems, provides the ability to integrate the Public-Switched Telephone Network, or PSTN, and high-speed data services over a HFC network. The CMTS provides the software and hardware to allow IP traffic from the Internet, or traffic used in VoIP telephony, to be converted for use on HFC networks. The CMTS is also responsible for initializing and monitoring all cable modems and EMTAs connected to the HFC network. We provide two products, the C4 ® CMTS and the C3 ® CMTS, used in the cable operator’s headend that provide VoIP and high-speed data services to residential or business subscribers. The CMTS is a highly complex, reliable, real-time sensitive element of a carrier-grade broadband network, responsible for ensuring the quality of the services provided.

Subscribe r Premises — Subscriber premises equipment includes DOCSIS ® certified cable modems for high-speed data applications as well as Euro-DOCSIS ® certified versions and PacketCable tm Certified EMTAs for VoIP applications in both DOCSIS ® and Euro-DOCSIS ® networks. The PacketCable tm solution builds on DOCSIS ® and its quality of service enhancements to support lifeline telephony deployed over HFC networks. Our Touchstone ® product line provides carrier-grade performance to enable operators to provide all data, telephony and video services on the same network using common equipment. The Touchstone product line consists of the Touchstone CM550, WBM650, and WBM 750 series of cable modems and the Touchstone ® TM402, TM502, TM602 and TM702 series of telephony modems.

Video/IP Products

Headend — We market our Video / IP headend equipment as the D5 tm product line. The D5 tm Universal Edge QAM converts digital video and IP data into radio frequency signals that can be transmitted on a cable service provider’s HFC plant. The D5 tm Universal Edge QAM is compatible with DOCSIS ® cable modems as well as MPEG-2 and MPEG-4 set top boxes. The D5 tm Universal Edge QAM is ideal for service providers deploying video on demand and switched digital video (SDV) services where many unicast channels are required. The D5 tm Universal Edge QAM is also forward compatible with M-CMTS tm standards being developed by CableLabs ® . A cable service provider can deploy the D5 tm Universal Edge QAM today for MPEG-2 digital video applications and convert it to modular CMTS and IPTV applications in the future.

Constant Bit Rate Products

Historically, we have offered a number of constant bit rate (CBR) voice over cable products. These CBR products have included, for headend equipment, our products under the brand name Cornerstone ® Voice, and for subscriber premises, our products marketed under the brand name Cornerstone ® Voice Port. However, since 2004, our customers have been migrating from CBR to VoIP. CBR product revenues are now immaterial.

CEO BACKGROUND

Name: Alex B. Best
Age: 67
Director since: 2003
ARRIS Board Committee: Compensation Committee, Nominating and Corporate Governance Committee and Technology Committee (Chair)
Principal occupation and recent business experience: Prior to his retirement in 2000, Mr. Best was the Executive Vice President of Cox Communications, Inc. From 1986 through 1999, he served as the Vice President of Engineering of Cox. Since 2000, Mr. Best has continued to consult for Cox on a part-time basis. From 1966 through 1986, Mr. Best worked for Scientific-Atlanta and was involved in nearly every aspect of its cable television product development and business applications. Mr. Best served as Chairman of the National Cable Television Association’s Engineering Advisory Committee from 1995 until 2000.

Name: Harry L. Bosco
Age: 62
Director since: 2002
ARRIS Board Committee: Audit Committee and Nominating and Corporate Governance Committee (Chair)
Principal occupation and recent business experience: Since 2000, Mr. Bosco has served as the Chief Executive Officer and President of OpNext, Inc. From 1965 to 2000, Mr. Bosco held numerous senior management positions within Lucent Technologies, formerly Bell Labs.
Other directorships: OpNext, Inc.

Name: John Anderson Craig
Age: 65
Director since: 1998
ARRIS Board Committee: Audit Committee and Compensation Committee
Principal occupation and recent business experience: Mr. Craig is a business consultant. From 1999 through 2000, Mr. Craig was Chief Marketing Officer of Nortel Networks, Inc. From 1981 to 1999, he held various senior management positions within Northern Telecom Inc., now known as Nortel Networks Inc.
Other directorships: Bell Canada International and CAE, Inc.

Name: Matthew B. Kearney
Age: 68
Director since: 2003
ARRIS Board Committee: Audit Committee
Principal occupation and recent business experience: Prior to his retirement in 1997, Mr. Kearney was the Chief Financial Officer of Griffin Gaming & Entertainment, Inc. (formerly Resorts International, Inc.). Mr. Kearney also served as President of Griffin Gaming & Entertainment, Inc. from 1993 through 1995. Prior to joining Resorts International, Inc., Mr. Kearney worked in public accounting for Price Waterhouse & Co. Mr. Kearney is a CPA (inactive) in New York and Florida.

Name: William H. Lambert
Age: 71
Director since: 1997
ARRIS Board Committee: Compensation Committee (Chair) and Nominating and Corporate Governance Committee
Principal occupation and recent business experience: Mr. Lambert is retired. From 1988 to 1997, Mr. Lambert served as the Chairman, President and Chief Executive Officer of TSX Corporation, which was acquired by ARRIS in 1997. Mr. Lambert has been a private investor since 1998.

Name: John R. Petty
Age: 77
Director since: 1993
ARRIS Board Committee: Audit Committee (Chair) and Nominating and Corporate Governance Committee. Mr. Petty is also the lead independent director.
Principal occupation and recent business experience: Mr. Petty is the Chairman and CEO of TECSEC Incorporated, a data security company. Mr. Petty also has served as the Chairman of Federal National Payables, Inc., Federal National Commercial, Inc., and Federal National Services, Inc., since 1992. Mr. Petty has been a private investor since 1988.

Name: Robert J. Stanzione
Age: 60
Director since: 1998
ARRIS Board Committee: Technology Committee
Principal occupation and recent business experience: Mr. Stanzione has been Chief Executive Officer of the Company since 2000. From 1998 through 1999, Mr. Stanzione was President and Chief Operating Officer of the Company. Mr. Stanzione has been Chairman of the Board of Directors since 2003. From 1995 to 1997, he was President and Chief Executive Officer of Arris Interactive L.L.C. From 1969 to 1995, he held various positions with AT&T Corporation.
Other directorships: National Cable & Telecommunications Association (NCTA) and Symmetricom, Inc.

Name: David A. Woodle
Age: 52
Director since: 2007
Principal occupation and recent business experience: In April 2008, Mr. Woodle became Chairman of the Board and Chief Executive Officer of NanoHorizons Inc., a nanotechnology company that specializes in producing nanosilver particles for anti-microbial applications. Prior to ARRIS’ acquisition of C-COR Incorporated on December 14, 2007, Mr. Woodle was C-COR’s Chairman and Chief Executive Officer, positions that he had held since 2000. Prior to joining C-COR, Mr. Woodle was Vice President and General Manager of Raytheon E-Systems/HRB Systems, and led merger transition efforts to successfully position that company in the wireless data telecommunications marketplace.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

In recent years, the technology used in cable systems has evolved significantly. Historically, cable systems offered only one-way analog video service. Due to technological advancements, these systems have evolved to become two-way broadband systems delivering high-volume, high-speed, interactive services. MSOs have over the years aggressively upgraded their networks to cost-effectively support and deliver enhanced voice, video and data services. As a result, cable operators have been able to use broadband systems to increase their revenues by offering enhanced interactive subscriber services, such as high-speed data, telephony, digital video and video on demand, and to effectively compete against other broadband communications technologies, such as DSL, local multiport distribution service, DBS, FTTH, and fixed wireless. Delivery of enhanced services also has helped MSOs offset slowing basic video subscriber growth, reduce their subscriber churn and compete against alternative video providers, in particular, DBS.

A key factor supporting the growth of broadband systems is the powerful growth of the Internet. Rapid growth in the number of Internet users, their desire for ever higher Internet access speeds, and more high-volume interactive services with growing customer control features have created demand for our products. Another key factor supporting the growth of broadband systems is the evolution of video services being offered to consumers. Video on demand, high definition television and switched digital video are three key video services expanding the use of MSOs’ broadband systems. The increase in volume and complexity of the signals transmitted through the network and emerging competitive pressures from telephone companies with digital subscriber line and fiber to the premises offerings are pushing cable operators to deploy new technologies as they evolve. Further, cable operators are looking for products and technologies that are flexible, cost effective, easily deployable and scalable to meet future demand. Because the technologies are evolving and the services delivered are growing in complexity and volume, cable operators need equipment that provides the necessary technical capability at a reasonable cost at the time of initial deployment and the flexibility later to accommodate technological advances and network expansion.

Over the past decade, United States cable operators have spent over $100 billion to upgrade their networks to deliver digital video and two-way services such as high-speed data, video on demand, and telephony. As global cable operators maximize their investment in their networks, we believe that our business will be driven by the industry dynamics and trends outlined below.

Industry Conditions

As global cable operators maximize their investment in their networks, we believe that our business will be impacted by the following industry dynamics and trends:

Competition Between Cable Operators and Telephone Companies is Increasing

Telephone companies are aggressively offering high-speed data services and are making progress in offering video services to the residential market. AT&T Inc. and Verizon Communications have stated publicly that they will spend billions of dollars to equip their networks to offer video service, once a service offered only by cable and satellite providers. Likewise, telephone companies have been increasingly competitive on pricing for higher speed data services, again to compete with the cable companies. Counter balancing this, cable companies are providing Internet Protocol-based telephone service, with Comcast now being the fourth largest telephone company in the U.S. Independent communications providers of multiple services are challenging both cable and telephone companies by using their infrastructures to offer those services at lower prices.

Competition Between U.S. Cable Operators and Direct Broadcast Satellite Services is Increasing

U.S. Direct Broadcast Satellite Services are aggressively offering many high definitions televisions channels (HDTV). DIRECTV and The Dish Network have stated publicly that they will deploy up to 150 HDTV channels including many local channels by the end of 2008. U.S. cable operators are responding by reclaiming spectrum through advanced technologies such as switched digital video and upgrading their networks to 1GHz to make more spectrum available for additional HDTV channels.

Personalized Programming is Becoming More Readily Available and Across Multiple Platforms

Increased demand for bandwidth capacity of cable systems is developing as content providers (Google, Yahoo, YouTube, ABC, CBS, NBC, movie and music studios, and gaming vendors) are offering personalized content across multiple venues. For example, broadcast network shows and user-generated (UG) content, such as video downloads, personalized web pages, and video and photo sharing, have become commonplace on the Internet. Likewise, certain cable operators are experimenting with offering more content through the use of network personal video recorders (nPVRs) which, once copyright issues are resolved, will add more traffic to the networks. Another bandwidth intensive service being offered by a major cable operator allows cable video subscribers to re-start programs on demand if they miss the beginning of a television show (time-shifted television). Television today has thus become more interactive and personal, further increasing the demands on the network. Further, the Internet has set the bar on personalization with viewers increasingly looking for “similar” experiences across screens — television, PC and phone, further increasing the challenges in delivering broadband content.

Growth in Enhanced Broadband Services Requires Continued Upgrades and maintenance by Domestic and International Cable Operators

Cable operators are offering enhanced broadband services, including high definition television, digital video, interactive and on demand video services, high speed Internet and voice over Internet Protocol. As these enhanced broadband services continue to attract new subscribers, we expect that cable operators will be required to invest in their networks to expand network capacity and support increased customer demand for personalized services. In the access portion, or “last-mile,” of the network, operators will need to upgrade headends, hubs, nodes, and radio frequency distribution equipment. While many domestic cable operators have substantially completed initial network upgrades necessary to provide enhanced broadband services, they will need to take a scalable approach to continue upgrades as new services are deployed. In addition, many international cable operators have not yet completed the initial upgrades necessary to offer such enhanced broadband services. Finally, as more and more critical services are provided over the MSO network plant maintenance becomes a more important requirement. Operators must replace network components (such as a amplifiers and lasers) as they approach the end of their useful lives.

Growing Demand for Bundled Services — Video, Voice, and Data

In response to increased competition from telecommunication service providers and direct broadcast satellite operators, cable operators have not only upgraded their networks to cost effectively support and deliver enhanced video, voice, and data, but continue to invest significantly to offer a “triple play” bundle of these services. The ability to cost effectively provide personalized, bundled services helps cable operators reduce subscriber turnover and increase revenue per subscriber. As a result, the focus on such services is driving cable operators to continue to invest in network infrastructure, content management, digital advertising insertion, and back office automation tools.

Cable Operators are Demanding Advanced Network Technologies and Software Solutions

The increase in volume and complexity of the signals transmitted over broadband networks as a result of the migration to an all digital, on demand network (Federal mandate for completion by February 2009 in the U.S.) is causing cable operators to deploy new technologies. For example, transport technologies based on Internet Protocol allow cable operators to more cost effectively deliver video, voice, and data across a common network infrastructure. Cable operators also are demanding sophisticated network and service management software applications that minimize operating expenditures needed to support the complexity of two-way broadband communications systems. As a result, cable operators are focusing on technologies and products that are flexible, cost effective, compliant with open industry standards, and scalable to meet subscriber growth and effectively deliver reliable, enhanced services.

Digital Video Recorders are Impacting Advertising Business

As the use of digital video recorders and other recording devices becomes more prevalent, advertisers face the need to develop new business models. Since personal recorders allow the viewer to skip over ads, network operators are looking for new ways to attract advertising dollars and deliver a meaningful ad experience to viewers. As a result, many network operators are implementing digital ad insertion, allowing them to transition from all analog to a mix of analog and digital and ultimately to all digital. One benefit is the ability to reallocate bandwidth. More importantly, digital advertising allows network operators to create a more dynamic and interactive experience between advertiser and viewer. Telephone companies are also planning for this transition.

Cable Operators are Developing Strategies to Offer Business Services

Cable operators are leveraging their investment in existing fiber and coax networks by expanding beyond traditional residential customers to offer voice, video, and data services to commercial (small and medium size businesses), education, healthcare, and government clients. Using their experience in delivering data, cable operators can bundle both voice and data for commercial subscribers and effectively compete with the telephone companies who have typically focused on large enterprises. Business services are just one of several market segments where cable and telephone companies are trying to penetrate each others’ markets.

Volatile Capital Market Conditions for Many Large Cable Operators

In recent years, the telecommunications equipment industry has been impacted by several financial challenges, including bankruptcies. Many of our domestic and international customers accumulated significant levels of debt during the earlier part of this decade and have since undertaken reorganizations and financial restructurings to streamline their balance sheets. Further, the equity and debt markets and general economic climate in the U.S. have been turbulent in 2007 and early 2008 and are expected to be so which may affect our customers spending patterns. It is also possible that continuing industry restructuring and consolidation will take place via mergers and or spin-offs. For example, in 2006 various Adelphia Communications properties were acquired by Comcast and Time-Warner Cable, two of the largest U.S. cable MSOs. Also in 2004, Cox Communications chose to go private. Regulatory issues, financial concerns, capital markets and business combinations among our customers are likely to significantly impact the overall industry capital spending plans potentially impacting our business. In addition, during the past 12 months many MSO’s have experienced a significant decline in the value of their stocks. This in turn may lead to MSO’s investing less in their networks for the foreseeable future.

In February 2006 Cisco Systems, Inc. acquired Scientific-Atlanta, Inc. Both Cisco and Scientific-Atlanta are key competitors of ARRIS. In February 2007 Ericsson purchased Tandberg Television. In July 2007 Motorola acquired Terayon Communication Systems. In December 2007 ARRIS acquired CCOR. It also is possible that other competitor consolidations may occur that could have an impact on future sales and profitability.

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 business;

• Expand our existing product/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, network capacity issues, on demand video rollout, operations management, network integration, and business services opportunities.

Below are some key highlights and trends relative to our strategy:

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


• Our sales grew 11% and 31% in 2007 and 2006, respectively as we have successfully leveraged our existing market position and industry experience to increase sales of both EMTA and CMTS products.

• We expect strong demand for CMTS products to continue in future periods as new services and competition between our customers and their competitors intensifies the need to provide ever faster download speeds requiring added CMTS capacity and features. In the second half of 2008 a new generation of CMTS product based upon the DOCSIS 3.0 standard is expected to be introduced. It is possible that customers may reduce their short term purchases of DOCSIS 2.0 CMTS in anticipation of the new product.

• We introduced our Universal EdgeQAM D5 late in 2007. We expect that sales of this key new product will ramp up through 2008. Initial margins on this product will be low until cost reductions can be implemented later in 2008

• We expect demand for EMTAs to remain robust; however, we do not anticipate the growth in sales we have enjoyed for the past few years. Many of our customers have now passed through the initial launch stage, and are at “steady state” deployment rates and may not continue to incrementally increase the rate of their purchases. We enjoyed 100% market share with many customers into 2007. Most of our customers have a multi-vendor strategy. As a result, in 2007 several of our customers awarded a portion of their business to our competitors, which we expect will continue. Our ultimate level of sales of EMTAs will be affected by, but not limited to, such factors as the success our customers have marketing IP telephony to their subscribers, and the success our customers have retaining their IP telephony subscribers as well as our ability to limit the impact of the implementation of a multi vendor strategy by our customers. We also anticipate increased competition for EMTAs in the future.

• Through our acquisition of C-COR in late 2007 we expanded our portfolio to include several key new products that leverage the IP spending of our customers. The Access and Transport products are expected to benefit from the plant upgrades MSO’s will undertake to expand the bandwidth they will require to offer new services to their subscribers. The OSS and On-Demand products also are well positioned to provide value added service and operational offerings to the MSO’s.


• The cable industry is dominated by a small number of very large MSO’s. Our business is primarily focused on serving the MSOs. As a result, we face customer concentration risks. In particular, Comcast represented 40% of our consolidated sales in 2007. In 2006 and 2007 we were successful in adding new customers, particularly in Latin America and Canada, and also expanded our sales to key existing customer, notably Time Warner. This has helped offset some of the concentration risk. In February 2008 we announced that we anticipate that sales to Comcast will be lower in the first quarter of 2008 than in recent quarters.

We continue to invest significantly in research and development.


• We have made significant investments through our research and development efforts in new products and expansion of our existing products. Our primary focus has been on products and services that will enable MSOs to build and operate high-availability, fault-tolerant networks, which allow them to generate greater revenue by offering high-speed data, IP telephony and digital video. This “success-based” capital expenditure is becoming an increasing portion of the cable operators’ total capital spending. In addition, some MSOs have expressed interest in offering bundled wireless telephony as part of their product offering. This product, known as Fixed Mobile Convergence (FMC), will allow cable subscribers to use mobile phones in their homes, connecting to the MSOs’ VoIP network in the home, and to roam from the home VoIP network to the cellular network outside of the home and back seamlessly. We are developing products to support this new offering. With our late 2007 acquisition of C-COR our research and development was significantly expanded to include Access and Transport, Video on Demand, Ad Insertion and OSS products. In 2007, we spent approximately $71.2 million on research and development, or 7.2% of revenue. We expect expenditures on research and development to be higher in the future as a result of the acquisition of C-COR. Prior to the acquisition on December 14, 2007, C-COR spent approximately $35.1 million on research and development in calendar 2007.

• Key research and development accomplishments in 2007 included:


• Continued work on DOCSIS ® 3.0 technology across CMTS and CPE product lines

• Introduction of the TM508/TM512 multiline EMTAs for commercial and multiple dwelling unit applications.

• Continued work on a session initiated protocol (“SIP”) based version of our EMTA for Eastern European and Asian customers.

• Introduction of our FlexPathTM wideband technology enabling delivery of over 100Mbps to the subscriber over standard cable plant. We announced a significant deployment of this product with J:COM in 2007

• Continued work on our D5 tm Universal Edge QAM product. We announced a significant deployment of Switched Digital Video with Comcast for this product line in third quarter 2007.

• “Bronze” qualification certification for the C4 ® CMTS DOCSIS ® 3.0 in the fourth quarter of 2007.

• Continued engagement at CableLabs ® on the DOCSIS ® 3.0 and Modular CMTS standards to develop a Next Generation Network Architecture (NGNA). Based on the technology of our flagship C4 ® CMTS and D5 tm Universal Edge QAM, we began the development of components that, when added to the existing installed base, should enable MSOs to cost effectively upgrade their networks to these new standards without the need to replace the existing equipment.

• Release and qualification of the 1 GHz Optical Lid Upgrade providing a solution for fiber deeper architectures and advanced services like HSD, HD and VoIP.

• Qualification of “drop-in” 1 GHz Amplifiers providing bandwidth enhancement for plant modernization while minimizing the need for plant disruptions associated with resplicing.

• Qualification of the mid-sized Segmentable 1 GHz Node (OM3100) to complement the full-sized segmentable, 1 GHz (OM4100) node providing bandwidth expansion and a pay as you grow solution.

• Next generation Mobile Workforce Management System release.

• Expanding capabilities of Network Service Manager.

• Released VOD in a Box — A solution that has the ability to launch VOD, nPVR, and SDV using a unified low cost video server platform.

• Developed innovative VOD and Ad Insertion solutions.

In November 2006, we issued Convertible Notes to supplement our cash position in anticipation of potential future acquisitions.


• In November 2006 we raised $276.0 million through the issuance of a 2% convertible note offering.

• Proceeds from this offering were used to fund the acquisition of C-COR on December 14, 2007.

• We ended 2007 with $391.8 million of cash, cash equivalents and short-term investments.

• In January 2008 we redeemed, at par, $35 million of convertible debt that was assumed as part of the C-COR acquisition.

We continue to expand through partnerships and acquisitions.


• To further our strategy we announced the acquisition of C-COR on September 24, 2007. The cash and stock transaction valued at approximately $680.4 million closed successfully on December 14, 2007. As a result of this acquisition we now have substantially greater scale and critical mass, as well as greater product breadth and enhanced customer diversity. As our customer base continues to consolidate, supplier scale and product breadth have become increasingly important. On a combined basis we expect our increased product breadth and greater scale to be strategically relevant to our customers, thereby giving us an opportunity to capture a larger share of their spending. The combination of our industry-leading voice, data and video products together with C-COR’s leading access, transmission, video and software solutions will enhance our competitive market position. Our new organization has an impressive global footprint with excellent customer and product line diversity and an even stronger international presence both in terms of sales and staff presence. The ability to offer end-to-end solutions should enable us to optimize customer relationships and drive greater product pull through.

Results of Operations

Overview

As highlighted earlier, we have faced, and in the future will face, significant changes in our industry and business. These changes have impacted our results of operations and are expected to do so in the future. As a result, we have implemented strategies both in anticipation and in reaction to the impact of these dynamics. These strategies were outlined in the Overview to the MD&A.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

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 ServAssure TM and WorkAssure TM 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.

• 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.

CONF CALL

Jim Bauer

Well, thank you, Lynn, and welcome all to the ARRIS conference call with management. This afternoon, we are going to discuss our third quarter 2008 financial results which we released after the close of markets today. As usual, we’ll be using a series of slides during the webcast which are posted already on the ARRIS website in the Investor Relations section.

With us here at the ARRIS headquarters are Bob Stanzione, ARRIS Chairman and Chief Executive Officer; Dave Potts, ARRIS Executive Vice President and Chief Financial Officer; Bruce McClelland, President of the Broadband Communication Group, and ARRIS Executive Vice President, Larry Margolis.

There will be a replay of this entire call approximately two hours after the conclusion of the call and the replay of the call and the slides will also be available at our web site for the next 12 months.

Before we begin, I'd like you to just take a look at chart number two and point out that during this call we will be making or we may be called upon to make forward-looking statements including statements regarding our outlook and expectations for the industry in general, estimated revenue and earnings for the fourth quarter of 2008, our outlook for 2009, certain financial operating metrics, the timing and introduction of certain new products and technologies, spending patterns by some of our customers and expected sales levels for certain product categories.

It's important to note that actual results may differ materially from those suggested by any forward-looking statements which may be made during today's call. And, of course, for further information please see our recent filings with the Securities and Exchange Commission.

Bob and Dave now are going to provide their comments on our results for the quarter and any other topics that you may wish to discuss after which we'll open up for questions and answers on those topics.

With that now over to you, Bob.

Bob Stanzione

Thanks, Jim, and good afternoon everyone. This September quarter was a very positive and eventful quarter for ARRIS and as you'll see in a moment our financial results are the best in our history. But before going into that I'd like to highlight a few points on chart four.

First, as we expected, our business with Comcast rebounded very strongly primarily due to the successful launch of our DOCSIS 3.0 wideband equipment.

Next, our overall CMTS sales in Q3 far exceeded the record level of the previous quarter. With the introduction of our new generation of DOCSIS 3.0 wideband equipment shipments of downstream ports grew from just over 8,000 in the second quarter to over 29,000 in the third quarter. Now Bruce is here and I'm sure you'll have some questions for him about that.

Third, we initiated the manufacture of CPE devices in Brazil to address the high cost of finished goods importation into Brazil. And also this increases our local presence and provides better value to our customers in the growing Latin America market.

The fourth point on the chart is that we also began deployment of our WorkAssure operations support systems software at a large customer in Latin America and we believe that this bodes well for further deployments in the region in the future.

And last but not least, we made a small but meaningful investment with the purchase of the assets of a Massachusetts software company called Auspice. This transaction expands our list of ServAssure customers and when integrated with the rest of our software products makes ARRIS the preeminent supplier of assurance software to the cable industry. We are pleased to be adding 24 very talented Auspice employees to this important part of our business.

Now, let's turn to chart five. In spite of the gloomy economic environment, the financial and business trends that we've been talking about all this year are still firmly in place. Clearly, Internet traffic continues to grow and both residential and especially business customers are demanding faster and more reliable service.

In addition, as we saw for example in yesterday’s report from Verizon on their strong FiOS additions, our customers, the cable service providers, continue to face strong competition and must continue to invest less they fall behind in the race to retain and grow market share. Of course, we've had as we've previously explained a part of our business has been negatively affected by the sharp downturns in household formation and the general economy. Nevertheless as you can see from our results, the good news clearly outlays the bad.

Now, Dave is going to provide a lot of financial detail in a minute but I'm going to steal some of his thunder with chart six.

In the third quarter, our sales reached a record level of just under 298 million, and we generated almost $45 million of cash from operations. Both GAAP and non-GAAP operating income reached record levels for the company and gross margins reached a record of 35.7%.

As I mentioned last quarter, this great gross margin performance which is up almost 900 basis points from a year ago, comes from a combination of our C-Cor acquisition and the successful introduction of new products such as our DOCSIS 3.0 equipment, our business service terminals, operations support systems software, as well as continuing cost reductions and changes to our selling strategy.

Now, let's turn to chart seven. You can see here that we've already reached or in some cases exceeded the operating metric goals that we set forth at our Investor Conference for you in March and hopefully these results will soon begin to be reflected in our multiples.

I know that we all want to look forward, not backwards but please indulge me just a bit further by taking a look at chart eight. A couple of important points; first, the so called lumpiness in our business is often noted. So, please compare the quarterly to the annual graphs. Yes, we do have some quarterly revenue variations but there's nothing lumpy about our five years of steady top line growth. That equates to about 17.5% compound annual growth rate over the period.

Second, take a look at the seasonality. In 2003, the fourth quarter was up; in 2004, it was flat; in 2005, it was down; in 2006, it was up and 2007, it was down. As we've said many, many times, the fourth quarter seasonality is hard to predict.

However, the most important takeaway from this chart is that ARRIS has been a consistent, solid growth story. In fact, during the four years from 2004 to 2007, we more than doubled the size of the company through organic growth. And then this year with our investment in C-Cor, and our continuing investments in new generation of products, we've been able to extend healthy growth into 2008. This is a track record that we are proud of and we are working very, very hard to extend into the future.

Now, let's look forward with chart nine. While we have a fairly good view of the fourth quarter, predicting into 2009 is not easy. No one knows how long or how deep the current economic storm will last and it's clearly not good for anyone's business.

Our informal checks with industry sources are indicating that operators are understandably deliberating longer than usual in setting next year’s budgets. So, we are clearly facing a more uncertain business environment.

On the other hand, positive data points are not hard to find. For example, Time Warner recently announced the launch of HBO Online, another new Internet-based on demand program download service.

Also just last week, Samsung and Netflix announced a service along with a new device for facilitating the download of high-definition movies. And on October 10, CBS and YouTube announced that they began streaming 30-minute episodes of TV shows to consumers and I could go on and on on this topic.

Head lines such as these continue to appear almost daily and support our belief in the continued growth and the widespread deployment of our technology around the world. Clearly, the macroeconomic fundamentals are shaky at best. However, unless this crisis turns into a catastrophe, we remain cautiously optimistic about our 2009 potential.

So with that, Dave, would you now review the financial details?

Dave Potts

Sure. Thanks, Bob and thanks everyone for joining us this afternoon. Let's start by reviewing some financial highlights on chart 11, please.

Net sales were $297.6 million in the third quarter, up 17% from $254.7 million in the third quarter last year. The increase reflects the addition of C-Cor. Including the revenues which C-Cor reported last year, sales from the third quarter of 2007 were $326.6 million.

Gross margin was 35.7% in the third quarter, up from both the second quarter 2008 and the third quarter of 2007. Including C-Cor, the second quarter 2007 gross margin was 32.4%. We are obviously very pleased with this result. This is slightly above the target we set for ourselves by year-end. In our history, we've only touched 36% once. That was in the third quarter of 2002.

SG&A and R&D totaled $60.5 million in the third quarter and was up approximately $19 million year-over-year, primarily as a result of the acquisition. Most importantly, SG&A and R&D in the third quarter of 2008 were down approximately $5.9 million as compared to the estimated combined expenditures of ARRIS and C-Cor for the same period of 2007. The year-over-year decline in operating expenses reflects our good progress on the synergy front.

Our adjusted non-GAAP EPS was $00.24 in the third quarter, which was up from high end of our guidance and is up from both $0.21 in the third quarter of 2007 and $0.15 in the second quarter of 2008.

Our GAAP EPS was $0.19 and compares to $0.25 in the third quarter of 2007. The three significant items to note: First is the amortization of intangibles related to the C-Cor acquisition which was an after-tax expense of approximately $0.05 per share in the quarter. Second, we had approximately $0.03 per share less interest income year-over-year as a result of lower cash balances and lower returns on deposits and investments.

Finally, included in our third quarter 2008 results is a $0.01 per share discrete tax benefit which we have excluded from our non-GAAP earnings. A reconciliation of our GAAP to non-GAAP earnings is attached to the press release and can also be found on our website.

Cash and short-term investments ended the third quarter at $330 million, up just over $30 million from the end of last quarter. We generated approximately $45 million of cash from operating activities, significantly up from the second quarter as a result of our robust earnings and a managed decline in inventory.

Now, let's turn to chart 12 where I've provided some year-to-date highlights please. For clarity, in addition to providing year-over-year GAAP comparisons, we again have provided comparisons to estimated 2007 combined results of ARRIS and C-Cor. Let me touch briefly on a few of the line items. First, reported sales were up nearly $110 million for the first nine months as compared to last year as a result of the C-Cor acquisition.

When compared to the estimated combined sales of ARRIS and C-Cor year-to-date, sales were down approximately $110 million year-over-year. There are two items to note in regards to this. First, Comcast is down $117 million year-over-year, particularly as a result of lower EMTA. purchases. Second, our ATS product sales are down approximately $57 million reflecting tightening spending by our customers on infrastructure.

Operating expenses decreased $10.8 million as compared to the first nine months of 2007 including C-Cor. Within that, SG&A is down $15 million while R&D is up $4 million. With respect to GAAP EPS, it is important to note that we had significant gains from the TANDBERG deal in 2007 which of course has not repeated itself in 2008.

Now, let's move to chart 13 and review some of the details with respect to sales. As you know the C-Cor acquisition has a significant impact. Our reported results compare our new combined company in 2008 to the former ARRIS standalone in 2007. To help you better understand the trends, on our website is a summary of sales and gross margin by segment as reported and including the former C-Cor results.

Let's first focus on the sales by segment bar chart on the top left comparing to our reported sales by segment. BCS sales were $217.7 million in Q3, up from the second quarter of $190.4 million primarily as a result of DOCSIS 3.0 C4 sales to Comcast, partially offset by lower sales of Time Warner versus last year BCS sales were down primarily as a result of the lower EMTA sales to Comcast.

ATS sales were $62.1 million in Q3 and compared to $77 million in the second quarter 2008. Again, and as Bob mentioned, we saw a decline in infrastructure spend by our customers. MCS sales were $17.7 million in Q3, up from $13.7 million in the second quarter.

Let's move to the bar chart on the bottom left. Here, we provide a comparison of the combined sales of the former ARRIS and C-Cor and we also adjust for estimated purchase accounting impacts. ATS sales were $62 million in the third quarter of 2008 and compared to $82.5 million in the third quarter 2007 on a combined basis. Both supplies and [A&T] are down. MCS sales were $21.3 million in the third quarter of 2008 including the estimated deferred revenue purchase accounting impacts and compares to $19.2 million in the third quarter of 2007 on a combined basis.

The pie charts at the top right provide some domestic versus international splits. Please note that this analysis includes the former C-Cor sales from prior periods. As you can see, our international mix is up year-over-year but down from the second quarter 2008. International sales were $77.4 million in the third quarter and compared to $87 million in the second quarter.

One final comment on sales. We have two 10% customers in the quarter; Time Warner and Comcast. Sales to Time Warner were $44 million in the third quarter of 2008 and compared to $75 million in the second quarter. Sales to Comcast were $101 million in the third quarter, up from $47 million in the second quarter 2008 and compare to $109 million on a combined basis in the third quarter of 2007.

With respect to our order backlog and book-to-bill ratio, we ended the third quarter with a backlog of $144 million which compares to $206 million at the end of the second quarter, and $147 million at the end of the first quarter. Our decline in backlog from Q2 primarily is in our BCS segment as we completed many of the initial orders for DOCSIS 3.0 C4s. As a result, our book-to-bill ratio in Q3 was 0.79.

Let’s turn to slide 14 and look at gross margin. Gross margin has been a keen focus of the management team. I'm very pleased with our progress in improving gross margin percentage. It improved to 35.7% in Q3, up from 33% in the second quarter of 2008 and 27% in the third quarter of 2007, terrific results.

As I mentioned earlier, we have hit the year end target we set for ourselves. Let me touch on the individual segments. BCS margin improved to 36.4% in Q3 '08, up from 32.3% in the second quarter of 2008 and 28.3% in the same period last year. The improvement is a result of both product and customer mix and continual cost reduction. ATS margin at 26.8% is down from the second quarter level of 31%. This reflects lower access in transport sales and a less rich product mix.

MCS margin was 57.7% in the third quarter. Given the higher margins associated with these products and the increase in sales particularly as we get through the purchase accounting impacts, this segment is contributing positively to our overall mix. Again, we are very pleased with the result. Of course future results will be very dependent upon mix and continued success of our cost reduction programs.

Let's turn to operating expenses on chart 15. We are also very pleased with our OpEx control. Once again the acquisition comes into play. We have provided both third quarter and year-to-date data for you. On an as reported basis, R&D and SG&A are up as a result of the acquisition. Similarly, amortization of intangibles is up as a result of the transaction.

In the far right-hand column of both blocks, we show what estimated spending was on a combined basis in 2007. As you can see on a combined basis, SG&A is down by about $6.9 million in the third quarter and down $14.7 million through the first nine months. R&D is up. As we have stated, we expect to invest slightly more in R&D.

Let's take a look at some balance sheet and cash highlights on chart 16. We ended the quarter with about $330 million of cash and short-term investments, up $32 million from the second quarter. There are several things to note. First, we generated $45 million of cash from operating activities. Our robust earnings were the foundation of this but as we suggested on the last call, we have also modestly reduced our inventory levels.

Year-to-date, we have generated approximately $86 million of cash from operating activities. Our CapEx was approximately $5 million in the quarter which is in line with our plans. Cash is king in this environment. We are very pleased with our third quarter and year-to-date cash generation and continue to be very focused on prudent working capital management.

Let's turn to guidance on chart 17. At this point, we estimate that fourth quarter sales will be in the range of $280 million to $300 million and that non-GAAP EPS will be in the range of $0.22 to $0.27 per diluted share, and GAAP EPS will be in the range of $0.16 to $0.21 per diluted share.

A reconciliation of GAAP to non-GAAP EPS guidance can be found in chart 18 and is also attached to the press release. Reconciling items include amortization of intangibles and equity compensation expense.

Like many companies, our annual review of the carrying value of goodwill occurs in the fourth quarter. Both our customers and we are in the midst of establishing forecast for the next year and beyond for what I think you would agree are very volatile times. This work will be a key input into the review of our goodwill. Currently, we anticipate and our guidance reflects no impairment. Should our analysis yield any different conclusions, it would impact our GAAP but not our non-GAAP earnings.

With respect to taxes, we are assuming a tax rate in Q4 of approximately 30%. At this point, we project our full year tax rate will be approximately 33%, resulting from the successes of our tax planning strategies.

It is important to note that the R&D tax credit bill was passed in October. As a result, we expect a positive cumulative impact of approximately $0.03 per share on both our GAAP and non-GAAP EPS in the fourth quarter. This too is reflected in our guidance.

Finally on chart 19, we have included a reconciliation of our GAAP to non-GAAP earnings per share for the third quarter and the first nine months of both 2008 and 2007.

Before I turn it back to Jim let me say this. The third quarter was simply a stellar quarter, particularly in the face of very difficult macro conditions. We had record sales of just under $300 million. We had record gross profits. We had record operating income. We generated $86 million of cash from operating activities through the first nine months and we have $330 million of cash. Simply put, the fine men and women of ARRIS have simply executed. Yes, the macro environment is cloudy.

That being said, like Bob, I too am cautiously optimistic and fundamentally believe we have the technology, the products, the relationships, the balance sheet and the people to continue to execute.

With that let me turn it back over to you Jim.

Jim Bauer

Thank you, Dave. That's just great. I want to now open up for questions. Lynn, if you could come back on the line and tell the participants how they can ask their questions.

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