ARRIS GROUP INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OF

ARRIS GROUP, INC.
(Formerly named Broadband Parent Corporation and successor registrant to ANTEC
Corporation)

A DELAWARE CORPORATION
IRS EMPLOYER IDENTIFICATION NO. 58-2588724
SEC FILE NUMBER 001-16631

11450 TECHNOLOGY CIRCLE
DULUTH, GA 30097
(678) 473-2000

ARRIS Group's Common Stock is registered pursuant to Section 12(g) of the
Act. ARRIS Group (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.

Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in a definitive proxy statement, portions of which are incorporated by
reference in Part III of this Form 10-K.

The aggregate market value of ARRIS Group's Common Stock (computed on the
basis of the last reported sales price per share $8.48 of such stock on the
Nasdaq National Market System) held by non-affiliates as of February 28, 2002
was approximately $303,897,124. As of February 28, 2002, 80,518,266 shares of
the registrant's Common Stock were outstanding. For these purposes, directors,
officers and 10% shareholders have been assumed to be affiliates.

Portions of ARRIS Group's Proxy Statement for its 2002 Annual Meeting of
Stockholders are incorporated by reference into Part III.

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TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

As used in this Annual Report, "we", "our", "us", "the Company", and
"ARRIS" refer to Arris Group, Inc. and our consolidated subsidiaries, unless the
context otherwise requires.

GENERAL

ARRIS, the successor to ANTEC Corporation, develops and supplies equipment
and technology for cable system operators and other broadband service providers.
We specialize in developing advanced cable telephony equipment enabling the
delivery of converged services, (voice, video and data) through broadband local
access networks and designing and engineering hybrid fiber-coax architectures.
Our complete solutions for internet protocol ("IP") and optical transport allow
broadband service providers to deliver a full range of integrated voice, video
and data services to their subscribers.

INDUSTRY OVERVIEW

The demand for broadband access has increased significantly in recent years
due to the powerful growth of the internet facilitated by the widespread use of
the world wide web for communicating and accessing information. Rapid growth in
the number of internet users and the demand for high-speed, high-volume
interactive services has strained existing communication networks. Increasingly,
the high-speed internet access experienced at work is being demanded at home.
The increase in volume and complexity of the signals transmitted through the
network has continually pushed broadband system operators to deploy new
technologies as they evolve. Additionally, system operators are looking for
products and technology that is flexible, cost effective, easily deployable and
scalable to meet future demand and mix of services. Because the technologies are
evolving and the signals are growing in complexity and volume, broadband system
operators need equipment that provides the necessary technical capacity at a
reasonable cost at the time of initial deployment and the flexibility to
accommodate expansion and technological advances. There also is a need to
customize equipment to allow for different types and combinations of services.
Our product offerings position us well to meet these industry challenges,
offering a full range of end-to-end solutions.

A broadband system consists of three principal segments.

- Headend. The headend is where the cable system operator receives
television signals via satellite and other sources and interfaces with
the internet and public switched networks, such as traditional telephone
systems. The headend facility organizes, processes and retransmits those
signals through the distribution network to subscribers.

- Distribution Network. The distribution network consists of fiber optic
and coaxial cables and associated optical and electronic equipment that
take the original signal from the headend and transmits it throughout the
cable system to nodes.

- Drop. Drops extend from nodes to subscribers' homes and connect to a
subscriber's television set, converter box, voice port device or computer
modem. A converter box may be addressable or non-addressable. An
addressable converter box permits the delivery of premium cable services,
including pay-per-view programming, by enabling the cable operator to
control the subscriber services through the headend. A non-addressable
converter box is one in which premium channels are activated or
eliminated by traps installed in the drop system outside the home.

Historically, cable systems offered one-way video only service. As a result
of technological advancements throughout the communications industry, these
systems are going through dramatic changes:

- to compete against other communications technologies, including digital
subscriber lines, local multiport distribution service and direct
broadcast satellite technologies, cable operators are upgrading their
networks to two-way, interactive broadband networks providing new and
improved services,

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- to increase share value through higher revenue growth, cable operators
are offering enhanced subscriber services such as high-speed data,
telephony, digital video, and video on demand which present incremental
revenue sources), and

- to provide greater bandwidth, service capacity, and reduced operating
expenses, cable operators must increase and deepen their utilization of
fiber optic technology, including dense wavelength division multiplexing
(a process by which more information is transmitted over a fiber optic
line than previously could be transmitted) products.

Traditionally, cable systems used coaxial cable and a series of radio
frequency, or RF amplifiers throughout a distribution network. Today, almost
every substantial upgrade or rebuild replaces elements of the traditional system
with fiber optic technology. The use of fiber optic technology enables operators
to transmit higher bandwidth signals greater distances and with less signal
degradation than in a traditional coaxial system. In addition, fiber optic
cable's capacity to transmit a wider bandwidth over greater distances than
coaxial cable allows for the transmission of more video, data and telephony
services to subscribers' premises. The use of fiber optic technology also
reduces the need for overall maintenance costs associated with active electronic
components. In a fiber optic network, optical signals are transmitted throughout
the distribution system along a fiber optic cable from the headend to the node,
where the signal is received and converted to RF electronic signals, and
transferred via coaxial cable to the subscriber premises.

The most recent significant advancements in cable technology have occurred
in cable telephony. Historically, cable telephone service was provided using
constant bit rate, or CBR technology, which utilizes the switched-circuit
technology currently used in traditional phone networks. Cable telephony using
CBR technology is an established cable telephony solution deployed in
approximately twenty-six countries and designed to provide telephone services,
including all of the custom calling features, to subscribers' home or office
over a hybrid fiber-coax network. This is a proven carrier-class telephony
solution that enables operators to directly compete with incumbent telephone
carriers with voice services and class-features, which include caller ID,
call-waiting and three-party conferencing. At the end of 2001, ARRIS
Cornerstone(R) CBR cable telephone products served over 2.2 million subscriber
lines with more than thirty operators worldwide.

A new technology is telephony using internet protocol, or IP. This
technology, called voice over IP, or VoIP, permits cable operators to provide
toll-quality cable telephony at costs substantially below those associated with
CBR technology. VoIP technology has been deployed by several system operators
throughout the world and is being tested in trials being conducted by other
system operators.

Data and voice over IP services are governed by a set of technical
standards promulgated by CableLabs(R) in North America and TComLabs(R) in
Europe, two industry trade associations. While the standards set out by these
two bodies necessarily differ in some ways to accommodate the differences in
hybrid fiber-coax network architectures between North America and Europe, they
have a great deal of commonality. The primary data standard specification for
North America is entitled "Data Over Cable Service Interface Specification", or
DOCSIS. Release 1.1 of this specification currently is the governing standard
for data services in North America. The "EuroDOCSIS" standard Release 1.1 is the
same for Europe. A new version of the standard, DOCSIS 2.0, recently has been
released which, will probably not be implemented until 2003. DOCSIS 2.0 builds
upon the capabilities of DOCSIS 1.0 and DOCSIS 1.1 and adds throughput in the
upstream portion of the cable plant -from the consumer out to the Internet. In
addition to the DOCSIS standards which govern data transmission, CableLabs(R)
has defined the PacketCable(R) standard for Voice over IP. This standard defines
the interfaces among network elements such as cable modem termination systems,
terminal devices, and servers to provide a high quality IP telephony service
over the hybrid fiber-coax network.

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OUR PRINCIPAL PRODUCTS

We provide cable system operators with a comprehensive product offering
that meets their end-to-end needs, from headend to subscriber premises. We
divide our product offerings into three categories:

Broadband................................ CBR and VoIP products, including headend
and subscriber premises equipment. This
category also includes our
state-of-the-art Operations,
Administration, Maintenance, and
Provisioning software and our systems
integration services.
Transmission, Optical and Outside Fiber optic related transmission
Plant.................................. products, including optical transmission
products, radio frequency transmission
products, and interconnectivity products.
Supplies and Services.................... Infrastructure products for fiber optic
or coaxial networks built under or above
ground, including cable and strand,
vaults, conduit, drop materials, tools,
and test equipment.

BROADBAND

Constant Bit Rate Products

Headend -- We market our headend equipment under the brand name
Cornerstone(R) Voice. Cornerstone Voice products for CBR technology include host
digital terminals, or HDT. An HDT is the device that interfaces between
public-switched networks and the hybrid fiber-coax network. Because the
Cornerstone Voice system is easy to implement, economical and scaleable, network
operators can offer telephony at a low penetration level and expand as customer
demand increases. ARRIS designs its equipment to meet the strict performance
reliability specifications and demanding environmental requirements expected of
a lifeline, carrier-class residential telephone service. This reliability and
robust design enables ARRIS' Cornerstone customers to compete at parity with the
incumbent local telephone company.

Subscriber Premises -- The key equipment at subscriber premises is a
network interface unit, or NIU. We market our NIUs under the brand name Voice
Port(TM). Voice Port(TM)s are the most widely deployed CBR network interface
units. Voice Ports work with the Cornerstone HDT to provide cable telephony and
pass through video signals. Operators who are deploying Cornerstone Data
(high-speed data) will deploy cable modems inside the home or work premises and
overlay the signal on to the same hybrid fiber-coax network as the Cornerstone
Voice application. This combination of product solutions provides subscribers
with voice and high-speed data functionality from the same operator. The Voice
Port portfolio includes a two-line single-family residence Voice Port NIU, a
two-line integrated indoor Voice Port NIU, a four-line Voice Port NIU, and a
twenty-four-line Voice Port NIU.

Voice over IP and Data Products

Headend -- The heart of a voice over IP headend is a "cable modem
termination system", or CMTS. A CMTS, along with a call agent and a gateway,
provide the ability to integrate a public-switched network, the Internet and a
hybrid fiber-coax network. The CMTS provides format conversion between the
formats used in the Internet and the formats used in the hybrid coax-networks.
It also is responsible for initializing and monitoring all cable modems
connected to the hybrid fiber-coax network. ARRIS provides two products that are
used in the cable operator's headend to provide voice over IP and high-speed
data services to residential subscribers. These are the Cornerstone Data CMTS
1500 and the Cadant C4 CMTS:

- The Cornerstone(R) Data CMTS 1500 is DOCSIS 1.1 and EuroDOCSIS 1.0
qualified. It is a scaleable headend solution, providing high-speed data
and VoIP services in headends from several thousand to 50,000
subscribers. We also provide a modular redundant chassis to enable CMTS
1500's to be

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grouped together with a 4:1 redundant architecture providing the
requisite reliability for telephony operation.

- The Cadant(R) C4(TM) CMTS is a highly dense, chassis-based product that
provides built-in redundancy for carrier-grade performance. It is DOCSIS
1.1 qualified and will support recently released DOCSIS 2.0 and
PacketCable standards. Each chassis supports up to 32 downstream channels
and 128 upstream channels making it one of the highest density scaleable
headend products currently available. It will provide high-speed data and
VoIP services in headends from 10,000 to hundreds of thousands of
subscribers.

Subscriber Premises -- This subscriber premises equipment includes cable
modems (DOCSIS 1.0 and 1.1 certified) for high-speed data applications and
embedded multimedia terminal adapters, or E-MTA for high-speed data and
telephony applications. We produce the Touchstone(TM) E-MTA line for deployments
in DOCSIS 1.1 hybrid fiber-coax networks. The Touchstone product line consists
of the Touchstone telephony modem for indoor applications and the Touchstone
telephony port for outdoor deployments. These E-MTAs support enhanced services
of IP telephony and high-speed data on the same network to residential and
business subscribers. The Touchstone product line complies with both DOCSIS and
PacketCable standards. The Touchstone telephony modem is DOCSIS 1.1 certified.
The Touchstone telephony port is based on the same design as the modem but has
not been submitted for certification. The PacketCable solution builds on DOCSIS
1.1 and its quality of service enhancements to support lifeline telephony
deployed over hybrid fiber-coax networks. The Touchstone product line provides
carrier-grade performance to enable operators to provide all IP and video
services on the same network using common equipment. We also are actively
involved with the new evolving DOCSIS 2.0 standard and are participating in
early interoperability testing with the Touchstone product family at CableLabs.

OAM&P -- OAM&P stands for Operations, Administration, Maintenance and
Provisioning. It is a software suite that enables operators to automate many of
the functions required to manage and grow subscribers for the multiple services
offered. Without OAM&P automation, it would be difficult for an operator to
manage subscriber growth effectively.

Our subscriber management products provide operators with the ability to
automatically provision headend and subscriber premises equipment to reflect
subscribers' parameters, provide key data for third party billing software, and
complete maintenance operations. Our Cornerstone(R) Cable Provisioning System
2000, or CPS2000, provides automated provisioning software for control of the
CMTS and cable modems. CPS 2000 works with various billing and middle-ware
software programs. ARRIS has formed strategic relationships with vendors to
integrate existing Cornerstone software for CMTS and Cable Modem OAM&P
functions. Operators are able to perform OAM&P functions across Cornerstone
Voice and Cornerstone Data employing the Cadant CMTS and Touchstone product
lines using a common OAM&P solution. The Cadant G2 IMS software supports
configuration performance and fault management of the Cadant C4 CMTS through
easy to use graphical user interfaces. A single G2 IMS server can support up to
100 C4 CMTS chassis and 20 simultaneous client applications.

System Integration -- We are a full service system integrator for converged
services over hybrid fiber-coax networks. We historically have been a pioneer in
the voice and data over hybrid fiber-coax business and have the experience and
infrastructure in place to help operators launch these services. Systems
integration offers the service provider a fully integrated solution that has
been tested end-to-end for interoperability, performance, capacity, scalability,
and reliability prior to ever being installed at the customer facility. This
system integration can be followed up by complete headend and operations center
design, installation, activation, and traffic planning. We offer the operator
coordination of the project management (for the suppliers and the overall
program), and future solution assurance services for the long-term, including
upgrade support, system audits, and configuration management. Our systems
integration service enables operators to rapidly deploy new services on their
networks with the assurance that all of the components of the network will
interoperate seamlessly.

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TRANSMISSION, OPTICAL AND OUTSIDE PLANT

We are a leading supplier of fiber optic related transmission products to
the cable industry. We have three primary product lines:

- OPTICAL TRANSMISSION products consisting of optical transmitters,
receivers and amplifiers, optical nodes, dense wavelength division
multiplexing transport systems, block converters, and element management
software.

- RF TRANSMISSION products, which include RF amplifiers and headend RF
management equipment.

- INTERCONNECTIVITY products, including a full line of fiber management
solutions such as optical entrance enclosures, outside plant fiber optic,
splice closures, transmission equipment and demarcation housings.

Our Laser Link(R) product line supplies the components for transmission and
switching of fiber optic lines within headends and hubs. These products deliver
high-quality signals and can be tailored to meet specific operator requirements.
The Laser Link 1550 nm optical laser transmitters and receivers for headends
convert incoming electronic video signals to an optical signal for transmission
over the fiber optic cable to hubs. The 1310 nm optical lasers, typically
located within hubs are used for a small number of homes passed. The
Transplex(R) Transport System with dense wavelength division multiplexing
provides optical switching within the headend to route fiber optic signals to
the appropriate hubs. The product line also includes RF Integrator(R) systems
for headend/hub RF signal management and fiber pre-amplifiers. LightLink(TM)
termination, couplers, optical and splice enclosures route fiber optics
throughout the headend and hub locations. We also provide an integrated assembly
consisting of the Laser Link mainframe shelves and LightLink(TM) equipment frame
system to provide optimal space and performance efficiencies within headends and
hubs.

Nodes are located between the hub and the subscriber premises and provide
the interface between the fiber optic network and the coaxial distribution
system. The Proteus(TM) scaleable node digital return transmitter detects the
light coming out of the cable and converts it back into electronic signals for
transmission to subscriber premises via coaxial cable. The RF Link(TM) 870 MHz
mini-bridger strengthens the signal either on its way to the node or from the
node. If line distances require it, RF Link 870 MHz line extenders provide
additional amplification to provide high-quality signals to the subscriber
premises. LightGuard(TM) enclosures are used for external splicing of the fiber
optic signals as the plant design extends to reach more homes. Regal(R) taps and
line passives split the signal for transmission along various branches of the
distribution system.

The physical distribution of the RF signal to the subscriber premises
requires a flexible selection of enclosures, connectors and drop assemblies to
meet different geographical and environmental needs. We provide MONARCH(TM)
enclosures for above ground and underground fiber and RF cable distribution as
well as network interface devices, or NIDs, for the customer premises. With the
advent of advanced services, connectors have become a critical element in the
reproduction of quality signals and reduction of noise interference. Our
Digicon(R) connector provides a high quality and easy to install component for
installations.

We also are a large supplier of other telecommunications products,
including T1 and digital subscriber technology components, for broadband signals
in traditional telephony architectures.

SUPPLIES AND SERVICES

We provide the infrastructure products for fiber optic or coaxial networks
built above ground (aerial) or underground. Operators with aerial system
requirements may obtain galvanized steel cables or strand to support the
transmission cables that run pole-to-pole as well as the support and attachment
hardware necessary to complete the system. For underground systems, we also
supply MONARCH(TM) underground vaults, pedestals, and conduit for plant
build-out. Aerial and underground drop installations to subscriber premises
needs are provided with Regal(R) taps, line and house passives. We provide a
wide selection of products from tools, test equipment, power protection and
other materials in order to meet the installation and operational needs for
operators anywhere in the world.

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SALES AND MARKETING

Our sales force is divided into two groups, North American and
International. Our North American sales force, in turn, is divided into one
group that focuses on the seven largest multiple system operators, or MSOs, and
a second group that focuses on smaller system operators, overbuilders, regional
Bell telephone companies and major communications companies and competitive
local exchange carriers. Our North American sales force is headquartered in both
Duluth, Georgia and Denver, Colorado.

Following our 2001 acquisition of Arris Interactive L.L.C. we significantly
expanded our international sales organization to facilitate sales to customers
previously served by Nortel Networks and to include sales of products for
high-speed data and cable telephony. This expansion included sales offices in
Barcelona, Spain (to service Southern Europe) and in Amsterdam, Netherlands (to
service Northern Europe). A new sales and service office was also added in
Japan, complementing our already existing Hong Kong office.

We maintain an inside sales group that is responsible for regular phone
contact, prompt order entry, timely and accurate delivery and effective sales
administration for the many changes frequently required in any substantial
rebuild or upgrade activity. In addition, the sales structure includes sales
engineers and technicians that can assist customers in system design and
specification and can promptly be on site to "trouble shoot" any problems as
they arise during a project.

We also have marketing and product management teams that focus on each of
the various product categories and work with our engineers and various
technology partners on new products and product improvements. These teams are
responsible for inventory levels and pricing, delivery requirements, market
demand and product positioning and advertising.

We are committed to providing superior levels of customer service by
incorporating innovative customer-centric strategies and processes supported by
business systems designed to deliver differentiating product support and
value-added services. We have implemented advanced customer relationship
management programs and sophisticated information systems to bring additional
value to our customers and provide significant value to our operations
management. Through these information systems, we can provide our customers with
product information ranging from operational manuals to the latest in order
processing information. Through on-going development and refinement, these
programs will help to improve our productivity and enable us to further improve
our customer-focused services.

CUSTOMERS

Although we do sell products to traditional telephone companies and our
broadband products can be deployed not only by cable system operators, but also
by traditional telephone companies, electric utilities and others, the
substantial majority of our sales are to cable system operators. In 2001, as the
US cable industry continued a trend toward consolidation, the seven largest
multiple system operators control over 90% of the US cable market, thereby
making our sales to those MSOs critical to our success. Internationally, the
market is dominated by approximately ten cable system operators, comprised of
US-based MSOs, government entities, and foreign-based multi-media owners. This
group controls approximately 60% of the total international "addressable"
market.

Our sales are substantially dependent upon (1) a system operator's
selection of our equipment, (2) demand for increased broadband services by
subscribers, and (3) general capital expenditure levels by system operators.
Although many of our non-Cornerstone products, e.g., transmission and outside
plant equipment, are purchased by system operators that do not use Cornerstone
technology, Cornerstone sales are critical to our success. Currently 30 MSOs
utilize the Cornerstone product in 56 cities in 15 countries.

According to Kagan World Media, as of June 2001, of the 107.6 million homes
passed by the top twenty-five MSOs in the United States, only 17.5% subscribed
to more than "basic cable." Therefore, substantial opportunity exists for
demand-driven growth in the sales of our products. This demand is dependent,
however, on subscriber demand for higher speed internet, alternative telephony,
and other services requiring more sophisticated equipment.

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General capital expenditures by system operators are a product of many
factors, including the general economy, competitive responses to their expansion
by traditional telephone companies, consumer demand, cost and availability of
capital. According to Gartner Dataquest, capital expenditures industry-wide
increased from $179.7 billion in 1999 to $217.6 billion in 2000, and decreased
to $210.7 billion in 2001, due to various factors. Industry analysts expect
capital spending to increase as demand for broadband services increase and new
technology is implemented -- such as the Cadant CMTS voice over IP system -- but
there can be no assurances that this will occur.

Our two largest customers are AT&T (including MediaOne Communications,
which was acquired by AT&T during 2000) and Cox Communications. Their sales for
2001, 2000, and 1999 are set forth below:

Other than Adelphia Communications Corp. and Insight, which accounted for
approximately 8.1% and 5.3%, respectively, of ARRIS' total sales for 2001, no
other customer provided more than 5% of ARRIS' total sales for the year ended
December 31, 2001. Adelphia accounted for approximately 5% of ARRIS' total sales
for December 31, 2000, and no other customer (other than AT&T and Cox
Communications) provided more than 5% of ARRIS' total sales for the year ended
December 31, 2000. No customer other than AT&T and Cox Communications provided
more than 5% of ARRIS' total sales for the year ended December 31, 1999.

Liberty Media Corporation, which had been a part of the Liberty Media Group
of AT&T (whose financial performance was "tracked" by a separate class of AT&T
stock), effectively controls approximately 10% of ARRIS' outstanding common
stock on a fully diluted basis. In August 2001, AT&T spun off Liberty Media to
the holders of its tracking stock, and AT&T subsequently no longer indirectly
owns that interest in ARRIS.

On December 19, 2001, AT&T Broadband and Comcast Corporation announced a
definitive agreement to combine AT&T Broadband with Comcast.

RESEARCH AND DEVELOPMENT

We are committed to the development of new technology in the evolving
broadband market. New products are developed in our research and development
laboratories in Duluth, Georgia; Andover, Massachusetts; and, as a result of our
2002 acquisition of Cadant, Inc., Lisle, Illinois. We also attempt to form
strategic alliances with world-class producers of complementary technology to
leverage its technologies and provide "best-in-class" solutions.

Research and development expenses in 2001, 2000, and 1999 were
approximately $54.5 million, $23.4 million, and $16.6 million, respectively. The
increase in 2001 was attributable primarily to the inclusion of Arris
Interactive's research and development activities beginning August 3, 2001. We
expect that research and development expenses will increase in 2002 compared to
2001 due to the inclusion of Arris Interactive for the entire year and the
development of new technologies from the recent acquisition of Cadant's assets.

We believe that our future success depends on rapid adoption and
implementation of Broadband local access industry specifications, as well as
rapid innovation and introduction of technologies that provide service and
performance differentiation. Examples of this include the industry-leading
DOCSIS 1.1 qualified CMTS1500 products and Cadant C4 product line (which was
acquired in January 2002), as well as the DOCSIS 1.1 certified Touchstone
telephony modem and the embedded multi-media terminal adapter.

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We believe the demand for new services requiring intensive, high-touch
processing and sophisticated management techniques will continue to increase. We
also believe this standards-based market place will continue to exert
significant pricing pressures. As a result, our product development activities
are primarily directed at the following areas:

- continued development of our IP-based products, such as the Cadant C4

- the Touchstone telephony Modem product line

- sharp focus on product cost and cost reduction

- extensive partnerships with best-in-class Call Management and Network OSS
vendors

- network solution testing and end-to-end integration services

We also continue to invest in the development of fiber optic products
targeted at broadband local access for residential and small business needs.

INTELLECTUAL PROPERTY

We have an aggressive program for protecting our intellectual property. The
program consists of maintaining our portfolio of 99 issued patents (both US and
foreign) and pursuing patent protection on new inventions (currently 83 patent
applications are pending). In our effort to pursue new patents, we have created
a process whereby employees may submit ideas of inventions for review by
management. The review process evaluates each submission for novelty,
detectability, and commercial value, and patent applications are filed on the
inventions that meet the criteria. Our patents and patent applications generally
are in the areas of optics, telecommunications hardware and software, and
related technologies. Recent research and development has led to a number of
patent applications in technology related to DOCSIS. The January 2002 purchase
of the assets of Cadant resulted in the acquisition of 19 US patent
applications, 7 PCT applications, 5 trademark applications, 1 US registered
trademark and 5 registered copyrights. The Cadant patents are in the area of
cable modems and cable modem termination systems.

For critical technology that is not owned by us, we have a program for
obtaining appropriate licenses with the industry leaders to ensure that the
strongest possible patents support the licensed technology. In addition, we have
formed strategic relationships with leading technology companies that will
provide us with early access to technology and will help keep us at the
forefront of its industry.

We have a program for protecting and developing trademarks. The program
consists of procedures for the use of current trademarks and for the development
of new trademarks. This program is designed to ensure that our employees
properly use those trademarks and any new trademarks that will develop strong
brand loyalty and name recognition. This is intended to protect our trademarks
from dilution or cancellation.

PRODUCT SOURCING AND DISTRIBUTION

Formerly, we manufactured or assembled a substantial portion of our
products. Manufacturing operations ranged from electro/mechanical,
labor-intensive assembly to sophisticated electronic surface mount automated
assembly lines. We operated five major manufacturing facilities as our primary
method of product sourcing. However, during the third quarter of 2001, we made
the decision to outsource most of our manufacturing and close four facilities
located in El Paso, Texas and Juarez, Mexico. The closure of the factories is
expected to be completed during the first half of 2002. Our remaining factory is
a 130,000 square foot, ISO certified facility in Rock Falls, Illinois. This
facility manufactures various outside plant equipment including T1 repeater
cases and transition cable.

Our decision to outsource manufacturing reflects the ongoing weakness in
industry capital spending and our evaluation of under-performing assets. Our new
product sourcing strategy centers around the use of contract manufacturers to
subcontract production where the scale and capacity make it economical to do so.
The facilities owned and operated by the contract manufacturers currently being
used are located in the United States, Mexico and the Philippines. Our largest
outsource manufacturers are Solectron and Mitsumi,

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located in Mexico and Japan, respectively. We distribute a substantial number of
products that are not designed or trademarked by us in order to provide our
customers with a comprehensive product offering. For instance, we distribute
hardware and installation products. These products are distributed through
regional warehouses in North Carolina, California and Rotterdam, Netherlands and
through drop shipments from our contract manufacturers located throughout the
world.

BACKLOG

Our backlog consists of unfilled customer orders believed to be firm and
long-term contracts that have not been completed. With respect to long-term
contracts, we include in our backlog only amounts representing orders currently
released for production or, in specific instances, the amount we expect to be
released in the succeeding 12 months. The amount contained in backlog for any
contract or order may not be the total amount of the contract or order. The
amount of our backlog at any given time does not reflect expected revenues for
any fiscal period. Our backlog at December 31, 2001 was approximately $132.8
million, at December 31, 2000 was approximately $209.5 million and at December
31, 1999 was approximately $105.4 million.

We believe that substantially all of the backlog existing at December 31,
2001, will be shipped in 2002.

INTERNATIONAL OPPORTUNITIES

We sell our products primarily in North America. Our international revenue
is generated from Asia Pacific, Europe, Latin America and Canada. The Asia
Pacific market includes Australia, China, Hong Kong, India, Indonesia, Japan,
Korea, Malaysia, New Zealand, Philippines, Sampan, Singapore, Taiwan and
Thailand. The European market includes France, Ireland, Italy, Netherlands,
Portugal, Spain and the United Kingdom. Sales to international customers were
approximately 14.6%, 8.5% and 6.4% of total sales for the years ended December
31, 2001, 2000 and 1999, respectively. International sales for the years ended
December 31, 2001, 2000 and 1999 were as follows:

* The year ended December 31, 2001 included approximately five months of
international Cornerstone revenue. Under the previous joint venture agreement
with Nortel Networks, ARRIS was not able to sell the Arris Interactive L.L.C.
products internationally. This agreement terminated upon our acquisition of
Nortel Networks' share of Arris Interactive L.L.C. on August 3, 2001.

We believe that international opportunities exist and continues to
strategically invest in worldwide marketing efforts, which have yielded some
promising results in several regions. During 2001, our international group was
actively engaged in replacing the Nortel Networks sales and support
infrastructure that was in place with Arris Interactive L.L.C. We made some
significant operational and geographical changes in the international
marketplace. We consolidated our international offices and warehouses to the
Netherlands from the United Kingdom to service all of Europe. We also opened a
sales office in Chile to address the growing market in that region. We plan on
expanding our international presence in the Far East by opening a sales and
warehouse facility in Japan by the second quarter of 2002. We currently maintain
sales offices in Argentina, Australia, Chile, China, Hong Kong, Mexico, Spain
and the Netherlands.

9

COMPETITION

All aspects of our business are highly competitive. The broadband
communications industry itself is dynamic, requiring companies to react quickly
and capitalize on change. We must retain skilled and experienced personnel, as
well as, deploy substantial resources to meet the ever-changing demands of the
industry. We compete with national, regional and local manufacturers,
distributors and wholesalers including some companies larger than us. Our major
competitors include:

- ADC Telecommunications, Inc.

- C-COR.net Corporation

- Cisco Systems

- Harmonic Inc.

- Juniper Networks

- Motorola, Inc.

- Phillips

- Riverstone Networks, Inc.

- Scientific-Atlanta

- Tellabs Inc.

- Terayon Communication Systems

Various manufacturers who are suppliers to us sell directly, as well as
through distributors, into the cable marketplace. In addition, because of the
convergence of the cable, telecommunications and computer industries and rapid
technological development, new competitors are entering the cable market. Many
of our competitors or potential competitors are substantially larger and have
greater resources than us.

Our products are marketed with emphasis on quality and are competitively
priced. Product reliability and performance, superior and responsive technical
and administrative support, and breadth of product offerings are key criteria
for competition. Technological innovations and speed to market are an additional
basis for competition.

EMPLOYEES

As of February 28, 2002, we had 1,416 full-time employees of which
approximately 66 were members of a union. We believe that we have maintained an
excellent relationship with our employees. Our future success depends, in part,
on our ability to attract and retain key executive, marketing, engineering and
sales personnel. Competition for qualified personnel in the cable industry is
intense, and the loss of certain key personnel could have a material adverse
effect on us. We have entered into employment contracts with our key executive
officers and have non-compete agreements with substantially all of our
employees. We also have a stock option program that is intended to provide
substantial incentives for our key employees to remain with us.

BACKGROUND AND HISTORY

ARRIS is the successor to ANTEC Corporation. From its inception until its
initial public offering in 1993, ANTEC was primarily a distributor of cable
television equipment and was owned and operated by Anixter, Inc. Subsequently
ANTEC completed several important strategic transactions and formed joint
ventures designed to expand significantly its product offerings. Most recently,
ANTEC formed a new holding company, ARRIS, and acquired Nortel Networks'
interest in Arris Interactive L.L.C., which previously had been a joint venture
between ANTEC and Nortel Networks.

10

A synopsis of ARRIS' evolution:

- 1969 -- Anixter entered the cable industry

- 1987 -- Anixter acquired TeleWire Supply

- 1988 -- Anixter and AT&T developed the first analog video laser
transmitter for the cable industry (Laser Link 1)

- 1991 -- ANTEC was established

- 1993 -- ANTEC's initial public offering

- 1994 -- ANTEC completed the acquisition of the following companies, which
significantly expanded its product development and manufacturing
capabilities:

- Electronic System Products, Inc. ("ESP"), an engineering consulting firm
with core capabilities in digital design, RF design and application
specific integrated circuit development for the broadband communications
industry

- Power Guard, Inc., a manufacturer of power supplies and high security
enclosures for broadband communications networks

- Keptel, Inc., a designer, manufacturer and marketer of outside plant
telecommunications and transmission equipment for both residential and
commercial use, primarily by telephone companies

- 1995 -- ANTEC and Nortel Networks formed Arris Interactive L.L.C.,
focused on the development, manufacture and sale of products that
enable the provision of a broad range of telephone and data
services over HFC architectures; ANTEC initially owned 25% and
Nortel Networks owned 75% of the Arris Interactive joint venture

- 1997 -- ANTEC acquired TSX Corporation, which provided electronic
manufacturing capabilities and expanded the Company's product
lines to include amplifiers and line extenders and enhanced laser
transmitters and receivers and optical node product lines

- 1998 -- ANTEC introduced the industry's first 1550 nm narrowcast
transmitter and dense wavelength division multiplexing ("DWDM")
optical transmission system

- 1999 -- ANTEC completed the combination of the Broadband Technology
Division of Nortel Networks, which is known as LANcity, with
Arris Interactive, resulting in an increase in Nortel Networks'
interest in the joint venture to 81.25% while ANTEC's interest
was reduced to 18.75%

- 1999 -- ANTEC introduced the industry's first 18 band block converter and
combined that with the DWDM allowing 144 bands on a single fiber

- 2001 -- ARRIS acquired all of Nortel Networks' ownership interest in
Arris Interactive in exchange for approximately 49% of the common
stock of a newly formed holding company, ARRIS, and a preferred
membership interest in Arris Interactive.

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

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

ITEM 2. PROPERTIES

We currently conduct our operations from 13 different locations; one of
which we own, while the remaining 12 are leased. These facilities consist of
sales and administrative offices, warehouses and

11

manufacturing facilities totaling approximately 900,000 square feet. ARRIS'
long-term leases expire at various dates through 2009. The principal properties
are located in Ontario, California; Duluth, Georgia; Suwanee, Georgia;
Englewood, Colorado; El Paso, Texas; Cary, North Carolina; Rock Falls, Illinois;
and Juarez, Mexico. ARRIS believes that its current properties are adequate for
its operations. During 2001, ARRIS began to implement a plan to expand on its
manufacturing outsourcing strategy and close down the factories located in El
Paso, Texas and Juarez, Mexico. The closure of the factories is anticipated to
be complete during the first half of 2002. We currently are under lease
obligations in three facilities, which we are not conducting operations in,
however these facilities are subleased to third parties.

A summary of our leased properties that are currently in use is as follows:

* This location is in relation to the Cadant acquisition, which occurred in
January 2002.
- ---------------

We own the following properties. These facilities have been pledged as
collateral to secure payment of our credit facility. The following table sets
forth the location and approximate square footage of each of our owned
properties:

- ---------------

** We are not currently conducting operations out of this facility, due to the
decision to outsource the manufacturing functions. This property is currently
for sale.

ITEM 3. LEGAL PROCEEDINGS

The Company is not currently engaged in any litigation that it believes
would have a material adverse effect on its financial condition or results of
operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of 2001, no matters were submitted to a vote of
the Company's security holders.

12

EXECUTIVE OFFICERS OF THE COMPANY

John M. Egan joined the Company in 1973 and has been Chairman of ARRIS'
Board of Directors since 1997. Mr. Egan was President and Chief Executive
Officer of ARRIS and its predecessors from 1980 to December 31, 1999. On January
1, 2000, Mr. Egan stepped down from his role as Chief Executive Officer of
ARRIS. He remains a full-time employee until June 2002. Mr. Egan is on the Board
of Directors of the National Cable Television Association ("NCTA"), the Walter
Kaitz Foundation, an association seeking to help the cable industry diversify
its management workforce to include minorities, and has been actively involved
with the Society of Cable Television Engineers and Cable Labs, Inc. Mr. Egan
received the NCTA's 1990 Vanguard Award for Associates.

Robert J. Stanzione has been President and Chief Executive Officer since
January 1, 2000. From January 1998 through 1999, Mr. Stanzione was President and
Chief Operating Officer of ARRIS. Mr. Stanzione has been a director of ARRIS
since 1997. From October 1995 to December 1997, he was President and Chief
Executive Officer of Arris Interactive. From 1969 to 1995, he held various
positions with AT&T Corporation.

Lawrence A. Margolis has been Executive Vice President, Chief Financial
Officer and Secretary of ARRIS since 1992 and was Vice President, General
Counsel and Secretary of Anixter, Inc., a global communications products
distribution company, from 1986 to 1992 and General Counsel and Secretary of
Anixter from 1984 to 1986. Prior to 1984, he was a partner at the law firm of
Schiff, Hardin & Waite.

Gordon E. Halverson has been Executive Vice President and Chief Executive
Officer, of ARRIS TeleWire Supply since April 1997. From 1990 to April 1997, he
was Executive Vice President, Sales of ARRIS. During the period 1969 to 1990, he
held various executive positions with predecessors of ARRIS. He received the
NCTA's 1993 Vanguard Award for Associates. Mr. Halverson is a member of the
NCTA, Society of Cable Television Engineers, Illinois Cable Association, Cable
Television Administration and Marketing Society.

James D. Lakin has been President, ARRIS Broadband since the acquisition of
Arris Interactive in August 2001. From October 2000 through August 2001, he was
President and Chief Operating Officer of Arris Interactive. From November 1995
until October 2000, Mr. Lakin was Chief Marketing Officer of Arris Interactive.
Prior to 1995, he held various executive positions with Compression Labs, Inc.
and its successor General Instrument Corporation.

Bryant K. Isaacs has been President of ARRIS Network Technologies since
September 2000. Prior to joining ARRIS, he was Founder and General Manager of
Lucent Technologies' Wireless Communications Networking Division in Atlanta from
1997 to 2000. From 1995 through 1997, Mr. Isaacs held the position of Vice
President of Digital Network Systems for General Instrument Corporation where he
was responsible for developing international business strategies and products
for digital video broadcasting systems.

13

Robert Puccini has been President of ARRIS TeleWire Supply since 1999, and
prior to that served as Chief Financial Officer of TeleWire for two years. Mr.
Puccini brings 20 years of experience in the cable television industry to ARRIS
TeleWire Supply. He has held various accounting and controller positions within
the former Anixter and ANTEC Corporations. Most recently, Puccini served as Vice
President, Project Management for the company's AT&T account. Mr. Puccini is a
CPA and received a bachelor's degree from DePaul University.

Ronald M. Coppock has been President of ARRIS International since January
1997 and was formerly Vice President International Sales and Marketing for TSX
Corporation. Mr. Coppock has been in the cable television and satellite
communications industry for over 20 years, having held senior management
positions with Scientific Atlanta, Pioneer Communications and Oak
Communications. Mr. Coppock is an active member of the American Marketing
Association, Kappa Alpha Order, Cystic Fibrosis Foundation Board, and the Auburn
University Alumni Action Committee.

David B. Potts has been the Senior Vice President of Finance and Chief
Information Officer since the acquisition of Arris Interactive, L.L.C. in August
2001. Prior to joining ARRIS, he was Chief Financial Officer of Arris
Interactive from 1995 through 2001. From 1984 through 1995, Mr. Potts held
various executive management positions with Nortel Networks including Vice
President and Chief Financial Officer of Bell Northern Research in Ottawa and
Vice President of Mergers and Acquisitions in Toronto. Prior to Nortel Networks
Mr. Potts was with Touche Ross in Toronto. Mr. Potts is a member of the
Institute of Chartered Accountants in Canada.

Leonard E. Travis has been Vice President and Controller of ARRIS since
March 2001. From 1998 through 2001, he was the Finance Director -- Europe of
RELTEC Corporation and the Vice President of Finance of Marconi
Services --Americas, a division of RELTEC's successor, Marconi, Plc. Prior to
1998, Mr. Travis held various controller positions in finance and operations at
RELTEC Corporation. Prior to RELTEC, Mr. Travis was with Material Sciences and
Ernst & Whinney. Mr. Travis is a CPA and a CMA.

James E. Knox has been General Counsel and Assistant Secretary since
February 1996. He has been Senior Vice President and Secretary of Anixter
International Inc. since 1986 and was a partner of the law firm of Mayer, Brown
& Platt from 1992 to 1996.

Michael H. Durant has been Treasurer since the acquisition of Arris
Interactive in August 2001. Prior to joining ARRIS, he was the Controller of
Arris Interactive L.L.C. from 2000 through 2001. Mr. Durant held various roles
at Bay Networks and its successor, Nortel Networks from 1996 to 2000, and served
as the Chief Financial Officer of LANcity from 1995 through 1996. Prior to 1995,
Mr. Durant held several finance and operations positions with EDS.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

Beginning on August 6, 2001, ARRIS' common stock trades on the Nasdaq
National Market System under the symbol "ARRS". Prior to the ARRIS
reorganization, on August 3, 2001, the Company's common stock traded on the
Nasdaq National Market System under the symbol "ANTC". (See Note 16 of Notes to

14

the Consolidated Financial Statements.) The following table reports the high and
low trading prices per share of the Company's common stock as listed on the
Nasdaq National Market System:

ARRIS has not paid dividends on its common stock since its inception. The
Company's primary loan agreement contains covenants that prohibit the Company
from paying dividends. (See Note 7 of the Notes to the Consolidated Financial
Statements.)

As of February 28, 2002, there were approximately 163 holders of record of
ARRIS common stock. This number excludes shareholders holding stock under
nominee or street name accounts with brokers.

15

ITEM 6. SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA

The selected consolidated financial data as of December 31, 2001 and 2000
and for each of the three years in the period ended December 31, 2001 set forth
below are derived from the accompanying audited consolidated financial
statements of ARRIS, and should be read in conjunction with such statements and
related notes thereto. The selected consolidated financial data as of December
31, 1999, 1998 and 1997 and for the years ended December 31, 1998 and 1997 is
derived from audited consolidated financial statements that have not been
included in this filing. The historical consolidated financial information is
not necessarily indicative of the results of future operations and should be
read in conjunction with ARRIS' historical consolidated financial statements and
the related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this document. See
Note 15 of the Notes to the Consolidated Financial Statements for a summary of
our quarterly consolidated financial information.

16

The Company believes that cash loss, cash loss per share, and cash loss
excluding unusual items are additional meaningful measures of operating
performance. However, this information will necessarily be different from
comparable information provided by other companies and should not be used as an
alternative to our operating and other financial information as determined under
accounting principles generally accepted in the United States. This table should
not be considered in isolation or as a measure of a company's profitability or
liquidity.

CALCULATION OF CASH EARNINGS, EXCLUDING UNUSUAL ITEMS:

- ---------------

(1) In 1999, ARRIS recorded pre-tax charges of approximately $16.0 million in
conjunction with the closure of its New Jersey facility and the
discontinuance of certain products. The charges included approximately $2.6
million related to personnel costs and approximately $3.0 million related
to lease termination and other costs. The charges also included an
inventory write-down of approximately $10.4 million reflected in cost of
sales. In 2000, ARRIS recorded an additional $3.5 million pre-tax charge to
cost of sales related to the 1999 reorganization. (See Note 4 of the Notes
to the Consolidated Financial Statements.)

(2) In 2000, ARRIS recorded a pre-tax gain of $2.1 million as a result of the
curtailment of ARRIS' defined benefit pension plan. (See Note 13 of the
Notes to the Consolidated Financial Statements.)

17

(3) In 1998, ARRIS recorded pre-tax charges of approximately $10.0 million in
conjunction with the consolidation of its corporate and administrative
functions. The charges included approximately $7.6 million related to
personnel costs and approximately $2.4 million related to lease termination
and other costs. (See Note 4 of the Notes to the Consolidated Financial
Statements.)

(4) In 1997 ARRIS recorded pre-tax charges of approximately $28.0 million in
connection with its acquisition of TSX Corporation. The charges included
are inventory, write-downs of approximately $6.5 million reflected in cost
of sales. The acquisition was accounted for as a pooling of interests.

(5) During 2001, ARRIS significantly reduced its overall employment levels.
This resulted in a pre-tax charge to cost of sales of approximately $1.3
million for severance and related costs and a pre-tax charge of $3.7
million to operating expenses.

(6) During 2001, a one-time warranty expense relating to a specific product was
recorded, resulting in a pre-tax charge of $4.7 million for the expected
replacement cost of this product. ARRIS does not anticipate any further
warranty expenses to be incurred in connection with this product.

(7) In 2001, in connection with the outsourcing of most of its manufacturing
functions, ARRIS recorded pre-tax restructuring and impairment charges of
approximately $66.2 million. Included in these charges was approximately
$32.0 million related to the write-down of inventories, and remaining
warranty and purchase order commitments of approximately $1.7 million were
charged to cost of goods sold. Also included in these charges was
approximately $5.7 million related to severance and associated personnel
costs, $5.9 million related to the impairment of goodwill due to the sale
of the power product lines, $14.8 million related to the impairment of
fixed assets, and approximately $6.1 million related to lease terminations
of factories and office space and other shutdown expenses. (See Note 4 of
the Notes to the Consolidated Financial Statements.)

(8) During 2001, ARRIS recorded a pre-tax write-off of in-process R&D of $18.8
million in connection with the Arris Interactive L.L.C. acquisition. (See
Note 16 of the Notes to the Consolidated Financial Statements.)

(9) During 2001, ARRIS recorded pre-tax charges of $1.9 million as an
extraordinary loss on the extinguishment of debt in accordance with EITF
96-19 Debtor's Accounting for a Modification or Exchange of Debt
Instruments. The amount reflected unamortized deferred finance fees related
to a loan agreement, which was replaced in connection with the Arris
Interactive L.L.C. acquisition. (See Note 7 of the Notes to the
Consolidated Financial Statements.)

(10) As a result of the restructuring and impairment charges during the third
quarter of 2001, a valuation allowance of approximately $38.1 million
against deferred tax assets was recorded in accordance with FASB Statement
No. 109, Accounting for Income Taxes. (See Note 4 of Notes to the
Consolidated Financial Statements.) This is offset by approximately $4.4
million of related taxes associated with the unusual items.

(11) In the fourth quarter of 2001, ARRIS closed a research and development
facility in Raleigh, North Carolina and recorded a $4.0 million charge
related to severance and other costs associated with closing that facility.

(12) Due to the economic disturbances in Argentina, we recorded a write-off of
$4.4 million related to unrecoverable amounts due from a customer in that
region during the fourth quarter of 2001.

(13) Because the Company's investment in Lucent and Avaya stock are considered
trading securities held for resale, they are required to be carried at
their fair market value with any gains or losses being included in
earnings. In calculating the fair market value of the Lucent and Avaya
investments and including $1.3 million of impairment losses on investments
available for sale in 2000, the Company recognized pre-tax losses of $0.8
million and $0.8 million, as of December 31, 2001 and 2000, respectively.

18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses ARRIS' Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments, including those related to customer incentives, product
returns, bad debts, inventories, investments, intangible assets, income taxes,
financing operations, warranty obligations, restructuring costs, retirement
benefits, and contingencies and litigation. Management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.

(a) Inventories

Our largest tangible asset is inventory, which net of reserves aggregated
$188.0 million as of December 31, 2001. Inventory is reflected in our financial
statements at the lower of average, approximating first-in, first-out cost or
market value. We continuously reevaluate future usage of product and where
supply exceeds demand, we establish a reserve. In reviewing inventory valuations
we also review for excess and obsolete items. This requires us to estimate
future usage, which, in an industry where rapid technological changes and
significant variations in capital spending by system operators are prevalent, is
difficult. As a result, to the extent that we have overestimated future usage of
inventory, the value of that inventory on our financial statements may be
overstated and when we recognize that overestimate we will have to adjust for
that overstatement through an increase in cost of sales in a future period.

b) Accounts Receivable

We establish a reserve for doubtful accounts based upon our historical
experience in collecting accounts receivable. A majority of our accounts
receivable are from a few large cable system operators, either with investment
rated debt outstanding or with substantial financial resources, and have very
favorable payment histories. As a result, our reserve is small relative to our
level of accounts receivable. Unlike businesses with relatively small individual
accounts receivables from a large number of customers, if we were to have a
collectibility problem with one of our major customers, it is possible that the
reserve that we have established will not be sufficient.

(c) Investments

Prior to March 1999, we owned a 25% interest in Arris Interactive L.L.C., a
joint venture with Nortel Networks ("Nortel") that was accounted for under the
equity method. Arris Interactive L.L.C. was focused on the development,
manufacture and sale of products that enable the provision of a broad range of
telephone and data services over hybrid fiber-coax systems. From March 1999 to
August 2001 we owned an 18.75% interest in Arris Interactive L.L.C., which was
accounted for on the cost method.

In connection with the Arris Interactive L.L.C. acquisition, the quarters
ended March 31, 2001 and June 30, 2001 were restated in accordance with
Accounting Principles Board ("APB") No. 18, The Equity Method of Accounting for
Investments in Common Stock. This APB states that an investment in common stock
of an investee that was previously accounted for by the cost method becomes
qualified for use of the equity method by an increase in the level of ownership.
We adopted the use of the equity method upon acquisition of Nortel's portion of
Arris Interactive L.L.C., and all prior periods presented have been adjusted
retroactively to reflect the equity method of accounting. During 2000, Arris
Interactive L.L.C. recorded net

19

income. However, in the periods prior to 2000, Arris Interactive L.L.C. incurred
net losses, of which we did not recognize our proportionate share due to our
investment in Arris Interactive L.L.C being reduced to zero. APB No. 18 states
that the Company should recognize gains only after its share of net income
equals its share of net losses not recognized. Our share of Arris Interactive's
net income in 2000 did not exceed the losses unrecognized in previous years, and
therefore, these periods have not been restated. However, during the periods
ending March 31, 2001 and June 30, 2001, Arris Interactive L.L.C. recorded net
losses. We have restated, under the equity method of accounting, these periods
to reflect our share of the losses due to our investment in and advances to
Arris Interactive at December 31, 2000 being sufficient to record such losses.

(d) Goodwill and Long-Lived Assets

Goodwill relates to the excess of cost over net assets resulting from an
acquisition. Goodwill resulting from the 1986 acquisition of Anixter (ARRIS'
former owner) by Anixter International was allocated to ARRIS based on ARRIS'
proportionate share of total operating earnings of Anixter for the period
subsequent to the acquisition. Goodwill also has resulted from acquisitions of
business by Anixter and ARRIS subsequent to 1986 that now are owned by ARRIS.

ARRIS assesses the recoverability of goodwill and other long-lived assets
whenever events or changes in circumstances indicate that expected future
undiscounted cash flows might not be sufficient to support the carrying amount
of an asset. If expected future undiscounted cash flows from operations are less
than a business' carrying amount, an asset is determined to be impaired, and a
loss is recorded for the amount by which the carrying value of the asset exceeds
its fair value. Fair value is based on discounting estimated future cash flows
or using other valuation methods as appropriate. Non-cash amortization expense
is being recognized as a result of amortization of goodwill on a straight-line
basis over a period of 40 years from the respective dates of acquisition. The
estimation of future cash flows is critical to the valuation of goodwill. Our
industry is subject to rapid technological changes and significant variations in
capital spending by system operators. As a result, estimations of future cash
flows are difficult, and to the extent that we have overestimated those cash
flows we also may have underestimated the need to reduce any attendant goodwill.

Effective January 1, 2002, we will adopt Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. In general, SFAS No.
142 requires that during 2002 we assess the fair value of the net assets
underlying our acquisition related goodwill on a business by business basis.
Where that fair value is less than the related carrying value, we will be
required to reduce the amount of the goodwill. These reductions will be made
retroactive to January 1, 2002. SFAS No. 142 also requires that we discontinue
the amortization of our acquisition related goodwill.

As of December 31, 2001, our financial statements included acquisition
related goodwill of $259.1 million, net of previous amortization. Although the
process of implementing Statement No. 142 will take several more months, we
preliminarily believe that a portion of this goodwill may be impaired and may
need to be reduced. In addition, we no longer will be amortizing acquisition
related goodwill, which aggregated $4.9 million in 2001, 2000, and 1999.

As of December 31, 2001, our financial statements included intangibles of
$44.5 million, net of amortization of $7.0 million. These intangibles are
related to the existing technology acquired from Arris Interactive L.L.C. on
August 3, 2001, and will be amortized over a three year period. The valuation
process to determine the fair market value of the existing technology was
performed by an outside valuation service. The value assigned was calculated
using an income approach utilizing the cash flow generated by this technology.

(e) Warranty

ARRIS provides, by a current charge to cost of sales in the period in which
the related revenue is recognized, an amount it estimates will be needed to
cover future warranty obligations. This estimate is based upon historical
experience. In the event of an unusual warranty claim, the amount of the reserve
may not be sufficient. For instance, in 2001 ARRIS had a one-time warranty
expense related to a single product and recorded a one-time charge of $4.7
million against cost of sales in connection with it. To the extent that other
unexpected warranty claims occur in the future, the reserves that ARRIS has
established may not be sufficient, cost of sales may have been understated, and
a charge against future costs of sales may be necessary.
20

(f) Income Taxes

ARRIS uses the liability method of accounting for income taxes, which
requires recognition of temporary differences between financial statement and
income tax basis of assets and liabilities, measured by enacted tax rates.

ARRIS established a valuation allowance in accordance with the provisions
of FASB Statement No. 109, Accounting for Income Taxes. The Company continually
reviews the adequacy of the valuation allowance and recognizes the benefits of
deferred tax assets only as reassessment indicates that it is more likely than
not that the deferred tax assets will be realized.

OVERVIEW

Last year was a year of significant change. Our industry experienced a
significant reduction in capital spending beginning at the end of 2000 that was
with us throughout 2001. Nortel Networks, our partner in Arris Interactive,
L.L.C., decided to exit that business, thereby providing us the opportunity to
purchase its interest in the joint venture. In December of 2001, we agreed to
purchase the business of Cadant Inc., a manufacturer of cable modem termination
systems that had developed a leading design in the industry for the critical
component in a voice over IP telephony system. We also refocused our business on
our core skills by substantially exiting manufacturing. We now outsource most of
our manufacturing to some of the leading contract manufacturers of electronic
products. Further, we have reduced workforce and other operating expenses
throughout our organization. As a result of these efforts, we believe that we
are well positioned for 2002.

Set forth below is a more detailed description of how our business
performed over the last two years. We urge you to read it carefully together
with the financial statements and description of our business that are included
in this report. You should be aware, however, that as a result of our
acquisition of Arris Interactive on August 3, 2001, our business has changed
significantly and our historical results of operations will not be as indicative
of future results of operations as they otherwise might be. Some of these
differences are discussed below.

ACQUISITION OF ARRIS INTERACTIVE L.L.C.

On August 3, 2001, we completed the acquisition from Nortel of the portion
of Arris Interactive that we did not own. Arris Interactive was a joint venture
formed by Nortel and us in 1995, and immediately prior to the acquisition we
owned 18.75% and Nortel owned the remainder. As part of this transaction:

- A new holding company, ARRIS, was formed

- ANTEC, our predecessor, merged with a subsidiary of ARRIS and the
outstanding ANTEC common stock was converted, on a share-for-share basis,
into common stock of ARRIS.

- Nortel and the Company contributed to Arris Interactive approximately
$131.6 million in outstanding indebtedness and adjusted their ownership
percentages in Arris Interactive to reflect these contributions

- Nortel exchanged its remaining ownership interest in Arris Interactive
for 37 million shares of ARRIS common stock (approximately 49.2% of the
total shares outstanding following the transaction) and a subordinated
redeemable preferred interest in Arris Interactive with a face amount of
$100 million

- ANTEC, now a wholly-owned subsidiary of ARRIS, changed its name to Arris
International, Inc.

In connection with this transaction, our bank indebtedness was refinanced
on August 3, 2001. The new facility is an asset-based revolving credit facility,
which permits us to borrow up to $175.0 million based upon availability under a
borrowing base calculation.

Following the transactions, Nortel designated two new members to our board
of directors. Nortel's ownership interest in ARRIS is governed in part, by an
Investor Rights Agreement that is filed as an exhibit in [ITEM 14(a) 3] Exhibit
List.

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ACQUISITION OF CADANT, INC.

On January 8, 2002, we completed our acquisition of substantially all of
the assets of Cadant, Inc., a privately held designer and manufacturer of next
generation cable modem termination systems. Under the terms of the transaction,
we paid 5.25 million shares of our common stock and assumed $17 million in
liabilities in exchange for the assets. We also agreed to pay up to 2.0 million
additional shares based upon future sales of the CMTS product.

INDUSTRY CONDITIONS

ARRIS' performance is largely dependent on capital spending for
constructing, rebuilding, maintaining and upgrading broadband communications
systems. After a period of intense consolidation and rapid stock-price
acceleration within the industry during 1999, the fourth quarter of 2000 brought
a sudden tightening of credit availability throughout the telecommunications
industry and a broad-based and severe drop in market capitalization for the
sector during the period. This caused broadband system operators to become more
judicious in their capital spending, adversely affecting us and other equipment
providers, generally.

In response to this downturn, we significantly reduced expense levels,
including workforce reductions during the first quarter of 2001 and the more
significant reductions announced and implemented in April 2001. The actions
taken in April resulted in a pre-tax charge of approximately $5.0 million in the
second quarter of 2001 for severance and related separation costs, and we
reduced overall employment levels by approximately 545 employees. Additionally,
as part of our continuing review and evaluation of underperforming assets to
assess their long-term strategic role within ARRIS, as well as strategic
opportunities we face, we restructured our manufacturing operations and are in
the process of implementing an outsourcing strategy. This manufacturing
restructuring resulted in the closure of four factories in El Paso, Texas and
Juarez, Mexico and the termination of 807 employees. The outsourcing is
anticipated to be completed during the first half of 2002.

RESULTS OF OPERATIONS

The following table sets forth ARRIS' key operating data as a percentage of
net sales:

22

SIGNIFICANT CUSTOMERS

Our two largest customers are AT&T (including MediaOne Communications,
which was acquired by AT&T during 2000) and Cox Communications.

Other than Adelphia Communications Corp. and Insight, which accounted for
approximately 8.1% and 5.3% of ARRIS' total sales for 2001, no other customer
provided more than 5% of ARRIS' total sales for the year.

Liberty Media Corporation, which had been a part of the Liberty Media Group
of AT&T (whose financial performance was "tracked" by a separate class of AT&T
stock), effectively controls approximately 10% of the Company's outstanding
common stock on a fully diluted basis. In August 2001, AT&T spun off Liberty
Media to the holders of its tracking stock, and AT&T subsequently no longer
indirectly owns that interest in the Company.

On December 19, 2001, AT&T Broadband and Comcast Corporation announced a
definitive agreement to combine AT&T Broadband with Comcast.

COMPARISON OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

Net Sales. ARRIS' sales for 2001 decreased by 25.1% to $747.7 million, as
compared to sales levels achieved in 2000. The reduction generally was the
result of the widespread slowdown in telecommunications infrastructure spending.
The slowdown in spending began in the fourth quarter of 2000 and continued
throughout 2001. All of our product categories experienced the reduction.

Our products and services are summarized in three new product categories
instead of the previous four categories: broadband (previously cable telephony
and internet access); transmission, optical, and outside plant; and supplies and
services. All prior period amounts have been aggregated to conform to the new
product categories.

- Broadband product revenues increased by approximately 18.0% to $368.5
million. Broadband product revenues accounted for approximately 49.3% of
2001 sales as compared to 31.3% for 2000. However, revenues in 2001
included approximately $30.0 million of sales to AT&T that were carried
over from the fourth quarter of 2000. Further, 2001 included five months
of additional international revenues due to the acquisition of Arris
Interactive, L.L.C. on August 3, 2001.

- Transmission, optical and outside plant product revenues decreased by
approximately 46.8% to $227.8 million. This revenue accounted for
approximately 30.5% of 2001 sales as compared to 42.8% for 2000. Although
all product lines within this category experienced a decline in sales
year-over-year, the areas with the most significant decreases included
optronics & nodes, RF, and taps, which decreased by approximately 49.7%,
73.8%, and 61.6%, respectively.

- Supplies and services product revenues decreased by approximately 41.4%
to $151.4 million. Supplies and services product revenue accounted for
approximately 20.2% of 2001 sales as compared to 25.9% for 2000.
Engineering service revenue in 2001 decreased approximately 34.7%. We
also experienced reduced sales of other product lines within this
category, including fiber optic cable, outside plant, and installation
materials and tools, which decreased by approximately 61.4%, 49.7%, and
23.3%, respectively.

23

International sales increased 28.2% to $108.9 million. This increase was
primarily the result of the addition of international sales of the Cornerstone
product line following our August 3, 2001 acquisition of Arris Interactive.
Under a previous agreement with Nortel, ARRIS had not been able to sell
Cornerstone products internationally. International sales in 2001 represented
approximately 14.6% of total sales, as compared to international sales of 8.5%
of the Company's total revenue in 2000.

Gross Profit. Gross profit decreased to $119.0 million in 2001 from $185.8
million in 2000. Gross profit margins for the year ended December 31, 2001
decreased 2.7 percentage points to 15.9% as compared to 18.6% for 2000. As a
result of the planned restructuring of manufacturing operations, approximately
$27.8 million of inventory related to the factories was written down, $5.8
million was incurred with the sale of the powering product line assets,
severance costs of approximately $1.3 million were incurred in connection with
the workforce reduction program incurred at the factory level, a one-time
warranty expense of $4.7 million for a specific product, and due to the economic
disturbances in Argentina, we recorded a write-off of $4.4 million (reflected in
the cost of sales) related to unrecoverable amounts due from a customer in that
region during 2001. During 2000, ARRIS recorded an additional $3.5 million
charge for product discontinuation costs, as an increase to cost of goods sold,
related to the reorganization that occurred in the fourth quarter of 1999.
However, after adjusting for unusual items in 2001 and 2000 the gross profit
margins for 2001 and 2000 would have been approximately 21.8% and 19.0%,
respectively.

The Company believes that excluding unusual items is a meaningful measure
of operating performance. However, this information will necessarily be
different from comparable information provided by other companies and should not
be used as an alternative to our operating and other financial information as
determined under accounting principles generally accepted in the United States.
This table should not be considered in isolation or in accordance with generally
accepted accounting principles, or as a measure of a company's profitability or
liquidity. The table below summarizes the effects of the unusual items on our
gross profit margin:

Selling, General, Administrative, and Development ("SGA&D")
Expenses. SGA&D expenses increased to $165.7 million from $134.0 million. SGA&D
expenses for 2001 included approximately $3.7 million of severance costs related
to workforce reductions. The SGA&D expenses for the year ended December 31, 2000
included a one-time pre-tax gain of $2.1 million realized as a result of
employee elections associated with a new and enhanced benefit plan and the
resultant effect on the Company's defined benefit pension plan. Excluding the
effects of these charges, the expenses for 2001 and 2000 would have been $162.0
million and $136.1 million, respectively. This year-over-year increase is
primarily the result of the additional expenses for five months following the
acquisition of Arris Interactive.

Restructuring and Impairment Charges. In the fourth quarter of 2001, ARRIS
closed a research and development facility in Raleigh, North Carolina and
recorded a $4.0 million charge related to severance and other costs associated
with closing that facility. In the third quarter of 2001, the Company announced
a restructuring plan to outsource the functions of most of its manufacturing
facilities. This decision to reorganize was due in part to the ongoing weakness
in industry spending patterns. The plan entails an expanded manufacturing
outsourcing strategy and the related closure of the four factories located in El
Paso, Texas and Juarez, Mexico. The closure of the factories is anticipated to
be complete during the first half of 2002. As a

24

result, we recorded restructuring and impairment charges of $32.5 million.
Included in these charges was approximately $5.7 million related to severance
and associated personnel costs, $5.9 million related to the impairment of
goodwill due to the pending sale of the power product lines, $14.8 million
related to the impairment of fixed assets, and approximately $6.1 million
related to lease termination and other shutdown expenses of factories and office
space. The personnel-related costs included termination expenses for the
involuntary dismissal of 807 employees, primarily engaged in production and
assembly functions performed at the facilities. ARRIS offered terminated
employees separation amounts in accordance with our severance policy and
provided the employees with specific separation dates. The severance and
associated personnel costs will be paid upon closure of the factories. As of
December 31, 2001, approximately $14.9 million of expenses relating to the
restructuring and impairment charges remained in our restructuring accrual.

In accordance with FASB Statement No. 109, Accounting for Income Taxes, a
valuation allowance of $38.1 million against deferred tax assets was recorded in
the third quarter of 2001 because the restructuring and impairment charges
described above put the Company in a cumulative loss position for recent years.

Write-off of in-process R&D. Acquired in-process research and development
totaling $18.8 million of acquired in-process research and development was
written off in connection with the Arris Interactive acquisition during the
third quarter of 2001.

Loss on Marketable Securities. In 2000, we made a $1.0 million strategic
investment in Chromatis Networks, Inc., receiving shares of the company's
preferred stock. On June 28, 2000, Lucent Technologies acquired Chromatis. As a
result of this acquisition, our shares of Chromatis stock were converted into
shares of Lucent stock. Subsequently, as a result of Lucent's spin off of Avaya,
Inc. during the third quarter of 2000, we were issued shares of Avaya stock.

Because the Company's investment in Lucent and Avaya stock are considered
trading securities held for resale, they are required to be carried at their
fair market value with any gains or losses being included in earnings. In
calculating the fair market value of the Lucent and Avaya investments and
including $1.3 million of impairment losses on investments available for sale in
2000, the Company recognized pre-tax losses of $0.8 million and $0.8 million, as
of December 31, 2001 and 2000, respectively.

Interest Expense. Interest expense for the years ended December 31, 2001
and 2000 were $9.3 million and $11.1 million, respectively. Interest expense for
all periods reflects the cost of borrowings on our revolving line of credit and
the interest paid on the 4.5% Convertible Subordinated Notes due 2003. As of
December 31, 2001, we did not have a balance outstanding under our credit
facility, as compared to $89.0 million outstanding at December 31, 2000. For the
year ended December 31, 2001, the average interest rate on our outstanding line
of credit borrowings was 7.2% with an overall blended rate of approximately 5.2%
including the subordinated notes. For the year ended December 31, 2000, the
average interest rate on the Company's outstanding line of credit borrowings was
7.9%, with an overall blended rate of approximately 5.9% including the
subordinated notes.

Membership Interest Expense. In conjunction with the acquisition of Arris
Interactive L.L.C., we issued to Nortel Networks a subordinated redeemable
preferred interest in Arris Interactive with a face amount of $100.0 million.
This membership interest earns a return of 10% per annum, compounded annually.
For the year ended December 31, 2001, we recorded membership interest expense of
$4.1 million.

Income Tax Expense. The Company recognized income tax expense of $27.6
million for the year ended December 31, 2001 as compared to an expense of
approximately $14.3 million during 2000. The increase in expense was due
primarily to the Company increasing its valuation allowance against deferred tax
assets.

Net (Loss) Income. A net loss of $(167.7) million was recorded for in
2001, as compared to net income of $20.7 million in 2000. The yearly results for
2001 included restructuring and impairment expenses of $36.5 million, inventory
write-offs of $32.0 million, severance related to workforce reduction of $5.0
million, a reserve of $4.4 million (reflected in the cost of sales) related to
unrecoverable amounts due from an Argentinean customer, purchase order
commitment write-offs of $0.7 million, warranty charges $5.7 million, income tax
valuation charges of $38.1 million, an in-process R&D write-off of $18.8
million, a market adjustment of $0.8 million on the Company's investment in
Lucent and Avaya and impairment losses on

25

investments available for sale, an extraordinary loss of $1.9 million in
connection with the write-off of the remaining deferred financing costs on the
previous credit facility, and the related tax effect of all unusual items of
$4.4 million. The yearly results for 2000 included a pre-tax loss of $0.8
million on the Company's investment in Lucent and Avaya, a charge of $3.5
million in connection with product discontinuation costs reflected as an
increase in cost of goods sold, a pension curtailment gain of $2.1 million, and
the related tax effect of all unusual items of $0.1 million.

The Company believes that excluding unusual items is a meaningful measure
of operating performance. However, this information will necessarily be
different from comparable information provided by other companies and should not
be used as an alternative to our operating and other financial information as
determined under accounting principles generally accepted in the United States.
This table should not be considered in isolation or in accordance with generally
accepted accounting principles, or as a measure of a company's profitability or
liquidity. The table below summarizes the effects of the unusual items on our
net (loss) income.

Exclusive of the above items, the net loss recorded for the year ended
December 31, 2001 was $(28.2) million or a loss of $(0.53) per diluted share as
compared to net income of $22.9 million or $0.58 per diluted share for the year
ended December 31, 2000.

COMPARISON OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

Net Sales. ARRIS' consolidated sales for 2000 increased by 18.2% to $998.7
million as compared to 1999 sales of $844.8 million. In 2000 and 1999, ARRIS
experienced a rise in sales resulting from earlier investments in new products,
primarily for cable telephony and the increase in capital spending by

26

communication providers, particularly the multiple system operators ("MSOs,") as
they rebuild their plants in an effort to provide additional services, such as
telephony. Through the twelve months ended December 31, 2000, all of ARRIS'
product lines, cable telephony and internet access products in particular,
benefited from the growth in capital spending despite the slow down experienced
during the fourth quarter of the year. ARRIS' Cornerstone voice and data product
revenues grew from approximately $237.4 million in 1999 to approximately $312.3
million in 2000, an increase of approximately 31.6%. Cornerstone's growth
focused on host digital terminal sales. The HDT product provides an interface
between the hybrid fiber-coax system and digital telephone switches.
Additionally, the introduction of revenue from LANcity cable product sales,
Cornerstone "data," was included in the results for the final three quarters of
1999 and all of 2000. These cable modems and cable modem termination systems
have an open scaleable architecture ideal for small to large networks, allowing
end users to work at speeds hundreds of times faster than conventional dial-up
connections. Sales of these data products amounted to approximately $18.5
million for 2000 and $38.2 million for 1999. The decline in data product sales
during 2000 is a result of the general market shift from proprietary technology
to a standards-based technology or data over cable standards interface system
("DOCSIS"). The DOCSIS modems are a commodity product that face strong pricing
pressure. Also, during the fourth quarter of 1999, ARRIS recorded revenue of
approximately $28.7 million in connection with the sale of RF Concentration
software to AT&T. This software is used in conjunction with the host digital
terminal, and AT&T bought licenses equivalent to the number of HDTs purchased
during 1999.

The balance of the revenue increase for 2000, as compared to the prior
year, was from revenue growth related to ARRIS' other product offerings.
Exclusive of the Cornerstone voice and data growth, combined sales for the
remaining product lines increased approximately $79.1 million:

- Broadband product revenues increased by approximately 32.0% to $312.3
million for the year ended December 31, 2000 as compared to $236.5
million for 1999. Broadband product revenues accounted for approximately
31.3% of sales for the year ended December 31, 2000 as compared to 28.0%
for 1999.

- Transmission, optical and outside plant product revenues increased by
approximately 10.1% to $427.9 million for the year ended December 31,
2000 as compared to $388.6 million in 1999. This revenue accounted for
approximately 42.8% of sales for the year ended December 31, 2000 as
compared to 46.0% for 1999.

- Supplies and services revenue increased approximately 17.7% to $258.5
million for the year ended December 31, 2000 as compared to $219.6
million for 1999. Sales of fiber optic cable products and engineering
services drove this increase. This revenue accounted for approximately
25.9% of sales for the year ended December 31, 2000 as compared to 26.0%
for 1999.

Sales to ARRIS' largest customer, AT&T (including MediaOne Communications,
which was acquired by AT&T during 2000), reached approximately $431.5 million
during 2000, or approximately 43