ARRIS GROUP INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OF

ARRIS GROUP, INC.
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
Securities Exchange Act of 1934. 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 held by
non-affiliates as of June 28, 2002 was approximately $270,446,897 (computed on
the basis of the last reported sales price per share $4.48 of such stock on the
Nasdaq National Market System). As of March 24, 2003, 74,641,555 shares of the
registrant's Common Stock were outstanding. For these purposes, directors,
officers and 10% shareholders have been assumed to be affiliates. ARRIS Group,
Inc. is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Portions of ARRIS Group's Proxy Statement for its 2003 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 without
limitation, including Arris International, Inc. (formerly ANTEC Corporation) and
Arris Interactive L.L.C., unless the context otherwise requires.

GENERAL

We develop and supply equipment and technology for cable system operators
and other broadband service providers which allow them to deliver a full range
of integrated voice, video and data services to their subscribers. Further, we
are a leading supplier of infrastructure products used by cable system operators
in the build-out and maintenance of hybrid fiber coaxial, or HFC, networks. We
are the successor to ANTEC Corporation.

Our principal executive offices are located at 11450 Technology Circle,
Duluth, Georgia 30097, and our telephone number is (678) 473-2000. We also have
a worldwide website at http://www.arrisi.com. We are currently developing the
system on our website that will provide copies or hyperlinks to copies of the
annual, quarterly and current reports we file with the Securities and Exchange
Commission and any amendments to those reports. We will provide copies of such
reports in electronic or paper form free of charge upon request to Investor
Relations.

INDUSTRY OVERVIEW

We provide our products and equipment principally to the cable television
market and, more specifically, to operators of multiple cable systems, or MSOs.
In recent years, the technology used in cable systems has evolved significantly.
Historically, cable systems offered only one-way video service. Due to
technological advancements and large investments in infrastructure upgrades,
these systems have evolved to become two-way broadband systems featuring
high-speed, high-volume, interactive services. In the United States alone, MSOs
have aggressively upgraded their networks to cost-effectively support and
deliver enhanced video, voice and data services and have invested over $70
billion in network upgrades. As a result, cable operators have been able to use
broadband systems to increase their revenues by offering enhanced interactive
subscriber services, such as high-speed data, telephony, digital video and video
on demand, and to effectively compete against other broadband communications
technologies, such as digital subscriber line, local multiport distribution
service, direct broadcast satellite, and fixed wireless. Delivery of enhanced
services also has helped MSOs offset slowing basic video subscriber growth and
reduce subscriber churn.

A key factor supporting the growth of broadband systems is the powerful
growth of the internet. Rapid growth in the number of internet users and the
demand for high-speed, high-volume interactive services has strained existing
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. Further, system operators
are looking for products and technology that are 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. We believe that our products position us well to meet these industry
challenges.

A broadband system consists of three principal components:

- Headend. The headend is a central point in the cable system where
signals are received via satellite and other sources and interfaces are
located that connect the Internet and public switched telephony networks.
The headend facility organizes, processes and retransmits those signals
through the distribution network to subscribers.

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- Distribution Network. The distribution network consists of fiber optic
and coaxial cables and associated optical and electronic equipment that
allocates the combined signals from the headend and transmits them
throughout the cable system to nodes.

- Subscriber Premises. Cable drops extend from nodes to subscribers' homes
and connect to a subscriber's television set, converter box, telephony
network interface device or computer modem.

As cable networks evolved from one-way video only networks to broadband
networks, the underlying network elements have evolved and have been upgraded.
Traditionally, cable systems used coaxial cable and a series of radio frequency,
or RF, amplifiers throughout a distribution network. Today, most of the major
cable systems have been, or will be, upgraded with fiber optic technology. The
use of fiber optic technology enables operators to transmit wider 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 a subscriber's premises. The use
of fiber optic technology also reduces the 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.
We offer to cable operators many of the hardware elements necessary for these
upgrades and products to maintain their fiber optic networks.

Significant advancements in technology have occurred which allow cable
operators to offer services beyond their traditional video offering. Two key
services are cable telephony and the provision of data. According to
In-Stat/MDR, worldwide revenues from cable telephony services are projected to
increase from $3.1 billion in 2002 to approximately $7.5 billion in 2006,
representing a compound annual growth rate of 25%. Additionally, according to
Gartner Dataquest, cable modem subscribers worldwide are projected to increase
from 28.8 million in 2002 to over 56.1 million in 2006, representing a compound
annual growth rate of 18%.

Data is the method by which cable operators can offer to their customers
high-speed access to the internet. We offer both headend and customer premises
products to cable operators that enable them to offer this service to their
subscribers. Our Cadant C4(TM) CMTS headend product is a high density,
chassis-based product that provides the industry's most flexible built-in
redundancy to ensure carrier-grade performance and allows operators to install
the system for data applications today with a seamless transition to voice
services in the future. We offer a competitive line of cable modems for the
customer premises.

The second key new service, cable telephony, is presently offered to cable
operators using two distinct technologies: constant bit rate, or CBR, technology
and Internet protocol, or IP, technology. CBR technology 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. 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 2002, our
Cornerstone CBR cable telephone products served over 3.5 million subscriber
lines deployed by 42 operators in 101 cities in 13 countries. IP technology,
also known as voice over IP, or VoIP, permits cable operators to provide
toll-quality cable telephony at costs 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. We offer telephony products using both of these technologies.

Data and VoIP services are governed by a set of technical standards
promulgated by CableLabs(R) in North America and TComLabs(R) in Europe, two
industry standard-setting bodies. While the standards set by these two bodies
necessarily differ in a few details to accommodate the differences in HFC
network architectures between North America and Europe, they have a great deal
in common. The primary data standard specification for cable operators in North
America is entitled "Data Over Cable Service Interface Specification", or
DOCSIS. Release 1.1 of this specification has been the governing standard for
data services in North America. The Euro-DOCSIS standard Release 1.1 is the same
for Europe. A new version of the standard, DOCSIS 2.0, was released in 2001, and
suppliers, including us, are expected to begin deliveries of

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product compliant to this new standard in 2003. DOCSIS 2.0 builds upon the
capabilities of DOCSIS 1.0 and DOCSIS 1.1 and adds additional throughput in the
upstream portion of the cable plant -- from the consumer out to the Internet. In
addition to the DOCSIS standards which govern data transmission, CableLabs has
defined the PacketCable(R) standard for VoIP. This standard defines the
interfaces among network elements such as cable modem termination systems, or
CMTS, multi-media terminal adapters, or MTA, gateways and call management
servers to provide high quality IP telephony service over the HFC network.

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 two categories:

Broadband............................... - Cable telephony products, CBR telephony
products and VoIP telephony products,
including headend and subscriber
premises equipment;
- High speed data products, including
DOCSIS headend and subscriber premises
equipment;
- Operational support systems; and
- System integration services.
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

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, a gateway, and
provisioning systems provide the ability to integrate the public-switched
telephone network and high-speed data services over an HFC network. The CMTS
provides the software and hardware to allow the IP traffic from the internet or
that used in VoIP telephony to be converted for use on HFC networks. It is also
responsible for initializing and monitoring all cable modems connected to the
HFC network. We provide two products that are used in the cable operator's
headend to provide VoIP and high-speed data services to residential or business
subscribers. These are the Cornerstone Data CMTS 1500 and the Cadant C4 CMTS:

- The Cadant C4 CMTS is a high density, chassis-based product that provides
the industry's most flexible built-in redundancy to ensure carrier-grade
performance. It is DOCSIS(TM) 1.1 and EuroDOCSIS 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
that service thousands to hundreds of thousands of high-speed data and
VoIP subscribers.

- The Cornerstone CMTS 1500 is a DOCSIS 1.1 and EuroDOCSIS 1.1 qualified
CMTS. It is a scaleable headend solution, providing high-speed data and
VoIP services in headends that service several thousand to 50,000
subscribers. We also provide a modular redundant chassis to enable CMTS
1500's to be grouped together with a four-to-one redundant architecture
providing the requisite reliability for carrier-grade telephony
operation.

Subscriber Premises -- Subscriber premises equipment includes DOCSIS 1.0
and 1.1 certified cable modems for high-speed data applications and DOCSIS 1.1
and PacketCable certified cable modems with embedded multimedia terminal
adapters, or E-MTA, for PacketCable-compliant VoIP applications. The PacketCable
solution builds on DOCSIS 1.1 and its quality of service enhancements to support
lifeline

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telephony deployed over HFC 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.
The Touchstone product line consists of the Touchstone 300-series and 450-series
Cable Modems, the Touchstone TM 202-series telephony modem for indoor
applications and the Touchstone TP 202-series telephony port for outdoor
deployments.

- The Touchstone CM300A Cable Modem is DOCSIS 1.1-certified enabling it to
be deployed in networks where advanced high-speed data features such as
tiered data services are planned. The Touchstone 300B Cable Modem
provides the same features as the CM300A but is EuroDOCSIS-certified for
use in European and similar systems. We plan to introduce the Touchstone
CM 450A/450C DOCSIS 2.0-based Cable Modems in the second quarter of 2003.
These advanced modems deliver higher upstream speeds enabling operators
to offer advanced services over HFC networks.

- The Touchstone TM 202A/B/C E-MTAs are PacketCable-certified indoor E-MTAs
that support enhanced services of high-speed data and up to two lines of
IP telephony on the same network for residential and business
subscribers. The Touchstone TM 202A is DOCSIS 1.1 certified for use in
North American and similar cable systems. The Touchstone TM 202B is
EuroDOCSIS 1.1 certified for use in European and similar cable systems.
The Touchstone TM 202C is DOCSIS 1.1-based and designed specifically for
the unique frequency plan of Japanese cable systems.

- The Touchstone TM 202P/R E-MTAs are PacketCable certified and provide all
of the features of the TM 202A/B/C series with the added benefit of an
integral battery back-up system enabling the service provider to offer
carrier-grade Telephony over IP, or ToIP(TM).

- The Touchstone TP 202A/C Telephony Port is a rugged, environmentally
hardened, ultra-reliable outdoor E-MTA that provides high-speed data
access and up to four lines of carrier-grade ToIP(TM) for service
providers wishing to compete by offering a service which is at parity
with the local telephone company.

Constant Bit Rate Products

Headend -- We market our headend equipment under the brand name Cornerstone
Voice. Cornerstone Voice products for the headend include host digital
terminals, or HDTs. An HDT is the device that provides the interfaces, controls
and communications channels between public-switched networks and the HFC
network. Because the Cornerstone Voice system is easy to implement, economical
and scaleable, network operators can offer telephony at low initial penetration
levels and expand as customer demand increases. We design this 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 our customers to compete
with the incumbent local telephone company with an equivalent, and often
superior, service offering.

Subscriber Premises -- The key equipment at subscriber premises is a
network interface unit, or NIU. We market our NIUs under the brand name
Cornerstone Voice Port(TM). The Cornerstone Voice Port is the most widely
deployed CBR NIU. Voice Port units operate in conjunction with the Cornerstone
HDT to provide cable telephony while also maintaining a subscriber's existing
video services. Operators who are also deploying high-speed data services, such
as our Cornerstone, Cadant and Touchstone brands, may deploy cable modems inside
the home or work premises and multiplex the data service signals on to the same
HFC network as the Cornerstone Voice application. This combination of 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 indoor Voice Port NIU with an integrated backup
battery, a four-line Voice Port NIU, and a twenty-four-line Voice Port NIU for
multiple dwelling unit applications.

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Operational Support Systems (OSS)

OSS stands for operational support systems. OSS are a group of networked
software suites that enable operators to automate many of the functions required
to install, provision, manage and grow a subscriber base while managing,
maintaining and upgrading the network for the multiple services offered. Without
OSS automation, operators cannot manage subscriber growth and network operations
effectively.

We are partnering with leading suppliers in the industry to 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. We are an
authorized value added reseller of Alopa's MetaServ(TM), which provides
automated provisioning software for control of the CMTS and cable modems.
MetaServ works with various billing and middleware software programs. We have
strategic relationships with other equipment vendors to integrate existing
Cornerstone software for CMTS and cable modem OSS functions. Operators are able
to perform OSS functions across Cornerstone Voice and Cornerstone Data employing
the Cadant CMTS and Touchstone product lines using a common OSS 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
Cadant G2 IM Server can support up to 100 Cadant C4 CMTS chassis and 20
simultaneous client applications.

System Integration Services

We are a full service system integrator for converged services over HFC
networks. We historically have been a pioneer in the voice and data over HFC
business and have the experience and infrastructure in place to help operators
launch these services. System integration offers the service provider a fully
integrated solution that has been tested for end-to-end interoperability,
performance, capacity, scalability, and reliability prior to ever being
installed at the customer facility. System solution verification can be followed
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 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.

SUPPLIES AND SERVICES

We offer a variety of supplies and services, including products and
value-added logistics programs, to support broadband network builds, rebuilds,
upgrades and maintenance. Our supplies and services are complemented by our
extensive channel-to-market infrastructure, which is focused on providing
efficient delivery of products from stocking or drop-ship locations.

We believe that the core strength of our products is our broad selection of
trusted name-brand products and strategic proprietary lines and our experience
in distribution. Our name-brand products are manufactured to our specifications
by manufacturing partners. These products include: taps, line passives, house
passives and premises installation equipment marketed under our Regal brand
name; MONARCH(TM) aerial and underground plant construction products and
enclosures; Digicon premium F-connectors; and FiberTel fiber optic connectivity
devices and accessories. Through our product selection, we are able to address
virtually every broadband infrastructure application, including fiber optics,
outside plant construction, drop and premises installation, and signal
acquisition and distribution.

We also resell products from hundreds of strategic supplier-partners, which
include widely recognized brands to small specialty manufacturers. Through our
strategic supplier-partners, we also supply ancillary products like tools and
safety equipment, testing devices and specialty electronics.

Our inventory management and logistics capabilities, which are critical to
our efficient and successful operation, are often leveraged to offer value-added
services to our customers. These services range from just-in-time delivery,
product "kitting," specialized electronic interfaces, and customized reporting,
to more complex and comprehensive supply chain management solutions. These
services complement our products

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offerings with advanced channel-to-market and logistics capabilities, extensive
product bundling opportunities, and an ability to deliver carrier-grade
infrastructure solutions in the passive transmission portions of the network.
The depth and breadth of our inventory and service capabilities enable us to
provide our customers with single supplier flexibility.

SALES AND MARKETING

Our sales force is divided into two groups, North American and
International. Our North American sales force is also divided into two groups.
The first group focuses on the six largest multiple system operators, or MSOs.
The second group 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
Duluth, Georgia and Denver, Colorado. Our International sales force includes
sales offices in Argentina, Chile, Japan, Spain and the Netherlands.

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 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

The majority of our sales are to cable system operators, 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. In 2002, as the US cable
industry continued a trend toward consolidation, the six largest MSOs controlled
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 a system operator's selection of
our equipment, demand for increased broadband services by subscribers, and
general capital expenditure levels by system operators.

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Our two largest customers are Comcast (including AT&T Broadband, which was
acquired by Comcast during 2002) and Cox Communications. Sales to these two
customers for 2002, 2001, and 2000 are set forth below:

Other than Jupiter Telecom and Cabovisao, which accounted for approximately 7.6%
and 6.0% of our total sales for 2002, no other customer provided more than 5% of
our total sales for the year ended December 31, 2002.

In the fourth quarter of 2002, Comcast completed its purchase of AT&T
Broadband. AT&T Broadband was our largest customer in terms of revenue in the
first three quarters of 2002. AT&T Broadband, with the deployment of telephony
as part of its core strategy, had been using our CBR products in many of its
major markets. Comcast has announced that as an initial priority after its
purchase of AT&T Broadband, it will emphasize video and high-speed data services
and will focus on improving the profitability of its telephony operations at the
expense of subscriber growth. As a result, we have experienced a significant
decline in sales of our CBR telephony product to Comcast in the fourth quarter
of 2002, a trend we expect to continue into 2003.

There are uncertainties surrounding the level of any future transactions
with Cabovisao or Adelphia. Sales to these two customers for 2002, 2001 and 2000
are set forth below:

Sales to Adelphia decreased during the second quarter of 2002 as a result
of Adelphia's financial troubles, which ultimately resulted in a bankruptcy
filing in June 2002. As a result, in June 2002, we established a bad debt
reserve of $20.2 million in connection with our accounts receivable from
Adelphia. In the third quarter of 2002, we sold a portion of our Adelphia
accounts receivable to an unrelated third party, resulting in a net gain of
approximately $4.3 million.

Cabovisao, a Portugal-based MSO, accounted for approximately 6% of our
total sales in 2002. As of March 10, 2003, Cabovisao owed us approximately 18.6
million euros in accounts receivable, a substantial portion of which was past
due. On October 17, 2002, the parent company of Cabovisao, CSii, issued an
announcement that suggested it may have difficulty in accessing or refinancing
its senior credit facility in the future. At that point, we suspended shipments
to them. In January 2003, Cabovisao senior management met with us and presented
a payment plan. In late January 2003, we received the first scheduled payment of
2.0 million euros. On the strength of the payment received and the payment plan
presented, we shipped 0.4 million euros of product to Cabovisao in February
2003. On January 29, 2003, the parent company of Cabovisao announced that it had
obtained access to bridge financing of 14.0 million euros and that it was
continuing negotiations with respect to a long-term financing solution. However,
Cabovisao failed to make the 2.5 million euros February payment to us by its due
date. On March 1, 2003, CSii announced that its bankers again extended the
waivers pertaining to the maturity date of its credit facility until March 26,
2003, but Csii would not make the scheduled March 3, 2003 interest payment on
its senior unsecured notes. The announcement also indicated the company had
formed a special board committee to consider alternatives to

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meet its financial needs, including debt restructuring or a possible
court-supervised restructuring, among other alternatives. We will not deliver
further products to Cabovisao until we have a satisfactory payment plan with
Cabovisao and are considering what actions should be taken regarding the
situation. We cannot provide any assurance that Cabovisao will satisfy our
accounts receivable or that it will continue to place orders with us in the
future.

RESEARCH AND DEVELOPMENT

We are committed to the development of new technology and rapid innovation
in the evolving broadband market. New products are developed in our research and
development laboratories in Duluth, Georgia and Lisle, Illinois. We form
strategic alliances with world-class producers and suppliers of complementary
technology to provide "best-in-class" solutions focused on "time-to-revenue."

Research and development expenses in 2002, 2001, and 2000 were
approximately $64.8 million, $26.9 million, and $9.1 million, respectively. The
increase in 2002 and 2001 was directly attributable to the inclusion of the
research and development activities of Arris Interactive L.L.C. beginning with
the acquisition on August 3, 2001, and the development of new technology
following the acquisition of Cadant on January 8, 2002.

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. To that end, the Cadant C4 CMTS product line
continues to lead the industry in areas such as fault tolerance, wire-speed
throughput and routing, and density. The Touchstone(TM) product line boasts a
wide-range of DOCSIS 1.1 and PacketCable 1.0 certified products, including the
Touchstone Cable Modem 300, in addition to the Touchstone Telephony Modem Model
2E-MTA. We also have developed an outdoor E-MTA to support lifeline telephony
and data services.

The following trends are having a direct effect on our current product
development activities:

- Continued increase in peer-to-peer services are accelerating demand for
new services requiring intensive, high-touch processing and sophisticated
management techniques;

- Innovations in video encode/decode technology are making possible very
low bit rate, high quality video streaming;

- Continued silicon integration and chip fabrication technology innovations
are making possible very low cost, multi-functional broadband consumer
devices, integrating not only telephony but wireless and video
decompression and digital rights management functionality; and

- Continued field and market trials of PacketCable VoIP technology,
potentially leading to adoption and mass deployment beginning in 2004.

As a result, our product development activities are primarily directed at
the following areas:

- Rapid development and delivery of Cadant C4 CMTS features, including
DOCSIS 2.0 support, Layer 3 routing enhancements, packet inspection and
filtering features, and increased downstream/upstream density;

- Introduction of the fourth generation Touchstone Telephony Modem E-MTA,
including support for low maintenance, consumer-friendly lithium ion
battery technology;

- Expansion of the Touchstone product line to include support for DOCSIS
2.0 and wireless home networking capabilities;

- Definition of services and products that will exploit the video
compression innovations of H.264 and Windows Media(TM) Player 9; and

- Continued emphasis on product cost reduction.

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INTELLECTUAL PROPERTY

We have an aggressive program for protecting our intellectual property. The
program consists of maintaining our portfolio of 45 issued patents (both U.S.
and foreign) and pursuing patent protection on new inventions (currently 133
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 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
Patent Convention Treaty (PCT) applications, 5 trademark applications, 1 U.S.
registered trademark and 5 registered copyrights. The Cadant patents are in the
area of cable modems and CMTSs. The March 2003 purchase of the assets of Atoga
Systems resulted in the acquisition of 2 US patent applications, which also have
been filed as PCT applications. The Atoga patents are in the area of network
traffic flow.

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 our 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

Our product sourcing strategy centers on the use of contract manufacturers
to subcontract production. Our largest contract manufacturers are Solectron and
Mitsumi, located in the United States and Japan, respectively. The facilities
owned and operated by these contract manufacturers for the production of our
products are located in the United States, Mexico and the Philippines. 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.

Prior to 2002, we manufactured or assembled a substantial portion of our
products related to our Actives, Keptel and Power product lines. Manufacturing
operations ranged from electro-mechanical, labor-intensive assembly to
sophisticated electronic surface mount automated assembly lines. We operated
five major manufacturing facilities related to these product lines. During the
third quarter of 2001, we made the decision to outsource most of our
manufacturing and have since closed four facilities located in El Paso, Texas
and Juarez, Mexico. The remaining factory in Rock Falls, Illinois, was closed in
conjunction with the sale of the Keptel product line in April 2002.

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, 2002 was approximately $43.8
million, at December 31, 2001 was approximately $119.2 million and at December
31, 2000 was approximately $182.8 million.

9

We believe that substantially all of the backlog existing at December 31,
2002 will be shipped in 2003.

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 primarily includes China, Hong Kong, Japan, Korea, and Singapore.
The European market primarily includes Austria, Germany, France, Netherlands,
Poland, Portugal, Romania, Spain, and Switzerland. The Latin American market
primarily includes Argentina, the Bahamas, Chile, Colombia, Mexico, and Puerto
Rico. Sales to international customers were approximately 22.6%, 11.4% and 4.3%
of total sales for the years ended December 31, 2002, 2001 and 2000,
respectively. International sales for the years ended December 31, 2002, 2001
and 2000 were as follows:

We believe that international opportunities exist and continue 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 We have made significant
operational and geographical changes in the international marketplace. We
consolidated our international offices and warehouses to the Netherlands (to
service northern Europe) and Spain (to service southern Europe). We also opened
a sales office in Chile to address the growing market in that region. In 2002,
we consolidated our international presence in the Far East by opening a sales
and warehouse facility in Japan. We currently maintain international sales
offices in Argentina, Chile, Japan, Spain and the Netherlands.

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.;

- Broadband Services, Inc.;

- Cisco Systems, Inc.;

- Juniper Networks, Inc.;

- Motorola, Inc.;

- Riverstone Networks, Inc.;

- Scientific-Atlanta, Inc.;

- Tellabs, Inc.;

- Terayon Communications Systems, Inc.; and

- TVC Communications, Inc.

10

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, 2003, we had 959 full-time employees. 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 confidentiality 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.

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 I).

- 1991 -- ANTEC was established.

- 1993 -- ANTEC's initial public offering.

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

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

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

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

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

11

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

- 1998 -- ANTEC introduced the industry's first 1550 nm narrowcast
transmitter and dense wavelength division multiplexing, or DWDM,
optical transmission system.

- 1999 -- 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%.

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 Class B
membership interest in Arris Interactive.

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.

ARRIS sold its Keptel product line. During 2001, sales in this
product line were approximately $44.8 million, and during 2002
(through the date of the sale), sales were approximately $7.5
million.

ARRIS sold its Actives product line. During 2001, sales in this
product line were approximately $68.2 million, and during 2002
(through the date of the sale), sales were approximately $58.8
million.

ARRIS closed its office in Andover, Massachusetts, which was
primarily a product development and repair facility.

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

ITEM 2. PROPERTIES

We currently conduct our operations from 12 different locations; two of
which we own, while the remaining 10 are leased. These facilities consist of
sales and administrative offices and warehouses totaling approximately 600,000
square feet. Our long-term leases expire at various dates through 2009. We
believe that

12

our current properties are adequate for our operations. A summary of our
principal leased properties that are currently in use is as follows:

* This location is in process of closing, and the closing should be
completed by June 30, 2003.
- ---------------

Our owned facilities have been pledged as collateral to secure payment of
our credit facility. We own the following properties:

ITEM 3. LEGAL PROCEEDINGS

We are not currently engaged in any litigation that we believe would have a
material adverse effect on our financial condition or results of operations.

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

During the fourth quarter of 2002, no matters were submitted to a vote of
our company's security holders.

EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth the name, age as of March 10, 2003, and
position with us of our executive officers.

John M. Egan joined the Company in 1973 and has been Chairman of our board
of directors since 1997. Mr. Egan was President of ARRIS from 1980 to 1997 and
Chief Executive Officer of ARRIS and its

13

predecessors from 1980 through 1999. On January 1, 2000, Mr. Egan stepped down
from his role as Chief Executive Officer of ARRIS. He remained a full-time
employee until his retirement in May 2002. Currently, Mr. Egan serves on the
Executive Committee of the Company. Mr. Egan is on the Board of Directors of the
National Cable Television Association, or 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 1998 through 1999, Mr. Stanzione was President and Chief
Operating Officer of ARRIS. Mr. Stanzione has been a director of ARRIS since
1998 and serves on the Company's Executive Committee. From 1995 to 1997, he was
President and Chief Executive Officer of Arris Interactive. From 1969 to 1995,
he held various positions with AT&T Corporation. Mr. Stanzione also serves as a
director of Evolve Products, Inc., CoaXmedia, and Georgia CF Foundation.

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. Mr. Margolis serves as a director of Cabletel
Communications Corporation.

Gordon E. Halverson has been Corporate Executive Vice President, Domestic
Sales since August 2001. From April 1997 to August 2001, Mr. Halverson was
Executive Vice President and Chief Executive Officer of ARRIS TeleWire Supply.
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.

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.

Bryant K. Isaacs has been President of ARRIS New Business Ventures since
December 2002. Prior to the sale of the Actives product line, Mr. Isaacs was
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.

James D. Lakin has been President of 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.

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, Mr. Puccini served as
Vice President, Project Management for ARRIS' AT&T account. Mr. Puccini is a
CPA.

14

David B. Potts has been the Senior Vice President of Finance and Chief
Information Officer since the acquisition of Arris Interactive 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.

Marc Geraci has been Treasurer of ARRIS since January 2003 and has been
with ARRIS and the former ANTEC Corporation since 1994. He began with ARRIS as
Controller for the International Sales Group and in 1997 was named Chief
Financial Officer of that group. Prior to joining ARRIS, he was a broker/dealer
on the Pacific Stock Exchange in San Francisco for eleven years and, prior to
that, in public accounting in Chicago for four years.

PART II

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

Since August 6, 2001, ARRIS' common stock has traded 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 18 of Notes to 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:

We have not paid cash dividends on our common stock since our inception.
Our credit agreement contains covenants that prohibit us from paying such
dividends. On October 3, 2002, to implement our shareholder rights plan, our
board of directors declared a dividend consisting of one right for each share of
our common stock outstanding at the close of business on October 25, 2002. Each
right represents the right to purchase one one-thousandth of a share of our
Series A Participating Preferred Stock and becomes exercisable only if a person
or group acquires beneficial ownership of 15% or more of our common stock or
announces a tender or exchange offer for 15% or more of our common stock or
under other similar circumstances.

As of March 25, 2003, there were approximately 241 record holders of our
common stock. This number excludes shareholders holding stock under nominee or
street name accounts with brokers.

15

ITEM 6. SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA

Discontinued Operations. On April 24, 2002, we sold our Keptel product
line. Keptel designed and marketed network interface systems and fiber optic
cable management products primarily for traditional residential and commercial
telecommunications applications. The transaction generated cash proceeds of
$30.0 million. Additionally, we retained a potential earn-out over a twenty-four
month period based on sales achievements. The transaction also included a
distribution agreement whereby we will continue to distribute Keptel products.
The Keptel product line had approximately $51.1 million of revenue in 2001 and
approximately $6.3 million of revenue for the three months ended March 31, 2002.
Total assets of approximately $31.1 million were disposed of, which included
inventory, fixed assets, intangibles (formerly classified as goodwill), and
other assets. We incurred approximately $7.4 million of related closure costs,
including severance, vendor liabilities, outside consulting fees, and other
shutdown expenses. During the second quarter of 2002, a net loss of $8.5 million
was recorded in connection with the sale of the Keptel product line. This net
loss was reported in restructuring and other in the Consolidated Statement of
Operations during the second quarter due to the overall immateriality of
Keptel's results of operations and assets to the consolidated results and assets
of the company. During the fourth quarter of 2002, we reduced the loss by $2.4
million as a result of the resolution of certain estimated costs associated with
the sale.

On November 21, 2002, we sold our Actives product line to
Scientific-Atlanta for net proceeds of $31.8 million. The Actives product line
had approximately $68.2 million of revenue in 2001, and approximately $44.3
million of revenue for the nine months ended September 30, 2002. The agreement
provided for the transfer of inventory and equipment attributable to the product
line, plus the transfer of approximately 34 employees. Total assets of
approximately $20.3 million were disposed of, which included inventory, fixed
assets, and other assets attributable to the product line. Additionally, ARRIS
incurred approximately $9.3 million of related closure costs, including
severance, vendor liabilities, professional fees, and other shutdown expenses.
In connection with the sale, we recognized a gain of approximately $2.2 million
during the fourth quarter of 2002.

As the sale of Actives and Keptel product lines represented a majority of
the transmission, optical and outside plant product category, we have
reclassified the results of these product lines to discontinued operations for
all periods presented in accordance with Statement of Financial Accounting
Standards, or SFAS, No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets for all periods. The balance of the product lines previously
reported in transmission, optical, and outside plant product category have been
combined with our supplies and services category. All prior period revenues have
been aggregated to conform to the new product categories.

The selected consolidated financial data as of December 31, 2002 and 2001
and for each of the three years in the period ended December 31, 2002 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, 2000, 1999 and 1998 and for the years ended December 31, 1999 and 1998 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 17 of the

16

Notes to the Consolidated Financial Statements for a summary of our quarterly
consolidated financial information.

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

(1) In 1999, we recorded pre-tax charges of approximately $16.0 million in
conjunction with the closure of our New Jersey facility and the
discontinuance of certain products, of which approximately $10.7 million
relates to and is classified in discontinued operations. The charges
included approximately $2.6 million related to personnel costs and
approximately $3.0 million related to lease termination and other costs. Of
the total charge of $5.6 million, approximately $1.4 million is reflected
in restructuring and $4.2 million is classified in discontinued operations.
The charges also included an inventory write-down of approximately $10.4
million, of which $6.5 million is classified in discontinued operations and
$3.9 million is reflected in cost of sales. In 2000, we recorded an
additional $3.5 million pre-tax charge to cost of sales related to the 1999
reorganization.

(2) During 2001, we significantly reduced our 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
selling, general, administrative and development expenses.

(3) During 2002, we recorded severance charges related to general reductions in
force of approximately $5.1 million, of which $1.1 million is reflected in
cost of goods sold and $4.0 million is reflected in selling, general,
administrative and development expenses.

(4) In 2001, we recorded pre-tax restructuring and impairment charges of
approximately $66.2 million. Of this total charge, approximately $50.1
million is classified in discontinued operations, $8.5 million is reflected
in cost of goods sold, and $7.6 million is reflected in restructuring. Of
the $50.1 million classified in discontinued operations, approximately
$25.1 million related to the write-down of inventories, $14.8 million
related to the impairment of fixed assets, $4.5 million related to lease
termination and other shutdown expenses, and $5.7 million related to
severance and associated personnel costs. The remaining $16.1 million
related to continuing operations, of which approximately $8.5 million
related to the write-down of inventories and certain purchase order and
warranty obligations and was charged to cost of goods sold, and
approximately $7.6 million related to the impairment of goodwill and lease
termination expenses and was reflected in restructuring. In 2002, we
recorded an additional $2.4 million pre-tax charge to discontinued
operations related to the 2001 restructuring.

(5) Due to the economic disturbances in Argentina, we recorded a write-off of
$4.4 million related to unrecoverable inventory amounts due from a customer
in that region during the fourth quarter of 2001, of which approximately
$1.6 million relates to and is classified in discontinued operations, and
$2.8 million is reflected in cost of goods sold.

(6) During 2002, we wrote off the remaining $2.1 million of power inventories
that had not been transferred to the buyer. This charge is reflected in
cost of goods sold.

18

(7) In 2000, we recorded a pre-tax gain of $2.1 million as a result of the
curtailment of our defined benefit pension plan.

(8) During the first half of 2002, we established a reserve of $20.2 million in
connection with our Adelphia receivables of which approximately $1.3
million relates to and is classified in discontinued operations, and
approximately $18.9 million is reflected in selling, general,
administrative and development expenses. Adelphia filed for bankruptcy in
June 2002. During the third quarter of 2002, we sold a portion of our
Adelphia accounts receivables to an unrelated third party, resulting in a
net gain of approximately $4.3 million. Of this total gain, approximately
$0.3 million relates to and is classified in discontinued operations, and
$4.0 million is reflected in selling, general and administrative and
development expense.

(9) During the fourth quarter of 2002, based upon management's analysis
including an independent valuation, we recorded a goodwill impairment
charge of $70.2 million with respect to our supplies and services product
line.

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

(11) In 1998, we recorded pre-tax charges of approximately $10.0 million in
conjunction with the consolidation of our corporate and administrative
functions, of which approximately $2.2 million relates to and is classified
in discontinued operations and $7.8 million is reflected in restructuring
expense. The charges included approximately $7.6 million related to
personnel costs and approximately $2.4 million related to lease termination
and other costs. Subsequently, during the fourth quarter of 1998 we reduced
this charge by $0.9 million as a result of the ongoing evaluation of the
estimated costs associated with these actions.

(12) During 2002, a restructuring charge of approximately $7.1 million was
recorded in connection with the closure of our development and repair
facility in Andover, Massachusetts.

(13) During 2001, we closed a research and development facility in Raleigh,
North Carolina and recorded a $4.0 million charge related to severance and
other costs associated with closing that facility.

(14) During 2002, we recorded a loss of $9.3 million associated with the 4 1/2%
note exchanges, in accordance with SFAS No. 84, Induced Conversions of
Convertible Debt. This loss was partially offset with a gain of
approximately $2.0 million related to cash repurchases of the 4 1/2% notes
in accordance with SFAS No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections.

(15) We hold certain investments in the common stock of publicly traded
companies totaling approximately $0.1 million and $0.8 million at December
31, 2002 and 2001, respectively, which are classified as trading
securities. Changes in the market value of these securities and gains or
losses on related sales of these securities are recognized in income and
resulted in pre-tax losses of approximately $0.6 million and $0.8 million
during the years ended December 31, 2002 and 2001, respectively.

We recorded a $13.5 million charge to income during 2002 on our available
for sale securities as a result of market value declines considered by
management to be other than temporary.

(16) During 2002, we recognized a $6.8 million income tax benefit as a result of
a change in tax legislation, allowing us to carry back losses for five
years versus the previous limit of two years.

(17) During 2001, as a result of the restructuring and impairment charges during
that period, a valuation allowance of approximately $38.1 million against
deferred tax assets was recorded in accordance with SFAS No. 109,
Accounting for Income Taxes.

(18) During 2001, a one-time warranty expense relating to a specific product was
recorded, resulting in a pre-tax charge of $4.7 million for the expected
replacement cost of this product of which all relates to and is classified
in discontinued operations. We do not anticipate any further warranty
expenses to be incurred in connection with this product.

(19) During 2002, a loss of $6.2 million was recorded in connection with the
sale of the Keptel product line. Additionally, during 2002, a gain of $2.2
million was recorded in connection with the sale of the Actives product
line. The net loss of $4.0 million relates to and is classified in
discontinued operations.

(20) During 2001, we recorded pre-tax charges of $1.9 million on the
extinguishment of debt in accordance with EITF 96-19, Debtor's Accounting
for a Modification or Exchange of Debt Instruments. The amount

19

reflected unamortized deferred finance fees related to a loan agreement,
which was replaced in connection with the Arris Interactive acquisition. In
2002, this loss was reclassified to loss from continuing operations as a
result of the gain on cash repurchases recognized in the fourth quarter of
2002 in accordance with SFAS No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.

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

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

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.

Discontinued Operations. On April 24, 2002, we sold our Keptel product
line. Keptel designed and marketed network interface systems and fiber optic
cable management products primarily for traditional residential and commercial
telecommunications applications. The transaction generated cash proceeds of
$30.0 million. Additionally, we retained a potential earn-out over a twenty-four
month period based on sales achievements. The transaction also includes a
distribution agreement whereby we will continue to distribute Keptel products.
The Keptel product line had approximately $51.1 million of revenue in 2001 and
approximately $6.3 million of revenue for the three months ended March 31, 2002.
Total assets of approximately $31.1 million were disposed of, which included
inventory, fixed assets, intangibles (formerly classified as goodwill), and
other assets. We incurred approximately $7.4 million of related closure costs,
including severance, vendor liabilities, outside consulting fees, and other
shutdown expenses. During the second quarter of 2002, a net loss of $8.5 million
was recorded in connection with the sale of the Keptel product line. This net
loss was reported in restructuring and other in the Consolidated Statement of
Operations during the second quarter due to the overall immateriality of
Keptel's results of operations and assets to the consolidated results and assets
of the company. During the fourth quarter of 2002, we reduced the loss by $2.4
million as a result of the resolution of certain estimated costs associated with
the sale.

On November 21, 2002, we sold our Actives product line to
Scientific-Atlanta for net proceeds of $31.8 million. The Actives product line
had approximately $68.2 million of revenue in 2001, and approximately $44.3
million of revenue for the nine months ended September 30, 2002. The agreement
provided for the transfer of inventory and equipment attributable to the product
line, plus the transfer of approximately 34 employees. Total assets of
approximately $20.3 million were disposed of, which included inventory, fixed
assets, and other assets attributable to the product line. Additionally, ARRIS
incurred approximately $9.3 million of related closure costs, including
severance, vendor liabilities, professional fees, and other shutdown expenses.
In connection with the sale, we recognized a gain of approximately $2.2 million
during the fourth quarter of 2002.

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As the sale of Actives and Keptel product lines represent a majority
portion of the Transmission, Optical and Outside Plant product category, we have
reclassified the results of these product lines to discontinued operations for
all periods presented in accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets for all periods. The balance of the product lines previously reported in
Transmission, Optical and Outside Plant product category have been combined with
our Supplies and Services product category.

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
$104.2 million as of December 31, 2002. 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 of approximately $10.7
million as of December 31, 2002 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. To the extent that
unexpected collectibility problems with any of our customers occur in the
future, the reserves that we have established may not be sufficient, and an
additional bad debt charge may be necessary. For example, we established a
reserve of $20.2 million during 2002 in connection with our Adelphia
receivables. Adelphia filed for bankruptcy in June 2002. As a result of selling
a portion of our Adelphia accounts receivables to an unrelated third party later
in 2002, this charge was reduced by approximately $4.3 million.

(c) Investments

We hold certain investments in the common stock of publicly traded
companies totaling approximately $0.1 million and $0.8 million at December 31,
2002 and 2001, respectively, which are classified as trading securities. Changes
in the market value of these securities and gains or losses on related sales of
these securities are recognized in income. We recorded pre-tax losses of
approximately $0.6 million and $0.8 million during the years ended December 31,
2002 and 2001, respectively, related to these investments.

We hold certain additional investments in the common stock of publicly
traded companies totaling approximately $1.8 million and $2.1 million at
December 31, 2002 and 2001, respectively, which are classified as available for
sale. In addition, we hold a number of non-marketable equity securities totaling
approximately $2.8 million and $12.0 million at December 31, 2002 and 2001,
respectively, which are classified as available for sale. At December 31, 2002
and 2001, we had unrealized losses related to these available for sale
securities of approximately $0 and $3.2 million, respectively, included in
comprehensive income. During the years ended December 31, 2002, 2001, and 2000,
we recorded impairment charges of approximately $13.5 million, $0, and $1.3
million on our available for sale securities as a result of market value
declines considered by management to be other than temporary.

We offer a deferred compensation arrangement, which allows certain
employees to defer a portion of their earnings and defer the related income
taxes. These deferred earnings are invested in a "rabbi trust", and are

21

accounted for in accordance with Emerging Issues Task Force 97-14, Accounting
for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi
Trust and Invested. A rabbi trust is a funding vehicle used to protect deferred
compensation benefits from events (other than bankruptcy). The investment in the
rabbi trust is classified as a current asset on our balance sheet. During the
year ended December 31, 2002, we recognized a loss of approximately $0.8 million
in connection with realized losses on the related investments.

(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.

Prior to January 1, 2002, we assessed the recoverability of goodwill and
other long-lived assets whenever events or changes in circumstances indicated
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 were less than a business' carrying amount, an asset was determined
to be impaired, and a loss was recorded for the amount by which the carrying
value of the asset exceeded its fair value. Fair value was based on discounting
estimated future cash flows or using other valuation methods as appropriate.
Non-cash amortization expense was 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 adopted SFAS No. 142, Goodwill and Other
Intangible Assets. In general, SFAS No. 142 requires that 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 are required to reduce the amount of the goodwill. In our
initial assessment of our goodwill in accordance with SFAS No. 142, we recorded
a transitional goodwill impairment loss of approximately $58.0 million,
primarily related to our Keptel product line, which was reflected in our
statement of operations as a cumulative effect of an accounting change as of
January 1, 2002. In addition, SFAS No. 142 requires that we assess the valuation
of goodwill on an annual basis. The Company's remaining goodwill was reviewed in
the fourth quarter of 2002, and based upon management's analysis including an
independent valuation, a charge of $70.2 million was taken with respect to our
supplies and services product category. SFAS No. 142 also requires that we
discontinue the amortization of our acquisition related goodwill. As of December
31, 2002, our financial statements included remaining acquisition related
goodwill of $151.3 million.

As of December 31, 2002, our financial statements included intangibles of
$64.8 million, net of accumulated amortization of $41.5 million. These
intangibles are primarily related to the existing technologies acquired from
Arris Interactive on August 3, 2001 and Cadant, Inc. on January 8, 2002, and are
amortized over a three-year period. Also included is an intangible pension asset
of $1.8 million, which is not being amortized. The valuation process to
determine the fair market value of the existing technologies by management
included valuations by an outside valuation service. The values assigned were
calculated using an income approach utilizing the cash flow expected to be
generated by these technologies.

(e) Warranty

We provide, by a current charge to cost of sales in the period in which the
related revenue is recognized, an estimate of 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 we had a warranty expense related to a single product and recorded a
charge of $4.7 million, now classified in discontinued operations. To the extent
that other unexpected warranty claims occur in the future, the reserves

22

that we have established may not be sufficient, cost of sales may have been
understated, and a charge against future costs of sales may be necessary.

(f) Income Taxes

We use 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.

We established a valuation allowance in accordance with the provisions of
SFAS No. 109, Accounting for Income Taxes. We continually review the adequacy of
the valuation allowance and recognize 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

Over the past two years, we have significantly changed our business through
acquisitions, product line rationalizations and cost reduction actions, allowing
us to focus on our long-term business strategy. As a result of our acquisitions
and dispositions, 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 suggest.

Acquisitions

During the third quarter of 2001, we acquired Nortel Networks' interest in
the joint venture Arris Interactive. In January 2002, we purchased substantially
all the assets and assumed certain liabilities of Cadant, Inc., a manufacturer
of cable modem termination systems that had developed a leading design in the
industry for enabling voice over IP telephony and high-speed data. In March
2003, we purchased certain assets of Atoga Systems, a developer of optical
transport systems for metropolitan area networks.

Product Line Rationalizations

Upon evaluation and review of our product portfolio, we concluded that the
Keptel product line was not core to our long-term strategy, thus we sold the
product line during the second quarter of 2002. The Keptel product line had
approximately $51.1 million of revenue in 2001 and approximately $6.3 million of
revenue for the three months ended March 31, 2002. In November 2002, upon
continued review and evaluation of our product portfolio, we sold our Actives
product line to Scientific-Atlanta. This product line had approximately $68.2
million of revenue in 2001, and approximately $44.3 million of revenue for the
nine months ended September 30, 2002. Both of these product lines were included
in our Transmission, Optical & Outside Plant product category and the results of
these operations for all periods have been reclassified to discontinued
operations.

Cost Reduction Actions

During 2001 and 2002, we implemented significant cost reduction actions. In
the third quarter of 2001, we concluded that it would be more cost effective to
outsource manufacturing of our Actives and Keptel product lines. This resulted
in the closure of four factories in Juarez, Mexico and El Paso, Texas. In
conjunction with the purchase of Cadant, we closed our facility in Raleigh,
North Carolina. The Raleigh location was a development facility where
duplicative work to that being done by the Cadant organization was being
performed. In 2001 and 2002, we continuously reviewed our cost structure with
the goal of improving both our effectiveness and efficiency of operations. As a
result, in October 2002, we announced the closure of our development and repair
facility in Andover, Massachusetts and implemented other expense reduction
actions including general reductions in force. These actions were in part
facilitated by the simplification of our business model as a result of the
closure of factories and product line rationalizations.

Debt Reduction and Refinancing Actions

Notes due 2003. In 1998, we issued $115.0 million of 4 1/2% convertible
subordinated notes due May 15, 2003. Between April 1, 2002 and December 31, 2002
we purchased approximately $75.7 million of the notes for an aggregate purchase
price of $73.7 million in cash and exchanged approximately 1.6 million shares of
our

23

common stock for $15.4 million of the notes. Between January 1, 2003 and March
10, 2003, we purchased approximately $12.4 million of the notes for cash. In
order for these transactions to be permitted under the terms of our credit
facility, we modified our credit facility on several occasions.

We recorded the exchanges in accordance with SFAS No. 84, Induced
Conversions of Convertible Debt, which requires the recognition of an expense
equal to the fair value of additional shares of common stock issued in excess of
the number of shares that would have been issued upon conversion under the
original terms of the notes. In connection with these exchanges, we recorded a
non-cash loss of approximately $8.7 million, based upon a weighted average
common stock value of $9.10 per share (as compared with a common stock value of
$24.00 per share in the original conversion ratio for the notes). We also
incurred associated fees of $0.6 million related to these exchanges, resulting
in an overall net loss of $9.3 million. We recorded a $2.0 million gain in 2002
on the notes purchased during the year in accordance with SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections. We anticipate recording neither a gain nor a loss
for the notes purchased in 2003.

We intend to repurchase or repay the remaining notes (approximately $11.5
million as of March 10, 2003) on or before their maturity on May 15, 2003. Our
credit facility imposes certain conditions on our ability to purchase or redeem
the notes, although we currently meet all of those conditions and expect to
continue to do so.

Notes due 2008. On March 18, 2003, we issued $125.0 million of 4 1/2%
convertible subordinated notes due March 15, 2008 under Rule 144A. These notes
are convertible at the option of the holder into our common stock at $5.00 per
share, subject to adjustment. We are entitled to call the notes for redemption
at any time, subject to our making a "make whole" payment if we call them for
redemption prior to March 15, 2006. In addition, we are required to repurchase
the notes in the event of a "change in control."

We used approximately $88.4 million of the proceeds, including the
reduction in the forgiveness of the Class B membership interest, of the notes
issuance to redeem the entire Class B membership interest in Arris Interactive
held by Nortel Networks. We used approximately $28.0 million of the proceeds of
the issuance to repurchase and retire 8 million shares of our common stock held
by Nortel Networks at a discount.

Credit Facility. As noted above, on several occasions during 2002 we
modified our credit facility in order to allow us to use existing cash reserves
and proceeds of asset sales to purchase or redeem our outstanding 4 1/2%
convertible subordinated notes due 2003. These modifications imposed certain
conditions on the use of such cash to purchase or redeem additional notes. On
March 11, 2003, we amended the credit facility to permit us to issue up to
$125.0 million of new convertible subordinated notes due 2008 and to use the
proceeds of the new notes to redeem the Class B membership interest in Arris
Interactive held by Nortel Networks and to purchase shares of the our common
stock held by Nortel Networks, subject to certain limitations. The amendment
also reduced the revolving loan commitments to $115.0 million.

Nortel Networks

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 Networks and us in
1995, and immediately prior to the acquisition we owned 18.75% and Nortel
Networks owned the remainder. As part of this transaction:

- A new holding company, ARRIS, was formed;

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

- Nortel Networks and our 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 Networks 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

24

transaction) and a subordinated redeemable Class B membership interest in
Arris Interactive with a face amount of $100 million;

- ANTEC, now our wholly-owned subsidiary, changed its name to Arris
International, Inc.;

- Nortel Networks designated two new members to our board of directors;

- We issued approximately 2.1 million options and 95,000 shares of
restricted stock to Arris Interactive employees.

In connection with this transaction, we entered into an agreement with
Nortel Networks whereby we pay Nortel Networks an agency fee of approximately,
on average, 10% for all sales of Arris Interactive legacy products made to
certain domestic and international customers. This agreement for domestic agency
fees expired December 31, 2001. The agreement for international agency fees was
terminated on December 6, 2002.

Membership Interest. In connection with the acquisition of Arris
Interactive in August 2001, Nortel Networks exchanged its remaining ownership
interest in Arris Interactive for 37 million shares of our common stock and a
subordinated redeemable Class B membership interest in Arris Interactive with a
face amount of $100.0 million. The Class B membership interest earned an
accreting non-cash return of 10% per annum, compounded annually, and was
redeemable in approximately four quarterly installments commencing February 3,
2002, provided that certain availability and other tests are met under our
revolving credit facility. Those tests were not met. The balance of the Class B
membership interest as of December 31, 2002 was approximately $114.5 million. In
June 2002, we entered into an option agreement with Nortel Networks that
permitted us to redeem the Class B membership interest in Arris Interactive at a
discount of 21% prior to June 30, 2003. To further induce us to redeem the Class
B membership interest, Nortel Networks offered to forgive approximately $5.9
million of the earnings on the Class B membership interest if we redeemed it
prior to March 31, 2003. As noted elsewhere, we used approximately $88.4 million
of the proceeds of the March 2003 convertible note offering to redeem the Class
B membership interest, including the reduction in the forgiveness of the
interest.

Common Stock. Of the 37 million shares of our common stock that Nortel
Networks received in 2001, it sold 15 million in a registered public offering in
June 2002. In order to reduce its holdings further, in March 2003 Nortel
Networks granted us an option to purchase up to 16 million shares at a 10%
discount to market, subject to a minimum purchase price of $3.50 per share for 8
million shares and $4.00 per share for the remainder. In addition, to the extent
that we purchased shares at a price of less than $4.00 per share, we were
obligated to return to Nortel Networks a portion of the return that was forgiven
with respect to the Class B membership interest, up to a maximum of $2.0
million. Pursuant to this option, on March 24, 2003, we purchased 8 million
shares for an aggregate purchase price of $28.0 million. Contemporaneously with
this transaction, we paid Nortel Networks $2.0 million, which represented the
reduction in the forgiveness of the Class B membership interest. We have not
decided when or whether we will exercise the option to repurchase the additional
8 million shares offered by Nortel Networks.

Amendment to Investor Rights Agreement. In connection with the sale of
shares of our common stock by Nortel Networks in June 2002, effective September
30, 2002, we agreed to relax certain restrictions in the Investor Rights
Agreement governing Nortel Networks' ownership and disposition of our stock that
will make it easier for Nortel Networks to sell its remaining shares of our
stock. Additionally, Nortel Networks and Liberty Media (our other large
shareholder), entered into a "standstill" agreement under which each of them has
agreed that it will not exercise its registration rights or, except under
certain circumstances, sell any shares of our common stock until July 31, 2003,
unless prior to then we both redeem our outstanding convertible notes and
repurchase at least 66% of Nortel Networks' Class B membership interest, in
which case the restrictions expire 30 days after the later of those two events.
As a result of the repurchase of the Class B membership interest, those
restrictions will expire on April 17, 2003.

25

ACQUISITION OF CADANT, INC.

On January 8, 2002, we acquired substantially all of the assets of Cadant,
Inc., a privately held designer and manufacturer of next generation CMTS. Under
the terms of the transaction, we issued 5.25 million shares of our common stock
and assumed approximately $16.5 million in liabilities in exchange for the
assets. We issued 2.0 million options to purchase our common stock and 250,000
shares of restricted stock to Cadant employees. We also agreed to issue up to
2.0 million additional shares of our common stock based upon the achievement of
future sales targets through 2003 for the CMTS product. These sales targets were
not achieved and no additional shares of our common stock will be issued.

ACQUISITION OF ATOGA SYSTEMS

-- On March 21, 2003, we purchased certain assets of Atoga Systems, a Fremont,
California-based developer of optical transport systems for metropolitan area
networks. Under the terms of the agreement, we obtained certain inventory, fixed
assets, and intellectual property in consideration for approximately $0.5
million of cash and the assumption of certain lease obligations. Further, we
retained approximately 30 employees and issued a total of 500,000 shares of
restricted stock to those employees. We anticipate the transaction to be
slightly dilutive to our earnings per share in 2003.

SALE OF KEPTEL PRODUCT LINE

-- On April 24, 2002, we sold our Keptel product line. Keptel designed and
marketed network interface systems and fiber optic cable management products
primarily for traditional telecommunications residential and commercial
applications. The transaction generated cash proceeds of $30.0 million.
Additionally, we retained a potential earnout over a twenty-four month period
based on sales achievements. The transaction also includes a distribution
agreement whereby we will continue to distribute Keptel products. The Keptel
product line had approximately $51.1 million of revenue in 2001 and
approximately $6.3 million of revenue for the three months ended March 31, 2002.
Total assets of approximately $31.1 million were disposed of, which included
inventory, fixed assets, intangibles (formerly classified as goodwill), and
other assets. We incurred approximately $7.4 million of related closure costs,
including severance, vendor liabilities, outside consulting fees, and other
shutdown expenses. The net result of the transaction was a loss on the sale of
the product line of approximately $8.5 million. During the fourth quarter of
2002, we reduced the loss by $2.4 million as a result of the resolution of
certain estimated costs associated with the sale.

SALE OF ACTIVES PRODUCT LINE

-- On November 21, 2002, we sold our Actives product line, excluding
receivables and payables, to Scientific-Atlanta for $31.8 million in net
proceeds. This product line had approximately $68.2 million of revenue in 2001
and approximately $44.3 million of revenue for the first nine months of 2002,
prior to the closing of the sale. The agreement provided for the transfer of
inventory and equipment attributable to the product lines, plus the transfer of
approximately 34 employees. Total assets of approximately $20.3 million were
disposed of, which included inventory, fixed assets, and other assets
attributable to the product line. Additionally, ARRIS incurred approximately
$9.3 million of related closure costs, including severance, vendor liabilities,
professional fees, and other shutdown expenses. In connection with the sale, we
recognized a gain of approximately $2.2 million.

INDUSTRY CONDITIONS

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

26

-- Developments in the industry and in the capital markets over the past two
years have reduced access to funding for new and existing customers, causing
delays in the timing and scale of deployments of our equipment, as well as the
postponement or cancellation of certain projects by our customers. In addition,
during the same period, we and other vendors received notification that several
customers were canceling new projects or scaling back existing projects or
delaying new orders to allow them to reduce inventory levels which were in
excess of their current deployment requirements.

This industry downturn and other factors have adversely affected several of
our largest customers. In June 2002, Adelphia filed bankruptcy at a time when it
owed us approximately $20.2 million in accounts receivable. As a result, we
incurred a $20.2 million charge during the second quarter 2002. However, we sold
a portion of t