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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.

ARRIS is unaware of any delinquent filers pursuant to Item 405 of Regulation S-K.

ARRIS Group, Inc. is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

The aggregate market value of ARRIS Group’s Common Stock held by non-affiliates as of June 30, 2003 was approximately $301.3 million (computed on the basis of the last reported sales price per share of such stock of $4.96 on the Nasdaq National Market System). As of March 9, 2004, 86,695,957 shares of the registrant’s Common Stock were outstanding. For these purposes, directors, officers and 10% shareholders have been assumed to be affiliates.

Portions of ARRIS Group’s Proxy Statement for its 2004 Annual Meeting of Stockholders are incorporated by reference into Part III.

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.

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. On our website we provide hyperlinks to copies of the annual, quarterly and current reports we file with the Securities and Exchange Commission, any amendments to those reports, and all press releases. We also maintain the following documents on our website:


	•	Code of Ethics (applicable to all employees), and our Financial Code of Ethics (applicable to our CEO, senior financial officers, and all finance, accounting, and legal managers). The website also will disclose whether there have been any amendments or waivers to the Code of Ethics and Financial Code of Ethics.

	•	Audit Committee Charter

	•	Compensation Committee Charter

	•	Nominating and Corporate Governance Committee Charter

We will provide copies of these documents in electronic or paper form upon request to Investor Relations, free of charge.

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 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. MSOs have aggressively upgraded their networks to cost-effectively support and deliver enhanced video, voice and data services. As a result, cable operators have been able to use broadband systems to increase their revenues by offering enhanced interactive subscriber services, such as high-speed data, telephony, digital video and video on demand, and to effectively compete against other broadband communications technologies, such as digital subscriber line, local multiport distribution service, direct broadcast satellite, fiber to the home, and fixed wireless. Delivery of enhanced services also has helped MSOs offset slowing basic video subscriber growth, reduce their subscriber churn and compete against alternative providers, in particular, digital broadcast satellite, or DBS.

A key factor supporting the growth of broadband systems is the powerful growth of the internet. Rapid growth in the number of internet users and the demand for high-speed, high-volume interactive services has created demand for high-speed internet access at home. Another key factor supporting the growth of broadband systems is the evolution of video services being offered to consumers. Video on demand and high definition television are two key video services expanding the use of MSOs’ broadband systems. 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.

Capital spending by MSOs on their networks has shifted in the past several years. The table below illustrates the shifting mix of capital spending by US MSOs:


	•	Spending on HFC rebuilds and upgrades has declined and is expected to decline further.

	•	Spending on maintenance and extension is expected to increase, particularly as the newly built plant ages.

	•	Spending on new services (digital video, telephony, high-speed data) has and is expected to increase.

Two of the fastest growing services are cable telephony and high-speed data. The data below is taken from both external sources and internal estimates and illustrates the expected growth in subscribers for these two services:

Cable telephony allows cable operators to offer their customers local and long distance residential telephone service. It 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. 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 2003, our Cornerstone® CBR cable telephone products served over 4 million subscriber lines deployed by 56 operators in 102 cities in thirteen 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® in North America and tComLabs 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 began delivering products compliant to this new standard in 2003 and will be offering more in 2004. DOCSIS 2.0 builds upon the capabilities of DOCSIS 1.1 and adds additional throughput in the upstream portion of the cable plant — from the consumer out to the Internet. In addition to the DOCSIS standards which govern data transmission, CableLabs has defined the PacketCable® 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.


	•	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.

	•	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.

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:

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 three 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, the Cadant® C4 CMTS, and the Cadant C3 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 PacketCable 1.0, DOCSIS 1.1 and Euro-DOCSIS 1.1 qualified and will support recently released DOCSIS 2.0 and Euro-DOCSIS 2.0 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 can provide high-speed data and VoIP services in headends that service thousands to hundreds of thousands of subscribers.

	•	The Cadant C3 CMTS is a rack mounted, single downstream-based product that provides high performance packet handling in an extremely compact package. It is DOCSIS 1.1 and Euro-DOCSIS 1.1 qualified and will support recently released DOCSIS 2.0 and PacketCable standards.


		Each unit supports one downstream channel and up to 6 upstream channels with a selectable choice of modulation schemes. The C3 supports markets worldwide with DOCSIS, Euro-DOCSIS and Japanese DOCSIS parameters that are selectable via software.

	•	The Cornerstone CMTS 1500 is a DOCSIS 1.1 and Euro-DOCSIS 1.1 qualified CMTS. It is a scalable headend solution, providing high-speed data and voice service in headends that service several thousand to 50,000 subscribers.

Subscriber Premises — Subscriber premises equipment includes DOCSIS 1.0, 1.1, and 2.0 Certified cable modems for high-speed data applications as well as Euro-DOCSIS certified versions and PacketCable Certified E-MTAs for VoIP applications in both DOCSIS and Euro-DOCSIS networks. The PacketCable solution builds on DOCSIS 1.1 and its quality of service enhancements to support lifeline telephony deployed over HFC networks. The Touchstone^TM product line provides carrier-grade performance to enable operators to provide all data, telephony and video services on the same network using common equipment. The Touchstone product line consists of the Touchstone 300-series and 450-series of cable modems, the Touchstone 202-series and 402 series of telephony modems for indoor applications and the Touchstone Telephony Port 204 — 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 Euro-DOCSIS certified for use in European and similar systems. The Touchstone CM450A Cable Modem is DOCSIS 2.0 certified which gives operators the potential to offer much higher upstream data rates. DOCSIS 2.0 is backward compatible with DOCSIS 1.0 and 1.1 headend systems. The Touchstone 450B Cable Modem provides the same features as the CM450A but is Euro-DOCSIS certified. ARRIS also manufactures cable modems that have been homologated in other countries, including Chile, Argentina, Israel, Australia, Hong Kong, and Korea.

	•	The Touchstone TM202A E-MTA is a PacketCable and DOCSIS 1.1 indoor E-MTA that supports enhanced services of high-speed data and up to two lines of IP telephony in a single unit. The TM202A’s innovative, compact design provides for easy installation. This product is also available in a Euro-DOCSIS design, the Touchstone TM202B, as well as one designed specifically for the unique frequency plan of Japanese cable systems, the Touchstone TM202C. The Touchstone TM202P is a PacketCable and DOCSIS 1.1 certified E-MTA that provides all of the features of the TM202A with the added benefit of an integrated battery back-up system enabling the service provider to guarantee service even in the event of a power outage. This allows them to compete directly with the incumbent local exchange carrier, or ILEC. This is also available in a Euro-DOCSIS version, the Touchstone Telephony Modem 202Q.

	•	The Touchstone Telephony Modem 402 series is our DOCSIS 2.0 and Euro-DOCSIS 2.0 family of E-MTAs. This line also is the first to incorporate Lithium-Ion battery technology. The resulting product, the Touchstone TM402P, provides extended battery back-up time. Additional versions are available offering less or no battery back-up capabilities, DOCSIS and Euro-DOCSIS variants, and country specific powering options.

	•	The Touchstone Telephony Port 204A is a rugged, environmentally hardened outdoor E-MTA that provides high-speed data access and up to four lines of carrier-grade VoIP for service providers wishing to maintain the demarcation point on the outside of the residence. This allows them to more closely parallel the deployment model used by ILECs, which makes service and maintenance easier over the long-term.

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 and 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 an NIU. We market our NIUs under the brand name Cornerstone Voice Port®. 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 onto 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 modular Voice Port NIU for multiple dwelling unit applications.

In March 2003, ARRIS acquired Fremont, California-based Atoga Systems. The Atoga Systems product portfolio includes the Optical Application Router, or OAR, family of hardware products and the AppDirector^TM Element Management System. Together, they offer cable operators and carriers a converged multi-service transport platform to carry IP, Ethernet and time-division multiplexing, or TDM, traffic over metro synchronous optical networks, or SONET, or dense wavelength division multiplexing, or DWDM, networks at a fraction of today’s costs.

The Atoga solution, when matched with the ARRIS C4 next generation CMTS, presents a complete solution for operators seeking to simplify their network designs along with offering advanced voice and data services to residential and business customers.

Operational support systems, or 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 call management server, gateways, 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.

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. 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.

We offer a variety of products that are used by MSOs to build and maintain their cable plants. Our products 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 a 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 substantially all broadband infrastructure applications, 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 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.

We are positioned to service customers worldwide with a sales force and supporting sales engineering resources in both domestic and international markets. The sales organization itself is divided in such a way as to allocate resources to the top MSOs worldwide while others are committed to addressing the general supplies requirements that are common across all customers. We maintain sales offices in Duluth, Georgia; Denver, Colorado; Philadelphia, Pennsylvania; San Jose, California; Ireland; Chile; Japan; Spain; and the Netherlands. Additionally, we have partnership agreements in a variety of countries and regions with value-added resellers, or VARs, which extend our sales presence in markets without established sales offices.

Additionally, 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.

The majority of our sales are to cable system operators or MSOs. We also sell products to traditional telephone companies, local exchange carriers, and competitive local exchange carriers. Our broadband products can be deployed not only by cable system operators, but also by traditional telephone companies, electric utilities and others. In 2003, 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.

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 2003, 2002, and 2001 are set forth below:

Jupiter Telecom accounted for approximately 7.9% and 7.6% of total sales in 2003 and 2002, respectively. In 2002, Cabovisao accounted for approximately 6% of total sales for the year. In 2001, Insight and Adelphia accounted for approximately 5.0% and 8.6%, respectively, of total sales for the year. No other customers provided more than 5% of total sales for the years ended December 31, 2003, 2002, or 2001.

Although with some of our customers we do have general purchase agreements, the vast majority of our sales, to both those that have agreements and to our remaining customers, result from purchase orders or other short-term commitments. A summary of the key terms of the general purchase agreements with Comcast and Cox Communications is as follows:

Comcast. We have non-exclusive agreements with Comcast to supply C4 CMTS units and parts and to sell cable television supplies for two-year terms expiring in March 2005. Commercial terms include a requirement to supply product based on Comcast forecasts (updated quarterly), most favorable pricing as compared to similarly-situated companies, and specific delivery lead times with penalties for late delivery and warranty terms ranging from one to five years depending on the product. Included in one of these purchase agreements is a service level agreement structured to provide Comcast service assurance by providing credits for any delinquent response to service needs with special escalation guidelines for the C4 CMTS. To date, no penalties have been incurred. Comcast is not obligated to make any purchases.

Cox Communications. We have an exclusive agreement with Cox Communications to supply Cornerstone Voice and Touchstone Telephony products and services at favorable pricing based on volume commitments. The agreement has a five-year term ending on July 31, 2007. Commercial terms include payment and delivery terms, a five-year warranty, penalties for delivery shortfall and delinquent performance guarantees. To date, no penalties have been incurred. Cox is not obligated to make any minimum purchase commitments.

Adelphia and Cabovisao, historically two of our larger customers, have uncertainties surrounding our future transactions with them, and the level of our transactions. Sales to these two customers for 2003, 2002 and 2001 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. Sales in 2003 to Adelphia have decreased from 2002 as a result of their bankruptcy. The company has taken initial steps to restructure itself through its bankruptcy proceedings, including obtaining debtor in possession financing. We have extended commercially reasonable credit terms to Adelphia in 2003 and they have consistently paid us within those terms. At the end of 2003, Adelphia owed us approximately $0.6 million. We are uncertain whether Adelphia will be successful with its financial restructuring and what impact, if any, this may have on our future relationship with them.

Cabovisao, a Portugal-based MSO, accounted for approximately 6% of our total sales in 2002. As of November 18, 2003, Cabovisao owed us approximately $20.6 million in accounts receivable, all of which was past due. Cabovisao and its parent company, Csii, are in the process of restructuring their financing. On June 30, 2003, Csii filed for court-supervised restructuring and recapitalization in Canada. In 2003 and 2002, we reserved $8.7 million and $3.6 million, respectively, for our Cabovisao receivable. On November 18, 2003 we sold our accounts receivable due from Cabovisao to an unrelated party for $10.1 million, and as a result, recorded a gain with respect to our reserves for doubtful accounts of $1.5 million in the fourth quarter of 2003. CSii is continuing its restructuring efforts. We have and will continue to sell product to Cabovisao on “cash with order” terms. We are uncertain what effect these developments will have on our future relationship with them.

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 Suwanee, Georgia, Cork, Ireland, San Jose, California 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 2003, 2002, and 2001 were approximately $62.9 million, $72.5 million, and $29.8 million respectively. These costs include allocated common costs associated with information technologies and facilities. The increase in 2002 was directly attributable to the inclusion of the research and development activities of Arris Interactive L.L.C. beginning with our acquisition of Arris Interactive L.L.C. on August 3, 2001, and the development of new technology following our acquisition of Cadant, Inc. on January 8, 2002. The decrease in 2003 is attributable to the closure of our development center in Andover, Massachusetts and other cost containment actions described elsewhere.

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 Cadant C3 is designed for small to mid-size operators who are looking for a CMTS that delivers superior RF performance while only occupying one rack unit of space for delivering high-speed data services. The Touchstone^TM product line offers a wide-range of DOCSIS, Euro-DOCSIS and PacketCable certified products, including Touchstone Cable Modems, Touchstone Telephony Modems and Touchstone Telephony Ports. These products are continuously being improved to include innovations that improve the subscriber’s experience and help to control operations expense.


	•	Continued development and acceptance of open standards for delivering voice, video and data;

	•	Most US-based MSOs have announced plans to roll-out VoIP in 2004 (from limited markets to full market deployments);

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

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

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

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


	•	Rapid development and delivery of Cadant C4 and C3 CMTS features, including DOCSIS 2.0, DOCSIS Set-top Gateway (DSG) and PacketCable Multimedia support, Layer 3 routing enhancements, packet inspection and filtering features, security enhancements, and increased downstream/upstream density;

	•	Expanding the range of next-generation, Lithium-Ion-based, Touchstone Telephony Modem E-MTAs to include formats to meet country and MSO specific performance, powering and cost requirements; and

	•	Development of network and client technologies to address the emerging worldwide market opportunities in next generation video and multimedia delivery (video over IP, PacketCable multimedia, and alternative metro transport systems).

We have an aggressive program for protecting our intellectual property. The program consists of maintaining our portfolio of 69 issued patents (both US and foreign) and pursuing patent protection on new inventions (currently more than 150 patent applications and provisional 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. Our recent research and development has led to a number of patent applications in technology related to DOCSIS. Our 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 modem termination systems. Our March 2003 purchase of the assets of Atoga Systems resulted in the acquisition of 5 U.S. patent applications, which also have been filed as PCT applications. Our Atoga patents

are in the area of network traffic flow. In August of 2003, we acquired various assets of Com21, Inc. Included in those assets were 16 issued U.S. patents plus 18 U.S. patent applications. The Com21 patents cover a wide range of technologies, including wide area networks, fiber and cable systems, ATM networks and cable modem termination systems.

For 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. The key technology not owned by us includes:

Broadcom provides several DOCSIS components in our cable modem termination system, or CMTS, product line. This DOCSIS technology is licensed under the terms of an early access program agreement. The early access program agreement provides access to this technology for one year from product release and also provides most favored nation pricing for similar volumes and terms. Several of our competitors have similar agreements with Broadcom for these components.

Texas Instruments provides components used in some of our customer premise equipment, or CPE, products (that is, embedded VoIP media terminal adapters, E-MTA, cable modems). Our agreements with Texas Instruments include technology licensing and component purchases. Several of our competitors have similar agreements with Texas Instruments for these components.

In addition, we purchase software for operating network and security systems or sub-systems, and a variety of routing protocols from different suppliers under standard commercial terms, including source code buy-out arrangements.

Although alternate supply and technology arrangements similar to the above are available or could be arranged, an interruption with any of the above companies could have a material impact on our business.

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.

Our product sourcing strategy centers on the use of contract manufacturers to subcontract production. Our largest contract manufacturers are Solectron, Mitsumi, and AG Communications located in the United States, Japan, and the United States, 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. Below is a summary of the key elements of our agreements with each of these companies:

Solectron. We provide Solectron with a 12-month rolling, non-binding forecast. We typically have a minimum of 60 days of purchase orders placed with Solectron for product. Purchase orders for delivery within 60 days are not cancelable. Purchase orders with delivery past 60 days may be cancelled with penalties of 75% for deliveries between 60 and 90 days, and 50% for deliveries between 90 and 120 days. Purchase orders with deliveries past 120 days may be cancelled without penalty. No minimum volume requirements exist. Solectron provides us with an 18-month warranty. ARRIS and Solectron entered into a supply agreement in 1998. The agreement automatically renews annually. The agreement may be terminated by either party with 120 days notice.

Mitsumi. We provide Mitsumi with a 12-month rolling, non-binding forecast. We typically have a minimum of 60 days worth of purchase orders placed with Mitsumi for product. Purchase orders for delivery within 60 days are not cancelable. Purchase orders with delivery past 60 days and up to 120 days may be

cancelled with ARRIS reimbursing Mitsumi for reasonable out of pocket costs. Purchase orders with deliveries past 120 days may be cancelled without penalty. Mitsumi provides us with an 18-month warranty. ARRIS and Mitsumi entered into a supply agreement in 1997. The agreement automatically renews annually. The agreement may be terminated by either party with nine months notice.

AG Communications. We provide AG Communications with a 6-month rolling, non-binding forecast. We typically have a minimum of 60 days worth of purchase orders placed with AG Communications for product. Purchase orders for delivery within 60 days are not cancelable. No minimum volume requirements exist. AG Communications provides us with an 18-month warranty. We have not yet entered into a formal supply agreement with AG Communications.

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.

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, 2003 was approximately $53.0 million, at December 31, 2002 was approximately $43.8 million and at December 31, 2001 was approximately $119.2 million.

We believe that substantially all of the backlog existing at December 31, 2003 will be shipped in 2004.

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, Singapore, and Taiwan. The European market primarily includes Austria, Belgium, France, Germany, Netherlands, Poland, Portugal, Spain, and Switzerland. The Latin American market primarily includes Argentina, the Bahamas, Chile, Colombia, Mexico, and Puerto Rico. Sales to international customers

were approximately 18.9%, 22.7% and 11.4% of total sales for 2003, 2002 and 2001, respectively. International sales for 2003, 2002 and 2001 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 L.L.C. 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). 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 Japan, Spain and the Netherlands.

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 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.;

	•	Cisco Systems, Inc.;

	•	Motorola, Inc.;

	•	Scientific-Atlanta, Inc.;

	•	Tellabs, Inc.;

	•	Terayon Communications Systems, Inc.; and

	•	TVC Communications, Inc.

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 may enter the cable market.

Since the introduction in 1996 of our Cornerstone® Voice product line, our customers have deployed over 4 million lines, giving us approximately two-thirds of the overall CBR cable telephony market. We continue to grow this business with our established customer base and attempt to add new, usually smaller, accounts. Remaining competitors in this market are Tellabs and ADC. Both continue to service their existing installed base with upgrades and extensions.

One of the principal growth markets for ARRIS is cable modem termination systems, or CMTS, which are the headend product for data and VoIP services. The largest provider of CMTS products is Cisco, which took an early lead in the initial deployment of data-only CMTS products. Cisco is expected to defend its position via both upgrades to existing products and the introduction of new products. At present Cisco continues to be a major player in data-only CMTS markets. Cisco had not previously developed a carrier-

grade telephony CMTS product but has recently begun to market that capability. Motorola, ADC and Terayon have been emphasizing routing and carrier-grade performance for their CMTS. Terayon, due to their proprietary silicon, were successful in bringing the first DOCSIS 2.0 CMTS to market. Each of these vendors has enjoyed some success with varying customers. During 2003, we believe ARRIS has garnered additional market share in the newer generation CMTS products that enable both data and carrier grade telephony deployments.

The customer premises business consists of cable modems and voice over IP enabled modems. In the cable modem and E-MTA business, the dynamics are very different. Cable modem sales are primarily driven by price and supply chain issues while E-MTAs are focused primarily on performance. Motorola is the market leader in cable modems. This position provides them with volume advantages in manufacturing, distribution and marketing expense. Motorola also was successful in gaining an early leader status in E-MTA sales at MSOs that were the first to deploy VoIP. However, as this market accelerates, ARRIS has been gaining share with several of these customers. We compete on product throughput and our telephony experience and integration capabilities. Terayon has had some success in the cable modem business, especially in international markets. Scientific-Atlanta also has had some success in the cable modem market. ARRIS is a relatively small competitor in the cable modem market, but has a larger share of the E-MTA market. Both Scientific-Atlanta and Terayon also have E-MTA products and compete in this market. At present the E-MTA market is small but will grow as VoIP deployments ramp-up.

In the supplies distribution business we compete with national distributors, like TVC Communications, Inc., and with several local and regional distributors. Product breadth, price, availability and service are the principal competitive advantages in the supply business.

Some of our competitors, notably Cisco, Motorola and Scientific-Atlanta, are larger companies with greater financial resources and product breadth than us. This may enable them to bundle products or market and price products more aggressively 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 additional competitive factors.

As of January 31, 2004, we had 791 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.

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.


	•	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 L.L.C. joint venture.

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

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

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

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


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

ARRIS sold substantially all of its power product lines. During 2000, sales in those product lines were approximately $18.0 million, and during 2001 (through the date of the sale), sales were approximately $8.1 million. ARRIS 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 to telecommunications companies were approximately $44.8 million, and during 2002 (through the date of the sale), sales were approximately $7.5 million.

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

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

Nortel Networks sold 15 million shares of ARRIS through a public offering reducing their position to 22 million shares

ARRIS redeemed, for cash and stock, $91.1 million of its convertible notes due May 2003.


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

ARRIS raised $125 million through a private placement of convertible notes due 2008.

ARRIS retired, at a discount, the Class B membership interest due to Nortel Networks for $88.4 million.

ARRIS repurchased and retired 8 million shares from Nortel Networks for an aggregate purchase price of $30 million (taking into account the return of $2 million forgiven on the Class B membership interest), reducing Nortel’s position to 14 million shares.

ARRIS purchased certain assets of Com21 (including the stock of its Irish subsidiary), a designer and manufacturer of next generation cable modem termination systems.

Nortel Networks sold 9 million shares of ARRIS through a public offering reducing their position to 5 million shares.


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

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 700,000 square feet. Our long-term leases expire at various dates through 2023. We believe that our current properties are adequate for our operations. A summary of our principal leased properties that are currently in use is as follows:

ARRIS was a party to three lawsuits brought by or against John Mezzalingua Associates, Inc. d/b/a PPC, including a suit initiated by Mezzalingua in July 2003 in the Federal Court for the Western District of Wisconsin.

In the first lawsuit, John Mezzalingua Associates, Inc. d/b/a PPC v. Antec Corp. No. 3.01CV-482-J-25-HTS (M.D. Fla., Jacksonville Div., filed May 4, 2001), Mezzalingua alleged that ARRIS’ Digicon product infringed on a design patent owned by Mezzalingua. The suit sought an unspecified amount in damages and an injunction against the sale of the allegedly infringing connectors. Following a verdict in Mezzalingua’s favor on January 22, 2002, Mezzalingua was awarded approximately $1.9 million in damages plus post-judgment interest and a permanent injunction was issued on February 11, 2002. ARRIS stopped selling the allegedly infringing product and appealed the judgment.

In the second lawsuit, Arris International, Inc. and Randall A. Holliday v. John Mezzalingua Associates, Inc. d/b/a PPC, No. 01-WM-2061 (D. Colo. filed October 17, 2001), ARRIS and Mr. Holliday alleged that Mezzalingua’s EX product infringes on two utility patents issued to Mr. Holliday and licensed to ARRIS. The suit sought a permanent injunction and unspecified damages for the alleged infringement. Mezzalingua counterclaimed on various grounds, including antitrust and unfair competition.

In the third lawsuit, Mezzalingua Associates, Inc. d/b/a PPC, Inc. v. Arris International, Inc.,
No. 03-C-0353-C (W.D. Wis. filed July 1, 2003), Mezzalingua alleged that certain of ARRIS’ Digicon products infringed on a utility patent issued to Mezzalingua on May 6, 2003. The Court preliminarily enjoined ARRIS’ further sale of the product. ARRIS stopped selling the allegedly infringing product and instead began selling a new product. The suit sought a permanent injunction and unspecified damages for the alleged infringement.

On February 8, 2004, all of the lawsuits were settled on confidential terms, and PPC granted ARRIS a license to sell its Digicon connectors. This settlement also provides protection for our entire current Digicon product line from all PPC patents, including a recently issued patent which was not the subject of the described litigation and is broader than the patents which were the subject of the litigation.

ARRIS is a defendant in a case entitled Metal Press S.A. de C.V. v. ARRIS International Inc. f/k/a Antec Corporation, No. 1:01-CV-2435-CAP (N.D. Ga., Atlanta Div., filed September 13, 2001). In general, Metal Press alleges that ARRIS breached a requirements contract for certain products. The suit seeks damages in the amount of approximately $7.6 million plus punitive damages and fees. Discovery is substantially complete, and ARRIS is in the process of preparing a motion for summary judgment. ARRIS does not believe that Metal Press’s claims are meritorious and intends to vigorously contest them.

During the fourth quarter of 2003, no matters were submitted to a vote of our company’s security holders.

The following table sets forth the name, age as of February 29, 2004, and position with us of our executive officers.

Robert J. Stanzione has been 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 has been the Chairman of the Board of Directors since May 2003. From 1995 to 1997, he was President and Chief Executive Officer of Arris Interactive L.L.C. From 1969 to 1995, he held various positions with AT&T Corporation. Mr. Stanzione also serves as a director of 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 L.L.C in August 2001. From October 2000 through August 2001, he was President and Chief Operating Officer of Arris Interactive L.L.C. From November 1995 until October 2000, Mr. Lakin was Chief Marketing Officer of Arris Interactive L.L.C. 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.

David B. Potts has been the Senior Vice President of Finance and Chief Information Officer since the acquisition of Arris Interactive L.L.C. in August 2002. Prior to joining ARRIS, he was Chief Financial Officer of Arris Interactive L.L.C 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.

Our Board of Directors has three committees: Audit, Compensation, and Nominating and Corporate Governance. The charters for all three committees are located on our worldwide website at http://www.arrisi.com. The Board believes that each of its members, with the exception of Mr. Stanzione, is independent, as defined by the SEC and Nasdaq Rules. Additionally, the Board has identified Matthew Kearney and John Petty as the Audit Committee financial experts, as defined by the SEC.

ARRIS’ common stock is traded on the Nasdaq National Market System under the symbol “ARRS”. 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. 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 9, 2004, there were approximately 287 record holders of our common stock. This number excludes shareholders holding stock under nominee or street name accounts with brokers.

Discontinued Operations. In 2002, we sold our Keptel and Actives product lines. As the sale of Actives and the Keptel telecommunications product lines represented components of the Company, 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, including Keptel products that previously were and continue to be sold by Telewire to cable companies, have been combined with our supplies category. All prior period revenues have been aggregated to conform to the new product categories. All revenues from discontinued product lines included herein reflect sales to third parties.

The selected consolidated financial data as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003 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, 2001, 2000 and 1999 and for the years ended December 31, 2000 and 1999 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 21 of the


	In 2003, 2002, and 2001, we recorded severance costs related to reductions in force of $0.4 million, $1.5 million, and $47 thousand, respectively, which was reflected in cost of sales.

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

	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. Due to unforeseen delays in exiting the facility after the shutdown, the Company increased its reserve by approximately $2.4 million (charged to discontinued operations) and $4.8 million ($4.4 million charged to discontinued operations and $0.4 million charged to continuing operations) during 2002 and 2003, respectively.

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

	In 1999, we recorded pre-tax charges in conjunction with the closure of our New Jersey facility and the discontinuance of certain products. The charges included an inventory write-down of approximately $10.4 million, of which $3.9 million is reflected in cost of sales and $6.5 million is classified in discontinued operations. In 2000, we recorded an additional $3.5 million pre-tax charge to cost of sales related to the 1999 reorganization as a result of additional inventory write-downs.


	In 2003, 2002, and 2001, we recorded severance costs related to reductions in force of $2.5 million, $3.9 million, and $1.4 million, respectively, which was reflected in selling, general, administrative and development expenses.

	In 2003, we recorded a charge of approximately $2.2 million related to the write-off of customer-relations software.

	In 2003 and 2002, we reserved $8.7 million and $3.6 million, respectively, for our Cabovisao receivable. Cabovisao is a Portugal-based customer who owed us approximately $20.6 million in accounts receivable at the end of the third quarter 2003, of which all was past due. Cabovisao and its parent


	company, Csii, have filed for court-supervised restructuring and recapitalization in Canada and are in the process of restructuring their financing. During the fourth quarter of 2003, we sold our accounts receivable to an unrelated third party for approximately $10.1 million, resulting in a gain of approximately $1.5 million.

	In 2003, we sold our engineering consulting services product line, known as ESP, to an unrelated third party. The transaction resulted in a loss of approximately $1.4 million.

	In 2003, we recorded a total of approximately $3.0 million related to potential patent litigation damages. The litigation involves our connector product, which is included in our supplies product category. The litigation was ultimately settled in February 2004.

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

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


	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 product line.


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


	During 2002, a restructuring charge of approximately $7.1 million was recorded in connection with the closure of our development and repair facility in Andover, Massachusetts, related to severance, lease termination, and other costs associated with closing the facility.

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

	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. Due to unforeseen delays in exiting the facility after the shutdown, the Company increased its reserve by approximately $2.4 million (charged to discontinued operations) and $4.8 million ($4.4 million charged to discontinued operations and $0.4 million charged to continuing operations) during 2002 and 2003, respectively.

	In 1999, we recorded pre-tax charges in conjunction with the closure of our New Jersey facility, which included approximately $2.6 million related to personnel costs and approximately $3.0 million related to lease termination and other costs. Of this charge of $5.6 million, approximately $1.4 million is reflected in restructuring and $4.2 million is classified in discontinued operations.


	During the first quarter 2003, ARRIS redeemed the entire Class B membership interest in Arris Interactive L.L.C. held by Nortel Networks for approximately $88.4 million. This discounted redemption resulted in a gain of approximately $28.5 million.

	During the fourth quarter 2003, we chose to cancel our credit facility, which was due to expire in August 2004. As a result, we wrote off approximately $2.3 million of unamortized finance fees related to the facility upon cancellation.

	During 2002, we recorded a loss of $9.3 million associated with the 4 1/2% notes due 2003 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 due 2003 in accordance with SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.

	During 2001, we recorded pre-tax charges of $1.9 million on the extinguishment of debt in accordance with EITF 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments. The amount reflected unamortized deferred finance fees related to a loan agreement, which was replaced in connection with the Arris Interactive L.L.C. acquisition. In 2003, this loss was reclassified to loss from continuing operations as a result of the gain on cash repurchases recognized in the fourth quarter of 2003 in accordance with SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.


	We held certain investments in the common stock of publicly traded companies, some of which are classified as trading securities and some are classified as available for sale. In addition, we hold a number of non-marketable equity securities, which are also classified as available for sale. Changes in the market value of the trading securities and gains or losses on related sales of these securities are recognized in income. Changes in the market value of the available for sale securities are recorded in other comprehensive income. However, the available for sale securities are subject to a periodic impairment review and any “other than temporary” impairments are recognized through income. We offer a deferred compensation arrangement, which allows certain employees to defer a portion of their earnings and defer the related income taxes. These deferred earnings are invested in a “rabbi trust”, and are accounted for in accordance with Emerging Issues Task Force Issue No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested. The investment in the rabbi trust is classified as an investment on our balance sheet.

	During the five-year periods of 2003, 2002, 2001, 2000, and 1999, we recognized total losses of $1.4 million, $14.9 million, $0.8 million, $0.8 million, and $0.3 million, respectively, on our investments discussed above.


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

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


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


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


	—	During 2002, a loss of $6.2 million was recorded in connection with the sale of the Keptel product line. Additionally, during 2003, a gain of $2.2 million was recorded in connection with the sale of the Actives product line. The net loss of $4.0 million relates to and is classified in discontinued operations.

	—	In 2003, 2002, and 2001, we recorded severance costs related to reductions in force of $0.2 million, $1.3 million, and $4.6 million, respectively, which was reflected in discontinued operations.

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

The accounting and financial reporting policies of the Company are in conformity with U.S. GAAP. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. Management has discussed the development and selection of the critical accounting estimates, communicated below, with the audit committee of the Company’s Board of Directors and the audit committee has reviewed the Company’s related disclosures herein.

ARRIS’ revenue recognition policies are in compliance with Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements and Staff Accounting Bulletin No. 104, Revenue Recognition, as issued by the Securities and Exchange Commission.

Product revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. Contracts and customer purchase orders generally are used to determine the existence of an arrangement. Shipping documents, proof of delivery and customer acceptance (when applicable) are used to verify delivery. Sales of services are recognized at the time of performance. Revenue is deferred if certain circumstances exist, including:


	•	when undelivered products or services that are essential to the functionality of the delivered product exist, revenue is deferred until such undelivered products or services are delivered, or

	•	when final acceptance of the product is specified by the customer, revenue is deferred until the acceptance criteria have been met.

At December 31, 2003, we had deferred revenue of $0.7 million related to shipments made to customers whereby the customer has the right of return and related to various customer service agreements.

ARRIS resells software developed by outside third parties as well as internally developed software. Software sold by ARRIS does not require significant production, modification or customization. The Company recognizes software license revenue, and product revenue for certain products where software is more than an incidental component of the hardware, under Statement of Position No. 97-2, Software Revenue Recognition (“SOP 97-2”), as amended by Statement of Position No. 98-9, Software Recognition, With Respect to Certain Transactions (“SOP 98-9”), when the following criteria are met: (1) there is persuasive evidence of an agreement with the customer, (2) shipment is made and title is passed, (3) the amount due from the customer is fixed and determinable, and (4) collectibility is reasonably assured. The Company assesses whether the amount due from the customer is fixed and determinable based on the terms of the

agreement with the customer, including, but not limited to, the payment terms associated with the transaction. ARRIS assesses collection based on a number of factors, including past transaction history with the customer and credit-worthiness of the customer. If the Company determines that collection of an amount due is not reasonable assured, it defers recognition of revenue until collection becomes reasonably assured.

Certain agreements also include multiple deliverables for products and/or services. The Company recognizes revenue from these agreements based on the relative fair value of the products and services. The determination of the fair value of the elements, which is based on a variety of factors including the amount ARRIS charges other customers for the products or services, price lists or other relevant information, requires judgment by management. If an undelivered element is essential to the functionality of the delivered element or required under the terms of the contract to be delivered concurrently, the Company defers the revenue on the delivered element until that undelivered element is delivered.

ARRIS’ internal costs incurred in developing software are charged to expense as research and development expense until technological feasibility has been established for the product, in accordance with Statement of Financial Accounting Standards No. 86 (“SFAS 86”), Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. As the time period between the establishment of technological feasibility and general release of internally developed software to its customers is generally very limited, no material development costs are incurred during this period and, therefore, no such costs have been capitalized to date.

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 $4.4 million as of December 31, 2003 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 the reserve we have established will not be sufficient. We held our assumptions constant, and are not planning to alter them in the current fiscal year, unless an unforeseen factor causes us to do so.

We calculate the reserve for uncollectible accounts using a model that considers customer payment history, recent customer press releases, bankruptcy filings, if any, Dun & Bradstreet reports, and financial statement review. The Company’s calculation is reviewed by management to assess whether additional research is necessary, and if complete, whether there needs to be an adjustment to the reserve for uncollectible accounts. The reserve is established through a charge to the provision and represents amounts of current and past due customer receivable balances which management estimates will not be collected. In the past several years, two of our major customers encountered significant financial difficulty due to the industry downturn and tightening financial markets. As a result, we added provisions to the reserve for uncollectible accounts for the following customers (in millions):

In both cases, we adjusted the reserves for these customers based upon our understanding of the situation and negotiations with them. Ultimately, we chose to sell our accounts receivable from these companies to unrelated third parties. At the end of 2003, we believe that we do not have a major customer that is in a financially distressed position.

Inventory is reflected in our financial statements at the lower of average, approximating first-in, first-out cost or market value.

We continuously evaluate future usage of product and where supply exceeds demand, we may 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. When we believe that we have overestimated, we adjust for that overstatement through an increase in cost of sales in the period identified. Inherent in our valuations are certain management judgments and estimates, including markdowns, shrinkage and future forecasts, which can significantly impact ending inventory valuation and gross margin. The methodologies utilized by the Company in its application of the above methods are consistent for all periods presented.

The Company, to assist in assessing the proper valuation of inventory, conducts annual physical inventory counts at all ARRIS locations. The Company, during the past twelve months, did not have inventory valuation issues that were not already identified in prior analyses. We have held our assumptions constant, and are not planning to alter them in the current fiscal year, unless an unforeseen factor causes us to do so.

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. The estimate is based upon historical experience. The embedded product base, failure rates, cost to repair and warranty periods are used as a basis for calculating the estimate. We also provide, by a charge to current cost of sales, estimated expected costs associated with non-recurring product failures. In the event of a significant non-recurring product failure, the amount of the reserve may not be sufficient. For example, 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 non-recurring warranty claims occur in the future, the reserves 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. As of December 31, 2003 a reserve of $4.6 million for warranty expense was reflected on the balance sheet versus a reserve of $6.0 million as of December 31, 2002. The change in the reserve balance reflects both the addition and usage of our on-going warranty claims. It also reflects the additions, usages and adjustments to our non-recurring product issues. We review and update our estimates, with respect to the non-recurring product issues on an on-going basis. The quantity of the embedded base of product in the field has been reasonably stable. The lack of volatility of the embedded base and our continued effort to control our cost to repair leads the company to believe that the reserve will be reasonably constant in the future.

Our long-term goal is to be a leading provider of broadband access products and services. Our primary market and focus is cable providers or multiple system operators, or MSOs; however, we regularly evaluate alternative outlets for our products and services — for example, the telecommunications market, including U.S. regional telephone companies, local exchange companies, competitive local exchange carriers, and governmental agencies.

Our performance is largely dependent on capital spending for constructing, rebuilding, maintaining and upgrading broadband communications systems. The cable market has evolved and changed significantly over the past two years. Key developments that have or may impact us include:

After a period of increased consolidation and 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.

Developments in the industry and in the capital markets over the past several 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 of 2002. However, we subsequently sold a portion of the Adelphia receivables during the third quarter of 2002 to an unrelated third party, resulting in a net gain of approximately $4.3 million in that quarter. For the year ended December 31, 2002, the net result was a loss of $15.9 million related to the Adelphia situation, of which $14.9 million related to continuing operations and $1.0 million related to discontinued operations.

In addition, as of November 18, 2003, Cabovisao, a Portugal-based customer, owed us approximately $20.6 million in accounts receivable, all of which was past due. This customer accounted for approximately 6% of our sales in 2002. Cabovisao and its parent company, Csii, have been in the process of restructuring their financing. On June 30, 2003, Csii filed for court-supervised restructuring and recapitalization in Canada. In 2003 and 2002, we reserved $8.7 million and $3.6 million, respectively, for our Cabovisao receivable. On November 18, 2003 ARRIS sold its accounts receivable due from Cabovisao to an unrelated party for $10.1 million. The net result was a loss of $10.8 million related to the Cabovisao situation. CSii is continuing its restructuring efforts. We are uncertain what effect, if any, these developments will have on our future relationship with them.

A significant portion of the MSOs have, or are nearing completion of their “two-way” plant upgrade programs. We, as well as our competitors (in particular, Scientific-Atlanta, Motorola and TVC), have sold significant amounts of equipment to the MSOs over the past five years in support of their upgrade programs. These sales were predominately of our supplies products as well as our former Transmission, Optical and Outside Plant products. We anticipate a further decline in revenues associated with these upgrades.

While reducing their overall capital expenditures, MSOs have increased their expenditures on equipment, which allows them to create new revenue-generating opportunities, including high-speed data, telephony and digital video. We anticipate future increases in expenditures by the MSOs on products and services, which allow them to capitalize on these opportunities.

Each of the key new revenue-generating services (high-speed data, telephony and digital video) were originally made available to the MSOs by various companies using proprietary product; however, next generation product is being developed and deployed in compliance with open standards established by the cable industry:


	•	High-speed data was offered, most significantly by ARRIS (LANcity), Motorola and Terayon, using proprietary cable modem termination systems and cable modems. In the United States, the MSOs created CableLabs to create an open standard architecture for high-speed data. This architecture was introduced in 1999 and remains the standard. ARRIS and its competitors had to respond to the creation of this standard. ARRIS has not sold proprietary high-speed data products since 2000. Similar standards exist in Europe.

	•	Telephony was first offered, most significantly by ARRIS, Motorola, ADC and Tellabs, using proprietary constant bit rate, or CBR, headends and network interface units. ARRIS continues to sell significant volumes of CBR equipment. The MSOs, through CableLabs, have created an open architecture for VoIP telephony. We anticipate that the majority of new telephony deployments will use this architecture. ARRIS and its competitors had to respond to the creation of this new standard.

	•	Digital Video was first offered, most significantly by Motorola, Scientific-Atlanta and Pace, using proprietary set-top boxes. We anticipate that the MSOs will ultimately drive a similar set of open interfaces for digital video.

We expect that MSOs will continue to create and demand open interfaces in the future.

Consolidation of our customers has, and may in the future, affect their purchases of our products. In the fourth quarter of 2002, Comcast completed its purchase of AT&T Broadband. Historically, AT&T Broadband had been our largest customer. 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 announced that, as its initial priority after its acquisition of AT&T Broadband, it would emphasize video and high-speed data operations and focus on improving the profitability of its telephony operations at the expense of subscriber growth. As a result, we experienced a significant decline in sales of our CBR telephony product to Comcast in the fourth quarter of 2002 and 2003, which we expect to continue into 2004.

It is possible other customer consolidations may occur which could have an impact on future sales of our products.

In response to and in anticipation of the factors above, we have implemented a long-term business strategy, which includes the following key elements:


	•	Transition to VoIP with an “Everything IP, Everywhere” philosophy and build on current market successes;

	•	Leverage our current voice and data business

	•	Strengthen and grow our supplies infrastructure distribution channel

	•	Expand our existing product/services portfolio through internal developments, partnerships and acquisitions

	•	Rationalize our product portfolio

	•	Maintain and improve a strong capital structure and expense structure

Below is a summary of some of the key actions we have taken in support of these strategies.

During the third quarter of 2001, we acquired Nortel Networks’ interest in our joint venture Arris Interactive L.L.C. 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. In August 2003, we purchased certain cable modem termination system-related assets of Com21, including the stock of its Irish subsidiary. These acquisitions were made to better position us to provide products and services to our customers that support their growing needs in the areas of high speed data, telephony and video. Below is a more detailed description of each of these acquisitions:

On August 3, 2001, we completed the acquisition from Nortel of the portion of Arris Interactive L.L.C. that we did not own. Arris Interactive L.L.C. 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 L.L.C. approximately $131.6 million in outstanding indebtedness and adjusted our ownership percentages in Arris Interactive L.L.C. to reflect these contributions;

	•	Nortel Networks exchanged its remaining ownership interest in Arris Interactive L.L.C. for 37 million shares of ARRIS common stock (approximately 49.2% of the total shares outstanding following the transaction) and a subordinated redeemable Class B membership interest in Arris Interactive L.L.C. 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 L.L.C. employees.

In connection with this transaction, we entered into an agreement with Nortel Networks whereby we paid Nortel Networks an agency fee of approximately, on average, 10% for all sales of Arris Interactive L.L.C. 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.

In connection with the acquisition of Arris Interactive L.L.C. in August 2001, Nortel Networks exchanged its remaining ownership interest in Arris Interactive L.L.C. for 37 million shares of our common stock and a subordinated redeemable Class B membership interest in Arris Interactive L.L.C. 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 were 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 L.L.C. 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.

Of the 37 million shares of our common stock that Nortel Networks received in 2001, it currently owns 5 million shares:


	•	Nortel Networks sold 15 million shares 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 (which had an aggregate fair market value of $32 million based on a share closing price on the Nasdaq National Market on March 24, 2003) for an aggregate purchase price of $30.0 million (taking into account the return of $2 million forgiven on the Class B membership interest).

	•	Nortel Networks sold 9 million shares in a registered public offering on November 28, 2003.

Consistent with our strategy, on January 8, 2002, we acquired substantially all of the assets of Cadant, Inc., a privately held designer and manufacturer of next-generation cable modem termination systems. Under the terms of the transaction, we issued 5.25 million shares of our common stock and assumed approximately $14.9 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 cable modem termination systems product. These sales targets were not achieved and no additional shares of our common stock will be issued.

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 $0.4 million of cash and the assumption of certain lease obligations. Further, we retained approximately 28 employees and issued a total of 500,000 shares of restricted stock to those employees.

On August 13, 2003, the Company completed the acquisition of certain cable modem termination system-related assets of Com21, including the stock of its Irish subsidiary. Under the terms of the agreement, ARRIS obtained accounts receivable, inventory, fixed assets, other current prepaid assets, and existing technology in exchange for approximately $2.4 million of cash, of which $2.2 million has been paid, and the assumption of approximately $0.6 million in liabilities. The Company has retained $0.2 million of the cash consideration for any liabilities ARRIS may be required to pay resulting from Com21 activity prior to the acquisition date. The Company also incurred approximately $0.2 million of legal and professional fees associated with the transaction. ARRIS retained approximately 50 Com21 employees. The Company completed this acquisition because it believes that the newly acquired product line, along with the existing product offerings of ARRIS, will allow the Company to reach smaller scale cable systems domestically and internationally.

In order to enhance our offering to MSOs, in particular, in relation to their move into VoIP, we have entered into several formal and informal alliance and cooperations with various other companies. These relationships include such things as:


	•	Resale agreements with respect to complementary products, for example, with Alopa for their operational support systems software and with Ellacoya for their peer-to-peer flow control. Resale of these products produces a profit for the Company and enables us to better serve our customers with more integrated solutions.

	•	Interoperability testing with a wide variety of key components for other manufacturers, including call management servers, media gateways, central office switches, and cable modems. Such testing enables us to assure our customers of our products’ complete compatibility with products produced by these other manufacturers.

We have made significant investments through our research and development efforts in new products and expansion of our existing products. Our primary focus has been on products and services, which will enable MSOs to generate greater revenue from offering high-speed data, telephony and digital video. In 2003 we spent approximately $62.9 million on research and development, or 14.5% of revenue. We expect to continue to spend similar levels on research and development in the future.

Upon evaluation and review of our product portfolio, we concluded that two product lines, Keptel and Actives, were not core to our long-term goals; thus, we sold these product lines during 2002. Both of these product lines were components of the Company, and the results of these operations for all periods have been reclassified to discontinued operations. In 2003 we also sold Electronic System Products, an engineering services product line, also not seen as core to our goals. Below is a more detailed description of each of these dispositions:

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 majority of historic sales were to telecommunication companies in applications not core to our long-term goals. 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 certain Keptel products in the cable MSO market through Telewire, our supplies distribution channel. Prior to the sale of the Keptel product line, the related products were manufactured by Keptel and were subsequently sold either directly by Keptel’s sales force to telecommunications companies or through Telewire to cable companies.

Although a few Keptel products are still distributed by Telewire, in accordance with the distribution agreement from the new owner, they are no longer manufactured by the Company and only represented approximately $6.7 million of sales for the year ended December 31, 2003. The Keptel product line, excluding sales through Telewire, had approximately $44.8 million of revenue in 2001 and approximately $7.5 million of revenue in 2002, prior to the closing of the sale. 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 2002 and 2003, the loss was reduced by $2.4 million and $0.4 million, respectively, as a result of the resolution of certain estimated costs associated with the sale. With

these adjustments, we have has now recognized a cumulative loss of approximately $5.7 million related to the transaction.

On November 21, 2002, we sold our Actives product line, excluding receivables and payables, to Scientific-Atlanta for $31.8 million in net proceeds. The agreement provided for the transfer of inventory and equipment attributable to the product lines, plus the transfer of approximately 34 employees. In connection with the sale, we recognized a gain of approximately $2.2 million. This product line had approximately $68.2 million of revenue in 2001 and approximately $58.8 million of revenue in 2002, prior to the closing of the sale. The majority of our historic sales of this product line were in support of the MSOs “two-way” upgrade programs. After assessing our potential for future demand given the decline in upgrades and our relative position in the market, we concluded the product line was not core to our long-term goals. In connection with the sale, we recognized a gain of approximately $2.2 million during the fourth quarter of 2002. We incurred approximately $9.3 million of related closure costs, including severance, vendor liabilities, professional fees, and other shutdown expenses. During 2003, we reduced our accrual for vendor liabilities by $4.4 million as a result of the resolution of certain estimated costs with the sale. With this adjustment, we have now recognized a cumulative gain of approximately $6.6 million related to the transaction.

On August 18, 2003, ARRIS sold its engineering consulting services product line, known as ESP, to an unrelated third party. The agreement involved the transfer of net assets of approximately $1.3 million, which included accounts receivable, fixed assets, an investment, and other assets attributable to the product line. Further, the transaction provided for the transfer of approximately 30 employees. Additionally, the Company incurred approximately $0.1 million of related closure costs, primarily legal and professional fees associated with the closing. ARRIS recognized a loss on the sale of approximately $1.4 million during the third quarter 2003. The ESP product line contributed revenue of approximately $1.3 million during the twelve-month period ended December 31, 2003 (approximately 7 months of operations) and revenue of $3.9 million during the twelve-month period ended December 31, 2002. The ESP revenue is classified in the supplies product category (formerly supplies and services). In accordance with the provisions of SFAS No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets, ESP is not reflected as a discontinued operation because it was determined to be an insignificant component of the Company’s consolidated operations and assets.

During the past three years we have implemented significant cost reduction actions. These actions were taken for several reasons, all with the intent to lower the breakeven point of our business:


	•	in conjunction with our acquisitions and product line divestitures we were left with duplicative and/or unnecessary costs that required rationalization

	•	as the “two-way” upgrades slowed and the general spending levels in the industry decreased as a result of tighter credit, it was necessary to reduce our cost structure as we experienced lower revenues

	•	as a result of the Comcast purchase of AT&T Broadband we experienced a sharp decline in revenues in Q4 2002 and 2003, as a result, it was necessary to reduce our cost structure

Our actions have included: closure of factories and the outsourcing of manufacturing, closure of a development facility, general reductions in force, and curtailment of certain employee benefits and bonuses. We continue to regularly examine other actions that may be taken to reduce the cost structure of the business and improve profitability. One such opportunity is the consolidation of facilities in Duluth, Georgia. During the first quarter of 2004, we will consolidate two facilities which will give us the opportunity to house many of our core technology, marketing, and headquarter functions in a single building. This consolidation will result in an annual expense reduction of approximately $1.5 million to $2.0 million, beginning in the second quarter

2004. The consolidation will require a write-off of lease costs and leasehold improvements of approximately $6.5 million to $7.5 million in the first quarter 2004.

We have taken steps over the past three years to restructure and reduce our debt:

In 1998, the Company issued $115.0 million of 4 1/2% convertible subordinated notes due May 15, 2003 (“Notes due 2003”). The Notes due 2003 were convertible, at the option of the holder, at any time prior to maturity, into the Company’s common stock at a conversion price of $24.00 per share. In 2002, ARRIS exchanged 1,593,789 shares of its common stock for approximately $15.4 million of the Notes due 2003. Additionally, the Company redeemed $23.9 million and $75.7 million of the Notes due 2003 during 2003 and 2002, respectively, using cash. As of May 15, 2003, all of the Notes due 2003 were redeemed.

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.” On February 4, 2004 we gave a notice of partial redemption for $50 million of the notes on March 8, 2004.

We used $88.4 million of the proceeds of the notes issuance to retire the membership interest of $116.9 million,, representing a $28.5 million discount. We also used the funds to repurchase and retire 8 million shares for $30.0 million (including $2 million for the reduction in the forgiveness of the return on the membership interest described elsewhere). On the date of the repurchase, the closing fair market value of the shares was approximately $32 million (closing stock price of $4.01).

On August 3, 2001 ARRIS entered into an asset-based credit facility. We last accessed the facility in the fourth quarter of 2001. On several occasions during 2001, 2002, and 2003, we modified our credit facility in order to allow us to, among other things: use existing cash reserves and proceeds of asset sales to purchase or redeem our outstanding 4 1/2% convertible subordinated notes due 2003, complete our acquisitions, complete our product line dispositions, repurchase shares from Nortel, and reduce the size of the facility. The facility was due to expire on August 3, 2004. During the fourth quarter of 2003 we examined our need for a bank facility and the cost to maintain it. We concluded that the cost benefit of renewing the facility did not warrant the expenditure of funds to do so, as we did not believe it would be likely that we would require access to funds from the facility in the foreseeable future. As a result, during the fourth quarter, we wrote-off approximately $2.3 million of unamortized finance fees related to the facility upon cancellation.

The implementation of these actions has changed our business and as a result our historical results of operations will not be as indicative of future results of operations as they otherwise might suggest.

As the sales of our Actives and Keptel telecommunications product lines represent components of the Company, 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. Our products and services are summarized in the following two

product categories, broadband and supplies, instead of the previous three categories. The balance of the product lines which were previously reported in the former transmission, optical and outside plant product category have been combined with our supplies product category, including Keptel products that have been and continue to be sold by Telewire to cable companies. All prior period amounts have been aggregated to conform to the new product categories.

Beginning in the second quarter of 2003, we included the revenue from DOCSIS cable modems and E-MTAs in our supplies product category; previously these sales were included in the broadband product category. We decided to change the classification as these products are original equipment manufacturer (“OEM”) in nature and inherently carry lower margins than those products within our broadband product category. All prior period amounts have been reclassified to conform to the current presentation.

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

Below is a table that shows our key operating data as a percentage of sales. Following the table is a detailed description of the major factors impacting the year over year changes of the key lines of our results of operations.

The table below sets forth our net sales for the three years ended December 31, 2003, 2002, and 2001, for each of our product categories described in Item 1 of this Form 10-K (in millions):

The table below sets forth our domestic and international sales for the three years ended December 31, 2003, 2002, and 2001 (in millions):

During 2003, sales of our broadband products declined by 35.5% as compared to 2002. The significant decrease in broadband product revenue in 2003 as compared to 2002 is the result of the following factors:


	•	Sales to Comcast for CBR telephony products declined by approximately $163.7 million year-over-year. AT&T Broadband had been our largest customer of CBR telephony products. In the fourth quarter 2002, Comcast completed its purchase of AT&T Broadband. Comcast had announced that its initial priority after its acquisition of AT&T Broadband would be to emphasize video and high-speed data operations and focus on improving the profitability of its telephony operations rather than subscriber growth. As a result, our sales of CBR products to Comcast have decreased significantly in 2003 and we expect this to continue into 2004. This decline has been partially offset by an increase in C4 sales to Comcast.

	•	In 2003 we began to achieve market traction for our new generation CMTS products. These new products include the C4, acquired as part of our Cadant acquisition, and the C3, acquired as part of our Com21 acquisition. In 2003, we had approximately $100 million of sales of these products. We believe we exited 2003 with a significant market share for these next generation CMTS products. Comcast was our most sizable customer; however, we shipped C3 and C4 to 42 customers in 2003. We expect to continue to achieve market success with the C3 and C4; however, we believe we will face significant competition from, in particular Motorola, Cisco, Terayon, and ADC. As we anticipated, Comcast and Motorola have announced that Comcast will use Motorola’s CMTS in certain networks. We anticipate that other major MSOs, including Time Warner, Cox, Adelphia, Charter, UPC, and Jupiter will increase their purchases of next generation CMTS in 2004 and beyond. We and our competitors are aggressively competing for this business. Revenue per telephony subscriber is lower in the VoIP market than in the CBR market, however we anticipate the overall market for VoIP will be significantly larger.

	•	We continue to have robust sales of our CBR product, particularly to Cox and Jupiter. Both companies expanded their footprint of HDTs in 2003, a leading indicator of future voiceport volume. We expect the footprint to further expand in 2004. We do believe that ultimately the sales of these products will decline as Cox and Jupiter complete their initial rollout of telephony. We are uncertain about the rate and timing of this decline. We anticipate that other MSOs will use VoIP as opposed to CBR for new telephony launches and that we will be positioned to participate in these launches.

	•	Broadband product revenue internationally declined by $69.4 million during 2003 as compared to 2002. A significant portion of this decline is attributable to the reduced purchases by Cabovisao as a result of its financing difficulties; Cabovisao accounted for approximately $39.0 million of the decrease in broadband international revenue in 2003. Further, both Jupiter in Japan and VTR in Chile slowed their purchases of our CBR telephony equipment.

Supplies product revenues decreased by approximately 28.9% in 2003 as compared to 2002. The year-over-year decrease in supplies product revenue is the result of several factors:


	•	Sales of power supplies related to CBR products declined as a direct result of the significant decrease in Comcast’s purchases of telephony products, as described above. Consolidated power supply revenue for 2003 was $0.2 million, as compared to revenue of $14.4 million in 2002.

	•	Revenues have been significantly impacted by the decline in shipments to Adelphia, which filed for bankruptcy during the second quarter of 2002. The bankruptcy filing by Adelphia and the resulting reduced sales to Adelphia accounted for approximately $6.5 million of the overall decrease in supplies product revenue year-over-year.

	•	A general slowdown in MSOs infrastructure spending as a result of the tightened credit market and the decline in spending by some customers on “two-way” upgrades, contributed to the remaining decrease in supplies revenue year-over-year. We believe that the rate of expenditure on upgrades will continue to decline, although we do believe that both Comcast and Adelphia have more plant to complete. Consistent with general industry data, we believe that MSO spending on maintenance will increase in 2004 and beyond as the upgraded plants age.

	•	Included in the supplies product category is DOCSIS cable modems and E-MTAs. Sales of these products increased modestly in 2003. We anticipate growth in these products in 2004 and beyond, particularly with respect to the E-MTA as VoIP launches begin in a meaningful way across the industry by multiple MSOs. We believe we have a strong early position with our E-MTA as a result of its features and our reputation and position in the market with respect to telephony. We anticipate that competition for the E-MTA will be significant and that cost will be a very strong factor. We anticipate that the gross margin percent will be neutral to positive on the future margins of our supplies portfolio. Achieving the margins is dependent on our ability to continually reduce the cost of the product(s).

Broadband product revenues increased by approximately 22.2% in 2002 as compared to sales in 2001. The key factors accounting for the change include:


	•	Broadband revenues for 2002 included a full year of international revenue for the Cornerstone product line whereas 2001 included only five months of international revenues due to the timing of the acquisition of Arris Interactive L.L.C. on August 3, 2001. Under the previous joint venture agreement, Nortel (not ARRIS) sold the Cornerstone products internationally. This agreement terminated upon our acquisition of Nortel’s share of Arris Interactive L.L.C. on August 3, 2001.

	•	Sales in 2002 included a full year of Cadant revenues following the acquisition in January 2002.

	•	Offsetting the above factors was a decline in sales to Comcast, following its acquisition of AT&T Broadband during the fourth quarter of 2002. Historically, AT&T Broadband had been our largest customer. 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 announced that as its initial priority after its acquisition of AT&T Broadband, it would emphasize video and high-speed data operations and 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, which, as we anticipated, continued into 2003.

Supplies product revenues decreased by approximately 22.3% in 2002, as compared to 2001. The key factors accounting for the change include:


	•	The bankruptcy filing by Adelphia and the resulting reduced sales to them accounted for approximately 52.4% of the overall decrease in supplies product revenue year over year.

	•	A general decline in MSOs’ infrastructure spending contributed to the decrease in supplies sales year-over-year.

The table below sets forth our gross profit for the three years ended December 31, 2003, 2002, and 2001, for each of our product categories (in millions):

The table below sets forth our gross margin percentages for the three years ended December 31, 2003, 2002, and 2001, for each of our product categories:

The reduction in broadband gross profit dollars and percentages in 2003 as compared to 2002 was related to the following factors:


	•	Gross profit dollars were significantly impacted in year over year declines in revenues.

	•	The reduced sales volume contributed to lower margin percentages, as there was a lower base to cover our fixed costs.

	•	A shift within the broadband product mix resulted in lower margins; specifically, we sold less CBR equipment in 2003 as compared to 2002.

	•	In 2003, we recorded $8.3 million of inventory reserves versus $4.6 million in 2002.

	•	Negatively impacting gross profit was $0.4 million and $0.7 million of employee severance for 2003 and 2002, respectively.

We continue to aggressively pursue and implement product cost reductions. In the third and fourth quarters of 2003 we implemented product cost reductions, which helped contribute to an increase in margins. Gross margin for our broadband product improved to 43.3% in the fourth quarter 2003, due to mix and the impact of the cost reductions.

The supplies category (excluding divested product lines) has historically been a product category with gross margins ranging from 18% to 22%. Several factors have negatively impacted margin percent in recent years, as detailed below.


	•	The decrease in revenues year over year significantly impacted gross profit dollars.

	•	Product mix, specifically, reduced sales of higher margin power supplies in the CBR market, increased sales of lower margin cable modems, and relatively reduced sales of other proprietary products negatively impacted margin.

	•	Increased competition in a declining revenue environment caused price erosion, which also negatively impacted gross margins.

	•	Negatively impacting gross profit was $0.8 million of employee severance for 2002.

	•	Inventory reserve levels in the past three years have been high, impacted by the general downturn in the industry, the Comcast acquisition of AT&T Broadband and the changing purchase patterns incident thereto and the decision to divest the powering product line. In 2003, we recorded $6.4 million (4.4% of sales) of inventory reserves versus $10.8 million (5.3% of sales) in 2002. We anticipate a return to more normal inventory reserve levels beginning in 2004.

Gross profit and gross margin within the broadband product category were positively impacted by the Arris Interactive L.L.C. acquisition in August 2001. Prior to the acquisition, ANTEC, the predecessor to ARRIS, was a distributor of Arris Interactive L.L.C. Cornerstone products. Beginning in August 2001, the new ARRIS earned much higher margins as the manufacturer of Cornerstone products on both domestic and international sales. The year ended December 31, 2002 included a full year of this positive impact, whereas 2001 included only five months. Negatively impacting the gross margin dollars in 2001 were charges for inventory reserves of $7.6 million as compared to $4.7 million in 2002. Also, negatively impacting gross profit was severance of $0.7 million in 2002.

Gross profit declined year over year predominately as a result of lower sales. Impacting the change in gross margin were charges for inventory reserves of $10.8 million (5.3% of sales) and $9.0 million (3.5% of sales) for 2002 and 2001, respectively. Also impacting the change in gross margin were employee severance charges of $0.8 million for 2002.


	•	The elimination of Nortel Networks’ agency fee accounted for approximately $11.7 million of the year-over-year decrease. The agreement with Nortel Networks for international agency fees terminated in December 2002.

	•	As we have highlighted elsewhere, we have implemented several actions to reduce both SG&A and R&D costs. These actions include reductions in force, curtailment of certain employee benefits and reductions in bonuses.

	•	Included in the SG&A expenses for 2003 and 2002 are severance costs of $1.1 million and $2.9 million, respectively.


	•	A significant factor relates to the acquisition of Arris Interactive L.L.C. Since it was purchased in August 2001, 2001 includes only five months of expense versus twelve months in 2002.

	•	As highlighted elsewhere, we paid Nortel agency fees in both 2002 and 2001. These fees were $11.7 million and $6.1 million for 2002 and 2001, respectively.

	•	Included in the SG&A expenses for 2002 and 2001 are severance costs of $2.9 million and $1.3 million, respectively.

	•	Offsetting the increase were cost containment actions including general reductions in force.

Our provision for doubtful accounts for 2003 and 2002 was significantly impacted by our reserves for Adelphia and Cabovisao. Excluding reserves for these customers, our provision for doubtful accounts was $(0.8) million, $5.2 million and $4.0 million for 2003, 2002 and 2001, respectively.

We continue to aggressively invest in research and development. Our primary focus is on products that allow MSOs to capture new revenues, in particular, high-speed data, VoIP, and Video over IP. In addition we continue to invest in our Atoga products.

Included in our R&D expenses are costs directly associated with our development efforts (people, facilities, materials, etc.) and reasonable allocations of our Information Technology and Telecom costs. In prior footnote disclosures related to research and development expense we did not include allocations of Information Technology Telecom costs or stock compensation costs. Since we have expanded our Statement of Operations disclosure to separately show research and development, and to be consistent with practices followed by other companies, research and development expense now includes such allocations in all periods presented.


	•	The closure in November 2002 of our Andover, Massachusetts’ location, which was primarily a product development and repair facility. Following the purchase of Cadant, we were able to reduce duplicative effort and close this facility.

	•	As we have highlighted elsewhere, we have implemented several actions to reduce both R&D and SG&A costs. These actions include reductions in force, curtailment of certain employee benefits and reductions in bonuses.

	•	Included in the R&D expenses for 2003 and 2002 are severance costs of $1.3 million and $1.0 million, respectively.

	•	Partially offsetting these decreases was the addition of expense related to the acquisition of Atoga in March 2003 and Com21 in August 2003.

Major development efforts in 2003 included work on the following: CMTS (C4, C3), CPE (DOCSIS modems & E-MTAs), Atoga product suite, sustaining effort on CBR products, product cost reductions, new initiatives (including video over IP).

The significant increase in R&D expense year over year also encompasses several factors:


	•	2001 included only five months of development costs associated with the acquisition of Arris Interactive L.L.C. as we purchased the business in August 2001, whereas 2002 included a full year of expenses.

	•	2002 included additional R&D costs as a result of the Cadant acquisition, which we purchased in January 2002. 2001 had no costs associated with Cadant.

	•	Included in the R&D expenses for 2002 and 2001 are severance costs of $1.0 million and $0.1 million, respectively.

	•	Offsetting the increase were cost containment actions including general reductions in force.

During the third quarter of the year ended December 31, 2001, we wrote off acquired in-process research and development totaling $18.8 million in connection with the Arris Interactive L.L.C. acquisition.

During 2003, ARRIS evaluated the restructuring accruals related to previously closed facilities. Upon final review, we recorded additional restructuring charges of $0.9 million during the year ended December 31, 2003 as a result of a change to the initial estimates used.

On October 30, 2002, we announced the closure of our office in Andover, Massachusetts. We decided to close the office in order to reduce operating costs through consolidations of our facilities. The closure affected approximately 75 employees and was completed during the second quarter of 2003. In connection with this facility closure, we recorded a charge of approximately $7.1 million in the fourth quarter of 2002. Included in this restructuring charge was approximately $2.1 million related to remaining lease payments, $2.7 million of fixed asset write-offs, $2.1 million of severance, and $0.2 million of other costs associated with these actions.

In the fourth quarter of 2001, we closed a research and development facility in Raleigh, North Carolina and recorded a $4.0 million charge. This charge included termination expenses of $2.2 million related to the involuntary dismissal of 48 employees, primarily engaged in engineering functions at that facility. Also included was $0.7 million related to lease commitments, $0.2 million related to the impairment of fixed assets, and $0.9 million related to other shutdown expenses.

In the third quarter of 2001, we recorded a charge of $5.9 million related to the impairment of goodwill due to the sale of the power product lines. Additionally, we recorded a restructuring charge of approximately $1.6 million related to lease terminations of office space.

We adopted SFAS No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment, or more frequently if impairment indicators arise. Upon adoption of SFAS No. 142, we recorded a transitional goodwill impairment loss of approximately $58.0 million, primarily related to our Keptel product line. During the fourth quarter of 2002, our remaining goodwill was reviewed, and based upon management’s analysis including an independent valuation, an impairment charge of $70.2 million was recorded with respect to our supplies product category primarily due to a decline in current purchasing by Adelphia, as well as the continuing decline in the industry in general. The valuation was determined using a combination of the income and market approaches on an invested capital basis, which is the market value of equity plus interest-bearing debt.

Total goodwill amortization expense for the year ended December 31, 2001 was $3.3 million. Beginning January 1, 2002, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment, or more frequently if impairment indicators arise.

Our intangibles amortization expense represents amortization of existing technology acquired as a result of the Arris Interactive L.L.C. acquisition in 2001, the Cadant, Inc. acquisition in 2002, and the Atoga and Com21 acquisitions in 2003.

The table below provides detail regarding our other expense (income) (in millions):

Interest expense for all periods reflects the cost of borrowings on our revolving line of credit, amortization of deferred finance fees, and the interest paid on our convertible subordinated notes and capital leases.

In conjunction with the acquisition of Arris Interactive L.L.C. in August 2001, we issued to Nortel Networks a subordinated redeemable Class B membership interest in Arris Interactive L.L.C. with a face amount of $100.0 million. This membership interest earned a return of 10% per annum, compounded annually. During the first quarter 2003, we redeemed the entire Class B membership interest in Arris Interactive L.L.C. held by Nortel Networks, at a discount, and, therefore, the membership interest ceased.

The net gain on debt retirement of $26.2 million in 2003 consists of two transactions:


	•	During the first quarter 2003, we redeemed the entire Class B membership interest in Arris Interactive L.L.C. held by Nortel Networks for approximately $88.4 million. This discounted redemption resulted in a gain of approximately $28.5 million during the first quarter of 2003.

	•	During the fourth quarter 2003, we chose to cancel our credit facility, which was due to expire in August 2004. As a result, we wrote off approximately $2.3 million of unamortized finance fees related to the facility upon cancellation.

The net loss on debt retirement of $7.3 million in 2002 consists of two transactions:


	•	During the second quarter 2002, we exchanged 1,593,789 shares of our common stock for approximately $15.4 million of the convertible subordinated notes due 2003. The exchanges were recorded in accordance with SFAS No. 84, Induced Conversions of Convertible Debt, which requires the recognition of an expense equal to the fair value of additional shares of common stock issued in excess of the number of shares that would have been issued upon conversion under the original terms of the notes. As a result, in connection with these exchanges, we recorded a non-cash loss of approximately $8.7 million, based upon a weighted average common stock value of $9.10 (as compared with a common stock value of $24.00 per share in the original conversion ratio for the notes). In connection with the exchanges, we also incurred associated fees of $0.6 million, resulting in an overall net loss of $9.3 million.

	•	During 2002, we redeemed $75.7 million of outstanding convertible subordinated notes. The notes were redeemed at a discount, resulting in a gain on the debt retirement of $2.0 million which was recorded in


		accordance with SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.

During 2001, we recorded pre-tax charges of $1.9 million related to the extinguishment of debt in accordance with EITF Issue No. 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments. The amount reflected unamortized deferred finance fees related to a loan agreement, which was replaced in connection with the Arris Interactive L.L.C. acquisition. In 2002, this loss was reclassified to loss from continuing operations 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 held certain investments in the common stock of publicly-traded companies, which were classified as trading securities. The remaining shares of common stock were sold during 2003 and the investment was $0 at December 31, 2003. 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 a pre-tax gain of $0.1 million in 2003 and pre-tax losses of approximately $0.6 million and $0.8 million in 2002 and 2001, respectively.

We held certain investments in the common stock of publicly traded companies totaling approximately $1.4 million at December 31, 2003, which are classified as available for sale. Changes in the market value of these securities are recorded in other comprehensive income. These securities are also subject to a periodic impairment review, which requires significant judgment. As these investments have been below their cost basis for a period greater than six months, an unrealized loss of $3.5 million was considered “other than temporary” and recognized through income in 2002. Additional impairment charges of $0.4 million were recorded in 2003.

In addition, we hold a number of non-marketable equity securities totaling approximately $0.9 million at December 31, 2003, which are classified as available for sale. The non-marketable equity securities are subject to a periodic impairment review, which requires significant judgment as there are no open-market valuations. During 2003, we recorded a charge of approximately $1.1 million in relation to the impairment of the carrying value of an investment in a start-up company, which raised a new round of financing at a substantial discount in early July 2003. During 2002, we recorded: 1) a $3.0 million impairment for an investment in a technology start-up, as its assets were sold to another company, 2) a $1.0 million impairment for an investment in a technology start-up company, as it was unable to raise further financing and filed for bankruptcy during the second quarter, and 3) additional impairment charges of $6.0 million were recorded in the fourth quarter of 2002 relating to other non-marketable equity securities deemed to be impaired based on various factors.

We offer a deferred compensation arrangement, which allows certain employees to defer a portion of their earnings and defer the related income taxes. These deferred earnings are invested in a “rabbi trust”, and are accounted for in accordance with Emerging Issues Task Force Issue No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested. 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 an investment on our balance sheet. During 2003 and 2002, we recorded unrealized gains of $0.6 million and $0.2 million related to the rabbi trust investment. In addition, in 2002 we recognized a loss of approximately $0.8 million in connection with realized losses on the related investments.

During 2003 and 2002, we recorded foreign currency gains related to our international customers whose receivables and collections are denominated in their local currency. Beginning in 2002, we implemented a hedging strategy to mitigate the monetary exchange fluctuations from the time of invoice to the time of payment, and have occasionally entered into forward contracts based on a percentage of expected foreign currency receipts.

As we are in a cumulative loss position for tax purposes, we did not incur income tax expense (benefit) during 2003. In 2002, we recognized a tax benefit of $6.8 million due to a change in the tax laws allowing NOL carry-backs for five years, which allowed the Company to record a tax benefit. The income tax expense in 2001 was primarily the result of the restructuring and impairment charges during that period, and a valuation allowance of approximately $38.1 million against deferred tax assets was recorded in accordance with SFAS No. 109, Accounting for Income Taxes. Of the net income tax expense of $27.6 million in 2001, approximately $35.6 million related to continuing operations, and a benefit of $8.0 million was related to discontinued operations.

We have adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, with respect to our Actives and Keptel product line disposals. As a result, these two product lines have been accounted for as discontinued operations and, where noted, current and historical results have been reclassified accordingly. Revenues from the discontinued operations were $66.3 million and $113.0 million for the years ended December 31, 2002 and 2001, respectively. The income (loss) from discontinued operations, net of taxes, for the years ending December 31, 2002 and 2001 was $(18.8) million and $(84.5) million, respectively. During 2002, we recorded a net loss on disposals of $4.0 million.

During 2003, we reduced our accruals for vendor liabilities, warranty issues, and other estimated costs related to disposals by $4.8 million. This adjustment was the result of settling certain vendor liabilities for amounts less than originally anticipated and changes to our original estimated disposal costs. With this adjustment, we have now recognized a cumulative gain on disposals of approximately $0.8 million related to discontinued product line disposals. Also during 2003, we increased our accrual by $4.4 million for restructuring liabilities associated with the discontinued operations of the Company’s manufacturing facilities. The net result of the above transactions in 2003 was a gain of $0.4 million in discontinued operations.

We adopted SFAS No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. Under the transitional provisions of SFAS No. 142, we recorded a goodwill impairment loss of approximately $58.0 million. The impairment loss has been recorded as a cumulative effect of a change in accounting principle on the accompanying Consolidated Statements of Operations for the year ended December 31, 2002.

As highlighted earlier, one of our key strategies is to maintain and improve our capital structure. The key metrics we focus on are summarized in the table below:

In managing our liquidity and capital structure, we have been and are focused on key goals, and we have and will continue in the future to implement actions to achieve them. They include:


	•	Liquidity — ensure we have sufficient cash resources or other short term liquidity to manage day to day operations

	•	2003 Notes — implement a plan to retire the notes; this was ultimately accomplished in 2002 and 2003 through a combination of cash redemptions ($99.6 million) and a share exchange offer ($15.4 million)

	•	Nortel Class B Membership Interest in Arris Interactive L.L.C. — implement a plan to retire the debt; this was ultimately accomplished in 2003 at a significant discount

	•	Growth — implement a plan to ensure we have adequate capital resources, or access thereto, to execute acquisitions

	•	Overhang — implement a plan to reduce the overhang on our stock caused by Nortel Networks holdings; at the end of 2003 Nortel’s holdings were down to five million shares (or approximately 6.6% of the shares outstanding)

	•	2008 Notes — implement a plan to retire the notes; the first step was taken by means of a partial redemption ($50 million) in March 2004

The table below lists the key actions we have taken, or may take in the future, and highlights their relationship to the goals listed above. Following the table is a description of the actions taken and an explanation as to how their potential impact can be seen in the Liquidity & Capital Resources Data above.


		Page

PART I
ITEM 1.	Business		1
ITEM 2.	Properties		17
ITEM 3.	Legal Proceedings		18
ITEM 4.	Submission of Matters to a Vote of Security Holders		19
PART II
ITEM 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		21
ITEM 6.	Selected Consolidated Historical Financial Data		21
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk		59
ITEM 8.	Consolidated Financial Statements and Supplementary Data		60
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		60
ITEM 9A.	Controls and Procedures		60
PART III
ITEM 10.	Directors and Executive Officers of the Registrant		104
ITEM 11.	Executive Compensation		104
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management		104
ITEM 13.	Certain Relationships and Related Transactions		104
ITEM 14.	Principal Accountant Fees and Services		104
PART IV
ITEM 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		104
ITEM 15(a).	Index to Consolidated Financial Statements and Financial Statement Schedules		105
Signatures			110
EX-21 SUBSIDIARIES OF THE REGISTRANT
EX-23 CONSENT OF ERNST & YOUNG LLP
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO


Broadband:		• Cable telephony products, CBR telephony products (headend and network interface units, or NIUs) and VoIP telephony products (headend)

		• High-speed data products, including DOCSIS headend equipment

		• Operational support systems

		• System integration services, and

		• Metro and regional optical transport equipment

Supplies:		• 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

		• Cable modems and embedded multimedia terminal adapters, or E-MTAs



	Years Ended December 31,

	2003			2002			2001


	(in millions)
Comcast (including AT&T Broadband)	$	136.6		$	250.2		$	245.6
% of sales		31.5	%		38.4	%		39.1	%
Cox Communications	$	104.3		$	106.7		$	110.9
% of sales		24.0	%		16.4	%		17.7	%



		Years Ended December 31

		2003		2002		2001


		(in thousands)
	Asia Pacific	$	36,781	$	51,382	$	20,484
	Europe		27,186		67,856		31,613
	Latin America		8,052		20,400		14,125
	Canada		10,091		8,522		5,679

Total		$	82,110	$	148,160	$	71,901


Location	Description		Area (sq. ft.)

Cary, North Carolina		Warehouse		151,500
Chicago, Illinois		Warehouse/Office space		18,000


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


Name	Age		Position

Robert J. Stanzione		56	Chief Executive Officer, Chairman of the Board
Lawrence A. Margolis		56	Executive Vice President, Chief Financial Officer, and Secretary
Gordon E. Halverson		61	Corporate Executive Vice President, Domestic Sales
Ronald M. Coppock		49	President, International
Bryant K. Isaacs		44	President, New Business Ventures
James D. Lakin		60	President, Broadband
Robert Puccini		42	President, TeleWire Supply
David B. Potts		46	Senior Vice President, Finance and Chief Information Officer
Leonard E. Travis		41	Vice President and Controller
Marc Geraci		51	Treasurer


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


	High		Low

2002
First Quarter	$	10.70	$	7.71
Second Quarter		9.90		3.13
Third Quarter		5.10		3.04
Fourth Quarter		4.09		1.50
2003
First Quarter	$	5.73	$	3.23
Second Quarter		6.70		3.63
Third Quarter		6.59		4.10
Fourth Quarter		7.58		4.85


Item 6.	*Selected Consolidated Historical Financial Data*


(5)	Restructuring and Impairment Charges and Discontinued Operations


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



	For the Years
	Ended
	December 31,

	2003			2002

Adelphia	$	—		$	(15.9	)
Cabovisao		(7.2	)		(3.6	)


	2003			2002

Gross inventory	$	98.9		$	119.1
Reserves		(20.3	)		(14.9	)

Net inventory	$	78.6		$	104.2


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


Item 1.	*Business*


	Constant Bit Rate Products


	Metro and Regional Optical Transport Equipment


	Operational Support Systems


	Increase in Spending by MSOs on New Revenue-Generating Services


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


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



			Net Sales						Increase (Decrease) Between Periods


			For the Years Ended December 31,						2003 vs. 2002						2002 vs. 2001

			2003		2002		2001		$			%			$			%

Product Category:
	Broadband		$	289.6	$	448.9	$	367.2	$	(159.3	)		(35.5	)%	$	81.7			22.2	%
	Supplies			144.4		203.0		261.1		(58.6	)		(28.9	)%		(58.1	)		(22.3	)%

		Total sales	$	434.0	$	651.9	$	628.3	$	(217.9	)		(33.4	)%	$	23.6			3.8	%



				Net Sales
										Increase (Decrease) Between Periods

				For the Years Ended
				December 31,						2003 vs. 2002						2002 vs. 2001

				2003		2002		2001		$			%			$			%

Domestic				$	351.9	$	503.7	$	556.4	$	(151.8	)		(30.1	)%	$	(52.7	)		(9.5	)%
International:
	Asia Pacific				36.8		51.4		20.5		(14.6	)		(28.4	)%		30.9			150.7	%
	Europe				27.2		67.9		31.6		(40.7	)		(59.9	)%		36.3			114.9	%
	Latin America				8.0		20.4		14.1		(12.4	)		(60.8	)%		6.3			44.7	%
	Canada				10.1		8.5		5.7		1.6			18.8	%		2.8			49.1	%

		Total International			82.1		148.2		71.9		(66.1	)		(44.6	)%		76.3			106.1	%

			Total	$	434.0	$	651.9	$	628.3	$	(217.9	)		(33.4	)%	$	23.6			3.8	%



			Gross Profit $
									Increase (Decrease) Between Periods

			For the Years Ended
			December 31,						2003 vs. 2002						2002 vs. 2001

			2003		2002		2001		$			%			$			%

Product Category:
	Broadband		$	110.1	$	190.4	$	105.3	$	(80.3	)		(42.2	)%	$	85.1			80.8	%
	Supplies			16.2		36.3		43.4		(20.1	)		(55.4	)%		(7.1	)		(16.4	)%

		Total	$	126.3	$	226.7	$	148.7	$	(100.4	)		(44.3	)%	$	78.0			52.5	%



			Gross Margin %


			For the Years Ended									Percentage Point Increase
			December 31,									(Decrease) Between Periods

			2003			2002			2001			2003 vs. 2002			2002 vs. 2001

Product Category:
	Broadband			38.0	%		42.4	%		28.7	%		(4.4	)		13.7
	Supplies			11.2	%		17.9	%		16.6	%		(6.7	)		1.3
		Total		29.1	%		34.8	%		23.7	%		(5.7	)		11.1



		Operating Expenses
								Increase (Decrease) Between Periods

		For the Years Ended
		December 31,						2003 vs. 2002						2002 vs. 2001

		2003		2002		2001		$			%			$			%

SG&A		$	82.7	$	103.4	$	95.9	$	(20.7	)		(20.0	)%	$	7.5			7.8	%
Provision for doubtful accounts			6.4		24.7		4.0		(18.3	)		(74.1	)%		20.7			517.5	%
R&D			62.9		72.5		29.8		(9.6	)		(13.2	)%		42.7			143.3	%
In-process R&D write-off			—		—		18.8		—			—			(18.8	)		(100.0	)%
Restructuring & impairment			0.9		7.1		11.6		(6.2	)		(87.3	)%		(4.5	)		(38.8	)%
Impairment of goodwill			—		70.2		—		(70.2	)		(100.0	)%		70.2			NA
Amortization of goodwill			—		—		3.3		—			—			(3.3	)		(100.0	)%
Amortization of intangibles			35.2		34.5		7.0		0.7			2.0	%		27.5			392.9	%

	Total	$	188.1	$	312.4	$	170.4	$	(124.3	)		(39.8	)%	$	142.0			83.3	%



										Increase (Decrease) Between
		Other Expense (Income)								Periods


		For the Years Ended
		December 31,								2003 vs. 2002			2002 vs. 2001

		2003			2002			2001		$			$

Interest expense		$	10.4		$	8.4		$	11.1	$	2.0		$	(2.7	)
Membership interest			2.4			10.4			4.1		(8.0	)		6.3
Loss (gain) on debt retirement			(26.2	)		7.3			1.9		(33.5	)		5.4
Loss on investments			1.4			14.9			0.8		(13.5	)		14.1
Loss (gain) on foreign currency			(2.4	)		(5.7	)		—		3.3			(5.7	)
Other expense (income)			0.2			0.2			8.1		—			(7.9	)

	Total expense (income)	$	(14.2	)	$	35.5		$	25.9	$	(49.7	)	$	9.6



		Year Ended December 31,

		2003			2002			2001


		(In millions, except DSO and Turns)
Key Working Capital Items
Cash provided by operating activities		$	14.7		$	117.4		$	111.5
Cash on hand		$	84.9		$	98.4		$	5.3
Accounts Receivable, net		$	56.3		$	81.0		$	137.1
	- Days Sales Outstanding (Full Year)		58			55			73
	- Days Sales Outstanding (Q4)		42			72			69
Inventory		$	78.6		$	104.2		$	137.1
	- Turns (Full Year)		3.4			3.5			3.5
	- Turns (Q4)		3.9			2.9			2.7
Key Debt Items
Bank Revolver Debt		$	0.0		$	0.0		$	0.0
Convertible Notes due 2003		$	0.0		$	23.9		$	115.0
Convertible Notes due 2008		$	125.0		$	0.0		$	0.0
Nortel Class B Membership Interest		$	0.0		$	114.5		$	104.1
Capital Expenditures		$	5.9		$	7.9		$	9.6
Shares Owned by Nortel			5.0			22.0			37.0
% Owned by Nortel			6.6	%		26.7	%		49.2	%