UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

OR

For the transition period from ____ to ____

Commission file number 1-4482

ARROW ELECTRONICS, INC.

Registrant’s telephone number, including area code (631) 847-2000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the Registrant (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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [X] No [  ]

The aggregate market value of voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was $2,757,766,064.

There were 116,790,264 shares of Common Stock outstanding as of March 8, 2005.

The following documents are incorporated herein by reference:

1. Proxy Statement to be filed in connection with Annual Meeting of Shareholders to be held May 6, 2005 (incorporated in Part III).

TABLE OF CONTENTS

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PART I

Item 1. Business.

Arrow Electronics, Inc. (the “company” or “Arrow”), incorporated in New York in 1946, is a major global provider of products, services, and solutions to industrial and commercial users of electronic components and computer products. The company believes it is one of the electronics distribution industry’s leaders in operating systems, employee productivity, value-added programs, and total quality assurance. Arrow serves as a supply channel partner for nearly 600 suppliers and 150,000 original equipment manufacturers (“OEMs”), contract manufacturers (“CMs”), and commercial customers.

Serving its industrial and commercial customers as a supply channel partner, the company offers both a wide spectrum of products and a broad range of services and solutions, including materials planning, programming and assembly services, inventory management, a comprehensive suite of online supply chain tools, and design services.

Arrow’s diverse worldwide customer base consists of OEMs, CMs, and commercial customers. Customers include manufacturers of industrial equipment (including machine tools, factory automation, and robotic equipment), telecommunications products, automotive and transportation, aircraft and aerospace equipment, scientific and medical devices, and computer and office products, as well as value-added resellers (“VARs”) of computer products.

The company maintains nearly 225 sales facilities and 15 distribution centers in 53 countries and territories. Through this network, Arrow provides one of the broadest product offerings in the electronics distribution industry and a wide range of value-added services to help customers reduce their time to market, lower their total cost of ownership, and enhance their overall competitiveness.

The company’s global electronic components business, the largest distributor of electronic components and related services in the world, spans the world’s three largest electronics markets — the Americas, EMEASA (Europe, Middle East, Africa, and South America), and the Asia/Pacific region. The Americas components group includes five sales and marketing organizations in the United States and Canada, as well as an operation in Mexico. The EMEASA components group is divided into the following three regions as well as having operations in the Republic of South Africa, Argentina, and Brazil:

-	Northern Europe, serving Denmark, England, Estonia, Finland, Ireland, Latvia, Lithuania, Norway, Scotland, and Sweden.
-	Central Europe, serving Austria, Belarus, Belgium, the Czech Republic, Germany, Hungary, the Netherlands, Poland, Russian Federation, Slovakia, Switzerland, and Ukraine.
-	Southern Europe, serving Bosnia and Herzegovina, Bulgaria, Croatia, Egypt, France, Greece, Israel, Italy, Portugal, Romania, Serbia and Montenegro, Slovenia, Spain, and Turkey.

In the Asia/Pacific region, Arrow operates in Australia, China, Hong Kong, India, Korea, Malaysia, New Zealand, the Philippines, Singapore, Taiwan, and Thailand.

Arrow’s North American Computer Products group (“NACP”) is a leading distributor of enterprise and embedded computing systems, as well as storage and software, to resellers and OEM customers in North America. NACP consists of the Enterprise Computing Solutions group, which serves resellers, and the OEM Computer Solutions group, which serves industrial OEM customers. The company also has dedicated computer product businesses in France, Spain, and the United Kingdom.

The company distributes a broad range of electronic components, computer products, and related equipment. Approximately 53% of the company’s sales consist of semiconductor products and related services. Industrial and commercial computer products and related services, including servers, workstations, storage products, microcomputer boards and systems, design systems, desktop computer systems, software, monitors, printers, flat panel displays, system chassis and enclosures, controllers, and communication control equipment, account for approximately 24% of sales. Arrow’s remaining sales, included within electronic components, are of passive, electromechanical, and interconnect products, primarily capacitors, resistors, potentiometers, power supplies, relays, switches, and connectors.

The financial information about the company’s reportable segments and geographic operations can be found in Note 17 of the Notes to Consolidated Financial Statements.

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Most manufacturers of electronic components and computer products rely on authorized distributors, such as the company, to augment their sales and marketing operations. As a stocking, marketing, and financial intermediary, the distributor relieves manufacturers of a portion of the costs and personnel associated with stocking and selling their products (including otherwise sizable investments in finished goods inventories, accounts receivable systems, and distribution networks), while providing geographically dispersed selling, order processing, and delivery capabilities. At the same time, the distributor offers a broad range of customers the convenience of accessing, from a single source, multiple products from multiple suppliers and rapid or scheduled deliveries, as well as other value-added services such as materials management and memory programming capabilities. The growth of the electronics distribution industry has been fostered by the many manufacturers who recognize their authorized distributors as essential extensions of their marketing organizations.

The company and its affiliates serve nearly 150,000 industrial and commercial customers. Industrial customers range from major OEMs and CMs to small engineering firms, while commercial customers include primarily VARs and OEMs. No single customer accounted for more than 2% of the company’s 2004 consolidated sales.

Most of the company’s customers require delivery of the products they have ordered on schedules that are generally not available on direct purchases from manufacturers, and frequently their orders are of insufficient size to be placed directly with manufacturers.

The electronic components and other products offered by the company are sold by both field sales representatives, who regularly call on customers in assigned market areas, and by inside sales personnel, who call on customers by telephone from the company’s selling locations. Each of the company’s North American selling locations, warehouses, and primary distribution centers is electronically linked to the company’s central computer system, which provides fully integrated, online, real-time data with respect to nationwide inventory levels and facilitates control of purchasing, shipping, and billing. The company’s international operations have similar online, real-time computer systems and they can also access the company’s Worldwide Stock Check System, which provides access to the company’s online, real-time inventory system.

The company sells the products of nearly 600 manufacturers. The company does not regard any one supplier of products to be essential to its operations and believes that many of the products currently sold by the company are available from other sources at competitive prices. Most of the company’s purchases are pursuant to authorized distributor agreements which are typically cancelable by either party at any time or on short notice.

Approximately 60% of the company’s inventory consists of semiconductors. It is the policy of most manufacturers to protect authorized distributors, such as the company, against the potential write-down of such inventories due to technological change or manufacturers’ price reductions. Write-downs of inventories to market value are based upon contractual provisions which typically provide certain protections to the company for product obsolescence and price erosion in the form of return privileges and price protection. Under the terms of the related distributor agreements, and assuming the distributor complies with certain conditions, such suppliers are required to credit the distributor for inventory losses incurred through reductions in manufacturers’ list prices of the items. In addition, under the terms of many such agreements, the distributor has the right to return to the manufacturer for credit, a defined portion of those inventory items purchased within a designated period of time.

A manufacturer which elects to terminate a distribution agreement is generally required to purchase from the distributor the total amount of its products carried in inventory. As of December 31, 2004, this type of repurchase arrangement covered approximately 87% of the company’s consolidated inventories. While these industry practices do not wholly protect the company from inventory losses, the company believes that they currently provide substantial protection from such losses.

The company’s business is extremely competitive, particularly with respect to prices, franchises, and, in certain instances, product availability. The company competes with several other large multinational and national distributors as well as numerous regional and local distributors. As one of the world’s largest electronics distributors, the company’s financial resources and sales are greater than most of its competitors.

The company and its affiliates employed over 11,500 employees worldwide as of December 31, 2004.

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Available Information

The company makes the annual report on Form 10-K, quarterly reports on Form 10-Q, and any current reports on Form 8-K, and amendments to any of these reports available through its website (http://www.arrow.com) as soon as reasonably practicable after the company files such material with the Securities and Exchange Commission (“SEC”). The information posted on the company’s website is not incorporated into this annual report on Form 10-K. In addition, the SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The annual report on Form 10-K, for the year ended December 31, 2004, includes the certifications of the company’s Chief Executive Officer and Chief Financial Officer as Exhibits 31 (i) and 31 (ii), respectively, which were filed with the SEC as required under Section 302 of the Sarbanes-Oxley Act of 2002 and certify the quality of the company’s public disclosure. The company’s Chief Executive Officer has also submitted a certification to the New York Stock Exchange (“NYSE”) certifying that he is not aware of any violations by the company of NYSE corporate governance listing standards.

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Executive Officers

The following table sets forth the names, ages, and the positions and offices with the company held by each of the executive officers of the company as of March 15, 2005:

Set forth below is a brief account of the business experience during the past five years of each executive officer of the company.

William E. Mitchell has been President and Chief Executive Officer of the company since February 2003. Prior thereto, he served as Executive Vice President of Solectron Corporation and President of Solectron Global Services, Inc. since March 1999.

Peter S. Brown has been Senior Vice President of the company and General Counsel since September 2001. Prior to joining the company, he served as the managing partner of the London office of the law firm of Pillsbury Winthrop LLP (formerly, Winthrop, Stimson, Putnam, & Roberts) for more than five years.

Germano Fanelli was appointed President of Arrow Electronics EMEASA in January 2004. Prior thereto, he served as Managing Director of Southern Europe and has been a Vice President of the company for more than five years.

Harriet Green was appointed President of Arrow Asia/Pacific in March 2004. Prior thereto, she served in several executive positions, including Managing Director of Northern Europe, President of the company’s Contract Manufacturing Services (CMS) Distribution group and most recently, Vice President of Worldwide Supplier Marketing. In addition, she has been a Vice President of the company for more than five years.

Michael J. Long has been President and Chief Operating Officer of NACP since July 1999 and has been a Vice President of the company for more than five years.

Brian P. McNally was appointed President of North American Components in March 2004 and has been a Vice President of the company since June 2002. Prior thereto, he served in several executive positions including President of the company’s CMS Distribution group and Managing Director of Northern Europe.

Paul J. Reilly has been Chief Financial Officer since October 2001 and has served as a Vice President of the company for more than five years.

Jan M. Salsgiver was appointed Vice President of Global Strategy and Operations in March 2004. Prior thereto, she served as President of the Americas Components group since July 1999. In addition, she has been a Vice President of the company for more than five years.

Mark Settle has been a Vice President of the company and Chief Information Officer since November 2001. Prior to joining the company, he served as Executive Vice President, Systems and Processing at Visa International since April 1999.

Susan M. Suver was appointed Vice President of Human Resources in March 2004. Prior thereto, she served as Vice President of Global Organizational Development. Prior to joining the company in October 2001, she held the position of Vice President, Organizational Effectiveness and Communications at Phelps Dodge Corporation.

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Item 2. Properties.

The company owns and leases sales offices, distribution centers, and administrative facilities worldwide. The company’s executive office is located in Melville, New York and occupies a 163,000 square foot facility under a long-term lease. The company owns 17 locations throughout the Americas, EMEASA, and the Asia/Pacific region. The company occupies over 270 additional locations under leases due to expire on various dates through 2053. The company believes its facilities are well maintained and suitable for company operations.

Item 3. Legal Proceedings.

Wyle Environmental Matters

As is discussed in Note 16 of the Notes to Consolidated Financial Statements, in 2000, when the company purchased Wyle Electronics (“Wyle”) from the VEBA Group (“VEBA”), the company assumed Wyle’s then outstanding obligations. Among the obligations the company assumed was Wyle’s 1994 indemnification of the purchasers of one of its divisions, Wyle Laboratories, for costs associated with then existing contamination or violation of environmental regulations. Under the terms of the company’s purchase of Wyle, VEBA agreed to indemnify the company for, among other things, costs related to environmental pollution associated with Wyle, including those associated with its prior sale of Wyle Laboratories.

The company has been named as a defendant in a suit filed in January 2005 in the California Superior Court in Riverside County, California (Gloria Austin, et al. v. Wyle Laboratories, Inc. et al.) in which approximately 100 plaintiffs (who identify themselves as owners, lessees, or occupants of land or residences within a several mile radius of a Wyle Laboratories facility in Norco, California) have sued twelve defendants under a number of different theories for unquantified damages allegedly caused by environmental contamination at and around Wyle Laboratories’ Norco site. Contaminated groundwater and related soil-vapor have been found in certain residential areas immediately adjacent to the site. Characterization of the on- and off-site scope and impact of the contamination, and the design of interim remedial measures, are on-going. Wyle Laboratories has also been named as a defendant in the proceeding and has demanded indemnification from Arrow in connection with it.

As with the costs of the ongoing investigation and remediation of the Norco and Huntsville, Alabama sites discussed in Note 16 of the Notes to Consolidated Financial Statements, the company believes that any cost or liability which it may incur in connection with the Austin v. Wyle matter, including the defense of the case, is covered by the VEBA indemnifications (except, under the terms of the environmental indemnification, for the first $450,000). VEBA has since merged with E.ON AG, a large German-based multinational conglomerate. Despite E.ON AG’s acknowledgment of the existence of the contractual indemnities, and a single, partial payment, neither the company’s demand for defense and indemnification in the Austin v. Wyle matter, nor its demand for further indemnification payments have been met. In September 2004, the company filed suit against E.ON AG and certain of its U.S. subsidiaries in the United States District Court for the Northern District of Alabama seeking further payments of indemnified amounts and additional related damages.

Export and Re-Export Regulations

Due to the international nature of its business, the company and its subsidiaries are subject to the import and export laws of the United States and other countries in which it operates or to which it exports.

Under U.S. Export Administration Regulations (“EAR”), administered by the Bureau of Industry and Security (“BIS”) of the Department of Commerce, licenses or proper license exceptions are required for the shipment of covered U.S. goods and technology to certain countries, including China, India, Russia and other countries which are among the markets in which the company operates. Non-compliance with the regulations can result in a wide range of penalties including the denial of export privileges, fines, criminal penalties, and seizure of commodities.

In September 2004, the company made a preliminary, voluntary disclosure to the BIS advising them that the company suspected that its Hong Kong subsidiary, Arrow Asia Pac, Ltd., may have exported or re-exported certain products without the required licenses.

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The company has since undertaken a review of its historical shipments from North America and the Asia/Pacific region to determine the number and nature of any violations. In March 2005, the company advised the BIS that it had identified 28 export or re-export shipments, over a five-year period, that may constitute violations of the EAR. The statutory maximum civil penalty for each violation of the EAR identified by the company is $11,000 for all but two of the shipments in question, which are subject to a higher statutory maximum civil penalty of $120,000 per violation. However, because it is not known whether the BIS will agree with the company’s count or characterization of the violations, and because penalties for such violations may also include export prohibitions or restrictions, it is not possible at this time to determine the extent of the penalties the company may incur. Notwithstanding the foregoing, based on the information available to the company at this time, the company does not believe such penalties will have a material adverse impact on the company’s financial position, liquidity, or results of operations.

The company understands that it is BIS practice to review submissions such as that made by the company and to attempt to achieve a negotiated settlement without formal proceedings. To the company’s knowledge, BIS has not yet commenced its review of the company’s submission or engaged the company in substantive discussions.

Other

From time to time, in the normal course of business, the company may become liable with respect to other pending and threatened litigation, environmental, regulatory, and tax matters. While such matters are subject to inherent uncertainties, it is not currently anticipated that any such matters will have a material adverse impact on the company’s financial position, liquidity, or results of operations.

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

None.

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PART II

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

Market Information

The company’s common stock is listed on the New York Stock Exchange (trading symbol: “ARW”). The high and low sales prices during each quarter of 2004 and 2003 were as follows:

Holders

On March 8, 2005, there were approximately 2,800 shareholders of record of the company’s common stock.

Dividend History

The company did not pay cash dividends on its common stock during 2004 or 2003. While the board of directors considers the payment of dividends on the common stock from time to time, the declaration of future dividends will be dependent upon the company’s earnings, financial condition, and other relevant factors, including debt covenants.

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Item 6. Selected Financial Data.

The following table sets forth certain selected consolidated financial data and should be read in conjunction with the company’s consolidated financial statements and related notes appearing elsewhere in this annual report on Form 10-K (in thousands except per share data):

(a)	In the fourth quarter of 2004, based upon an evaluation of its business and accounting practices, the company determined that revenue related to the sale of service contracts should more appropriately be classified on an agency basis rather than a gross basis. While this change reduces reported sales and cost of sales, it has no impact on gross profit, operating income, net income, cash flow, or the balance sheet. All prior period sales and cost of sales have been reclassified to present the revenue related to the sale of service contracts on an agency basis. Sales and cost of sales have been reduced by $171.0 million for the nine months ended September 30, 2004 and $151.0 million, $120.4 million, $79.9 million, and $38.7 million in 2003, 2002, 2001, and 2000, respectively.
(b)	Operating income and income from continuing operations include an acquisition indemnification credit of $9.7 million ($.09 and $.08 per share on a basic and diluted basis, respectively), restructuring charges of $11.4 million ($6.9 million net of related taxes or $.07 and $.06 per share on a basic and diluted basis, respectively), an integration credit of $2.3 million ($1.4 million net of related taxes or $.01 per share), and an impairment charge of $10.0 million ($.09 and $.08 per share on a basic and diluted basis, respectively). Income from continuing operations also includes a loss on prepayment of debt of $33.9 million ($20.3 million net of related taxes or $.18 and $.16 per share on a basic and diluted basis, respectively) and a loss on investment of $1.3 million ($.01 per share).
(c)	Operating income and income from continuing operations include an acquisition indemnification charge of $13.0 million ($.13 per share), restructuring charges of $38.0 million ($27.1 million net of related taxes or $.27 per share), and an integration charge associated with the acquisition of the Industrial Electronics Division of Agilysys, Inc. of $6.9 million ($4.8 million net of related taxes or $.05 per share). Income from continuing operations also includes a loss on prepayment of debt of $6.6 million ($3.9 million net of related taxes or $.04 per share).
(d)	The disposition of the Gates/Arrow operation in May 2002 represents a disposal of a “component of an entity”. Accordingly, the selected data for 2002, 2001, and 2000 reflect Gates/Arrow as a discontinued operation.
(e)	Operating income and loss from continuing operations include a severance charge of $5.4 million ($3.2 million net of related taxes or $.03 per share). Loss from continuing operations also includes a loss on prepayment of debt of $20.9 million ($12.9 million net of related taxes or $.13 per share).
(f)	Operating income and loss from continuing operations include restructuring costs and other charges of $174.6 million and $227.6 million ($145.1 million net of related taxes or $1.47 per share), respectively, and an integration charge associated with the acquisition of Wyle Electronics and Wyle Systems of $9.4 million ($5.7 million net of related taxes or $.06 per share).

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

For an understanding of the significant factors that influenced the company’s performance during the past three years, the following discussion should be read in conjunction with the consolidated financial statements and other information appearing elsewhere in this annual report on Form 10-K.

Overview

The company has two business segments: electronic components and computer products. Consolidated sales grew by 24.8% in 2004, compared with the year-earlier period, as a result of strong sales growth in the components businesses in North America, EMEASA (Europe, Middle East, Africa, and South America), and Asia/Pacific, as well as continued growth in the company’s North American Computer Products (“NACP”) businesses. The increase in sales, excluding the impact of the weaker U.S. dollar, was 21.3%. The growth in the North American Components (“NAC”) businesses was driven by the strength of demand from the company’s broad customer base, as well as the cyclical upturn that began during 2003 and continued through mid-2004. Since that time, the rate of increase has slowed throughout the markets the company serves. The second half of 2004 has been marked by rational demand and continued cautiousness on the part of customers as product remains readily available. The growth in the EMEASA components businesses is primarily due to improved customer order patterns and the acquisition of Disway AG (“Disway”) during the third quarter of 2004. The growth in the Asia/Pacific components businesses is a result of the region’s strong market growth coupled with the company’s initiatives to expand its product offering and customer base. The growth in the NACP businesses is due to a company initiative to grow sales of certain strategic product segments, a change in the business model used for the sale of Hewlett-Packard Company (“HP”) products beginning in the first quarter of 2004, as described below, and increases in its Enterprise Computing Solutions business due to increased sales of storage and software, as well as increases in the size of the markets served by Arrow.

Net income increased to $207.5 million in 2004, compared with net income of $25.7 million in 2003. The increase in net income is due to the company’s ability to increase sales without operating expenses increasing at the same rate, the impact of efficiency initiatives reducing operating expenses, and lower interest costs as a result of the prepayment of debt. In addition, the following items impact the comparability of the company’s results for the years ended December 31, 2004 and 2003:

	•	an acquisition indemnification credit of $9.7 million in 2004 and an acquisition indemnification charge of $13.0 million in 2003;
	•	restructuring charges of $11.4 million ($6.9 million net of related taxes) in 2004 and $38.0 million ($27.1 million net of related taxes) in 2003;
	•	an integration credit of $2.3 million ($1.4 million net of related taxes) in 2004 and an integration charge of $6.9 million ($4.8 million net of related taxes) in 2003;
	•	an impairment charge of $10.0 million in 2004;
	•	a loss on the prepayment of debt of $33.9 million ($20.3 million net of related taxes) in 2004 and $6.6 million ($3.9 million net of related taxes) in 2003; and
	•	a loss on the write-down of an investment of $1.3 million in 2004.

Sales

In the fourth quarter of 2004, based upon an evaluation of its business and accounting practices, the company determined that revenue related to the sale of service contracts should more appropriately be classified on an agency basis rather than a gross basis. While this change reduces reported sales and cost of sales, it has no impact on gross profit, operating income, net income, cash flow, or the balance sheet. All prior period sales and cost of sales have been reclassified to present the revenue related to the sale of service contracts on an agency basis. Sales and cost of sales have been reduced by $171.0 million for the nine months ended September 30, 2004 and $151.0 million and $120.4 million in 2003 and 2002, respectively.

Consolidated sales for 2004 increased 24.8% from $8.5 billion in 2003 to $10.6 billion. The growth in the NAC businesses was driven by the strength of demand from the company’s broad customer base, as well as the cyclical upturn that began during 2003 and continued through mid-2004. Since that time, the rate of increase has slowed throughout the markets the company serves. The second half of 2004 has been marked by rational demand and continued cautiousness on the part of customers as product remains readily available. The growth in the NACP businesses is due to a company initiative to grow sales of certain strategic

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product segments, a change in the business model used for the sale of HP products beginning in the first quarter of 2004, and increases in its Enterprise Computing Solutions business due to increased sales of storage and software, as well as increases in the size of the market served by Arrow. EMEASA sales for 2004 increased by $578.7 million or 20.8%, compared with the year-earlier period, primarily due to improved customer order patterns, the impact of a weaker U.S. dollar on the translation of the company’s European financial statements, and the completion, during the third quarter of 2004, of the acquisition of Disway, reduced, in part, by the elimination of sales in the Nordic commodity computer products business, which the company exited during the third quarter of 2003. Asia/Pacific sales for 2004 increased by $349.8 million or 42.6%, compared with the year-earlier period, as a result of improved market conditions as well as the company’s initiatives to expand its product offering and customer base. The increase in consolidated sales was impacted by the translation of the company’s international financial statements into U.S. dollars which resulted in increased sales of $246.3 million for 2004, compared with the year-earlier period, due to a weaker U.S. dollar. The increase in consolidated sales, giving effect to the impact of the weaker U.S. dollar, was 21.3% for 2004.

Sales of electronic components increased by $1.6 billion or 25.5% for 2004, compared with the year-earlier period. The overall increase in sales include the aforementioned factors related to increased sales of electronic components in North America, Europe, and the Asia/Pacific region.

Sales of computer products increased by $478.8 million or 22.7% for 2004, compared with the year-earlier period. An estimated $196.6 million of the increase was the result of a change in the business model with HP. During February 2004, HP modified its agreement with distributors transforming the relationship from that of an agent to that of a distributor and thereby changing the method of recognizing revenue. Excluding the change related to HP, computer product sales would have increased by 13.4% for 2004. Sales in the Enterprise Computing Solutions business increased by 34.0% for 2004, compared with the year-earlier period, due to increased sales of storage and software, as well as increases in the size of the market served by Arrow. Sales of industrial related computer products to original equipment manufacturers (“OEM”) increased by 17.1% for 2004, compared with the year-earlier period. These increases were reduced, in part, by the elimination of sales in the Nordic commodity computer products business, which the company exited during the third quarter of 2003.

Consolidated sales for 2003 increased 17.3% from $7.3 billion in 2002 to $8.5 billion. Sales in the NACP businesses increased in 2003 by $173.5 million or 11.3% due to the growth in the business. Sales in the NAC businesses increased in 2003 by $626.8 million or 24.9%, when compared with the year-earlier period, primarily due to the acquisition of the Industrial Electronics Division (“IED”) of Agilysys, Inc. as well as growth in its businesses. EMEASA sales for 2003 increased by $334.6 million or 13.7%, compared with the year-earlier period, primarily as a result of the impact of a weakening U.S. dollar on the translation of the company’s European financial statements. Asia/Pacific sales for 2003 increased by $162.8 million or 24.7%, compared with the year-earlier period, as a result of improved market conditions as well as the company’s increased focus in this region. The increase in consolidated sales was impacted by the translation of the company’s international financial statements into U.S. dollars which resulted in increased sales of $369.9 million for 2003, compared with the year-earlier period, due to a weaker U.S. dollar. The increase in consolidated sales, giving effect to the impact of the weaker U.S. dollar, was 11.6% for 2003.

Sales of electronic components increased by $1.1 billion or 20.6% for 2003, compared with the year-earlier period. Sales in the NAC businesses for 2003 increased by 24.9%, compared with the year-earlier period. This increase was primarily a result of the acquisition of the IED business in late February 2003. The remaining factors impacting the overall increase in worldwide sales of electronic components include the impact of a weakened U.S. dollar on the translation of the company’s financial statements and the aforementioned increased sales in the Asia/Pacific region and North America.

Sales of computer products increased by $161.2 million or 8.3% for 2003, compared with the year-earlier period. Sales in the Enterprise Computing Solutions business increased by 18.2% in 2003, compared with the year-earlier period. Sales in the OEM business increased by 16.5% in 2003, compared with the year-earlier period. These increases were reduced, in part, by the 43.8% decrease in sales of the Nordic commodity computer products business, which was exited during the third quarter of 2003.

Gross Profit

The company recorded gross profit of $1.7 billion for 2004, compared with $1.4 billion in the year-earlier period. The increase in gross profit is primarily due to the 24.8% increase in sales in 2004. The gross profit margin for 2004 decreased by approximately 50 basis points when compared with the year-earlier period.

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The decrease in gross profit margin is the result of the lower margin Asia/Pacific and NACP businesses accounting for a larger part of the company’s sales mix and pricing pressures in the marketplace relating to the worldwide components businesses. The change in the business model used for the sale of HP products, beginning in the first quarter of 2004, reduced the gross profit margin by approximately 30 basis points but had no impact on gross profit.

The company recorded gross profit of $1.4 billion for 2003, compared with $1.3 billion in the year-earlier period. The increase in gross profit is primarily due to the 17.3% increase in sales in 2003. The gross profit margin for 2003 decreased by approximately 70 basis points when compared with the year-earlier period. The decrease in gross profit margin is primarily due to margin pressures in the components businesses around the world.

Restructuring, Integration, and Other Charges (Credits)

The company recorded restructuring charges of $11.4 million ($6.9 million net of related taxes or $.07 and $.06 per share on a basic and diluted basis, respectively) and $38.0 million ($27.1 million net of related taxes or $.27 per share) in 2004 and 2003, respectively. These items are discussed in greater detail below.

Restructurings

The company, over the last 24 months, announced a series of steps to make its organizational structure more efficient resulting in annualized savings in excess of $100.0 million. The estimated restructuring charges associated with these actions total approximately $47.9 million, of which $9.8 million ($6.1 million net of related taxes or $.06 and $.05 per share on a basic and diluted basis, respectively) and $38.0 million ($27.1 million net of related taxes or $.27 per share) were recorded in 2004 and 2003, respectively. These restructuring charges related primarily to personnel costs associated with the elimination of approximately 350 positions in 2004 and 1,085 positions in 2003 across multiple locations, segments, and functions. Approximately 85% of the total charge is expected to be spent in cash. The company will record the balance of approximately $.1 million over the next several quarters.

As of December 31, 2004, $5.8 million of these charges were accrued but unused of which $2.8 million are for personnel costs, $2.6 million are to address remaining facilities commitments, and $.4 million are for asset write-downs and other.

During 2004, the company recorded a restructuring charge of $1.6 million ($.9 million net of related taxes or $.01 per share) related to the 2001 restructuring. The net restructuring charge consisted of $2.1 million related to facilities and $.4 million of asset write-downs, offset, in part, by a credit of $.9 million.

Integration

During 2004, the company recorded an integration credit of $2.3 million ($1.4 million net of related taxes or $.01 per share), which primarily related to the renegotiations of facilities related obligations.

During 2003, the company incurred integration costs of $18.4 million related to the acquisition of IED. Of the total amount recorded, $6.9 million ($4.8 million net of related taxes or $.05 per share), relating primarily to severance costs for the company’s employees, was expensed and $11.5 million ($9.2 million net of related taxes), relating primarily to severance costs for IED employees and professional fees, was recorded as additional cost in excess of net assets of companies acquired.

As of December 31, 2004, approximately $.6 million of the IED related accrual was required to address remaining contractual obligations. The remaining integration accrual, as of December 31, 2004, of approximately $4.9 million relates to numerous acquisitions made prior to 2000 and primarily represent payments for remaining contractual obligations.

Restructuring and Integration Summary

The remaining balances of the aforementioned restructuring and integration accruals as of December 31, 2004 aggregate $22.1 million, of which $17.6 million is expected to be spent in cash, and will be utilized as follows:

-	The personnel costs accruals of $2.8 million will be utilized to cover costs associated with the termination of personnel, which are primarily expected to be spent by the end of 2005.

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-	The facilities accruals totaling $13.8 million relate to terminated leases with expiration dates through 2010. Approximately $4.8 million will be paid in 2005. The minimum lease payments for these leases are approximately $4.0 million in 2006, $1.5 million in 2007, $2.2 million in 2008, and $1.3 million thereafter.
-	The customer termination accrual of $4.1 million relates to costs associated with the termination of certain customer programs primarily related to services not traditionally provided by the company and is expected to be utilized over several years.
-	Asset write-downs of $.3 million relate primarily to inventory, the majority of which are expected to be utilized by the end of 2005.
-	Other of $1.1 million primarily represents certain terminated contracts, the majority of which are expected to be utilized by the end of 2005.

In the first quarter of 2005, the company announced that it has taken additional actions to become more effectively organized and to improve its operating efficiencies, which will further reduce its costs on an annual basis by approximately $50.0 million with $40.0 million being realized in 2005. The company estimates the restructuring charge associated with these actions to be approximately $7.5 million.

Acquisition Indemnification

In the third quarter of 2003, the company recognized an acquisition indemnification charge of €11.3 million ($13.0 million or $.13 per share at the 2003 third quarter-end exchange rate) for the full amount of a claim asserted by the French tax authorities relating to alleged fraudulent activities concerning value-added tax by Tekelec Europe SA (“Tekelec”), a French subsidiary of the company. The alleged activities occurred prior to the company’s purchase of Tekelec from Tekelec Airtronic SA in 2000. In August 2004, an agreement was reached with the French tax authorities pursuant to which Tekelec agreed to pay €3.4 million in full settlement of this claim. The company recorded an acquisition indemnification credit of €7.9 million ($9.7 million at the exchange rate prevailing on August 12, 2004 or $.09 and $.08 per share on a basic and diluted basis, respectively) in the third quarter of 2004 to reduce the liability previously recorded (€11.3 million) to the required level (€3.4 million). In December 2004, Tekelec paid €3.4 million ($4.6 million at the exchange rate prevailing at year-end) in full settlement of this claim.

Impairment

In the fourth quarter of 2004, the company recorded an impairment charge related to costs in excess of net assets of companies acquired of $10.0 million ($.09 and $.08 per share on a basic and diluted basis, respectively). This non-cash charge principally relates to the company’s electronic components operations in Latin America. In calculating the impairment charge, the fair value of the reporting units was estimated using a weighted average multiple of earnings before interest and taxes from comparable businesses.

Severance

During 2002, the company’s then chief executive officer resigned. As a result, the company recorded a severance charge totaling $5.4 million ($3.2 million net of related taxes or $.03 per share), primarily based on the terms of his employment agreement. Included therein are provisions primarily related to salary continuation, retirement benefits, and the vesting of restricted stock and options.

Operating Income

The company recorded operating income of $439.3 million in 2004 as compared with operating income of $184.0 million in 2003. The increase in operating income of $255.3 million is primarily a result of higher absolute gross profit dollars due to increased sales in 2004, the cost savings realized from the current restructurings, and the impact of the lower overall acquisition indemnification, restructuring, and integration charges in 2004 compared to 2003 offset, in part, by the impairment charge in 2004.

Operating expenses increased in 2004 compared with 2003 by $46.9 million or 3.8%. This increase is primarily due to the increase in the foreign exchange rates. Variable expenses related to incremental sales were partially offset by the cost savings resulting from the company’s restructuring activities.

The company recorded operating income of $184.0 million in 2003 as compared with $167.5 million in 2002. The increase in operating income of $16.5 million for 2003 compared with the year-earlier period is primarily a result of higher gross profit resulting from increased sales and the cost savings realized from the company’s

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restructuring activities, offset by an increase in the variable costs associated with higher sales and the impact of the acquisition indemnification, restructuring, and integration charges.

Operating expenses increased in 2003 compared with 2002 by $144.9 million or 13.3%. This increase was primarily due to the recording of an acquisition indemnification charge and restructuring charges in 2003 in addition to marginally higher variable expenses as a result of increased sales.

Loss on Prepayment of Debt

During 2004, the company repurchased, through a series of transactions, $319.8 million accreted value of its zero coupon convertible debentures due in 2021, which could have been initially put to the company in February 2006 (“convertible debentures”). The related loss on the repurchase, including the premium paid and the write-off of related deferred financing costs, aggregated $15.0 million ($9.0 million net of related taxes or $.08 and $.07 per share on a basic and diluted basis, respectively). Also during 2004, the company repurchased and/or redeemed, through a series of transactions, $250.0 million principal amount of its 8.7% senior notes due in October 2005. The premium paid and the related deferred financing costs written-off upon the repurchase and/or redemption of this debt, net of the gain recognized by terminating the related interest rate swaps, aggregated $18.9 million ($11.3 million net of related taxes or $.10 and $.09 per share on a basic and diluted basis, respectively). These charges total $33.9 million ($20.3 million net of related taxes or $.18 and $.16 per share on a basic and diluted basis, respectively), of which $28.2 million was cash, and are recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense will be reduced by approximately $36.2 million from the dates of repurchase and/or redemption through the earliest maturity date, based on interest rates in effect at the time of the repurchases.

During 2003, the company repurchased, through a series of transactions, $169.0 million accreted value of its convertible debentures. The related loss on the repurchase, including the write-off of related deferred financing costs offset, in part, by the discount on the repurchase, aggregated $3.6 million ($2.2 million net of related taxes or $.02 per share). Also during 2003, the company repurchased, through a series of transactions, prior to maturity, $84.8 million principal amount of its 8.2% senior notes due in October 2003. The premium paid and the related deferred financing costs written-off upon the repurchase of this debt aggregated $2.9 million ($1.8 million net of related taxes or $.02 per share). These charges total $6.6 million ($3.9 million net of related taxes or $.04 per share), of which $2.3 million was cash, and were recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense was reduced by approximately $15.4 million from the dates of the repurchases through the earliest maturity date, based on interest rates in effect at the time of the repurchases.

During 2002, the company repurchased $398.2 million principal amount of its 6.45% and 8.2% senior notes, due in the fourth quarter of 2003. The premium paid and the related deferred financing costs written-off upon the repurchase of this debt aggregated $20.9 million ($12.9 million net of related taxes or $.13 per share), of which $14.8 million was cash, and was recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense was reduced by approximately $31.1 million from the dates of the repurchases through the 2003 maturity date.

Loss on Investment

The company determined that an other-than-temporary impairment occurred in 2004 related to an investment and, accordingly, recognized a loss on the investment of $1.3 million ($.01 per share).

Interest Expense

Net interest expense decreased 23.5% in 2004 to $103.2 million, compared with $135.0 million in 2003, primarily as a result of lower debt balances. The company has taken advantage of its strong liquidity by utilizing the cash proceeds from the sale of 13.8 million shares (net proceeds of $312.5 million) of common stock in February 2004, existing cash balances, and cash flow from operations of $187.5 million to prepay approximately $570.0 million of debt in 2004.

Net interest expense of $135.0 million in 2003 decreased from $152.6 million in 2002 primarily as a result of the generation of cash from operations of $291.6 million in 2003, which was utilized to reduce debt by $62.5 million offset, in part by the loss of interest income from the cash utilized to pay for the acquisition of IED and declining interest rates on high quality liquid investments.

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Income Taxes

The company recorded an income tax provision of $96.4 million on income before income taxes and minority interest of $305.0 million for 2004 (an effective tax rate of 31.6%) compared with an income tax provision of $21.2 million on income before income taxes and minority interest of $47.3 million (an effective tax rate of 44.8%) for 2003. The income taxes recorded in 2004 are impacted by the aforementioned restructuring charges, integration credit, impairment charge, and loss on investment. Also, the acquisition indemnification credit did not result in a tax charge. The income taxes recorded in 2003 were impacted by the restructuring charges and integration charge, and the acquisition indemnification charge was not deductible for tax purposes. The company’s income tax provision and effective tax rate is primarily impacted by, among other factors, the statutory tax rates in the countries in which it operates, and the related level of income generated by these operations.

The company recorded an income tax provision of $21.2 million on income before income taxes and minority interest of $47.3 million for 2003 (an effective tax rate of 44.8%), compared with a tax benefit of $1.8 million on a loss before income taxes and minority interest of $3.3 million in 2002 (an effective tax benefit rate of 53.1%). The income taxes and effective tax rates recorded in 2003 and 2002 were impacted by the estimated tax benefit related to the aforementioned restructuring, integration, and severance charges. The company’s effective tax rate and income tax provision is primarily impacted by, among other factors, a tax reorganization completed at the end of 2002, the statutory tax rates in the countries in which it operates, and the related level of income generated by these operations.

Discontinued Operations

In May 2002, the company sold substantially all of the assets of Gates/Arrow, a business unit within NACP. Total cash proceeds of $42.9 million, after price adjustments, have been collected. The company’s consolidated financial statements and related notes have been presented to reflect Gates/Arrow as a discontinued operation for 2002.

The company recorded a loss of $10.2 million ($6.1 million net of related taxes or $.06 per share) on the disposal of Gates/Arrow. The loss related to personnel costs ($1.3 million), facilities ($3.1 million), professional fees ($.6 million), asset write-downs ($3.0 million), and other ($2.2 million).

Change in Accounting Principle

On January 1, 2002, the company adopted Financial Accounting Standards Board (“FASB”) Statement No. 142, “Goodwill and Other Intangible Assets”, and accordingly, discontinued the amortization of goodwill. As a result of the evaluation process performed during the second quarter of 2002, the company recorded an impairment charge of $603.7 million ($6.05 per share), which was recorded as a cumulative effect of change in accounting principle at January 1, 2002.

Net Income (Loss)

The company recorded net income of $207.5 million for 2004, compared with $25.7 million in the year-earlier period. Included in the results for 2004 are the acquisition indemnification credit of $9.7 million, restructuring charges of $6.9 million (net of related taxes), an integration credit of $1.4 million (net of related taxes), an impairment charge of $10.0 million, a loss on prepayment of debt of $20.3 million (net of related taxes), as well as a loss on investment of $1.3 million. Included in the results for 2003 are the acquisition indemnification charge of $13.0 million, restructuring charges of $27.1 million (net of related taxes), an integration charge of $4.8 million (net of related taxes), and a loss on prepayment of debt of $3.9 million (net of related taxes).

The company recorded net income of $25.7 million for 2003, compared with a net loss of $610.5 million in the year-earlier period. Included in the results for 2003 are the acquisition indemnification charge of $13.0 million, restructuring charges of $27.1 million (net of related taxes), an integration charge of $4.8 million (net of related taxes), and a loss on prepayment of debt of $3.9 million (net of related taxes). Included in the results for 2002 are the loss associated with discontinued operations of $5.9 million (net of related taxes), a loss on prepayment of debt of $12.9 million (net of related taxes), a cumulative effect of change in accounting principle of $603.7 million, and a severance charge of $3.2 million (net of related taxes) related to the resignation of the company’s then chief executive officer.

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Liquidity and Capital Resources

At December 31, 2004, the company had cash, cash equivalents, and short-term investments of $463.9 million. The net amount of cash generated by the company’s operating activities during 2004 was $187.5 million primarily from earnings from operations, adjusted for non-cash items and the net impact of the charges, credits, and losses, partially offset by investments in working capital to support increased sales. The net amount of cash used for investing activities during 2004 was $196.4 million, including $158.6 million for net purchases of short-term investments, $35.0 million for acquired businesses and $23.5 million for various capital expenditures offset, in part, by proceeds of $9.6 million from notes receivable and net proceeds of $10.5 million from the sale of property, plant and equipment, which includes, $8.6 million from the sale of the Brookhaven, New York logistics center. The net amount of cash used for financing activities during 2004 was $300.6 million, primarily reflecting $329.6 million used to repurchase convertible debentures and $268.4 million used to repay 8.7% senior notes, offset, in part by the net proceeds of $312.5 million from the sale of common stock in February 2004. The effect of exchange rate changes on cash was an increase of $2.4 million.

The net amount of cash provided by the company’s operating activities in 2003 was $291.6 million, primarily a result of earnings from operations, adjusted for non-cash items and the net impact of the charges, and lower working capital requirements. The net amount of cash used for investing activities in 2003 was $261.5 million, including $231.3 million for acquired businesses and $32.0 million for various capital expenditures. The net amount of cash used for financing activities in 2003 was $96.7 million, primarily reflecting $282.2 million used to repay senior notes and $168.4 million used to repurchase convertible debentures, offset by the net proceeds of $346.3 million from the June 2003 senior note offering.

The net amount of cash provided by operating activities in 2002 was $667.9 million, primarily reflecting lower working capital requirements. The net amount of cash used for investing activities in 2002 was $79.8 million, including $111.9 million for acquired businesses and $51.7 million for various capital expenditures offset, in part, by the cash proceeds of $41.1 million from the sale of Gates/Arrow and the partial repayment of a note receivable of $41.7 million resulting from a previous transaction. The net amount of cash used for financing activities in 2002 was $484.3 million, primarily reflecting the early retirement of bonds due in the fourth quarter of 2003 and the repayment of short-term and long-term debt.

Cash Flows from Operating Activities

The company historically has maintained a significant investment in accounts receivable and inventories. As a percentage of total assets, accounts receivable and inventories were approximately 63.0% and 58.0% at December 31, 2004 and 2003, respectively.

One of the characteristics of the company’s business is that in periods of revenue growth, investments in accounts receivable and inventories grow, and the company’s need for financing may increase. In the periods in which sales decline, investments in accounts receivable and inventories generally decrease, and cash is generated. In 2004, working capital increased at a slower rate than the increase in sales. The company continues to focus on improving its working capital management.

Net cash provided by operating activities decreased by $104.1 million in 2004, as compared with the year-earlier period, primarily due to investments in working capital to support increased sales, partially offset by earnings from operations, adjusted for non-cash items and the net impact of the charges, credits, and losses.

Net cash provided by operating activities decreased by $376.3 million in 2003, as compared with the year-earlier period, primarily due to investments in working capital to support increased sales, partially offset by earnings from operations, adjusted for non-cash items and the net impact of the charges.

Cash Flows from Investing Activities

In July 2004, the company acquired Disway, an electronic components distributor operating in Italy, Germany, Austria, and Switzerland. In 2003, Disway had sales of approximately $155.0 million. The final purchase price is subject to a full year audit.

In February 2003, the company acquired substantially all the assets of the IED business. The net cost of this acquisition was $238.1 million, including a final payment of $12.2 million during the first quarter of 2004.

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As a result of certain acquisitions, the company may be contractually required to purchase the shareholder interest held by others in its majority (but less than 100%) owned subsidiaries. During 2004, the company made a payment in the amount of $.8 million to increase its ownership interest in Dicopel US and Dicopel SA from 70% to 80%. During 2003, the company made payments which aggregated $5.4 million to purchase additional interests in certain of its majority (but less than 100%) owned subsidiaries. If the put or call options on outstanding agreements were exercised at December 31, 2004, such payments would be approximately $11.0 million ($5.0 million at December 31, 2003). As these payments are based on the earnings of the acquired companies, the payments will change as the performance of these subsidiaries change.

The company utilizes short-term investments as part of its cash management activities. During 2004, the net purchases of short-term investments were $158.6 million.

During the second quarter of 2004, the company received proceeds of $8.6 million on the sale of its Brookhaven, New York logistics center.

Capital expenditures decreased in 2004 by $8.5 million, or 26.6% when compared with 2003 and also decreased in 2003 by $19.7 million, or 38.1%, when compared with 2002. These decreases are a result of the company’s continued cost containment actions, including the consolidation of facilities.

Cash Flows from Financing Activities

Total debt decreased to $1.47 billion at December 31, 2004 from $2.03 billion at December 31, 2003, primarily due to the repurchase of convertible debentures and redemption of the company’s 8.7% senior notes noted below.

During 2004, the company repurchased, through a series of transactions, $319.8 million accreted value of its convertible debentures. The related loss on the repurchase, including the premium paid and the write-off of related deferred financing costs, aggregated $15.0 million ($9.0 million net of related taxes or $.08 and $.07 per share on a basic and diluted basis, respectively). Also during 2004, the company repurchased and/or redeemed, through a series of transactions, $250.0 million principal amount of its 8.7% senior notes due in October 2005. The premium paid and the related deferred financing costs written-off upon the repurchase and/or redemption of this debt, net of the gain recognized by terminating the related interest rate swaps, aggregated $18.9 million ($11.3 million net of related taxes or $.10 and $.09 per share on a basic and diluted basis, respectively). These charges total $33.9 million ($20.3 million net of related taxes or $.18 and $.16 per share on a basic and diluted basis, respectively), of which $28.2 million was cash, and are recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense will be reduced by approximately $36.2 million from the dates of repurchase and/or redemption through the earliest maturity date, based on interest rates in effect at the time of the repurchases.

In February 2004, the company issued 13.8 million shares of common stock with net proceeds of $312.5 million. The proceeds were used to redeem $208.5 million of the company’s outstanding 8.7% senior notes due in October 2005, as described above, and for the repurchase of a portion of the company’s outstanding convertible debentures ($91.9 million accreted value).

The company has a $550.0 million asset securitization program (the “program”). At December 31, 2004 and 2003, there were no receivables sold to and held by third parties under the program, and as such, the company had no obligations outstanding under the program. The company has not utilized the program since June 2001. The program agreement, which requires annual renewals of the banks’ underlying liquidity facilities, has been extended through February 2008, and the facility fee has been reduced to .2%.

The company maintains a $450.0 million revolving credit facility which matures in December 2006. At December 31, 2004 and 2003, the company had no outstanding borrowings under this facility, for which the company pays a facility fee of .25% per annum.

In June 2003, the company completed the sale of $350.0 million principal amount of 6.875% senior notes due in 2013. The net proceeds of the offering of $346.3 million were used to repay the aforementioned 8.2% senior notes and for general corporate purposes. The additional debt the company carried during the period between the sale of the 6.875% senior notes in June 2003 and the repayment of the 8.2% senior notes in October 2003 negatively impacted income by $4.7 million ($2.9 million net of related taxes).

During 2003, the company repurchased, through a series of transactions, $169.0 million accreted value of its convertible debentures. The related loss on the repurchase, including the write-off of related deferred

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financing costs offset, in part, by the discount on the repurchase, aggregated $3.6 million ($2.2 million net of related taxes or $.02 per share). Also during 2003, the company repurchased, through a series of transactions, prior to maturity, $84.8 million principal amount of its 8.2% senior notes due in October 2003. The premium paid and the related deferred financing costs written-off upon the repurchase of this debt aggregated $2.9 million ($1.8 million net of related taxes or $.02 per share). These charges total $6.6 million ($3.9 million net of related taxes or $.04 per share), of which $2.3 million was cash, and were recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense was reduced by approximately $15.4 million from the dates of the repurchases through the earliest maturity date, based on interest rates in effect at the time of the repurchases.

During 2002, the company repurchased $398.2 million principal amount of its 6.45% and 8.2% senior notes, due in the fourth quarter of 2003. The premium paid and the related deferred financing costs written-off upon the repurchase of this debt aggregated $20.9 million ($12.9 million net of related taxes or $.13 per share), of which $14.8 million was cash, and was recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense was reduced by approximately $31.1 million from the dates of repurchase through the 2003 maturity date.

In March 2005, the company amended the indenture related to its convertible debentures to eliminate the company’s option to satisfy the put of such debentures by the holders thereof through the issuance of shares of the company’s common stock.

Restructuring and Integration Activities

Based on the aforementioned restructuring and integration charges, at December 31, 2004, the company has a remaining accrual of $22.1 million, of which $17.6 million is expected to be spent in cash. The expected cash payments are approximately $8.6 million in 2005, $4.0 million in 2006, $1.5 million in 2007, $2.2 million in 2008, and $1.3 million thereafter.

In the first quarter of 2005, the company announced that it has taken additional actions to become more effectively organized and to improve its operating efficiencies, which will further reduce its costs on an annual basis by approximately $50.0 million with $40.0 million being realized in 2005. The company estimates the restructuring charge associated with these actions to be approximately $7.5 million, the majority of which is expected to be spent in cash in 2005.

Contractual Obligations

Payments due under contractual obligations at December 31, 2004 were as follows (in thousands):

(a)	Includes convertible debentures of $298.6 million, due in 2021, which may be put to the company in February 2006 at a future accreted value of $312.4 million, which includes interest.
(b)	Amounts represent an estimate of non-cancelable inventory purchase orders and other contractual obligations related to information technology and facilities as of December 31, 2004. Most of the company’s inventory purchases are pursuant to authorized distributor agreements, which are typically cancelable by either party at any time or on short notice, usually within a few months.

(c)	Includes estimates of contributions required to meet the requirements of several defined benefit plans. Amounts are subject to change based upon the performance of plan assets, as well as the discount rate used to determine the obligation. The company is unable to estimate the projected contributions beyond 2010. Also included are amounts relating to personnel, customer termination, and certain other costs resulting from restructuring and integration activities. Amounts relating to facilities are included in operating leases.

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Under the terms of various joint venture agreements, the company would be required to pay its pro-rata share, based upon its ownership interests, of the third party debt of the joint ventures in the event that the joint ventures were unable to meet their obligations. At December 31, 2004, the company’s pro-rata share of this debt was $7.8 million. The company believes there is sufficient equity in the joint ventures to cover this potential liability.

Off-Balance Sheet Arrangements

An off-balance sheet arrangement is any contractual arrangement involving an unconsolidated entity under which a company has (a) made guarantees, (b) a retained or a contingent interest in transferred assets, (c) any obligation under certain derivative instruments or (d) any obligation under a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the company, or engages in leasing, hedging, or research and development services within the company.

The company does not have any off-balance sheet financing or unconsolidated special purpose entities.

Critical Accounting Policies and Estimates

The company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires the company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. The company evaluates its estimates, including those related to uncollectible receivables, inventories, intangible assets, income taxes, restructuring and integration costs, and contingencies and litigation, on an ongoing basis. The company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The company believes the following critical accounting policies, among others, involve the more significant judgments and estimates used in the preparation of its consolidated financial statements:

-	The company recognizes revenue in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). Under SAB 104, revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectibility is reasonably assured. Revenue typically is recognized at time of shipment. Sales are recorded net of discounts, rebates, and returns.
	A portion of the company’s business involves shipments directly from its suppliers to its customers. In these transactions, the company is responsible for negotiating price both with the supplier and customer, payment to the supplier, establishing payment terms with the customer, product returns, and has risk of loss if the customer does not make payment. As the principal with the customer, the company recognizes the sale and cost of sale of the product upon receiving notification from the supplier that the product has been shipped.
	In addition, the company has certain business with select customers and suppliers that is accounted for on an agency basis (that is, the company recognizes the fees associated with serving as an agent in sales with no associated cost of sales) in accordance with Emerging Issues Task Force Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”.

	In the fourth quarter of 2004, based upon an evaluation of its business and accounting practices, the company determined that revenue related to the sale of service contracts should more appropriately be classified on an agency basis rather than a gross basis. While this change reduces reported sales and cost of sales, it has no impact on gross profit, operating income, net income, cash flow, or the balance sheet. All prior period sales and cost of sales have been reclassified to present the revenue related to the sale of service contracts on an agency basis. Sales and cost of sales have been reduced by $171.0 million for the nine months ended September 30, 2004 and $151.0 million and $120.4 million in 2003 and 2002, respectively.

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-	The company assesses its investments accounted for as available-for-sale on a quarterly basis to determine whether declines in market value below cost are other-than-temporary. When the decline is determined to be other-than-temporary, the cost basis for the individual security is reduced and a loss is realized in the period in which it occurs. The company makes such determination based upon the quoted market price, financial condition, operating results of the investee, and the company’s intent and ability to retain the investment over a period of time which would be sufficient to allow for any recovery in market value. In addition, the company assesses the following factors:
	-  broad economic factors impacting the investee’s industry,    -  publicly available forecasts for sales and earnings growth for the industry and investee, and    -  the cyclical nature of the investee’s industry.
	The company could potentially have an impairment charge in future periods if, among other factors, the investee’s future earnings differ from currently available forecasts.
-	The carrying value of the company’s deferred tax assets is dependent upon the company’s ability to generate sufficient future taxable income in certain tax jurisdictions. Should the company determine that it would not be able to realize all or part of its deferred tax assets in the future, a valuation allowance to the deferred tax assets would be established in the period such determination was made.
	It is the company’s policy to establish accruals for taxes that may become payable in future years as a result of examinations by tax authorities. The company establishes the accruals based upon management’s assessment of probable contingencies. At December 31, 2004, the company believes it has appropriately accrued for probable contingencies. To the extent the company were to prevail in matters for which accruals have been established or be required to pay amounts in excess of accruals, the company’s effective tax rate in a given financial statement period could be affected.
-	The company uses various financial instruments, including derivative financial instruments, for purposes other than trading. Derivatives used as part of the company’s risk management strategy are designated at inception as hedges and measured for effectiveness both at inception and on an ongoing basis. The company has also entered into interest rate swap transactions that convert certain fixed rate debt to variable rate debt, effectively hedging the change in fair value of the fixed rate debt resulting from fluctuations in interest rates. The fair value hedges and the hedged debt are adjusted to current market values through interest expense.
-	The company is subject to proceedings, lawsuits, and other claims related to environmental, labor, product and other matters. The company assesses the likelihood of an adverse judgment or outcomes for these matters, as well as the range of potential losses. A determination of the reserves required, if any, is made after careful analysis. The required reserves may change in the future due to new developments.

-

The company has recorded charges in connection with restructuring its businesses, as well as the integration of acquired businesses. These items primarily include employee separation costs and estimates related to the consolidation of facilities (net of sub-lease income), contractual obligations, and the valuation of certain assets including accounts receivable, inventories, and investments. Actual amounts could be different from those estimated.

21

Impact of Recently Issued Accounting Standards

In December 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” (“Statement No. 123R”). Statement No. 123R addresses all forms of share-based payment (“SBP”) awards, including, but not limited to, shares issued under stock options, restricted stock, performance shares, and stock appreciation rights. Statement No. 123R will require companies to expense SBP awards with compensation cost for SBP transactions measured at fair value. The company will adopt the new accounting provisions of Statement 123R in the third quarter of 2005. The company is currently evaluating the impact of applying the various provisions of Statement No. 123R.

Financial Accounting Standards Statement No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“Statement No. 132R”), effective on January 1, 2004, revises employers’ disclosures about pension plans and other postretirement benefit plans and requires additional disclosures in annual financial statements about the types of plan assets, investment strategy, measurement dates, plan obligations, cash flows, and components of net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. Statement No. 132R also requires interim disclosure of the elements of net periodic benefit cost and, if significantly different from amounts previously disclosed, the total amount of contributions paid or expected to be paid during the current fiscal year. The company adopted the disclosure provisions of Statement No. 132R in the first quarter of 2004.

Information Relating to Forward-Looking Statements

This report includes forward-looking statements that are subject to certain risks and uncertainties which could cause actual results or facts to differ materially from such statements for a variety of reasons, including, but not limited to: industry conditions, changes in product supply, pricing and customer demand, competition, other vagaries in the electronic components and computer products markets, changes in relationships with key suppliers, the effects of additional actions taken to lower costs, and the company’s ability to generate additional cash flow. Shareholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The company undertakes no obligation to update publicly or revise any of the forward-looking statements.

22

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The company is exposed to market risk from changes in foreign currency exchange rates and interest rates.

Foreign Currency Exchange Rate Risk

The company, as a large global organization, faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material impact on the company’s financial results in the future. The company’s primary exposure relates to transactions in which the currency collected from customers is different from the currency utilized to purchase the product sold in Europe, the Asia/Pacific region, Canada, and Latin America. The company’s policy is to hedge substantially all currency exposures for which natural hedges do not exist. Natural hedges exist when purchases and sales within a specific country are both denominated in the same currency and therefore no exposure exists to hedge with a foreign exchange forward or option contract (collectively, “foreign exchange contracts”). In many regions in Asia, for example, sales and purchases are primarily denominated in U.S. dollars, resulting in a “natural hedge”. Natural hedges exist in most countries in which the company operates, although the percentage of natural offsets, as compared with offsets, which need to be hedged by foreign exchange contracts, will vary from country to country. The company does not enter into foreign exchange contracts for trading purposes. The risk of loss on a foreign exchange contract is the risk of nonperformance by the counterparties, which the company minimizes by limiting its counterparties to major financial institutions. The fair value of the foreign exchange contracts is estimated using market quotes. The notional amount of the foreign exchange contracts at December 31, 2004 and 2003 was $224.7 million and $222.7 million, respectively. The carrying amounts, which are nominal, approximated fair value at December 31, 2004 and 2003. The translation of the financial statements of the non-North American operations is impacted by fluctuations in foreign currency exchange rates. The increase in consolidated sales and operating income was impacted by the translation of the company’s international financial statements into U.S. dollars which resulted in increased sales of $246.3 million and increased operating income of $11.9 million for 2004, compared with the year-earlier periods, based on 2003 sales at the average rate for 2004. Sales and operating income would have decreased by approximately $272.5 million and $13.2 million, respectively, if average foreign exchange rates had declined by 10% against the U.S. dollar in 2004. This amount was determined by considering the impact of a hypothetical foreign exchange rate on the sales and operating income of the company’s international operations.

Interest Rate Risk

The company’s interest expense, in part, is sensitive to the general level of interest rates in the Americas, Europe, and the Asia/Pacific region. The company historically has managed its exposure to interest rate risk through the proportion of fixed rate and floating rate debt in its total debt portfolio. In addition, the company uses interest rate swaps to manage its targeted mix of fixed and floating rate debt. At December 31, 2004, approximately 64% of the company’s debt was subject to fixed rates, and 36% of its debt was subject to floating rates. A one percentage point change in average interest rates would not have a material impact on interest expense, net of interest income, in 2004. This was determined by considering the impact of a hypothetical interest rate on the company’s average floating rate on investments and outstanding debt. This analysis does not consider the effect of the level of overall economic activity that could exist. In the event of a change in the level of economic activity, which may adversely impact interest rates, the company could likely take actions to further mitigate any potential negative exposure to the change. However, due to the uncertainty of the specific actions that might be taken and their possible effects, the sensitivity analysis assumes no changes in the company’s financial structure.

23

Item 8. Financial Statements and Supplementary Data.

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Arrow Electronics, Inc.

We have audited the accompanying consolidated balance sheets of Arrow Electronics, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and the schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arrow Electronics, Inc. at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, on January 1, 2002, Arrow Electronics, Inc. adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Arrow Electronics, Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2005 expressed an unqualified opinion thereon.

 
/s/ ERNST & YOUNG LLP

 
New York, New York
March 11, 2005

24

ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except per share data)

See accompanying notes.

25

ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)

See accompanying notes.

26

ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)

See accompanying notes.

27

ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(In thousands)

28

ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (continued)
(In thousands)

See accompanying notes.

29

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

1. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the company and its majority-owned subsidiaries. All significant intercompany transactions are eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires the company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments, which are readily convertible into cash and have maturities of three months or less when acquired.

Short-term Investments

Short-term investments, consisting primarily of high-grade debt securities including Auction Rate Securities, are classified as available-for-sale securities. The company classifies as short-term investments those investments with an original maturity of less than one year or those investments it intends to sell within one year. The carrying amount reported in the consolidated balance sheet for short-term investments approximates fair value.

Financial Instruments

The company uses various financial instruments, including derivative financial instruments, for purposes other than trading. Derivatives used as part of the company’s risk management strategy are designated at inception as hedges and measured for effectiveness both at inception and on an ongoing basis. The company has also entered into interest rate swap transactions that convert certain fixed rate debt to variable rate debt, effectively hedging the change in fair value of the fixed rate debt resulting from fluctuations in interest rates. The fair value hedges and the hedged debt are adjusted to current market values through interest expense.

Inventories

Inventories are stated at the lower of cost or market. Cost approximates the first-in, first-out method.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is computed on the straight-line method for financial reporting purposes and on accelerated methods for tax reporting purposes. Leasehold improvements are amortized over the shorter of the term of the related lease or the life of the improvement. Long-lived assets are reviewed for impairment whenever changes in circumstances or events may indicate that the carrying amounts may not be recoverable. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference.

Investments

Investments are accounted for using the equity method of accounting if the investment provides the company the ability to exercise significant influence, but not control, over an investee. Significant influence is generally deemed to exist if the company has an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method of accounting is appropriate. The company records

30

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

its investments in equity method investees meeting these characteristics as “Investments in affiliated companies” in the accompanying consolidated balance sheet.

All other equity investments, which consist of investments for which the company does not have the ability to exercise significant influence, are accounted for under the cost method, if private, or as available-for-sale, if public, and are included in “Other assets” in the accompanying consolidated balance sheet. Under the cost method of accounting, investments are carried at cost and are adjusted only for other-than-temporary declines in realizable value, distributions of earnings, and additional investments. If classified as available-for sale, the company accounts for the changes in the fair value with unrealized gains or losses reflected in the shareholders’ equity section in the accompanying consolidated balance sheet in “Other”. The company assesses its long-term investments accounted for as available-for-sale on a quarterly basis to determine whether declines in market value below cost are other-than-temporary. When the decline is determined to be other-than-temporary, the cost basis for the individual security is reduced and a loss is realized in the period in which it occurs. When the decline is determined to be temporary, the unrealized losses are included in the shareholders’ equity section in the accompanying consolidated balance sheet in “Other”. The company makes such determination based upon the quoted market price, financial condition, operating results of the investee, and the company’s intent and ability to retain the investment over a period of time which would be sufficient to allow for any recovery in market value. In addition, the company assesses the following factors:

	-	broad economic factors impacting the investee’s industry,
	-	publicly available forecasts for sales and earnings growth for the industry and investee, and
	-	the cyclical nature of the investee’s industry.

The company could potentially have an impairment charge in future periods if, among other factors, the investee’s future earnings differ from currently available forecasts.

Cost in Excess of Net Assets of Companies Acquired

On January 1, 2002, the company adopted Financial Accounting Standards Board (“FASB”) Statement No. 142, “Goodwill and Other Intangible Assets”, and accordingly, discontinued the amortization of goodwill. As a result of the evaluation process performed during the second quarter of 2002, the company recorded an impairment charge of $603,709 ($6.05 per share), which was recorded as a cumulative effect of a change in accounting principle at January 1, 2002. The company performs an annual impairment test as of the first day of the fourth quarter. In addition, the company adopted, as of January 1, 2002, FASB Statement No. 141, “Business Combinations”, which requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and that certain identifiable intangible assets be recognized as assets apart from goodwill. The company has no identifiable intangible assets other than goodwill.

The company performs an annual impairment test as of the first day of the fourth quarter, or earlier if indicators of potential impairment exist, to evaluate goodwill. Goodwill is considered impaired if the carrying amount of the reporting unit exceeds its estimated fair value. In assessing the recoverability of goodwill, the company reviews both quantitative as well as qualitative factors to support its assumptions with regard to fair value. The fair value of a reporting unit is estimated using a weighted average multiple of earnings before interest and taxes from comparable companies. In determining the fair value, the company makes certain judgments, including the identification of reporting units and the selection of comparable companies. If these estimates or their related assumptions change in the future as a result of changes in strategy and/or market conditions, the company may be required to record an impairment charge.

Foreign Currency Translation

The assets and liabilities of foreign operations are translated at the exchange rates in effect at the balance sheet date, with the related translation gains or losses reported as a separate component of shareholders’ equity in the accompanying consolidated balance sheet. The results of foreign operations are translated at the monthly average exchange rates.

31

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

Income Taxes

Income taxes are accounted for under the liability method. Deferred taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. The carrying value of the company’s deferred tax assets is dependent upon the company’s ability to generate sufficient future taxable income in certain tax jurisdictions. Should the company determine that it would not be able to realize all or part of its deferred tax assets in the future, a valuation allowance to the deferred tax assets would be established in the period such determination was made.

It is the company’s policy to establish accruals for taxes that may become payable in future years as a result of examinations by tax authorities. The company establishes the accruals based upon management’s assessment of probable contingencies. At December 31, 2004, the company believes it has appropriately accrued for probable contingencies. To the extent the company were to prevail in matters for which accruals have been established or be required to pay amounts in excess of accruals, the company’s effective tax rate in a given financial statement period could be affected.

Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the aggregate change in shareholders’ equity excluding changes in ownership interests. Comprehensive income (loss) consists of foreign currency translation adjustments, unrealized gain (loss) on securities, unrealized gain on foreign exchange options, and minimum pension liability adjustments. The foreign currency translation adjustments included in comprehensive income (loss) have not been tax effected as investments in foreign affiliates are deemed to be permanent. No deferred income tax has been provided on the unrealized gain on securities as the company has sufficient capital loss carryforwards.

Stock-based Compensation

The company accounts for stock-based compensation using Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees”. The company adopted the disclosure requirements of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, as amended by FASB Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (collectively, “Statement No. 123”) which uses a fair-value based method of accounting for stock-based employee compensation plans.

The company’s current method of accounting utilizes the intrinsic value method whereby stock options are granted at market price and therefore no compensation costs are recognized.

32

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

If compensation expense for the company’s various stock-based compensation plans (“compensation plans”) had been determined utilizing the fair value method of accounting at the grant dates for awards under the compensation plans in accordance with Statement No. 123, the company’s pro forma net income (loss) and basic and diluted net income (loss) per share would have been as follows:

The estimated weighted average fair value, utilizing the Black-Scholes option-pricing model, at the date of option grant, during 2004, 2003, and 2002 was $11.34, $9.62, and $7.77 per share, respectively. The weighted average fair value was estimated using the following assumptions:

There is no expected dividend yield.

Segment Reporting

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The company’s operations are classified into two reportable business segments, the distribution of electronic components and the distribution of computer products.

Revenue Recognition

The company recognizes revenue in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). Under SAB 104, revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectibility is reasonably assured. Revenue typically is recognized at time of shipment. Sales are recorded net of discounts, rebates, and returns.

A portion of the company’s business involves shipments directly from its suppliers to its customers. In these transactions, the company is responsible for negotiating price both with the supplier and customer, payment to the supplier, establishing payment terms with the customer, product returns, and has risk of loss if the customer does not make payment. As the principal with the customer, the company recognizes the sale and cost of sale of the product upon receiving notification from the supplier that the product has been shipped.

In addition, the company has certain business with select customers and suppliers that is accounted for on an agency basis (that is, the company recognizes the fees associated with serving as an agent in sales with no associated cost of sales) in accordance with Emerging Issues Task Force Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”.

33

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

In the fourth quarter of 2004, based upon an evaluation of its business and accounting practices, the company determined that revenue related to the sale of service contracts should more appropriately be classified on an agency basis rather than a gross basis. While this change reduces reported sales and cost of sales, it has no impact on gross profit, operating income, net income, cash flow, or the balance sheet. All prior period sales and cost of sales have been reclassified to present the revenue related to the sale of service contracts on an agency basis. Sales and cost of sales have been reduced by $171,004 for the nine months ended September 30, 2004 and $150,982 and $120,355 in 2003 and 2002, respectively.

Shipping and Handling Costs

Shipping and handling costs included in selling, general and administrative expenses totaled $57,296, $42,941, and $32,747 in 2004, 2003, and 2002, respectively.

Software Development Costs

The company capitalizes qualifying costs under FASB Statement of Position 98-1, “Accounting for the Costs to Develop or Obtain Software for Internal Use” including certain costs incurred in connection with developing or obtaining software for internal use. Capitalized software costs are amortized on a straight-line basis over the estimated useful life of the software, which is generally three to five years.

Impact of Recently Issued Accounting Standards

In December 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” (“Statement No. 123R”). Statement No. 123R addresses all forms of share-based payment (“SBP”) awards, including, but not limited to, shares issued under stock options, restricted stock, performance shares, and stock appreciation rights. Statement No. 123R will require companies to expense SBP awards with compensation cost for SBP transactions measured at fair value. The company will adopt the new accounting provisions of Statement 123R in the third quarter of 2005. The company is currently evaluating the impact of applying the various provisions of Statement No. 123R.

Financial Accounting Standards Statement No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“Statement No. 132R”), effective on January 1, 2004, revises employers’ disclosures about pension plans and other postretirement benefit plans and requires additional disclosures in annual financial statements about the types of plan assets, investment strategy, measurement dates, plan obligations, cash flows, and components of net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. Statement No. 132R also requires interim disclosure of the elements of net periodic benefit cost and, if significantly different from amounts previously disclosed, the total amount of contributions paid or expected to be paid during the current fiscal year. The company adopted the disclosure provisions of Statement No. 132R in the first quarter of 2004.

Reclassification

Certain prior year amounts have been reclassified to conform with current year presentation.

2. Acquisitions

In July 2004, the company acquired Disway AG (“Disway”), an electronic components distributor in Italy, Germany, Austria, and Switzerland. In 2003, Disway had sales of approximately $155,000. The final purchase price is subject to a full year audit. For financial reporting purposes, the Disway acquisition has been accounted for as a purchase transaction. Accordingly, Disway’s results of operations have been included in the consolidated results of the company from the date of acquisition.

In February 2003, the company acquired substantially all the assets of the Industrial Electronics Division (“IED”) of Agilysys, Inc. IED was an electronics distributor serving industrial original equipment manufacturers (“OEMs”) and contract manufacturers (“CMs”). The net consideration paid for this acquisition was $238,132, of which $225,953 was paid through December 31, 2003 and $12,179 was paid during the first quarter of 2004.

34

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

A summary of the allocation of the net consideration paid for the IED business to the fair value of the assets acquired and liabilities assumed is as follows:

The cost in excess of net assets of companies acquired of $75,127 has been allocated to the company’s electronic components segment. Of the total amount, $54,437 is expected to be deductible for tax purposes.

The IED acquisition has been accounted for as a purchase transaction. Accordingly, the consolidated results of the company, for 2003, include IED’s performance from the date of acquisition.

The unaudited summary of operations for the year ended December 31, 2003 has been prepared on a pro forma basis, as though the acquisition of the IED business occurred on January 1, 2003, as follows (shares in thousands):

The 2003 unaudited summary of operations does not purport to be indicative of the results which would have been obtained if the acquisition had been made at the beginning of 2003 or of those results which may be obtained in the future.

During 2002, the company purchased 100% of a division of Adecom Srl and acquired a 51% interest in Adecom Services Srl. The company also increased its holdings in IR Electronics from 64% to 100% and increased its ownership in Arrow/Ally, Inc. from 75% to 97.4%. The aggregate cost of these acquisitions was $4,104.

In connection with certain acquisitions, the company was required to make future payments contingent upon the acquired businesses’ earnings and in certain instances, the achievements of operating goals. During 2002, the company made such payments aggregating $108,470, of which $95,659 was capitalized as cost in excess of net assets of companies acquired, and $12,811 was recorded as a reduction of capital in excess of par value. At December 31, 2004 and 2003, the company did not have any further requirements to make additional payments.

35

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

As a result of certain acquisitions, the company may be contractually required to purchase the shareholder interest held by others in its majority (but less than 100%) owned subsidiaries. The payments for such purchases, which are dependent upon the exercise of a put or call option by either party, are based upon a multiple of earnings over a contractually determined period and, in certain instances, capital structure. There are no expiration dates for these agreements. The terms of these agreements generally provide no limitation to the maximum potential future payments; however, in most instances the amount to be paid will not be less than the pro-rata net book value (total assets minus total liabilities) of the subsidiary. During 2004, the company made a payment in the amount of $805 to increase its ownership interest in Dicopel US and Dicopel SA (collectively, “Dicopel”) from 70% to 80%. During 2003, the company made such payments which aggregated $5,376 to increase its ownership interest in Arrow Components (NZ) Limited to 100%; in Dicopel from 60% to 70%; and in Components Agent (Cayman) Limited to 100%. During 2002, there were no such payments made. The aforementioned payments were capitalized as cost in excess of net assets acquired partially offset by the carrying value of the related minority interest. If the put or call options on outstanding agreements were exercised at December 31, 2004, such payments would be approximately $11,000 ($5,000 at December 31, 2003), which would be capitalized as cost in excess of net assets of companies acquired partially offset by the carrying value of the related minority interest. As these payments are based on the earnings of the acquired companies, the payments will change as the performance of these subsidiaries change.

3. Investments

Affiliated Companies

The company has a 50% interest in several joint ventures with Marubun Corporation, collectively referred to as Marubun/Arrow, and a 50% interest in Altech Industries (Pty.) Ltd., a joint venture with Allied Technologies Limited. These investments are accounted for using the equity method.

The following tables present the company’s investment in Marubun/Arrow and the company’s investment and long-term note receivable in Altech Industries at December 31, 2004 and 2003, and the equity in earnings of affiliated companies for the years ended December 31, 2004 and 2003: