UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 1-4482

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [X] No [  ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [  ] No [X]

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 the 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [  ] Non-accelerated filer [  ]

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

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 $3,841,026,588.

There were 122,901,974 shares of Common Stock outstanding as of February 16, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

The definitive proxy statement related to the registrant’s Annual Meeting of Shareholders, to be held May 8, 2007, is incorporated by reference in Part III to the extent described therein.

TABLE OF CONTENTS

PART I
Item 1.		Business			3
Item 1A.		Risk Factors			7
Item 1B.		Unresolved Staff Comments			12
Item 2.		Properties			13
Item 3.		Legal Proceedings			13
Item 4.		Submission of Matters to a Vote of Security Holders			14
PART II
Item 5.		Market for Registrant’s Common Equity and Related Stockholder Matters			15
Item 6.		Selected Financial Data			17
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			34
Item 8.		Financial Statements and Supplementary Data			36
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			75
Item 9A.		Controls and Procedures			75
Item 9B.		Other Information			77
PART III
Item 10.		Directors and Executive Officers of the Registrant			78
Item 11.		Executive Compensation			78
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			78
Item 13.		Certain Relationships and Related Transactions			78
Item 14.		Principal Accounting Fees and Services			78
PART IV
Item 15.		Exhibits and Financial Statement Schedules			79
SIGNATURES					88
EX-2.E: ASSET PURCHASE AGREEMENT
EX-10.A: SAVINGS PLAN
EX-10.N: AMENDED AND RESTATED FIVE YEAR CREDIT AGREEMENT
EX-10.O.XV: AMENDMENT NO. 14 TO TRANSFER AND ADMINISTRATION AGREEMENT
EX-10.O.XVI: AMENDMENT NO. 15 TO TRANSFER AND ADMINISTRATION AGREEMENT
EX-21: SUBSIDIARY LISTING
EX-23: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EX-31.I: CERTIFICATION
EX-31.II: CERTIFICATION
EX-32.I: CERTIFICATION
EX-32.II: CERTIFICATION

PART I

Most manufacturers of electronic components rely on authorized distributors, such as the company, to augment their sales and marketing operations. As a marketing, stocking, and financial intermediary, the distributor relieves manufacturers of a portion of the costs and personnel associated with selling and stocking 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, memory programming capabilities, and financing solutions. 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.

Computer Products

The company’s global computer products business includes Arrow’s Enterprise Computing Solutions (“ECS”) business, which is a leading distributor of enterprise and embedded computing systems and storage, software, and services to resellers in North America, as well as the Nordic region and Central and Eastern Europe. The company began its global expansion of its ECS business into the European marketplace with the acquisition of DNSint.com AG (“DNS”), based in Munich, Germany, in December 2005 and expanded into the United Kingdom with the December 2006 acquisition of InTechnology plc’s storage and security distribution business (“InTechnology”), based in Harrogate, England. ECS increased its presence in the storage and security markets with the InTechnology acquisition and in value-added software through the November 2005 acquisition of Alternative Technology, Inc. (“Alternative Technology”), which is headquartered in Englewood Colorado, and supports VARs in delivering software solutions that optimize, accelerate, monitor, and secure an end-user’s network. The company also has dedicated computer products businesses in France, Spain, and the United Kingdom.

Within computer products, approximately 49% of the company’s sales consist of enterprise and embedded computing systems and related services, 26% consist of storage, and 15% consist of software. The remaining 10% of the company’s computer products sales consist of industrial computer products.

The distribution of computer products has evolved in recent years from a business dominated by inventory, integration, and supply chain efficiency to a business focused on sales management, business partner enablement, and demand generation. Manufacturers of computer products are rationalizing supply chain and channel strategies as they seek to maximize selling opportunities while extracting efficiencies from routes to market. Increasingly, they look to the distribution channel as an out-sourced selling entity that helps them achieve growth goals but under a variable cost model that allows them to be more competitive in the market. In better serving the needs of the manufacturers, the company’s business focus is to be an extension of the manufacturer’s sales and marketing organizations, as well as to support traditional supply chain management for vendors with those requirements.

A key component of the channel strategies of computer products manufacturers is a segmentation of product offerings into open-sourced and closed-sourced distribution channels. Under open-sourced distribution, a broad population of the manufacturer’s distribution partners is able to sell the products in this category. Products subject to closed-sourced distribution are sold by a limited number of distribution partners. The company sells products in both distribution channels with a higher weighting on closed-sourced products.

The company primarily goes to market through a large population of VARs authorized to sell a manufacturer’s products. VARs range in size from small to medium-sized businesses and are typically structured as sales organizations and service providers. They purchase computer products from distributors and manufacturers and resell them to end-users. The company provides sales enablement, back-office, and integration support to its VAR partners in order to help them profitably grow their businesses.

Customers and Suppliers

The company and its affiliates serve more than 140,000 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 2006 consolidated sales.

The 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. The company also has sales teams that focus on small and emerging

customers where sales representatives regularly call on customers by telephone from centralized selling locations, and inbound sales agents serve customers that call into the company. Each of the company’s North American electronic components selling locations, warehouses, and primary distribution centers are 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 electronic components 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 more than 600 manufacturers. No single supplier accounted for more than 7% of the company’s 2006 consolidated sales. The company does not regard any one supplier of products to be essential to its consolidated results of operations and believes that many of the products currently sold by the company are available from other sources at competitive prices. However, certain parts of the company’s business, such as the company’s ECS business, rely on a limited number of suppliers. 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.

Distribution Agreements

It is the policy of most manufacturers to protect authorized distributors, such as the company, against the potential write-down of 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 reductions in manufacturers’ list prices. 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, 2006, this type of repurchase arrangement covered approximately 83% 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.

Competition

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.

Employees

The company and its affiliates employed nearly 12,000 employees worldwide as of December 31, 2006.

Available Information

The company makes the annual report on Form 10-K, quarterly reports on Form 10-Q, 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 U.S. 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, 2006, 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 (the “NYSE”) certifying that he is not aware of any violations by the company of NYSE corporate governance listing standards.

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 was appointed Chairman of the company in May 2006. He has been President and Chief Executive Officer of the company since February 2003. Prior to joining the company, 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, General Counsel, and Secretary of the company for more than five years.

Kevin J. Gilroy was appointed Senior Vice President of the company and President of Arrow Enterprise Computing Solutions in January 2007. Prior to joining the company, he served as President and Chief Executive Officer of OnForce, Inc. from May 2006 to December 2006 and Executive Vice President and General Manager of OnForce, Inc. from November 2005 to May 2006. He also was an independent consultant from October 2005 to November 2005. Prior thereto, he spent over twenty-four years at Hewlett-Packard Company, most recently as Senior Vice President and General Manager of Worldwide SMB Operations Segment from May 2004 to October 2005, and Vice President and General Manager of Americas Commercial Channels from January 2002 to May 2004.

Michael J. Long was appointed Senior Vice President of the company in January 2006 and, prior thereto, he served as Vice President of the company for more than five years. He was appointed President of Arrow Global Components in September 2006. Prior thereto, he served as President of North America and Asia/Pacific Components from January 2006 until September 2006, President of North America from May 2005 to December 2005, and President and Chief Operating Officer of Arrow Enterprise Computing Solutions from July 1999 to April 2005.

M. Catherine Morris was appointed Senior Vice President of the company and President of Arrow Enterprise Computing Solutions in January 2007. Prior thereto, she served as Acting President, Arrow Enterprise Computing Solutions from September 2006 to December 2006; Vice President, Support Services, North America from October 2005 to August 2006; Vice President, Finance and Support Services, Enterprise Computing Solutions from September 2002 to September 2005; and Vice President, Corporate Development of the company from January 1999 to August 2002.

Paul J. Reilly was appointed Senior Vice President of the company in May 2005 and, prior thereto, he served as Vice President of the company for more than five years. He has been Chief Financial Officer of the company for more than five years.

Vincent T. Melvin was appointed Vice President and Chief Information Officer of the company in September 2006. Prior to joining the company, he served as Senior Vice President and Chief Information Officer of Sanmina-SCI, Inc. from December 2001 to September 2006.

Item 1A. Risk Factors .

Described below and throughout this report are certain risks that the company’s management believes are applicable to the company’s business and the industry in which it operates. There may be additional risks that are not presently material or known. There are also risks within the economy, the industry and the capital markets that affect business generally, and the company as well, which have not been described.

If any of the described events occur, the company’s business, results of operations, financial condition, liquidity, or access to the capital markets could be materially adversely affected. When stated below that a risk may have a material adverse effect on the company’s business, it means that such risk may have one or more of these effects.

A large portion of the company’s revenues comes from the sale of semiconductors, which is a highly cyclical industry, and an industry down-cycle could have a material adverse effect on the company’s business.

The semiconductor industry historically has experienced fluctuations in product supply and demand, often associated with changes in technology and manufacturing capacity, and is generally considered to be highly cyclical. Sales of semiconductor products and related services represented approximately 56% of the company’s consolidated sales in 2006 and 53% in both 2005 and 2004, and the company’s revenues, particularly in its electronic components businesses, tend to closely follow the strength or weakness of the semiconductor market. While the semiconductor industry has strengthened in recent years, it is uncertain whether this improvement will continue, and future downturns in the technology industry, particularly in the semiconductor sector, could have a material adverse effect on the company’s business and negatively impact its ability to maintain current profitability levels.

If the company is unable to maintain its relationships with its suppliers, its business could be materially adversely affected.

Substantially all of the company’s inventory is purchased from suppliers with which the company has entered into non-exclusive distribution agreements. These agreements are typically cancelable on short notice (generally 30 to 90 days). Certain parts of the company’s business, such as the company’s ECS business, rely on a limited number of suppliers. To the extent that the company’s significant suppliers are unwilling to continue to do business with the company, the company’s business could be materially adversely affected. In addition, to the extent that the company’s suppliers modify the terms of their contracts with the company (including, without limitation, the terms regarding price protection, rights of return, rebates, or other terms that are favorable to the company), or extend lead times, limit supplies due to capacity constraints, or other factors, there could be a material adverse effect on the company’s business.

The company operates in a competitive industry and continues to be under the pressure of eroding gross profit margins, which could have a material adverse effect on the company’s business.

The market for the company’s products and services is very competitive and subject to rapid technological change. Not only does the company compete with other distributors, it also competes for customers with many of its own suppliers. Additional competition has emerged from third-party logistics providers, fulfillment companies, catalogue distributors and online distributors and brokers.

Additionally, prices for the company’s products tend to decrease over their life cycle, which can result in decreased gross profit margins for the company. There is also substantial and continuing pressure from customers to reduce their total cost for products. Suppliers may also seek to increase their own profitability by reducing the company’s gross profit margin on products they sell to the company. The company expends substantial amounts on the value creation services required to remain competitive, retain existing business, and gain new customers, and the company must evaluate the expense of those efforts against the impact of price and margin reductions.

Further, our margins are lower in certain geographic markets and certain parts of our business than in others. For example, the components we sell in the Asian markets tend to have lower profit margins than in North America and Europe. Additionally, our ECS products typically have lower profit margins than our components businesses. As our ECS sales and sales in lower margin jurisdictions have increased as a percentage of overall sales, our profit margins have fallen. Thus, the company’s consolidated gross profit margins have eroded over time, from 16.2% in 2004 to 15.0% in 2006. If the company is unable to effectively compete in its

industry or is unable to maintain acceptable gross profit margins, its business could be materially adversely affected.

Products sold by the company may be found to be defective and, as a result, warranty and/or product liability claims may be asserted against the company, which may have a material adverse effect on the company.

The company sells its components at prices that are significantly lower than the cost of the equipment or other goods in which they are incorporated. Since a defect or failure in a product could give rise to failures in the end products that incorporate them (and claims for consequential damages against the company from its customers), the company may face claims for damages that are disproportionate to the revenues and profits it receives from the products involved in the claims. While the company and its suppliers generally exclude consequential damages in their standard terms and conditions, the company’s ability to avoid such liabilities may be limited as a result of differing factors, such as the inability to exclude such damages due to the laws of some of the countries where it does business. The company’s business could be materially adversely affected as a result of a significant quality or performance issue in the products sold by the company, if it is required to pay for the damages that result. Although the company currently has product liability insurance, such insurance is limited in coverage and amount.

Declines in value and other factors pertaining to the company’s inventory could materially adversely affect its business.

The electronic components and computer products industries are subject to rapid technological change, evolving industry standards, changes in end-market demand, and regulatory requirements, which can contribute to the decline in value or obsolescence of inventory. During an economic downturn, prices could decline due to an oversupply of product and, therefore, there may be greater risk of declines in inventory value. Although most of the company’s suppliers provide the company with certain protections from the loss in value of inventory (such as price protection and certain rights of return), the company cannot be sure that such protections will fully compensate it for the loss in value, or that the suppliers will choose to, or be able to, honor such agreements. For example, many of the company’s suppliers will not allow it to return products after they have been held in inventory beyond a certain amount of time, and, in most instances, the return rights are limited to a certain percentage of the amount of product the company purchased in a particular time frame. In addition, as discussed below, the company historically has sold and continues to sell products that contain substances that are regulated, or may be regulated, by various environmental laws. Some of the company’s inventory may become obsolete as a result of these or other existing or new regulations. All of these factors pertaining to inventory could have a material adverse effect on the company’s business.

The company is subject to environmental laws and regulations that could materially adversely affect its business.

The company is subject to a wide and ever-changing variety of foreign and U.S. federal, state, and local laws and regulations, compliance with which may require substantial expense. Of particular note are two European Union (“EU”) directives known as the Restriction of Certain Hazardous Substances Directive (“RoHS”) and the Waste Electrical and Electronic Equipment Directive. These directives restrict the distribution of products within the EU containing certain substances and require a manufacturer or importer to recycle products containing those substances. In addition, China has recently passed the Management Methods on Control of Pollution from Electronic Information Products, which will eventually prohibit the import of products for use in China that contain the same substances banned by the RoHS directive. Failure to comply with these directives or any other applicable environmental regulations could result in fines or suspension of sales. Additionally, these directives and regulations may result in the company having non-compliant inventory that may be less readily salable or have to be written off.

In addition, some environmental laws impose liability, sometimes without fault, for investigating or cleaning up contamination on or emanating from the company’s currently or formerly owned, leased, or operated property, as well as for damages to property or natural resources and for personal injury arising out of such contamination. As the distribution business, in general, does not involve the manufacture of products, it is typically not subject to significant liability in this area. However, there may be occasions, including through acquisitions, where environmental liability arises. Such liability may be joint and several, meaning that the company could be held responsible for more than its share of the liability involved, or even the entire share. In addition, the presence of environmental contamination could also interfere with ongoing operations or adversely affect the company’s ability to sell or lease its properties. The discovery of contamination for which the company is responsible, or the enactment of new laws and regulations, or changes in how existing

requirements are enforced, could require the company to incur costs for compliance or subject it to unexpected liabilities.

The foregoing matters could materially adversely affect the company’s business.

The company is currently involved in the investigation and remediation of environmental problems at two sites and has been named as a defendant with regard to a third site as a result of its Wyle Electronics acquisition, and the company is in litigation related to those sites.

As a result of its acquisition of Wyle Electronics (“Wyle”) from the VEBA Group (“VEBA”) in 2000, the company assumed Wyle’s outstanding liabilities, including the responsibility for certain environmental contamination at sites formerly owned by Wyle. The agreement pursuant to which the company bought Wyle from VEBA contains an indemnification from VEBA to the company for all of the costs associated with the Wyle environmental obligations. Three sites are known to have such contamination, one at Norco, California, one at El Segundo, California, and the third at Huntsville, Alabama, and the company has thus far borne most of the cost of the investigation and remediation of the Norco and Huntsville sites, under the direction of the cognizant state agencies. The company has expended more than $17 million to date in connection with these sites. With regard to the El Segundo site, the company has also been named as a defendant in a lawsuit filed in connection with alleged contamination at a small industrial building formerly leased by Wyle Laboratories. The outcome of the lawsuit, the nature of any contamination, and the amount of any associated liability are as yet unknown.

VEBA’s successor-in-interest, E.ON AG, acknowledged liability under the VEBA contractual indemnities with respect to the Norco and Huntsville sites and made a small initial payment, but has subsequently refused to make further payments. As a result, the company has initiated litigation against E.ON AG and certain others in the United States District Court for the Central District of California and in the Frankfurt am Main Regional Court in Germany. The company believes strongly in the merits of its cases and the probability of recovery from E.ON AG, but there can be no guaranty of the outcome of litigation, and, should the company lose on all of its claims in both cases, it would bear all of the cost of the Wyle environmental obligations. Because characterization and remedial design is not yet complete at any of these sites, the future costs in excess of accrued costs associated there with are as yet undetermined and could have a material adverse effect on the company.

In addition, the company is, along with other parties, a defendant in three suits, all of which have been consolidated for pre-trial purposes, by plaintiff landowners and residents in Riverside County Court in California for personal injury and property damages allegedly caused by the contaminated groundwater and related soil-vapor found in certain residential areas adjacent to the Norco site. Wyle Laboratories, formerly a division of Wyle Electronics, has demanded defense and indemnification from the company in connection with the litigation, and the company has, in turn demanded defense and indemnification from E.ON AG. The claims for indemnification are at issue in the U.S. District Court and Frankfurt Regional Court proceedings.

While the company believes strongly in the merits of its claim for indemnification against E.ON AG and has no reason to believe that the plaintiff’s allegations of damages in the Norco matter pending in Riverside County have merit, there can be no guaranty regarding the outcome of any of the matters, and should the company be found to be liable for damages and E.ON AG found not to be liable to indemnify the company for those damages and those costs that will be incurred in the future, it could have a material adverse effect on the company.

The company may not have adequate or cost-effective liquidity or capital resources.

The company needs cash or committed liquidity facilities to make interest payments on and to refinance indebtedness, and for general corporate purposes, such as funding its ongoing working capital, acquisition, and capital expenditure needs. At December 31, 2006, the company had cash and cash equivalents of $337.7 million. In addition, the company currently has access to credit lines in excess of $1.3 billion. The company’s ability to satisfy its cash needs depends on its ability to generate cash from operations and to access the financial markets, both of which are subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond its control.

The company may, in the future, need to access the financial markets to satisfy its cash needs. The company’s ability to obtain external financing is affected by its debt ratings. Any increase in the company’s level of debt, change in status of its debt from unsecured to secured debt, or deterioration of its operating results may cause a reduction in its current debt ratings. Any downgrade in the company’s current debt rating

could impair the company’s ability to obtain additional financing on acceptable terms. Under the terms of any external financing, the company may incur higher than expected financing expenses and become subject to additional restrictions and covenants. For example, the company’s existing debt agreements contain restrictive covenants, including covenants requiring compliance with specified financial ratios, and a failure to comply with these or any other covenants may result in an event of default. An increase in the company’s financing costs or a breach of debt instrument covenants could have a material adverse effect on the company.

The agreements governing some of the company’s financing arrangements contain various covenants and restrictions that limit the discretion of management in operating the business and could prevent the company from engaging in some activities that may be beneficial to its business.

The agreements governing the company’s financings contain various covenants and restrictions that, in certain circumstances, could limit its ability to:

	•		grant liens on assets;
	•		make restricted payments (including paying dividends on capital stock or redeeming or repurchasing capital stock);
	•		make investments;
	•		merge, consolidate, or transfer all or substantially all of its assets;
	•		incur additional debt; or
	•		engage in certain transactions with affiliates.

As a result of these covenants and restrictions, the company may be limited in how it conducts its business and may be unable to raise additional debt, compete effectively, or make investments.

The company’s failure to have long-term sales contracts may have a material adverse effect on its business.

Most of the company’s sales are made on an order-by-order basis, rather than through long-term sales contracts. The company generally works with its customers to develop non-binding forecasts for future volume of orders. Based on such non-binding forecasts, the company makes commitments regarding the level of business that it will seek and accept, the inventory that it purchases, the timing of production schedules, and the levels of utilization of personnel and other resources. A variety of conditions, both specific to each customer and generally affecting each customer’s industry, may cause customers to cancel, reduce, or delay orders that were either previously made or anticipated. Generally, customers cancel, reduce, or delay purchase orders and commitments without penalty. The company seeks to mitigate these risks, in some cases, by entering into noncancelable/nonreturnable sales agreements, but there is no guaranty that such agreements will adequately protect the company. Significant or numerous cancellations, reductions, or delays in orders by customers could materially adversely affect the company’s business.

The company’s non-U.S. locations represent a significant and growing portion of its sales, and consequently, the company is increasingly exposed to risks associated with operating internationally.

In 2006, 2005, and 2004, approximately 53%, 47%, and 46%, respectively, of the company’s sales came from its operations outside the United States. As a result of the company’s foreign sales and locations, its operations are subject to a variety of risks that are specific to international operations, including the following:

	•		import and export regulations that could erode profit margins or restrict exports;
	•		the burden and cost of compliance with foreign laws, treaties, and technical standards and changes in those regulations;
	•		potential restrictions on transfers of funds;
	•		foreign currency fluctuations;
	•		import and export duties and value-added taxes;
	•		transportation delays and interruptions;
	•		uncertainties arising from local business practices and cultural considerations; and
	•		potential military conflicts and political risks.

While the company has and will continue to adopt measures to reduce the potential impact of losses resulting from the risks of doing business abroad, it cannot ensure that such measures will be adequate.

When the company makes acquisitions, it may not be able to successfully integrate them or attain the anticipated benefits.

If the company is unsuccessful in integrating its acquisitions, or if integration is more difficult than anticipated, the company may experience disruptions that could have a material adverse effect on its business. In addition, the company may not realize all of the anticipated benefits from its acquisitions, which could result in an impairment of goodwill or other intangible assets.

If the company fails to maintain an effective system of internal controls or discovers material weaknesses in its internal controls over financial reporting, it may not be able to report its financial results accurately or timely or detect fraud, which could have a material adverse effect on its business.

An effective internal control environment is necessary for the company to produce reliable financial reports and is an important part of its effort to prevent financial fraud. The company is required to periodically evaluate the effectiveness of the design and operation of its internal controls over financial reporting. Based on these evaluations, the company may conclude that enhancements, modifications or changes to internal controls are necessary or desirable. While management evaluates the effectiveness of the company’s internal controls on a regular basis, these controls may not always be effective. There are inherent limitations on the effectiveness of internal controls, including collusion, management override, and failure of human judgment. In addition, control procedures are designed to reduce rather than eliminate business risks. If the company fails to maintain an effective system of internal controls, or if management or the company’s independent registered public accounting firm discovers material weaknesses in the company’s internal controls, it may be unable to produce reliable financial reports or prevent fraud, which could have a material adverse effect on the company’s business. In addition, the company may be subject to sanctions or investigation by regulatory authorities, such as the SEC or the NYSE. Any such actions could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of the company’s financial statements, which could cause the market price of its common stock to decline or limit the company’s access to capital.

The regulatory authorities in the jurisdictions for which the company ships product could levy substantial fines on the company or limit its ability to export and re-export products if the company ships product in violation of applicable export regulations.

A significant percentage of the company’s sales are made outside of the United States through the exporting and re-exporting of product. Many of the products the company sells are either manufactured in the United States or based on U.S. technology (“U.S. Products”). As a result, in addition to the local jurisdictions’ export regulations applicable to individual shipments, U.S. Products are subject to the Export Administration Regulations (“EAR”) when exported and re-exported to and from all international jurisdictions. Licenses or proper license exceptions may be required by local jurisdictions’ export regulations, including EAR, for the shipment of certain U.S. Products to certain countries, including China, India, Russia, and other countries in which the company operates. Non-compliance with the EAR or other applicable export regulations can result in a wide range of penalties including the denial of export privileges, fines, criminal penalties, and the seizure of commodities. In the event that any export regulatory body determines that any shipments made by the company violate the applicable export regulations, the company could be fined significant sums and/or its export capabilities could be restricted, which could have a material adverse effect on the company’s business.

The company relies heavily on its internal information systems, which, if not properly functioning, could materially adversely affect the company’s business.

The company’s current global operations reside on multiple technology platforms. These platforms are subject to electrical or telecommunications outages, computer hacking, or other general system failure, which could have a material adverse effect on the company’s business. Because most of the company’s systems consist of a number of legacy, internally developed applications, it can be harder to upgrade and may not be adaptable to commercially available software. Additionally, the company recently completed the process of installing certain modules in North America as part of a phased implementation schedule associated with the design of a new global financial system. The company is about to undergo the same process in Asia and parts of Europe. There is no guarantee that the implementation will be successful or that there will not be integration difficulties that will adversely affect the company’s operations or the accurate recording and

reporting of financial data. Failure of the company’s internal information systems or material difficulties in upgrading its global financial system could have material adverse effects on its business.

Further, the company is converting its various business information systems worldwide to a single Enterprise Resource Planning (“ERP”) system. The company has committed significant resources to this conversion, which started in late 2006 and is expected to be phased in over the next four years. This conversion is extremely complex, in part, because of the wide range of processes and the multiple legacy systems that must be integrated globally. The company will be using a controlled project plan that it believes will provide for the adequate allocation of resources. However, such a plan, or a divergence from it, may result in cost overruns, project delays, or business interruptions. During the conversion process, the company may be limited in its ability to integrate any business that it may want to acquire. Failure to properly or adequately address these issues could impact the company’s ability to perform necessary business operations, which could materially adversely affect the company’s business.

Item 1B. Unresolved Staff Comments .

None.

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 15 locations throughout North America, EMEASA, and the Asia Pacific region. The company occupies over 280 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 .

Tekelec Matters

In 2000, the company purchased Tekelec Europe SA (“Tekelec”) from Tekelec Airtronic SA (“Airtronic”) and certain other selling shareholders. Subsequent to the closing of the acquisition, Tekelec received a product liability claim in the amount of € 11.3 million. The product liability claim was the subject of a French legal proceeding started by the claimant in 2002, under which separate determinations were made as to whether the products that are subject to the claim were defective and the amount of damages sustained by the purchaser. The manufacturer of the products also participated in this proceeding. The claimant has commenced legal proceedings against Tekelec and its insurers to recover damages in the amount of € 3.7 million and expenses of € .3 million plus interest.

Wyle Matters

As discussed in Note 15 of the Notes to Consolidated Financial Statements (“Note 15”), in 2000, when the company purchased Wyle from 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. VEBA has since merged with E.ON AG, a German-based multinational conglomerate.

The company is aware of two Wyle Laboratories facilities (in Huntsville, Alabama and Norco, California) at which contaminated groundwater has been identified. Each site will require remediation, the final form and cost of which is as yet undetermined. As further discussed in Note 15, the Alabama site is being investigated by the company under the supervision of the Alabama Department of Environmental Management. The Norco site is subject to a consent decree, entered in October 2003, between the company, Wyle Laboratories, and the California Department of Toxic Substance Control (“DTSC”).

The company has also been named as a defendant in a lawsuit filed in September 2006 in the United States District Court for the Central District of California (Apollo Associates, L.P., a California Limited Partnership; Murray Neidorf, an individual, v. Arrow Electronics, Inc. et al.) in connection with alleged contamination at a third site, a small industrial building formerly leased by Wyle Laboratories, in El Segundo, California. The outcome of the proceedings, as well as the nature of any contamination and the amount of any associated liability, is all as yet unknown.

Arrow has been named as a defendant in three suits related to the Norco facility, all of which have been consolidated for pre-trial purposes. In January 2005, an action was filed in the California Superior Court in Riverside County, California (Gloria Austin, et al. v. Wyle Laboratories, Inc. et al.) in which 91 plaintiff landowners and residents have sued a number of defendants under a variety of theories for unquantified damages allegedly caused by environmental contamination at and around the Norco site. Contaminated groundwater and related soil-vapor have been found in certain residential areas adjacent to the site. Also filed in the Superior Court in Riverside County were Jimmy Gandara, et al. v. Wyle Laboratories, Inc. et al. in January 2006, and Lisa Briones et al. v. Wyle Laboratories, Inc. et al. in May 2006, both of which contain allegations similar to those in the Austin case on behalf of approximately 20 additional plaintiffs. The outcome of the cases and the amount of any associated liability are all as yet unknown.

The company believes that any cost which it may incur in connection with environmental conditions at the Norco, Huntsville, and El Segundo sites and the related litigation is covered by the contractual

indemnifications (except, under the terms of the environmental indemnification, for the first $.45 million), which arose out of the company’s purchase of Wyle from VEBA.

Despite E.ON AG’s acknowledgment of liability under the VEBA contractual indemnities, and a single, partial payment, neither the company’s demand for subsequent payments nor its demand for defense and indemnification in the Riverside County litigation and other costs associated with the Norco site has 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. The case has since been transferred to the United States District Court for the Central District of California, where it has been consolidated with a case commenced by the company and Wyle Laboratories in May 2005 against E.ON AG seeking indemnification, contribution, and a declaration of the parties’ respective rights and obligations in connection with the Riverside County litigation and other costs associated with the Norco site. The court has ruled that the enforcement and interpretation of E.ON AG’s contractual obligations are matters for a court in Germany, a ruling with which the company disagrees and which it is appealing. Nevertheless, in October 2005, the company filed a related action against E.ON AG in the Frankfurt am Main Regional Court in Germany.

Also included in the proceedings against E.ON AG is a claim for the reimbursement of pre-acquisition tax liabilities of Wyle in the amount of $8.7 million for which E.ON AG is also contractually liable to indemnify the company. E.ON AG has specifically acknowledged owing the company not less than $6.3 million of such amounts, but its promises to make payments of at least that amount have not been kept.

Based on an opinion of counsel received by the company in the fourth quarter of 2006 that recovery from E.ON AG of costs incurred to date that are covered under the contractual indemnifications associated with the environmental clean-up related to the Wyle sites is probable, the company increased the receivable for amounts due from E.ON AG by $7.4 million during 2006 to $17.7 million. The company’s net costs for such indemnified matters may vary from period to period as estimates of recoveries are not always recognized in the same period as the accrual of estimated expenses. In 2006, the company recorded a charge of $1.4 million ($.9 million net of related taxes or $.01 per share on both a basic and diluted basis) related to the environmental matters arising out of the company’s purchase of Wyle.

In connection with the acquisition of Wyle, the company acquired a $4.5 million tax receivable due from E.ON AG (as successor to VEBA) in respect of certain tax payments made by Wyle prior to the effective date of the acquisition, the recovery of which the company also believes is probable.

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 other 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.

PART II

Performance Graph

The following graph compares the performance of the company’s common stock for the periods indicated with the performance of the Standard & Poor’s 500 Stock Index (“S&P 500 Stock Index”) and the average performance of a group consisting of the company’s peer companies on a line-of-business basis. The peers included in the Electronic Distributor Index are Avnet, Inc., Agilysys, Inc., All American Semiconductor, Inc., Bell Microproducts, Inc., Jaco Electronics, Inc., and Nu Horizons Electronics Corp. The graph assumes $100 invested on December 31, 2001 in the company, the S&P 500 Stock Index, and the Electronics Distributor Index. Total return indices reflect reinvestment dividends and are weighted on the basis of market capitalization at the time of each reported data point.

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 (dollars in thousands except per share data):

(a)		Operating income and income from continuing operations include restructuring charges of $11.8 million ($9.0 million net of related taxes or $.07 per share on both a basic and diluted basis), a charge related to a pre-acquisition warranty claim of $2.8 million ($1.9 million net of related taxes or $.02 per share on both a basic and diluted basis), a charge related to pre-acquisition environmental matters arising out of the company’s purchase of Wyle of $1.4 million ($.9 million net of related taxes or $.01 per share on both a basic and diluted basis), and stock option expense of $13.0 million ($8.5 million net of related taxes or $.07 per share on both a basic and diluted basis) resulting from the company’s adoption of Financial Accounting Standards Board (“FASB”) Statement No. 123 (revised 2004), “Share-Based Payment”, and the Securities and Exchange Commission Staff Accounting Bulletin No. 107 (collectively, “Statement No. 123(R)”). Income from continuing operations also includes a loss on prepayment of debt of $2.6 million ($1.6 million net of related taxes or $.01 per share on both a basic and diluted basis) and the reduction of the provision for income taxes of $46.2 million ($.38 per share on both a basic and diluted basis) and the reduction of interest expense of $6.9 million ($4.2 million net of related taxes or $.03 per share on both a basic and diluted basis) related to the settlement of certain tax matters.
(b)		Operating income and income from continuing operations include restructuring charges of $12.7 million ($7.3 million net of related taxes or $.06 and $.05 per share on a basic and diluted basis, respectively) and an acquisition indemnification credit of $1.7 million ($1.3 million net of related taxes or $.01 per share on a basic basis). Income from continuing operations also includes a loss on prepayment of debt of $4.3 million ($2.6 million net of related taxes or $.02 and $.01 per share on a basic and diluted basis, respectively) and a loss of $3.0 million ($.03 per share on both a basic and diluted basis) on the write-down of an investment.
(c)		Operating income and income from continuing operations include 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 acquisition indemnification credit, due to a change in estimate, of $9.7 million ($.09 and $.08 per share on a basic and diluted basis, respectively), an impairment charge of $10.0 million ($.09 and $.08 per share on a basic and diluted basis, respectively), and an integration credit, due to a change in estimate, of $2.3 million ($1.4 million net of related taxes or $.01 per share on both a basic and diluted basis). 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 of $1.3 million ($.01 per share on both a basic and diluted basis) on the write-down of an investment.

(d)		Operating income and income from continuing operations include restructuring charges of $38.0 million ($27.1 million net of related taxes or $.27 per share on both a basic and diluted basis), an acquisition indemnification charge, due to a change in estimate, of $13.0 million ($.13 per share on both a basic and diluted basis), 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 on both a basic and diluted basis). 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 on both a basic and diluted basis).
(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 on both a basic and diluted basis). 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 on both a basic and diluted basis).
(f)		The disposition of the Gates/Arrow operation in May 2002 was reflected as a discontinued operation.

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

Overview

The company has two business segments: electronic components and computer products. Consolidated sales grew by 21.6%, compared with the year-earlier period, primarily as a result of continued sales growth in the worldwide components businesses and the impact of acquisitions. The acquisitions of DNS and Ultra Source Technology Corp. (“Ultra Source”), which were completed in December 2005, contributed sales of $1.21 billion in 2006. Consolidated sales for 2006 increased 12.2%, on a pro forma basis, including DNS and Ultra Source for full year 2005. The sales increase of 12.0% in the NAC businesses for 2006, compared with the year-earlier period, was primarily driven by the strength of demand for semiconductors and passive, electromechanical and connector products from the company’s broad customer base, as well as the company’s focus on sales-related initiatives for passive, electromechanical and connector products. The sales growth of 18.5% in the EMEASA components businesses, compared with the year-earlier period, was primarily due to increased end-market demand in this region as well as the company’s increased focus on sales-related initiatives. Sales grew by 20.0% in the Asia/Pacific components businesses on a pro forma basis, including Ultra Source for full year 2005, due to the region’s strong market growth coupled with the company’s initiative to expand its product offerings and customer base. The sales growth of 18.0% in the worldwide computer products business was primarily due to the acquisition of DNS and growth in storage and industry standard servers offset, in part, by lower sales in North America due to a decline in lower-margin software and the loss of a large reseller customer at the end of 2005 due to mergers and acquisitions activity, lower market demand for proprietary servers, and lower computer product sales in Europe.

During the fourth quarter of 2006, the company settled certain tax matters covering multiple years. As a result of the tax settlements, the company recorded a reduction of the provision for income taxes of $46.2 million, of which $40.4 million related to tax years prior to 2006. In connection with the settlement of these tax matters an accrual of $6.9 million ($4.2 million net of related taxes) for related interest costs was reversed.

On November 30, 2006, the company acquired Alternative Technology, which is headquartered in Englewood, Colorado, and supports VARs in delivering software solutions that optimize, accelerate, monitor, and secure an end-user’s network. Total Alternative Technology sales for 2006 were approximately $320 million, of which $48.7 million were included in the company’s consolidated results of operations from the acquisition date. The Alternative Technology acquisition will enable the company to further expand the breadth of its ECS business and create significant opportunities for the company in the growing value-added software market.

On December 29, 2006, the company acquired InTechnology, which is headquartered in Harrogate, England, and delivers storage and security solutions to VARs in the United Kingdom. Total InTechnology sales for 2006 were approximately $365 million. The InTechnology acquisition will further expand the company’s ECS business into the United Kingdom.

On January 2, 2007, the company announced that it signed a definitive agreement with Agilysys, Inc. (“Agilysys”) pursuant to which the company will acquire substantially all of the assets and operations of the Agilysys KeyLink Systems Group (“KeyLink”), a leading enterprise computing solutions distributor, for $485 million in cash. The company will also enter into a long-term procurement agreement with the Agilysys Enterprise Solutions Group, Agilysys’ value-added reseller business. KeyLink, which is based in Cleveland, Ohio, has approximately 500 employees and provides complex solutions from industry leading manufacturers to more than 800 reseller partners. Total KeyLink sales for 2006, including revenues associated with the above-mentioned procurement agreement, were approximately $1.6 billion. The KeyLink acquisition is expected to be $.18 to $.22 accretive in the first twelve months post closing, excluding any potential integration costs. This transaction, which will be funded with cash-on-hand plus borrowings under the company’s existing committed liquidity facilities, is subject to customary closing conditions, including obtaining necessary government approvals, and is expected to be completed by the end of the first quarter of 2007.

Net income increased to $388.3 million in 2006, compared with net income of $253.6 million in 2005. The increase in net income was due to increased sales, the impact of efficiency initiatives reducing operating expenses, and, to a lesser extent, the acquisitions of DNS, Ultra Source, and Alternative Technology. The acquisitions of DNS, Ultra Source, and Alternative Technology generated net income of $11.5 million in 2006.

The following items also impact the comparability of the company’s results for the years ended December 31, 2006 and 2005:

	•		restructuring charges of $11.8 million ($9.0 million net of related taxes) in 2006 and $12.7 million ($7.3 million net of related taxes) in 2005;
	•		a charge related to a pre-acquisition warranty claim of $2.8 million ($1.9 million net of related taxes) in 2006;
	•		a charge related to pre-acquisition environmental matters arising from the company’s purchase of Wyle of $1.4 million ($.9 million net of related taxes) in 2006;
	•		stock option expense of $13.0 million ($8.5 million net of related taxes) in 2006 resulting from the company’s adoption of Statement No. 123(R);
	•		an acquisition indemnification credit of $1.7 million ($1.3 million net of related taxes) in 2005;
	•		a loss on prepayment of debt of $2.6 million ($1.6 million net of related taxes) in 2006 and $4.3 million ($2.6 million net of related taxes) in 2005;
	•		a loss of $3.0 million on the write-down of an investment in 2005; and
	•		a reduction of the provision for income taxes of $46.2 million, of which $40.4 million related to tax years prior to 2006, and the reduction of interest expense of $6.9 million ($4.2 million net of related taxes), of which $4.0 million ($2.4 million net of related taxes) related to tax years prior to 2006, related to the settlement of certain tax matters in 2006.

Sales

Consolidated sales for 2006 increased $2.41 billion, or 21.6%, compared with the year-earlier period. The increase was driven by an increase in the worldwide electronic components business of $1.99 billion, or 22.6%, and an increase in the worldwide computer products business of $420.3 million, or 18.0%, compared with the year-earlier period.

The growth in the worldwide electronic components business for 2006 was primarily driven by the sales increase in the NAC businesses of 12.0%, the sales increase in the EMEASA components businesses of 18.5%, and the sales increase in the Asia/Pacific components businesses of 20.0%, on a pro forma basis, including Ultra Source for the full year 2005. The sales increase in the NAC businesses of 12.0%, compared with the year-earlier period, was primarily driven by the strength of demand for semiconductors and passive electromechanical and connector products from the company’s broad customer base, as well as the company’s focus on sales-related initiatives for passive, electromechanical and connector products. The sales increase in the EMEASA components businesses of 18.5%, compared with the year-earlier period, was primarily due to the increased end-market demand in this region as well as the company’s increased focus on sales-related initiatives. The increase in the Asia/Pacific components businesses of 20.0%, on a pro forma basis including Ultra Source, compared with the year-earlier period, was due to the region’s strong market growth coupled with the company’s initiative to expand its product offerings and customer base.

The growth in the worldwide computer products business of 18.0% for 2006, compared with the year-earlier period, was primarily due to the acquisition of DNS in December 2005 and the growth in storage and industry standard servers offset, in part, by lower sales in North America due to a decline in low-margin software and the loss of a large reseller customer at the end of 2005 due to mergers and acquisitions activity, lower market demand for proprietary servers, and lower computer product sales in Europe.

The translation of the company’s international financial statements into U.S. dollars resulted in increased sales of $44.6 million for 2006, compared with the year-earlier period, due to a weaker U.S. dollar. Excluding the impact of foreign currency, the company’s sales would have increased by 21.2% in 2006.

Consolidated sales for 2005 increased $518.1 million, or 4.9%, compared with 2004. The increase was driven by an increase in the worldwide electronic components business of $348.3 million, or 4.1%, and an increase in the worldwide computer products business of $169.7 million, or 7.8%, compared with the year-earlier period.

The growth in the worldwide electronic components business for 2005 was primarily driven by the sales increase in the Asia/Pacific components businesses of 25.3% and the sales increase in the EMEASA

components businesses of 2.0%, compared with the year-earlier period. The sales increase in the Asia/Pacific components businesses for 2005, compared with the year-earlier period, was due to the region’s strong market growth coupled with the company’s initiative to expand its product offerings and customer base. The sales increase in the EMEASA components businesses for 2005, compared with the year-earlier period, was primarily due to the acquisition of Disway during 2004. Sales in the NAC businesses remained flat in 2005, when compared with the year-earlier period. End-market demand in North America remained stable throughout 2005, while in Europe the market experienced a relatively small decline.

The growth in the worldwide computer products business for 2005 was primarily due to increased sales in North America’s server, storage, software, and manufacturer services group of 12.6% for 2005, compared with the year-earlier period. The increase in sales was partially offset by a decrease in sales of industrial-related computer products to OEMs in North America of 9.9% for 2005, compared with the year-earlier period, primarily due to the company’s decision in early 2005 to terminate certain low-margin customer engagements and lower computer product sales in France.

The translation of the company’s international financial statements into U.S. dollars resulted in increased sales of $6.8 million for 2005, compared with the year-earlier period, due to a weaker U.S. dollar. Excluding the impact of foreign currency, the company’s sales would have increased by 4.8% in 2005.

Gross Profit

The company recorded gross profit of $2.03 billion and $1.74 billion for 2006 and 2005, respectively. The gross profit margin for 2006 decreased by approximately 60 basis points when compared with the year-earlier period. The decrease in gross profit margin was primarily the result of the acquisitions of DNS and Ultra Source, which have lower gross profit margins (as well as lower operating expense structures). Excluding the impact of these acquisitions, the gross profit margin would have increased by approximately 10 basis points when compared with the year-earlier period.

The company recorded gross profit of $1.74 billion and $1.72 billion for 2005 and 2004, respectively. The gross profit margin for 2005 decreased by approximately 60 basis points when compared with the year-earlier period. The decrease in gross profit margin was primarily the result of pricing pressures in the marketplace relating to the worldwide electronic components business and a larger portion of sales mix from the Asia/Pacific components businesses and the ECS businesses that have lower gross profit margins.

Restructuring, Integration, and Other Charges (Credits)

The company recorded total restructuring charges of $11.8 million ($9.0 million net of related taxes or $.07 per share on both a basic and diluted basis), $12.7 million ($7.3 million net of related taxes or $.06 and $.05 per share on a basic and diluted basis, respectively), and $11.4 million ($6.9 million net of related taxes or $.07 and $.06 per share on a basic and diluted basis, respectively) in 2006, 2005, and 2004, respectively. These items are discussed below.

Restructurings

Included in the total restructuring charges for 2006 is $12.3 million related to initiatives by the company to improve operating efficiencies. These initiatives, in the aggregate, are expected to generate annual cost savings of approximately $9.0 million beginning in 2007.

During 2005, 2004, and 2003, the company announced a series of steps to make its organizational structure more efficient. The cumulative restructuring charges associated with these actions total $61.8 million, which include restructuring charges of $.2 million, $13.8 million, and $9.8 million in 2006, 2005, and 2004, respectively. The restructuring charges for 2005 and 2004 are net of a gain of $2.9 million and $1.5 million, respectively, on the sale of facilities. Included in the restructuring charge for 2005 was a $1.3 million loss resulting from the sale of the company’s Cable Assembly business. Approximately 85% of the total charge was spent in cash.

At December 31, 2006, $4.3 million of the previously discussed charges were accrued but unused of which $2.6 million are for personnel costs and $1.7 million are to address remaining facilities commitments.

Also during 2006, the company recorded a restructuring credit against the accrual related to the 2001 restructuring of $.7 million. During 2005, the company recorded a restructuring credit against the accrual of $1.0 million related to the 2001 restructuring. At December 31, 2006, $4.2 million related to the 2001 restructuring was accrued but unused of which $1.4 million is to address remaining real estate lease commitments and $2.8 million primarily relates to the termination of certain customer programs.

Integration

During 2005, the company recorded $2.3 million as additional cost in excess of net assets of companies acquired associated with the Disway acquisition.

During 2004, the company recorded an integration credit, due to a change in estimate, of $2.3 million ($1.4 million net of related taxes or $.01 per share on both a basic and diluted basis), which primarily related to the final negotiation of facilities related obligations for numerous acquisitions made prior to 2001.

At December 31, 2006, the integration accrual of $3.4 million related to the acquisition of Disway in 2004 and certain acquisitions made prior to 2004 and is for remaining contractual obligations.

Restructuring and Integration Summary

The remaining balances of the restructuring and integration accruals aggregate $11.9 million at December 31, 2006, of which $9.0 million is expected to be spent in cash, will be utilized as follows:

-		The personnel costs accruals of $2.6 million will be utilized to cover costs associated with the termination of personnel, which are primarily expected to be spent through 2007.
-		The facilities accruals totaling $5.8 million relate to vacated leases with expiration dates through 2010, of which $2.4 million will be paid in 2007, $1.4 million in 2008, $1.2 million in 2009, and $.8 million in 2010.
-		The customer termination accrual of $2.8 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.
-		Other of $.7 million primarily relates to certain terminated contracts and is expected to be utilized over several years.

Acquisition Indemnification

During the first quarter of 2005, Tekelec, a French subsidiary of the company, entered into a settlement agreement with Airtronic pursuant to which Airtronic paid € 1.5 million (approximately $2.0 million) to Tekelec in full settlement of all of Tekelec’s claims for indemnification under the purchase agreement. The company recorded the net amount of the settlement of $1.7 million ($1.3 million net of related taxes or $.01 per share on a basic basis) as an acquisition indemnification credit.

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 a claim asserted by the French tax authorities related to alleged fraudulent activities concerning value-added tax by Tekelec. The alleged fraudulent activities occurred prior to the company’s purchase of Tekelec from Airtronic. 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 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 in full settlement of this claim.

Impairment

In 2004, the company recorded an impairment charge related to cost 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 related 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.

Pre-Acquisition Warranty Claim

During the fourth quarter of 2006, the company recorded a charge of $2.8 million ($1.9 million net of related taxes or $.02 per share on both a basic and diluted basis) related to a pre-acquisition warranty claim.

Pre-Acquisition Environmental Matters

As discussed in Note 15 of the Notes to Consolidated Financial Statements, in 2000, when the company purchased Wyle from 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. VEBA has since merged with E.ON AG, a German-based multinational conglomerate. The company’s net costs for such indemnified matters may vary from period to period as estimates of recoveries are not always recognized in the same period as the accrual of estimated expenses. During the fourth quarter of 2006, the company recorded a charge of $1.4 million ($.9 million net of related taxes or $.01 per share on both a basic and diluted basis) related to the environmental matters arising out of the company’s purchase of Wyle.

Stock-Based Compensation Expense

Effective January 1, 2006, the company adopted the provisions of Statement No. 123(R), which requires share-based payment (“SBP”) awards exchanged for employee services to be measured at fair value and expensed in the consolidated statements of operations over the requisite employee service period. The company adopted the modified prospective transition method provided for under Statement No. 123(R) and, accordingly, did not restate prior period amounts.

As a result of adopting Statement No. 123(R), the company recorded, as a component of selling, general and administrative expenses, a charge of $13.0 million ($8.5 million net of related taxes or $.07 per share on both a basic and diluted basis) for 2006 relating to the expensing of stock options. Upon adoption of Statement No. 123(R), the company evaluated the need to record a cumulative effect adjustment relating to estimated forfeitures for unvested previously issued awards and concluded the impact was not material. See Note 1 of the Notes to Consolidated Financial Statements (“Note 1”) for a further discussion on stock-based compensation.

Operating Income

The company recorded operating income of $606.2 million in 2006 as compared with operating income of $480.3 million in 2005.

Selling, general and administrative expenses increased $161.3 million, or 13.4%, in 2006, on a sales increase of 21.6% compared with 2005. The dollar increase in selling, general and administrative expenses in 2006, as compared with the year-earlier period, was due to selling, general and administrative expense incurred by DNS and Ultra Source of $66.0 million and $13.0 million for the expensing of stock options as a result of the company adopting Statement No. 123(R), with the difference attributable to higher variable selling expenses

due to increased sales. Selling, general and administrative expenses, as a percentage of sales, was 10.0% and 10.8% for 2006 and 2005, respectively. The decrease in selling, general and administrative expenses as a percentage of sales, compared with the year-earlier period, was primarily the result of the acquisitions of DNS and Ultra Source, which have lower operating expense structures, and due to the company’s ability to more effectively leverage its existing cost structure to support a higher level of sales.

The company recorded operating income of $480.3 million in 2005 as compared with operating income of $439.3 million in 2004.

Selling, general and administrative expenses decreased $19.1 million, or 1.6%, in 2005 on a sales increase of 4.9% compared with 2004. This decrease was primarily due to the cost savings resulting from the company’s initiatives to be more efficiently organized, offset, in part, by the impact of the acquisition of Disway in 2004.

Loss on Prepayment of Debt

The company recorded a loss on prepayment of debt of $2.6 million ($1.6 million net of related taxes or $.01 per share on both a basic and diluted basis), $4.3 million ($2.6 million net of related taxes or $.02 and $.01 per share on a basic and diluted basis, respectively), and $33.9 million ($20.3 million net of related taxes or $.18 and $.16 per share on a basic and diluted basis, respectively) in 2006, 2005, and 2004, respectively. These items are discussed below.

During 2006, the company redeemed the total amount outstanding of $283.2 million principal amount ($156.4 million accreted value) of its zero coupon convertible debentures due in 2021 (“convertible debentures”) and repurchased $4.1 million principal amount of its 7% senior notes due in January 2007. The related loss on the redemption and repurchase, including any related premium paid, write-off of deferred financing costs, and cost of terminating a portion of the related interest rate swaps, aggregated $2.6 million ($1.6 million net of related taxes or $.01 per share on both a basic and diluted basis) and is recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense was reduced by approximately $2.6 million from the dates of redemption and repurchase through the respective maturity dates, based on interest rates in effect at the time of the redemption and repurchase.

During 2005, the company repurchased, through a series of transactions, $151.8 million accreted value of its convertible debentures. The related loss on the repurchases, including the premium paid and the write-off of related deferred financing costs, aggregated $3.2 million ($1.9 million net of related taxes or $.02 and $.01 per share on a basic and diluted basis, respectively). Also during 2005, the company repurchased, through a series of transactions, $26.8 million principal amount of its 7% senior notes due in January 2007. The premium paid, the related deferred financing costs written-off upon the repurchase of this debt, and the loss for terminating the related interest rate swaps, aggregated $1.1 million ($.7 million net of related taxes). These charges totaled $4.3 million ($2.6 million net of related taxes or $.02 and $.01 per share on a basic and diluted basis, respectively), including $1.7 million in cash, and were recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense was reduced by approximately $2.4 million from the dates of repurchase through the redemption date, based on interest rates in effect at the time of the repurchases.

During 2004, the company repurchased, through a series of transactions, $319.8 million accreted value of its convertible debentures. The related loss on the repurchases, 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 totaled $33.9 million ($20.3 million net of related taxes or $.18 and $.16 per share on a basic and diluted basis, respectively), including $28.2 million in cash, and were recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense was reduced by approximately $36.2 million from the dates of repurchase through the redemption date, based on interest rates in effect at the time of the repurchases.

Write-Down of Investments

During 2005, the company determined that an other-than-temporary decline in the fair value of its investment in Marubun Corporation had occurred and, accordingly, recognized a loss of $3.0 million ($.03 per share on

both a basic and diluted basis) on the write-down of this investment. During 2004, the company determined that an other-than-temporary decline in the fair value of an investment had occurred and, accordingly, recognized a loss of $1.3 million ($.01 per share on both a basic and diluted basis) on the write-down of this investment.

Tax Items

During the fourth quarter of 2006, the company settled certain tax matters covering multiple years. As a result of the settlement of the tax matters, the company recorded a reduction of the provision for income taxes of $46.2 million ($.38 per share on both a basic and diluted basis), of which $40.4 million ($.33 per share on both a basic and diluted basis) related to tax years prior to 2006.

Interest Expense

Net interest expense decreased 1.4% in 2006 to $90.6 million, compared with $91.8 million in 2005, primarily as a result of the previously discussed resolution of certain tax matters, which resulted in a reduction of related interest expense of $6.9 million ($4.2 million net of related taxes or $.03 per share on both a basic and diluted basis), of which $4.0 million ($2.4 million net of related taxes or $.02 per share on both a basic and diluted basis) related to tax years prior to 2006, and lower debt balances, offset by higher variable-rate debt and reduced interest income. Interest income decreased $6.0 million in 2006 compared with the year-earlier period primarily due to the use of interest-bearing cash to redeem the convertible debentures and to fund acquisitions.

Net interest expense decreased 11.0% in 2005 to $91.8 million, compared with $103.2 million in 2004, primarily as a result of lower debt balances.

Income Taxes

The company recorded an income tax provision of $128.5 million on income before income taxes and minority interest of $518.3 million for 2006 (an effective tax rate of 24.8%) compared with an income tax provision of $131.2 million on income before income taxes and minority interest of $385.6 million (an effective tax rate of 34.0%) for 2005. The income taxes recorded in 2006 are impacted by the previously discussed resolution of certain tax matters, which resulted in a reduction in the provision for income taxes of $46.2 million, of which $40.4 million related to tax years prior to 2006, and the previously discussed restructuring charges, pre-acquisition warranty claim, and pre-acquisition environmental matters. Excluding the impact related to tax years prior to 2006 of the previously discussed resolution of certain tax matters, the company’s effective tax rate would have been 32.3%. The income taxes recorded in 2005 are impacted by the previously discussed restructuring charges, acquisition indemnification credit, and write-down of an investment. There was no tax benefit provided on the aforementioned write-down of investment in 2005 as this capital loss 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 $131.2 million on income before income taxes and minority interest of $385.6 million for 2005 (an effective tax rate of 34.0%) compared with an income tax provision of $96.4 million on income before income taxes and minority interest of $305.0 million (an effective tax rate of 31.6%) for 2004. The income taxes recorded in 2004 were impacted by the previously discussed restructuring charges, integration credit, impairment charge, and write-down of an investment. The acquisition indemnification credit in 2004 did not result in a tax charge. There was no tax benefit provided on the aforementioned write-down of investments in 2005 and 2004 as these capital losses are not currently deductible for tax purposes.

Net Income

The company recorded net income of $388.3 million for 2006, compared with $253.6 million in the year-earlier period. Included in the results for 2006 are the previously discussed restructuring charges of $9.0 million, a charge related to a pre-acquisition warranty claim of $1.9 million, a charge related to pre-acquisition environmental matters arising out of the company’s purchase of Wyle of $.9 million, stock option expense of $8.5 million,

a loss on prepayment of debt of $1.6 million, and the reduction of the provision for income taxes of $46.2 million and the reduction of interest expense, net of related taxes, of $4.2 million related to the settlement of certain tax matters totaling $50.4 million. The acquisitions of DNS, Ultra Source, and Alternative Technology generated net income of $11.5 million in 2006. The company recorded net income of $253.6 million for 2005, compared with $207.5 million in the year-earlier period. Included in the results for 2005 are the previously discussed restructuring charges of $7.3 million, acquisition indemnification credit of $1.3 million, loss on prepayment of debt of $2.6 million, and loss of $3.0 million on the write-down of an investment. Included in the results for 2004 are the previously discussed restructuring charges of $6.9 million, acquisition indemnification credit of $9.7 million, impairment charge of $10.0 million, integration credit of $1.4 million, loss on prepayment of debt of $20.3 million, and loss of $1.3 million on the write-down of an investment.

Liquidity and Capital Resources

At December 31, 2006 and 2005, the company had cash and cash equivalents of $337.7 million and $580.7 million, respectively. The net amount of cash provided by the company’s operating activities during 2006 was $120.8 million, primarily due to earnings from operations, adjusted for non-cash items, offset, in part, by increased inventory purchases, and increased accounts receivable supporting increased sales in the worldwide electronic components businesses. The net amount of cash used for investing activities during 2006 was $238.7 million, primarily reflecting $66.1 million for various capital expenditures and $176.2 million for consideration paid for acquired businesses. The net amount of cash used for financing activities during 2006 was $132.7 million, including $160.6 million used to repurchase convertible debentures and senior notes, $15.7 million in other long-term debt repayments, and net repayments of short-term borrowings of $22.3 million, offset by $59.2 million for proceeds from the exercise of stock options and $6.7 million relating to excess tax benefits from stock-based compensation arrangements. The effect of exchange rate changes on cash was an increase of $7.6 million.

The net amount of cash generated by the company’s operating activities during 2005 was $402.5 million, primarily from earnings from operations adjusted for non-cash items, and the company’s ability to reduce the amount of net working capital required to support sales. The net amount of cash used for investing activities during 2005 was $32.8 million, including $179.0 million for consideration paid for acquired businesses, $33.2 million for various capital expenditures offset, in part, by $158.6 million for net proceeds from the sale of short-term investments and $18.4 million from the sale of facilities. The net amount of cash used for financing activities during 2005 was $88.4 million, primarily reflecting $152.4 million used to repurchase convertible debentures and $27.8 million used to repay senior notes offset by $82.2 million for proceeds from the exercise of stock options and a change in short-term borrowings of $12.0 million. The effect of exchange rate changes on cash was a decrease of $5.9 million.

The net amount of cash provided by operating activities in 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 consideration paid for acquired businesses, and $23.5 million for various capital expenditures offset, in part, by proceeds of $10.5 million from the sale of facilities. 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, $268.4 million used to repay senior notes, and a change in short-term borrowings of $39.9 million offset by the net proceeds of $312.5 million from the sale of common stock in February 2004 and $27.9 million from the exercise of stock options. The effect of exchange rate changes on cash was an increase of $2.4 million.

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 66.0% and 63.1% at December 31, 2006 and 2005, respectively.

Net cash provided by the company’s operating activities decreased by $281.7 million in 2006, as compared with the year-earlier period, primarily due to investments in working capital to support increased sales offset by earnings from operations adjusted for non-cash items. Working capital as a percentage of sales was 19.2% in 2006 compared with 19.6% in 2005.

Net cash provided by operating activities increased by $215.0 million in 2005, as compared with the year-earlier period, primarily reflecting the company’s initiatives to manage working capital more efficiently and earnings from operations. Working capital as a percentage of sales was 19.6% in 2005 compared with 20.7% in 2004.

Cash Flows from Investing Activities

In December 2006, the company acquired InTechnology, a distributor of storage and security solutions to VARs based in the United Kingdom, for a purchase price of $80.5 million, which included acquisition costs. The cash consideration paid was $80.5 million.

In November 2006, the company acquired Alternative Technology, a leading specialty distributor of access infrastructure and security solutions based in Englewood, Colorado, for a purchase price of $77.3 million, which included $17.5 million of debt paid at closing, cash acquired of $2.3 million, and acquisition costs. Additional cash consideration ranging from zero to a maximum of $4.8 million may be due if Alternative Technology achieves certain specified financial performance targets over a three-year period from January 1, 2007 through December 31, 2009. The cash consideration paid, net of cash acquired, was $75.0 million.

In February 2006, the company acquired SKYDATA Corporation (“SKYDATA”), a value-added distributor of data storage solutions with sales in 2005 of approximately $43.0 million. The cash consideration paid, net of cash acquired of $3.2 million, was $9.8 million. The impact of the SKYDATA acquisition was not deemed to be material to the company’s consolidated financial position and results of operations.

In December 2005, the company acquired DNS, a distributor of mid-range computer products in Central, Northern, and Eastern Europe, for a purchase price of $116.2 million, which included cash acquired as well as acquisition costs. In addition, there was the assumption of $30.6 million in debt. Additional cash consideration ranging from zero to a maximum of € 12.8 million (approximately $16.9 million at the December 31, 2006 exchange rate) may be due if DNS achieves certain specified financial performance targets over a two-year period from January 1, 2006 through December 31, 2007. The cash consideration paid, net of cash acquired of $7.5 million, was $108.7 million.

In December 2005, through a series of transactions, the company acquired 70.7% of the common shares of Ultra Source, one of the leading electronic components distributors in Taiwan, for a purchase price of $64.6 million, which included cash acquired as well as acquisition costs. In addition, Ultra Source had $78.9 million in debt and $19.5 million in cash. The cash consideration paid, net of cash acquired, was $45.2 million.

In July 2005, the company acquired the component distribution business of Connektron Pty. Ltd (“Connektron”), a passive, electromechanical, and connectors distributor in Australia and New Zealand. The cash consideration paid was $2.5 million. The impact of the Connektron acquisition was not deemed to be material to the company’s consolidated financial position and results of operations.

In July 2004, the company acquired Disway, an electronic components distributor in Italy, Germany, Austria, and Switzerland. The company made a final payment of $20.1 million during 2005 related to this acquisition. The impact of the Disway acquisition was not deemed to be material to the company’s consolidated financial position and results of operations.

During 2006, 2005, and 2004, the company made payments of $4.7 million, $2.5 million, and $.8 million, respectively, which were capitalized as cost in excess of net assets of companies acquired, partially offset by the carrying value of the related minority interest, to increase its ownership interest in majority-owned subsidiaries.

During 2005, the net proceeds from the sale of short-term investments were $158.6 million. During 2004, the net purchases of short-term investments were $158.6 million.

Capital expenditures were $66.1 million, $33.2 million, and $23.5 million in 2006, 2005, and 2004, respectively. During 2006, the company initiated a global ERP effort to standardize processes worldwide and adopt best-in-class capabilities. Implementation is expected to be phased-in over the next four years. For 2007, the estimated cash flow impact of this initiative is expected to be in the $70 to $80 million range. The company expects to finance these costs from cash flow from operations.

The company received proceeds of $18.4 million and $10.5 million during 2005 and 2004, respectively, on the sale of facilities.

Cash Flows from Financing Activities

Net payments of short-term debt were $22.3 million in 2006, net borrowings of short-term debt were $12.0 million in 2005, and net payments of short-term debt were $39.9 million in 2004. Repayments of long-term debt were $15.7 million, $2.4 million, and $3.1 million in 2006, 2005, and 2004, respectively. Proceeds from the exercise of stock options were $59.2 million, $82.2 million, and $27.9 million in 2006, 2005, and 2004, respectively.

During 2006, the company redeemed the total amount outstanding of $283.2 million principal amount ($156.4 million accreted value) of its convertible debentures and repurchased $4.1 million principal amount of its 7% senior notes due in January 2007. The related loss on the redemption and repurchase, including any related premium paid, write-off of deferred financing costs, and cost of terminating a portion of the related interest rate swaps, aggregated $2.6 million ($1.6 million net of related taxes or $.01 per share on both a basic and diluted basis). As a result of these transactions, net interest expense was reduced by approximately $2.6 million from the dates of redemption and repurchase through the respective maturity dates, based on interest rates in effect at the time of the redemption and repurchase.

During 2005, the company repurchased, through a series of transactions, $151.8 million accreted value of its convertible debentures. The related loss on the repurchases, including the premium paid and the write-off of related deferred financing costs, aggregated $3.2 million ($1.9 million net of related taxes or $.02 and $.01 per share on a basic and diluted basis, respectively). Also during 2005, the company repurchased, through a series of transactions, $26.8 million principal amount of its 7% senior notes due in January 2007. The premium paid, the related deferred financing costs written-off upon the repurchase of this debt, and the loss for terminating the related interest rate swaps, aggregated $1.1 million ($.7 million net of related taxes). These charges totaled $4.3 million ($2.6 million net of related taxes or $.02 and $.01 per share on a basic and diluted basis, respectively), including $1.7 million in cash. As a result of these transactions, net interest expense was reduced by approximately $2.4 million from the dates of repurchase through the redemption date, based on interest rates in effect at the time of the repurchases.

During 2004, the company repurchased, through a series of transactions, $319.8 million accreted value of its convertible debentures. The related loss on the repurchases, 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 totaled $33.9 million ($20.3 million net of related taxes or $.18 and $.16 per share on a basic and diluted basis, respectively), including $28.2 million in cash. As a result of these transactions, net interest expense was reduced by approximately $36.2 million from the dates of repurchase through the redemption date, based on interest rates in effect at the time of the repurchases.

In June 2004, the company entered into a series of interest rate swaps (the “2004 swaps”), with an aggregate notional amount of $300.0 million. The 2004 swaps modify the company’s interest rate exposure by effectively converting the fixed 9.15% senior notes to a floating rate, based on the six-month U.S. dollar LIBOR plus a spread (an effective rate of 9.73% and 8.57% at December 31, 2006 and 2005, respectively), and a portion of the fixed 6.875% senior notes to a floating rate also based on the six-month U.S. dollar LIBOR plus a spread (an effective rate of 7.50% and 5.55% at December 31, 2006 and 2005, respectively), through their maturities. The 2004 swaps are classified as fair value hedges and had a negative fair value of $3.2 million and a fair value of $.4 million at December 31, 2006 and 2005, respectively.

In November 2003, the company entered into a series of interest rate swaps (the “2003 swaps”), with an aggregate notional amount of $200.0 million. The 2003 swaps modify the company’s interest rate exposure by effectively converting the fixed 7% senior notes to a floating rate, based on the six-month U.S. dollar LIBOR plus a spread (an effective rate of 9.55% and 7.77% at December 31, 2006 and 2005, respectively) through their maturities. The 2003 swaps are classified as fair value hedges and had a negative fair value of $.2 million and $4.1 million at December 31, 2006 and 2005, respectively. The 2003 swaps related to the 7% senior notes were terminated in January 2007 upon the repayment of the 7% senior notes.

In January 2007, the company amended and restated its bank credit agreement and, among other things, increased the revolving credit facility size from $600.0 million to $800.0 million and entered into a term loan of $200.0 million. Interest on borrowings under the revolving credit facility is based on a base rate or a euro

currency rate plus a spread based on the company’s credit ratings (.425% at January 11, 2007). The company had no outstanding borrowings under the credit facility at December 31, 2006 and 2005. The credit facility matures in January 2012. The facility fee related to the credit facility is .125%. In January 2007, the company borrowed $200.0 million under the term loan facility. The $200.0 million term loan is repayable in full in January 2012. Interest on the term loan is based on a base rate or euro currency rate plus a spread based on the company’s credit ratings (.60% at January 11, 2007).

The company has a $550.0 million asset securitization program (the “program”). At December 31, 2006 and 2005, 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 program expires in February 2008. The program agreement requires annual renewals of the banks’ underlying liquidity facilities, and the next renewal date is May 2007. The facility fee related to the program agreement is .175%.

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).

Restructuring and Integration Activities

Based on the previously discussed restructuring and integration charges at December 31, 2006, the company has a remaining accrual of $11.9 million, of which $9.0 million is expected to be spent in cash. The expected cash payments are approximately $5.2 million in 2007, $1.6 million in 2008, $1.4 million in 2009, and $.8 million in 2010.

Contractual Obligations

Payments due under contractual obligations at December 31, 2006 were as follows (in thousands):

(a)		Includes 7% senior notes of $169.1 million. The company repaid these senior notes in January 2007 in accordance with their terms.
(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, 2006. 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 2012. Also included are amounts relating to personnel, facilities, customer termination, and certain other costs resulting from restructuring and integration activities.

As previously discussed, in January 2007, the company borrowed $200.0 million under the term loan facility.

On January 2, 2007, the company announced that it signed a definitive agreement with Agilysys pursuant to which the company will acquire substantially all of the assets and operations of the Agilysys KeyLink Systems

Group, a leading enterprise computing solutions distributor, for $485 million in cash. The company expects to fund this transaction with cash-on-hand plus borrowings under its existing committed liquidity facilities.

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 are unable to meet their obligations. At December 31, 2006, there was no third party debt outstanding.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

The company’s consolidated financial statements are 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:

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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 (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”.

-		The company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowances for doubtful accounts are determined using a combination of factors, including the length of time the receivables are outstanding, the current business environment, and historical experience.
-		Inventories are stated at the lower of cost or market. Write-downs of inventories to market value are based upon contractual provisions governing price protection, stock rotation, and obsolescence, as well as assumptions about future demand and market conditions. If assumptions about future demand change and/or actual market conditions are less favorable than those projected by the company, additional write-downs of inventories may be required. Due to the large number of transactions and the complexity of managing the process around price protections and stock rotations, estimates are made regarding adjustments to the book cost of inventories. Actual amounts could be different from those estimated.
-		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. 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, 2006, the company believes it has appropriately accrued for probable contingencies. To the extent the company prevails in matters for which accruals are established or is required to pay amounts in excess of the accruals, the company’s effective tax rate in a given financial statement period may 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 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 effective portion of the change in the fair value of the derivative designated as a net investment hedge is recorded in the foreign currency translation adjustment, which is included in the shareholders’ equity section, and any ineffective portion would be recorded in earnings. The company uses the hypothetical derivative method to assess the effectiveness of its net investment hedge on a quarterly basis.
-		The company is subject to proceedings, lawsuits, and other claims related to environmental, labor, product, tax, 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 impacting the probability of a loss, the estimate of such loss, and the probability of recovery of such loss from third parties.
-		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. Actual amounts could be different from those estimated.
-		Effective January 1, 2006, the company adopted the provisions of Statement No. 123(R), which requires SBP awards exchanged for employee services to be measured at fair value and expensed in the consolidated statements of operations over the requisite employee service period.

Prior to January 1, 2006, the company accounted for SBP awards under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, which utilized the intrinsic value method and did not require any expense to be recorded in the consolidated financial statements if the exercise price of the award was not less than the market price of the underlying stock on the date of grant. The company elected to adopt, for periods prior to January 1, 2006, 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”, which used a fair value based method of accounting for SBP awards.

The company adopted the modified prospective transition method provided for under Statement No. 123(R) and, accordingly, has not restated prior period amounts. The fair value of stock options is determined using the Black-Scholes valuation model and the assumptions shown in Note 1. The assumptions used in calculating the fair value of SBP awards represent management’s best estimates. The company’s estimates may be impacted by certain variables including, but not limited to, stock price volatility, employee stock option exercise behaviors, additional stock option grants, estimates of forfeitures, and related tax impacts. See Note 1 for a further discussion on stock-based compensation.

-		The costs and obligations of the company’s defined benefit pension plan are dependent on actuarial assumptions. The two critical assumptions used, which impact the net periodic pension cost (income) and the benefit obligation, are the discount rate and expected return on plan assets. The discount rate represents the market rate for a high quality corporate bond, and the expected return on plan assets is based on current and expected asset allocations, historical trends, and expected returns on plan assets. These key assumptions are evaluated annually. Changes in these assumptions can result in different expense and liability amounts.
-		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 and 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.
-		Shipping and handling costs may be reported as either a component of cost of products sold or selling, general and administrative expenses. The company reports shipping and handling costs, primarily related to outbound freight, in the consolidated statements of operations as a component of selling, general and administrative expenses. If the company included such costs in cost of products sold, gross profit margin as a percentage of sales for 2006 would decrease from 15.0% to 14.5% with no impact on reported earnings.

Impact of Recently Issued Accounting Standards

In June 2006, the FASB ratified the provisions of EITF Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences” (“EITF Issue No. 06-2”). EITF Issue No. 06-2 requires that compensation expense associated with a sabbatical leave, or other similar benefit arrangement, be accrued over the requisite service period during which an employee earns the benefit. EITF Issue No. 06-2 is effective for fiscal years beginning after December 15, 2006 and should be recognized as either a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or a change in accounting principle through retrospective application to all prior periods. The adoption of the provisions of EITF Issue No. 06-2 is not anticipated to have a material impact on the company’s consolidated financial position and results of operations.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN 48”) which prescribes a recognition threshold and measurement attribute, as well as criteria for subsequently recognizing, derecognizing, and measuring uncertain tax positions for financial statement purposes. FIN 48 also requires expanded disclosure with respect to the uncertainty in income tax assets and liabilities. FIN 48 is effective for fiscal years beginning after December 15, 2006 and is required to be recognized as a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The adoption of the provisions of FIN 48 is not anticipated to have a material impact on the company’s consolidated financial position and results of operations.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“Statement No. 157”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Statement No. 157 applies to other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. Statement No. 

157 is effective for fiscal years beginning after November 15, 2007 and should be applied prospectively, except for the provisions for certain financial instruments that should be applied retrospectively as of the beginning of the year of adoption. The transition adjustment of the difference between the carrying amounts and the fair values of those financial instruments should be recognized as a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption . The company is currently evaluating the impact of adopting the provisions of Statement No. 157.

Information Relating to Forward-Looking Statements

This report includes forward-looking statements that are subject to numerous assumptions, 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, the company’s planned implementation of its new global financial system and new enterprise resource planning system, 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, increased profit margin pressure, the effects of additional actions taken to become more efficient or 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.

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 such 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, option, or swap contracts (collectively, the “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, 2006 and 2005 was $298.0 million and $228.4 million, respectively. The carrying amounts, which are nominal, approximated fair value at December 31, 2006 and 2005.

The translation of the financial statements of the non-United States 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 $44.6 million and increased operating income of $2.3 million for 2006, compared with the year-earlier periods, based on 2005 sales at the average rate for 2006. Sales and operating income would have decreased by approximately $385.8 million and $13.8 million, respectively, if average foreign exchange rates had declined by 10% against the U.S. dollar in 2006. 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.

In May 2006, the company entered into a cross-currency swap, which has a maturity date of July 2011, for approximately $100.0 million or € 78.3 million (the “2006 cross-currency swap”) to hedge a portion of its net investment in euro-denominated net assets and which has been designated as a net investment hedge. The 2006 cross-currency swap will also effectively convert the interest expense on $100.0 million of long-term debt from U.S. dollars to euros. Based on the foreign exchange rate at December 31, 2006, the company would expect reduced interest expense of approximately $.7 million for the period from January 2007 through July 2007 (date that interest will reset). As the notional amount of the 2006 cross-currency swap is expected to equal a comparable amount of hedged net assets, no material ineffectiveness is expected. The 2006 cross-currency swap had a negative fair value of $3.2 million at December 31, 2006.

In October 2005, the company entered into a cross-currency swap, which has a maturity date of October 2010, for approximately $200.0 million or € 168.4 million (the “2005 cross-currency swap”) to hedge a portion of its net investment in euro-denominated net assets and which has been designated as a net investment hedge. The 2005 cross-currency swap will also effectively convert the interest expense on $200.0 million of long-term debt from U.S. dollars to euros. Based on the foreign exchange rate at December 31, 2006, the company would expect reduced interest expense of approximately $1.4 million for the period from October 2006 through April 2007 (date that interest will reset). As the notional amount of the 2005 cross-currency swap is expected to equal a comparable amount of hedged net assets, no material ineffectiveness is expected. The 2005 cross-currency swap had a negative fair value of $21.7 million and a fair value of $.5 million at December 31, 2006 and 2005, respectively.

Interest Rate Risk

The company’s interest expense, in part, is sensitive to the general level of interest rates in North America, 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. Additionally, the company also utilizes interest rate swaps in order to manage its targeted mix of fixed- and floating-rate debt.

At December 31, 2006, approximately 52% of the company’s debt was subject to fixed rates, and 48% of its debt was subject to floating rates. A one percentage point change in average interest rates would not have had a material impact on interest expense, net of interest income, in 2006. 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.

In June 2004, the company entered into a series of interest rate swaps, with an aggregate notional amount of $300.0 million. The 2004 swaps modify the company’s interest rate exposure by effectively converting the fixed 9.15% senior notes to a floating rate, based on the six-month U.S. dollar LIBOR plus a spread (an effective rate of 9.73% and 8.57% at December 31, 2006 and 2005, respectively), and a portion of the fixed 6.875% senior notes to a floating rate, also based on the six-month U.S. dollar LIBOR plus a spread (an effective rate of 7.50% and 5.55% at December 31, 2006 and 2005, respectively), through their maturities. The 2004 swaps are classified as fair value hedges and had a negative fair value of $3.2 million and a fair value of $.4 million at December 31, 2006 and 2005, respectively.

In November 2003, the company entered into a series of interest rate swaps, with an aggregate notional amount of $200.0 million. The 2003 swaps modify the company’s interest rate exposure by effectively converting the fixed 7% senior notes to a floating rate, based on the six-month U.S. dollar LIBOR plus a spread (an effective rate of 9.55% and 7.77% at December 31, 2006 and 2005, respectively), through their maturities. The 2003 swaps are classified as fair value hedges and had a negative fair value of $.2 million and $4.1 million at December 31, 2006 and 2005, respectively. The 2003 swaps related to the 7% senior notes were terminated in January 2007 upon the repayment of the 7% senior notes.

Item 8. Financial Statements and Supplementary Data .

See accompanying notes.

See accompanying notes.

See accompanying notes.

See accompanying notes.

ARROW ELECTRONICS, INC.

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

Capitalized software costs are amortized on a straight-line basis over the estimated useful life of the software, which is generally three to seven years.

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

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 sheets. Under the cost method of accounting, investments are carried at cost and are adjusted only for other-than-temporary declines in realizable value, 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 sheets 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 sheets 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

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 and 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 sheets. The results of foreign operations are translated at the monthly average exchange rates.

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, 2006, the company believes it has appropriately accrued for probable contingencies. To the extent the company prevails in matters for which accruals are established or is required to pay amounts in excess of the accruals, the company’s effective tax rate in a given financial statement period may be affected.

Net Income Per Share

Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income 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

Comprehensive income consists of net income, foreign currency translation adjustments, unrealized gain on securities, unrealized loss on employee benefit plan assets, unrealized gain (loss) on foreign exchange options, and minimum pension liability adjustments. The unrealized gain on securities are net of any reclassification adjustments for realized loss included in net income. The foreign currency translation adjustments included in comprehensive income have not been tax effected as investments in foreign affiliates are deemed to be permanent.

Stock-based Compensation

Effective January 1, 2006, the company adopted the provisions of FASB Statement No. 123 (revised 2004), “Share-Based Payment” and the Securities and Exchange Commission Staff Accounting Bulletin No. 107 (collectively, “Statement No. 123(R)”), which requires share-based payment (“SBP”) awards exchanged for employee services to be measured at fair value and expensed in the consolidated statements of operations over the requisite employee service period.

Prior to January 1, 2006, the company accounted for SBP awards under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, which utilized the intrinsic value method and did not require any expense to be recorded in the consolidated financial statements if the exercise price of the award was not less than the market price of the underlying stock on the date of grant. The company elected to adopt, for periods prior to January 1, 2006, 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 used a fair value based method of accounting for SBP awards.

Statement No. 123(R) requires companies to record compensation expense for stock options measured at fair value, on the date of grant, using an option-pricing model. The fair value of the company’s stock options is determined using the Black-Scholes valuation model, which is consistent with the company’s valuation techniques previously utilized under Statement No. 123.

The company adopted the modified prospective transition method provided for under Statement No. 123(R) and, accordingly, did not restate prior period amounts. Under this transition method,

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

compensation expense for the year ended December 31, 2006 includes compensation expense for all SBP awards granted prior to, but not yet vested as of, January 1, 2006 based on the grant date fair value estimated in accordance with the original provisions of Statement No. 123. Stock-based compensation expense for all SBP awards granted after January 1, 2006 is based on the grant date fair value estimated in accordance with the provisions of Statement No. 123(R). Stock-based compensation expense includes an estimate for forfeitures and is recognized over the expected term of the award on a straight-line basis upon adoption of Statement No. 123(R). Upon adoption of Statement No. 123(R), the company evaluated the need to record a cumulative effect adjustment relating to estimated forfeitures for unvested previously issued awards and concluded the impact was not material.

As a result of adopting Statement No. 123(R), the company recorded, as a component of selling, general and administrative expenses, a charge of $12,979 ($8,543 net of related taxes or $.07 per share on both a basic and diluted basis) for the year ended December 31, 2006, relating to the expensing of stock options.

Statement No. 123(R) requires that the realized tax benefit related to the excess of the deductible amount over the compensation expense recognized be reported as a financing cash flow rather than as an operating cash flow, as required under previous accounting guidance. As a result, the related excess tax benefits for the year ended December 31, 2006 of $6,661 is classified as a reduction in cash flows from operating activities and as a cash inflow from financing activities. The actual tax benefit realized from SBP awards for the year ended December 31, 2006 was $7,297.

The following table presents the company’s pro forma net income and basic and diluted net income per share for the years ended December 31, 2005 and 2004 had compensation expense been determined in accordance with the fair value method of accounting at the grant dates for awards under the company’s various stock-based compensation plans: