industry practices do not wholly protect the company from inventory losses, the company believes that they currently provide substantial protection from such losses.

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

The company, incorporated in New York in 1946, and its affiliates employed over 11,200 employees worldwide as of December 31, 2003.

Available Information

The company makes the annual report on Form 10-K, quarterly reports on Form 10-Q, and any current reports on Form 8-K, and amendments to any of these reports available through its Internet site ( http://www.arrow.com ) as soon as reasonably practicable after the company files such material with the Securities and Exchange Commission ("SEC"). The information posted on the company's Internet site is not incorporated into this annual report on Form 10-K. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Executive Officers

The following table sets forth the names, ages, and the positions and offices with the company held by each of the executive officers of the company as of March 5, 2004:

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 President and Chief Executive Officer of the company in February 2003. Prior thereto, he served as Executive Vice President of Solectron Corporation and President of Solectron Global Services, Inc. since March 1999 and previously served as Chairman, President and Chief Executive Officer of Sequel, Inc. since 1995.

Betty Jane Scheihing has been a Senior Vice President of the company since May 1996.

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

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

Harriet Green was appointed President of Arrow Asia/Pacific in March 2004. Prior thereto, she served in several executive positions, including Managing Director of Northern Europe, President of the company's Contract Manufacturing Services (CMS) Distribution group, and most recently, Vice President of Worldwide Supplier Marketing.

Brian McNally was appointed President of North American Components in March 2004. Prior thereto, he served in several executive positions including President of the company's CMS Distribution group and Managing Director of Northern Europe.

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

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

Jan M. Salsgiver was appointed Vice President of Global Strategy and Operations in March 2004. Prior thereto, she served as President of the Americas Components group since July 1999 and as President of the Arrow Supplier Services Group since its inception in January 1998. In addition, she has been a Vice President of the company for more than five years.

Mark F. Settle has been a Vice President of the company and Chief Information Officer since November 2001. Prior to joining the company, he served as

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

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 18 locations throughout the Americas, Europe, and the Asia/Pacific region. The company occupies over 270 additional locations under leases due to expire on various dates through 2053. The company believes its facilities are well maintained and suitable for company operations.

Item 3.   Legal Proceedings.

The company and/or its subsidiaries are parties to various legal proceedings arising in the normal course of business. It is not anticipated that any such matters will have a material adverse impact, individually and in the aggregate, on the company's financial position, liquidity, or results of operation.

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

None.

PART II

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

Market Information

The company's common stock is listed on the New York Stock Exchange (trading symbol: "ARW"). The high and low sales prices during each quarter of 2003 and 2002 were as follows:

Holders

On February 27, 2004, there were approximately 3,000 shareholders of record of the company's common stock.

Dividend History

The company did not pay cash dividends on its common stock during 2003 or 2002. While the board of directors considers the payment of dividends on the common stock from time to time, the declaration of future dividends will be dependent upon the company's earnings, financial condition, and other relevant factors, including debt covenants.

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:

SELECTED FINANCIAL DATA (a)

(In thousands except per share data)

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

For an understanding of the significant factors that influenced the company's performance during the past three years, the following discussion should be read in conjunction with the consolidated financial statements and other information appearing elsewhere in this annual report on Form 10-K. In May 2002, the company sold substantially all of the assets of Gates/Arrow, a business unit within the company's North American Computer Products group ("NACP") that sold commodity computer products such as printers, monitors, other peripherals, and software in North America. The disposition of the Gates/Arrow operations represents a disposal of a "component of an entity" as defined in Financial Accounting Standards Board ("FASB") Statement No. 144. Accordingly, the company's consolidated financial statements and related notes have been presented to reflect Gates/Arrow as a discontinued operation for all periods. In April 2002, the FASB issued Statement No. 145, wh ich requires that gains and losses on the extinguishment of debt be classified as income or loss from continuing operations rather than as an extraordinary item as previously required. Accordingly, the company's 2002 consolidated financial statements and related notes have been restated to reflect the loss on prepayment of debt as a component of income or loss from continuing operations.

Overview

The company has two business segments: electronic components and computer products. Consolidated sales grew by 17.4% in 2003 as a result of the acquisition of the Industrial Electronics Division ("IED") of Agilysys, Inc. (formerly Pioneer-Standard Electronics, Inc.) on February 28, 2003, the impact of the strengthening Euro, strong sales growth in the components businesses in North America and Asia/Pacific, and continued growth in the NACP businesses. The growth in the North American Components ("NAC") business is due to the cyclical upturn that began during the summer months. The growth in the Asia/Pacific components business is a result of that region's strong growth coupled with the company's increased focus in the region. The growth in NACP is due to an increasing market for the mid-range related products as well as a company initiative to grow sales of servers and software.

Net income increased to $25.7 million in 2003 compared with a loss of $610.5 million in 2002. In 2003, the company recorded pre-tax restructuring charges of $37.9 million associated with an initiative to reduce operating costs resulting in cost savings of $75.0 million annually, a pre-tax integration charge of $6.9 million associated with the acquisition of IED, an acquisition indemnification charge of $13.0 million associated with an acquisition in 2000, and a pre-tax loss on the prepayment of debt of $6.6 million. In 2002, the company recorded a goodwill impairment charge of $603.7 million in connection with the adoption of FASB Statement No. 142, "Goodwill and Other Intangible Assets," a pre-tax loss on the prepayment of debt of $20.9 million, a pre-tax severance charge of $5.4 million, and a net loss associated with discontinued operations of $5.9 million. In addition to the impact of the aforementioned items that have an effect on comparability, th e increase in net income is due to the impact of efficiency initiatives reducing operating expenses by $60.0 million in 2003, the company's ability to increase sales, both organically generated as well as those resulting from the acquisition of IED, without operating expenses increasing at the same rate, and lower interest costs as a result of the prepayment of debt.

Sales

Consolidated sales for 2003 increased 17.4% from $7.4 billion in 2002 to $8.7 billion. Sales in the Americas increased in 2003 by $799.6 million or 18.6% when compared with the year-earlier period principally due to the acquisition of the IED business, as well as organic growth in both the components and computer products businesses. European sales for 2003 increased by $326.8 million or 13.4% compared with the year-earlier period principally as a result of the impact of a weakening U.S. dollar on the translation of the company's European financial statements. Asia/Pacific sales for 2003 increased by $162.8 million or 24.7%, compared with the year-earlier period, as a result of improved market conditions as well as the company's increased focus in this region. The consolidated increase in sales was impacted by the translation of

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

Computer products sales increased by $191.8 million or 9.3% for 2003 compared with the year-earlier period. Sales in the North American Enterprise Computing Solutions business increased by 18.9% in 2003 compared with the year-earlier period. Sales in the computer products' original equipment manufacturers ("OEM") business increased by 16.5% in 2003 compared with the year-earlier period, though the OEM market continues to be impacted by reduced activity levels at large complex telecommunications and networking companies. These increases were offset, in part, by the 43.8% decrease in sales of the Nordic commodity computer products business, which was exited during the third quarter of 2003.

In 2002, consolidated sales decreased by 22.1% from $9.5 billion in 2001 to $7.4 billion. This decline was principally due to a $1.8 billion or 25.6% decrease in sales of electronic components as a result of severely depressed demand at telecommunications and networking customers and the contract manufacturers that serve them, and lower demand in the company's core OEM business due to weakened general economic conditions. In addition, the company terminated a single customer engagement in the Asia/Pacific region during 2001. Sales of computer products decreased by $266.2 million or 11.4% in 2002 when compared with 2001. Beginning in mid-2001, the company's computer products businesses implemented a new strategy, which focused less on sales volume and placed more emphasis on profitability. While sales of computer products declined compared with 2001, operating income increased by 33.2%. Sales in the North American Enterprise Computing Solutions business (fo rmerly North American mid-range computer products) were relatively flat compared with 2001, while operating income increased by 38.0%. In 2002, sales of low margin microprocessors (a product segment not considered a part of the company's core business) decreased by $185.0 million or 27.9% when compared with 2001. Lastly, translation of the financial statements of the company's international operations into U.S. dollars resulted in increased revenues of $118.3 million because of a weakening U.S. dollar in 2002 when compared with 2001.

In 2001, consolidated sales decreased by 21.4% from $12.1 billion in 2000 to $9.5 billion. This decline was principally due to a $2.7 billion or 27.1% decrease in sales of electronic components as a result of severely depressed demand at telecommunications and networking customers and the contract manufacturers that serve them, and lower demand in the company's core OEM business due to weakened general economic conditions. In addition, the company terminated a single customer engagement in the Asia/Pacific region during 2001, which resulted in a sales decline of approximately $193 million versus 2000. Sales of computer products increased by $78.1 million or 3.5% in 2001 when compared with 2000. In the fourth quarter of 2000, Hewlett Packard modified its agreements with its distributors transforming the previously existing relationship from that of a distributor to that of an agent. Thus, the company modified its method of recognizing revenue to include onl y the payment from Hewlett Packard for the company's sales and marketing efforts. The modification resulted in a reduction of more than $300 million in revenue in 2001 compared with 2000. In 2001, sales of low margin microprocessors (a product segment not considered a part of the company's core business) decreased by nearly $207 million. Lastly, translation of the financial statements of the company's international operations into U.S. dollars resulted in reduced revenues of $117.7 million because of a strengthened U.S. dollar in 2001 when compared with 2000. Each of these factors was offset, in part, by the acquisitions that occurred in 2000.

Restructuring, Integration, and Other Charges

Restructuring

2003

During 2003, the company implemented actions to become more effectively organized and to improve its operating efficiencies, with targeted annualized savings of $75.0 million, of which approximately $60.0 million was realized in 2003. The company has taken these steps in order to make its organizational structure, systems, and processes more efficient. The estimated restructuring charges associated with these actions total approximately $42.4 million, of which $37.9 million ($27.1 million net of related taxes or $.27 per share) was recorded in 2003. The remaining amount of approximately $4.5 million will be recorded over the next several quarters. Approximately $39.0 million of the total charge is expected to be spent in cash. A summary of the restructuring charges included in operating income is as follows (in millions):

The company recorded a charge of $26.8 million related to personnel costs as part of the 2003 restructuring. The total number of positions eliminated was approximately 1,085 positions, or 9%, out of prior year's ending worldwide total of 11,700 positions. There was no single group of employees impacted by these restructuring actions. Instead it impacted both exempt and non-exempt employees across multiple locations, segments, and functions.

The company recorded a charge of $6.0 million relating to facilities closed. As part of the physical logistics network rationalization, one primary distribution center in England was closed and another will be closed over the next several months, and their operations will be centralized in the newer, state-of-the-art, Pan-European facility in Venlo, the Netherlands. In addition, the primary distribution center in Brookhaven, New York was partially closed and the remaining operations will be closed over the next several months, and customers and suppliers will be serviced out of a newer, more efficient distribution center in Reno, Nevada. Further, the company exited its Nordic commodity computer products business serving hardware integrators and resellers in Norway, Sweden, Denmark, and Finland.

The company recorded a provision of $3.1 million for asset write-downs. The provision was principally for fixed assets and was recorded in North America and Europe.

Also included in the charge was $2.0 million for IT systems and other miscellaneous items related to the early termination of computer equipment, logistics support, and service commitments no longer being used.

On February 17, 2004, the company announced, as part of on-going evaluations, a series of additional steps designed to enhance the company's operating efficiencies, primarily related to the elimination of corporate support functions. The net result is estimated to reduce the company's cost structure by an additional $15.0 million annually. Approximately 50% of this annual cost savings will begin in the first quarter of 2004, with the remaining 50% beginning late in the second quarter of 2004. The company expects to record a restructuring charge relating to these actions over several quarters in 2004 totaling $2.0 million to $5.0 million, before taxes.

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2001

In mid-2001, the company took a number of significant steps, including a reduction in its worldwide workforce, salary freezes and furloughs, cutbacks in discretionary spending, deferral of non-strategic projects, consolidation of facilities, and other major cost containment and cost reduction actions, to mitigate, in part, the impact of significantly reduced revenues. As a result of these actions, the company recorded restructuring costs and other charges of $227.6 million ($145.1 million net of related taxes or $1.47 per share). These charges include costs associated with headcount reductions, the consolidation or closing of facilities, valuation adjustments to inventory and Internet investments, the termination of certain customer engagements, and various other miscellaneous items. Of the total charge, $174.6 million reduced operating income (including $97.5 million in cost of products sold) and $53.0 million was recorded as a loss on investments. There were no material revisions to these actions and their related costs. A summary of charges included in operating income is as follows (in millions):

The company recorded a charge of $15.2 million related to personnel costs as part of the mid-2001 restructuring. The total number of positions eliminated was nearly 1,200, out of the then existing worldwide total of 14,150, or approximately 9%. The actual number of employees terminated approximated original estimates. The reduction in headcount was principally due to reduced activity levels across all functions throughout the company. There was no single group of employees or business segment that was impacted by this restructuring. Instead it impacted both exempt and non-exempt employees across a broad range of functions including sales and marketing, warehouse employees, employees working in value-added centers, finance personnel in credit/collections and accounts payable, human resources and IT. The company's approach was to reduce its headcount in the areas with reduced activities.

The company also consolidated or closed 15 facilities and accordingly recorded a charge of $10.0 million related to vacated leases, including write-offs of related leasehold improvements.

The company also terminated certain customer programs principally related to services not traditionally provided by the company because they were not profitable. The $38.8 million provision included charges for inventory these customers no longer required, pricing disputes, non-cancelable purchase commitments, and value-added taxes.

The company recorded an inventory provision of $97.5 million, which was included in cost of products sold. The provision related to a substantial number of parts. In addition to North America, provisions were recorded in Europe and the Asia/Pacific region. The inventory charge was principally related to products purchased for single or limited customer engagements and in certain instances from non-traditional, non-franchised sources for which no contractual protections such as return rights, scrap allowance, or price protection exist. The inventory provision was principally for electronic components. The parts were written down to estimated realizable value; in many cases to estimated scrap value or zero. At December 31, 2003, approximately 66% of the inventory for which a provision was made had been scrapped and approximately 34% of this inventory was sold at its reduced carrying value with minimal impact on gross margins.

Also included in the charge was $13.1 million for IT systems and other miscellaneous items related to logistics support and service commitments no longer being used, hardware and software not utilized by the company, professional fees related to contractual obligations of certain customer terminations, and the write-off of an investment in an IT-related service provider.

In connection with the restructuring costs and other charges discussed above, operating expenses declined, in part, as a result of the reduction in workforce, cutbacks in discretionary spending, deferral of non-strategic projects, and consolidation of facilities initiated in mid-2001 as a result of the significant reduction in sales and related activities. The financial impact of these actions, commencing in the second quarter of 2002, of approximately $100.0 million for 2003 and $70.0 million for 2002 is reflected as a reduction in selling, general and administrative expenses. These cost savings may not be permanent as increased activity levels resulting from, among other factors, increased revenues may require an increase in headcount and other increased spending.

Internet Investments Write-Down

As a result of the significant decline in the Internet sector during 2001, the company assessed the value of its investments early in the third quarter of 2001. In order to assess the value of its investments, the company selected a pool of comparable publicly traded companies and obtained the stock price of each company at the date of the company's original investment and in the third quarter of 2001. The percentage change in the average stock price was applied to the related investment to determine the change in the value of the investment, modified to the extent that the entity had cash to repay the investors. The company determined that certain of these investments had experienced an other-than-temporary decline in their realizable values. Accordingly, included in the $227.6 million charge recorded in the third quarter of 2001, the company recorded a charge of $53.0 million to write various Internet investments down to their realizable values. At December 31, 2003, the remaining book value of these investments was $1.3 million, which represents the company's interest in Viacore, Inc.

Integration

2003

In February 2003, the company acquired substantially all the assets of the IED business. IED serves industrial OEMs and contract manufacturers. The net consideration paid for this acquisition was $238.1 million, of which $226.0 million was paid through December 31, 2003. In order to ensure the best financial returns as a result of the acquisition, the company fully integrated the IED business into the NAC group. The full integration included, among other actions, the conversion of data into the company's IT platform, the transfer and combination of the acquired inventories to the company's distribution centers, and the closing of duplicative facilities. As a result of these actions, the acquired business does not exist as a seperate division or profit and loss center. As the financial performance of the acquired business is no longer separately identifiable, it is not possible to quantify the impact of the acquisition on operating income. Through the c ombined businesses, the company expects to achieve cost savings and additional revenue that is expected to improve earnings by approximately $.20 per share annually.

For financial reporting purposes, the acquisition is accounted for as a purchase transaction in accordance with FASB Statement No. 141, "Business Combinations." Accordingly, the consolidated results of the company in 2003 include IED's performance from the date of acquisition. The company has recorded cost in excess of net assets acquired of $75.1 million.

In the first quarter of 2003, the company recorded integration costs of $18.4 million ($14.1 million net of related taxes) related to the acquisition of IED. Of the total amount recorded, $6.9 million ($4.8 million net of related taxes or $.05 per share) relating primarily to severance costs for the company's employees was charged to income from continuing operations, and $11.5 million ($9.2 million net of related taxes) relating primarily to severance costs for IED employees and professional fees was recorded as additional goodwill. As of December 31, 2003, approximately $1.2 million of this accrual was required to address remaining contractual obligations.

2001 and prior

In 2001, the company recorded an integration charge of $9.4 million ($5.7 million net of related taxes or $.06 per share) related to the acquisition of Wyle Electronics and Wyle Systems (collectively, "Wyle"). Of the total amount recorded, $1.4 million represented costs associated with the closing of various overlapping office facilities and distribution and value-added centers, $4.1 million represented costs associated with the termination of certain personnel largely performing duplicate functions, $2.7 million represented costs associated with outside services related to the conversion of systems and certain other costs of the integration of Wyle into the company, and $1.2 million represented the write-down of property, plant and equipment to estimated fair value. As of December 31, 2003, approximately $1.8 million of this accrual was required to address remaining contractual obligations.

During 1999, the company acquired Richey Electronics, Inc. ("Richey") and the electronics distribution group of Bell Industries, Inc. ("EDG"). As a result of these acquisitions, in 1999, the company recorded an integration charge of $24.6 million ($16.5 million net of related taxes or $.17 per share) and an additional $38.0 million ($25.8 million net of related taxes), as cost in excess of net assets of companies acquired, to integrate Richey and EDG into the company. Of the total amount recorded, $30.1 million was associated with the closing of various office facilities and distribution and value-added centers with the remaining amounts associated with severance, the termination of certain supplier relationships, and professional fees. As of December 31, 2003, approximately $3.3 million of this accrual was required to address remaining contractual obligations.

The remaining integration accrual as of December 31, 2003, of approximately $10.4 million, relates to numerous acquisitions made prior to 2000, which individually are not significant and principally represent payments for remaining contractual obligations.

The remaining restructuring and integration charges of $37.8 million as of December 31, 2003, of which $29.3 million is expected to be spent in cash, will be utilized as follows:

The company's integration and restructuring programs principally impacted its electronic components operations.

Acquisition Indemnification

In 2000, the company purchased Tekelec Europe SA ("Tekelec"), a French company, from Tekelec Airtronic SA ("Airtronic") and certain other selling shareholders. Pursuant to the share purchase agreement, Airtronic agreed to

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The VAT Matter is currently the subject of administrative proceedings in France. Airtronic elected to assume the defense of this claim, in accordance with the terms of the purchase agreement, and asserted certain defenses to the claim. In September 2003, the French courts confirmed the criminal conviction of the son of the former president of Airtronic, who was an employee of Tekelec prior to the acquisition, for tax fraud involving conduct similar in part to that alleged in connection with the tax claim against Tekelec.

The product liability claim is subject to French legal proceedings under which separate determinations are made as to whether the products were defective and the amount of damages sustained by the purchaser. The manufacturer of the product is also a party to these proceedings. The company believes that it has valid defenses to this claim and intends to contest it vigorously.

During 2003, judgments were rendered in favor of the former employees, and Tekelec, while appealing, has been ordered to pay damages in the amount of €.4 million ($.5 million at the year-end exchange rate). This amount has previously been accrued by the company in connection with the accounting for the acquisition of Tekelec. Tekelec has demanded payment of this amount from Airtronic and received in response a letter, dated October 8, 2003, asserting that the indemnification provisions of the purchase agreement are not enforceable. The company has been advised by counsel that the indemnification provisions are enforceable and intends to pursue its rights vigorously. Based on Airtronic's position on the enforceability of the indemnity, which the company believes creates a conflict of interest on the part of Airtronic's lawyer in representing Tekelec before the tax authorities, Tekelec has dismissed Airtronic's counsel in favor of retaining its own tax lawyer and intends to pursue separate discussions with the tax authorities. Were Tekelec to enter into a settlement of this matter without the consent of Airtronic, the company's right to claim against Airtronic under the indemnification provisions could be impaired.

In light of the company's inability to assess Airtronic's ability and intent to fulfill its obligations under the indemnity with respect to the VAT Matter, an acquisition indemnification charge of €11.3 million ($13.0 million or $.13 per share at the September 30, 2003 foreign exchange rate) was recognized in the third quarter of 2003.

Loss on Prepayment of Debt

During 2003, the company repurchased $169.0 million accreted value of its zero coupon convertible debentures (the "convertible debentures") due in 2021, which could have been put to the company in February 2006. The related loss on the repurchase aggregated $3.6 million ($2.2 million net of related taxes or $.02 per share), which includes the write-off of related deferred financing costs offset, in part, by the discount on the repurchase. The loss on the repurchase is recognized in income from continuing operations in the company's consolidated statement of operations. As a result of these transactions, interest expense will be reduced by approximately $5.0 million annually from the dates of repurchase through the 2006 put date, if interest rates remain the same.

During 2003, the company repurchased, prior to maturity, $84.8 million principal amount of its 8.2% senior notes, which matured in October 2003. The premium paid and the related deferred financing costs written-off upon the repurchase of this debt aggregated $2.9 million ($1.8 million net of related taxes or $.02 per share), and is recognized in income from continuing

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During 2002, the company repurchased $398.2 million principal amount of its 6.45% and 8.2% senior notes, due in the fourth quarter of 2003. The premium paid and the related deferred financing costs written-off upon the repurchase of this debt aggregated $20.9 million ($12.9 million net of related taxes or $.13 per share) and is recognized in the loss from continuing operations in the company's consolidated statement of operations. As a result of these transactions, interest expense was reduced by approximately $31.1 million from the dates of repurchase through the 2003 maturity date. As required by FASB Statement No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," the 2002 loss on extinguishment of debt, which was previously recorded as an extraordinary item, was reclassified as a component of the loss from continuing operations.

Discontinued Operations

In May 2002, the company sold substantially all of the assets of Gates/Arrow, a business unit within NACP that sold commodity computer products such as printers, monitors, other peripherals, and software to value-added resellers in North America. The total cash proceeds of $42.9 million, after price adjustments, have been collected. The assets sold consisted primarily of accounts receivable, inventories, and property and equipment. The buyer also assumed certain liabilities.

The company recorded a loss of $10.2 million ($6.1 million net of related taxes or $.06 per share) on the disposal of Gates/Arrow. The loss consists of the following (in millions):

Personnel costs relate to the termination of 88 individuals employed by the Gates/Arrow business and 57 NACP warehouse personnel due to reduced activity levels as a result of the sale of Gates/Arrow. Facilities costs are principally related to vacated warehouse space no longer required as a result of the sale. The write-down of assets adjusted the carrying value of the assets sold to the value agreed upon under the terms of the contract of sale.

Change in Accounting Principle

In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets." This Statement, among other things, eliminates the amortization of goodwill and requires annual tests for determining impairment of goodwill. On January 1, 2002, the company adopted Statement No. 142, and accordingly, discontinued the amortization of goodwill.

As required by Statement No. 142, the company completed the two steps required to identify and measure goodwill impairment for each reporting unit as of January 1, 2002. The first step involved identifying all reporting units with carrying values (including goodwill) in excess of fair value determined by reference to comparable businesses using a weighted average EBIT multiple. The reporting units identified from the first step were then measured for impairment by comparing the units' fair value to their carrying value. Those reporting units having a carrying value substantially exceeding their fair value were identified as being fully impaired, and the company fully wrote down the related goodwill. For reporting units with potential impairment, the company determined the fair value of the assets and liabilities of the unit and wrote down the goodwill to its implied fair value accordingly. The majority of the reporting units' assets and liabilities were in ventories, accounts receivable, accounts payable, and accrued expenses, which are carried at fair value. No other impairment indicators have arisen since January 1, 2002.

As a result of the evaluation process performed during the second quarter of 2002, the company recorded an impairment charge of $603.7 million ($6.05 per share), which was recorded as a cumulative effect of change in accounting principle at January 1, 2002.

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The company's annual impairment tests in 2003 and 2002 did not result in any additional impairments to the carrying value of goodwill.

Severance Charge

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

Operating Income

The company recorded gross profit of $1.4 billion for 2003, compared with gross profit of $1.3 billion in the year-earlier period. The increase in gross profit is principally due to the 17.4% increase in sales in 2003. The gross profit margins for 2003 decreased by approximately 70 basis points when compared with the year-earlier period. The decrease in gross profit percentage is principally due to margin pressures in the components businesses around the world.

The company recorded operating income of $184.0 million in 2003 as compared with $167.5 million in 2002. Included in operating income for 2003 are the aforementioned acquisition indemnification charge of $13.0 million, restructuring charges of $37.9 million, and integration charge of $6.9 million. Included in operating income for 2002 is the aforementioned severance charge of $5.4 million associated with the resignation of the company's former chief executive officer. The increase in operating income of $16.5 million for 2003 compared with the year-earlier period is principally a result of higher gross profit resulting from the 17.4% increase in sales and lower operating costs resulting from the company's ability to improve operating efficiencies offset by increasing variable costs associated with higher sales, the restructuring charges, the acquisition indemnification charge, and the integration charge.

The company recorded gross profit of $1.3 billion for 2002, compared with gross profit of $1.5 billion in the year-earlier period. Included in gross profit for 2001 are restructuring costs and other charges of $97.5 million. The decline in gross profit is principally due to the 22.1% decline in sales in 2002. The gross profit margins for 2002 improved by approximately 140 basis points when compared with the year-earlier period. The increase in gross profit percentage is principally due to a change in the mix of sales, which in 2002 is more heavily concentrated on the businesses serving core OEM customers that typically have higher margins, a corresponding smaller proportion of sales to large accounts that typically have a lower gross profit percentage, and the aforementioned charges included in 2001. It also reflects the computer products businesses' increasing focus on higher margin business.

The company recorded operating income of $167.5 million in 2002 as compared with $152.7 million in 2001. Included in operating income for 2002 is the aforementioned severance charge of $5.4 million. Included in operating income for 2001 are $174.6 million of restructuring costs and other charges described above, the integration charge of $9.4 million associated with the acquisition of Wyle, and goodwill amortization of $48.0 million. The increase in operating income of $14.9 million for 2002 compared with the year-earlier period is principally a result of a 17.9% reduction in expenses, partially as a result of the decline in selling, general and administrative costs of approximately $104.6 million from December 31, 2001, principally due to lower variable

18

The company recorded gross profit of $1.5 billion for 2001, compared with gross profit of $2.0 billion in the year-earlier period. Included in gross profit for 2001 are the aforementioned restructuring costs and other charges of $97.5 million. The decline in gross profit is principally due to the decline in sales of 21.4% in 2001. The gross profit margins for 2001 decreased by approximately 80 basis points when compared with the year-earlier period. The decrease in gross profit percentage is principally due to the decline in sales in 2001 and the aforementioned charges included in 2001.

The company's operating income decreased to $152.7 million in 2001 compared with $773.2 million in 2000. The decrease in operating income was due to the sudden and dramatic reduction in sales that began in the latter part of the first quarter of 2001, and accelerated thereafter.

Interest Expense

Interest expense of $135.0 million (net of interest income of $11.3 million) in 2003 decreased from $152.6 million (net of interest income of $21.2 million) in the year-earlier period principally as a result of the generation of cash from operations of $291.6 million in 2003, which was utilized to reduce debt by $62.5 million offset, in part, by the loss of interest income from the cash utilized to pay for the acquisition of IED and declining interest rates on high quality liquid investments.

Net interest expense of $152.6 million in 2002 decreased from $210.6 million in the year-earlier period as a result of significantly lower debt balances. During 2002, cash flow from operations totaled $667.9 million, thereby permitting the company to reduce debt by $385.8 million and increase cash by $137.2 million. The positive cash flow reflected the decline in sales coupled with improved working capital utilization.

Interest expense of $210.6 million (net of interest income of $5.0 million) in 2001 increased from $169.9 million in the year-earlier period. The increase in interest expense was the result of the full year impact of interest on $1.2 billion of additional borrowings incurred in 2000 to fund acquisitions offset, in part, by the generation of $1.7 billion in cash flow from operations in 2001. The increase in cash flow from operations was due to the company's decreased working capital and capital expenditure requirements. The cash generated from operations in 2001 was utilized to reduce debt by $1.1 billion and to increase cash on hand by $501.3 million.

Income Taxes

The company recorded an income tax provision of $21.2 million on income before income taxes and minority interest of $47.3 million for 2003 (an effective tax rate of 44.8%), compared with a tax benefit of $1.8 million on a loss before income taxes and minority interest of $3.3 million in the year-earlier period (an effective tax benefit rate of 53.1%). As required by FASB Statement No. 145, the loss on extinguishment of debt of $20.9 million ($12.9 million net of related taxes) in 2002, previously recorded as an extraordinary item, was reclassified as a component of the loss from continuing operations. Accordingly, the 2002 income tax provision of $6.1 million on income before income taxes and minority interest of $17.5 million (an effective tax rate of 35.1%) has been restated to reflect this presentation. The income taxes and effective tax rates recorded in 2003 and 2002 were impacted by the estimated tax benefit related to the aforementioned restructu ring, integration, acquisition indemnification, and severance charges. The company's effective tax rate and income tax provision is principally impacted by, among other factors, a tax reorganization completed at the end of 2002, the statutory tax rates in the countries in which it operates, and the related level of income generated by these operations.

The 2002 income tax benefit of $1.8 million on a loss before income taxes and minority interest of $3.3 million (an effective tax benefit rate of 53.1%), compared with a tax benefit of $35.2 million on a loss before income taxes and minority interest of $112.1 million in 2001 (an effective tax benefit rate of

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The company recorded an income tax benefit of $35.2 million (an effective tax benefit rate of 31.4%) in 2001 compared with a provision for taxes of $244.7 million (an effective tax rate of 40.7%) in 2000.

Net Income (Loss)

The company recorded net income of $25.7 million for 2003, compared with a net loss of $610.5 million in the year-earlier period. Included in the results for 2003 are the acquisition indemnification charge of $13.0 million, restructuring charges of $27.1 million (net of related taxes), integration charge of $4.8 million (net of related taxes), and loss on prepayment of debt of $3.9 million (net of related taxes). Included in the results for 2002 are the loss associated with discontinued operations of $5.9 million (net of related taxes), loss on prepayment of debt of $12.9 million (net of related taxes), cumulative effect of change in accounting principle of $603.7 million related to the impairment of goodwill as mandated by FASB Statement No. 142, and severance charge of $3.2 million (net of related taxes) related to the resignation of the company's former chief executive officer.

The company recorded income from continuing operations of $25.7 million in 2003, compared with losses from continuing operations of $.9 million in the year-earlier period. The improvement of results from continuing operations is principally due to the increase in sales, cost savings realized from the aforementioned restructuring efforts, decrease in interest expense, and decrease in losses on the prepayment of debt, offset, in part, by the aforementioned acquisition indemnification, restructuring, and integration charges.

The company recorded a net loss of $610.5 million for 2002, compared with $73.8 million in the year-earlier period. Included in the results for 2002 are the aforementioned net loss associated with discontinued operations, loss on the prepayment of debt, cumulative effect of change in accounting principle, and severance charge. Included in the results for 2001 were the restructuring costs and other charges of $145.1 million (net of related taxes), integration charge of $5.7 million (net of related taxes), and net income associated with discontinued operations of $1.8 million (net of related taxes). The increase in the net loss was a result of the aforementioned charges and the significant reduction in sales offset, in part, by the decrease in operating expenses and interest expense.

Net loss in 2001 was $73.8 million compared with net income of $357.9 million, in 2000. Included in the results for 2001 were the aforementioned restructuring and integration charges, and income from discontinued operations. Included in the results for 2000 was the net income associated with discontinued operations of $6.0 million (net of related taxes). The company recorded losses from continuing operations of $75.6 million in 2001 compared with income from continuing operations of $351.9 million in 2000. The decrease in the income from continuing operations was due to lower gross profit, as a result of lower sales, and higher levels of interest expense.

Liquidity and Capital Resources

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

The net amount of cash provided by operating activities in 2002 was $667.9 million, principally reflecting lower working capital requirements. The net amount of cash used for investing activities in 2002 was $79.8 million,

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The net amount of cash provided by operating activities in 2001 was $1.7 billion, principally reflecting lower working capital requirements. The net amount of cash used for investing activities in 2001 was $107.1 million, including $64.4 million for various capital expenditures, $27.3 million for the acquisition of the remaining 10% interest in Scientific and Business Minicomputers, Inc. ("SBM") and $15.5 million for various investments. The net amount of cash used for financing activities in 2001 was $1.1 billion, primarily reflecting the repayment of short-term and long-term debt.

Cash flows from operating activities

The company historically has maintained a significant investment in accounts receivable and inventories. As a percentage of total assets, accounts receivable and inventories were approximately 58.1% and 55.3% in 2003 and 2002, respectively. At December 31, 2003, cash and short-term investments decreased to $612.4 million from $694.1 million at December 31, 2002 primarily as a result of $226.0 million utilized to pay for the acquisition of IED, $282.2 million used to repay senior notes, and $168.4 million used to repurchase convertible debentures, offset, in part, by the net proceeds of $346.3 million from the June 2003 senior note offering, and as a result of improved management of working capital. Total debt decreased to $2.03 billion at December 31, 2003 from $2.09 billion compared with the year-earlier period.

One of the characteristics of the company's business is that in periods of revenue growth, investments in accounts receivable and inventories grow, and the company's need for financing may increase. In the periods in which revenue declines, investments in accounts receivable and inventories generally decrease, and cash is generated. At December 31, 2003, working capital, defined as accounts receivable and inventories net of payables, increased by $223.9 million, or 13.5%, compared with December 31, 2002, due to increased sales and the acquisition of IED. At December 31, 2002, working capital decreased by $458.7 million, or 21.6%, compared with December 31, 2001, due to decreased sales and improved asset utilization. In 2001, working capital decreased by 45.6%, or $1.8 billion, compared with 2000, due to decreased sales and improved asset utilization.

Cash flows from investing activities

In February 2003, the company acquired substantially all the assets of the IED business. The net cost of this acquisition was $238.1 million, of which $226.0 million was paid through December 31, 2003. Through the combined businesses, the company expects to achieve cost savings and additional revenue that is expected to improve earnings by approximately $.20 per share annually.

In connection with certain acquisitions, the company was required to make future payments that are contingent upon the acquired businesses' earnings and in certain instances, the achievements of operating goals. During 2002, the company made such payments aggregating $108.5 million, of which $95.7 million was capitalized as cost in excess of net assets of companies acquired, and $12.8 million was recorded as a reduction of capital in excess of par value. At December 31, 2003, the company did not have any further requirements to make additional payments.

As a result of certain acquisitions, the company may be contractually required to purchase the shareholder interest held by others in its majority (but less than 100%) owned subsidiaries. Such payments, which are dependent upon the exercise of a put or call option by either party, are based upon a multiple of earnings over a contractually determined period and, in certain instances, capital structure. There are no expiration dates for these agreements. The terms of these agreements provide no limitation to the maximum potential future payments; however, in most instances the amount to be paid will not be

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During 2001, the company acquired the remaining 10% interest in SBM. The cost of this remaining interest was $27.3 million.

Capital expenditures decreased by $19.7 million, or 38.1%, in 2003 when compared with 2002 and $12.6 million, or 19.6%, in 2002 when compared with 2001, as a result of the company's continued cost containment actions, including the consolidation of facilities.

Cash flows from financing activities

As a result of the company's strong cash flow and lower returns available for short-term highly liquid investments, the company repurchased debt, prior to maturity.

In February 2004, the company sold 13.8 million shares of common stock in an underwritten public offering, including 1.8 million shares of common stock subject to a customary over-allotment option exercised by the underwriters. The net proceeds from this offering of approximately $313.0 million, including the shares purchased pursuant to the over-allotment option, will be used to redeem the company's outstanding 8.7% senior notes due in 2005 (principal amount of $208.5 million) and for general corporate purposes, which may include the redemption or repurchase of other outstanding indebtedness from time to time. Until the redemption of the 8.7% senior notes, the net proceeds will be maintained as cash and short-term investments.

In February 2004, the company repurchased an additional $89.3 million accreted value of its convertible debentures due in 2021, which could have been put to the company in 2006. The related pre-tax loss on the repurchase aggregated approximately $4.7 million, which includes the premium paid and the write-off of related deferred financing costs, and will be recorded as a loss on prepayment of debt in the consolidated statement of operations during the first quarter of 2004. As a result of these transactions, interest expense will be reduced by approximately $2.7 million annually from the dates of repurchase through the 2006 put date, if interest rates remain the same.

In January 2004, the company repurchased $41.5 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 of this debt, net of the gain recognized by terminating the corresponding interest rate swaps, aggregated approximately $3.2 million pre-tax and will be recorded as a loss on prepayment of debt in the consolidated statement of operations during the first quarter of 2004. As a result of these transactions, interest expense will be reduced by approximately $3.7 million from the dates of repurchase through the 2005 maturity date.

During 2003, the company repurchased $169.0 million accreted value of its convertible debentures due in 2021, which could have been put to the company in February 2006. The related loss on the repurchase aggregated $3.6 million ($2.2 million net of related taxes or $.02 per share), which includes the write-off of related deferred financing costs offset, in part, by the discount on the repurchase. The loss on the repurchase is recognized in income from continuing operations in the company's consolidated statement of operations. As a result of these transactions, interest expense will be reduced by approximately $5.0 million annually from the dates of repurchase through the 2006 put date, if interest rates remain the same.

During 2003, the company repurchased, prior to maturity, $84.8 million principal amount of its 8.2% senior notes, which matured in October 2003. The

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In June 2003, the company completed the sale of $350.0 million principal amount of 6 7/8% senior notes due in 2013. The net proceeds of the offering of $346.3 million were used to repay the company's 8.2% senior notes, which matured in October 2003, and for general corporate purposes. The additional debt the company carried during the period between the sale of the 6 7/8% senior notes in June 2003 and the repayment of the 8.2% senior notes in October 2003 negatively impacted income by $4.7 million ($2.9 million net of related taxes).

The company utilized $192.0 million of the proceeds from the 6 7/8% senior note offering to repay the outstanding principal amount at maturity of the 8.2% senior notes, which matured on October 1, 2003.

In December 2003, the company amended its three-year $450.0 million revolving credit facility to make certain changes to the terms of the facility, including amendments to covenants, and extended the facility through December 2006. A provision was added which would allow the banks to terminate, under certain conditions, the credit facility in October 2005 should a liquidity test not be met. The three-year revolving credit facility, as amended, bears interest at the applicable Eurocurrency rate plus a margin which is based on facility utilization and other factors. The company pays the banks a facility fee of .25% per annum. At December 31, 2003 and 2002, the company had no outstanding borrowings under this facility.

In November 2003, the company entered into a series of interest rate swaps (the "2003 swaps") with third parties, with an aggregate notional amount of $200.0 million, in order to hedge the change in fair value of the company's 7% senior notes, due in 2007, as a result of fluctuations in interest rates. These contracts are classified as fair value hedges and mature in January 2007. 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 (effective rate of 5.20% at December 31, 2003) through their maturities. The company accounts for these fair value hedges in accordance with FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The hedges were assessed as effective as the market value adjustment for the hedged notes and the swaps directly offset each other. The fair value of the 2003 swaps at D ecember 31, 2003 was $1.6 million and is included in long-term "Other assets" in the accompanying consolidated balance sheet and the offsetting adjustment to the carrying value of the debt hedged is included in "Long-term debt" in the accompanying consolidated balance sheet.

In February 2003, the company renewed its asset securitization program (the "program"), extended the term of the program to February 2006, and made certain changes to the terms of the program, including amendments to covenants, elimination of a rating trigger that could have made the program unavailable for additional borrowing in the event that the company's senior unsecured credit rating fell below investment grade, and reduction in the size of the program from $750.0 million to $550.0 million. In February 2004, the company further amended certain financial covenants. The company entered into the asset securitization program as a means to maximize the company's borrowing flexibility. Since the company's business is working capital intensive, this program allows us to grow our borrowing capacity as our accounts receivable balance grows. This program also makes available funding at a lower cost than traditional unsecured borrowing arrangements. Under the program, the company can sell, on a revolving basis, an individual interest in a pool of certain North American trade accounts receivable and retain a subordinated interest and servicing rights to those receivables. At December 31, 2003 and 2002, there were no receivables sold to and held by third parties under the program, and as such, the company had no obligations outstanding under the program. The company has not utilized the program since June 2001.

During 2002, the company repurchased $398.2 million principal amount of its 6.45% and 8.2% senior notes, due in the fourth quarter of 2003. The premium paid and the related deferred financing costs written-off upon the repurchase of this debt aggregated $20.9 million ($12.9 million net of related taxes or $.13 per share) and is recognized in the loss from continuing operations in the company's consolidated statement of operations. As a result of these transactions, interest expense was reduced by approximately $31.1 million from the dates of repurchase through the 2003 maturity date. As required by FASB Statement No. 145, the 2002 loss on extinguishment of debt, which was previously recorded as an extraordinary item, was reclassified as a component of the loss from continuing operations.

In August 2002, the company entered into a series of interest rate swaps (the "2002 swaps") with third parties, with an aggregate notional amount of $250.0 million, in order to hedge the change in fair value of the company's 8.7% senior notes, due in 2005, as a result of fluctuations in interest rates. These contracts are classified as fair value hedges and mature in October 2005. The 2002 swaps modify the company's interest rate exposure by effectively converting the fixed 8.7% senior notes to a floating rate based on the six-month U.S. dollar LIBOR plus a spread (effective rate of 6.19% and 6.76% at December 31, 2003 and 2002, respectively) through their maturities. The company accounts for these fair value hedges in accordance with FASB Statement No. 133. The hedges were assessed as effective as the market value adjustments for the hedged notes and the swaps directly offset each other. The fair value of the 2002 swaps at December 31, 2003 and 2002 was $8.4 million and $9.5 million, respectively, and is included in long-term "Other assets" in the accompanying consolidated balance sheet and the offsetting adjustment to the carrying value of the debt hedged is included in "Long-term debt" in the accompanying consolidated balance sheet. In January 2004, concurrently with the repurchase of $41.5 million of the 8.7% senior notes, an equivalent amount of the 2002 swaps were terminated.

During the first quarter of 2001, the company completed the sale of $1.5 billion principal amount at maturity of convertible debentures due February 21, 2021. The convertible debentures were priced with a yield to maturity, including the accretion of discount, of 4% per annum and may be converted into the company's common stock at a conversion ratio of 11.972 common shares per $1,000 of principal amount at maturity. The company, at its option, may redeem all or part of the convertible debentures (at the issue price plus accrued original issue discount through the date of redemption) any time on or after February 21, 2006. Holders of the convertible debentures may require the company to repurchase the convertible debentures (at the issue price plus accrued original issue discount through the date of repurchase) on February 21, 2006, 2011, or 2016. The net proceeds resulting from this transaction of $671.8 million were used to repay a $400.0 million short-te rm credit facility with the remaining amount principally utilized to repay amounts outstanding under the company's then existing global multi-currency credit facility.

The three-year revolving credit facility and the asset securitization program limit the incurrence of additional borrowings, limit the company's ability to issue cash dividends or repurchase stock, and require that certain financial ratios be maintained at designated levels. The company was in compliance with all of the covenants as of December 31, 2003. The company is currently not aware of any events which would cause non-compliance in the future.

Restructuring Activities

During 2003, the company implemented actions to become more effectively organized and to improve its operating efficiencies, with targeted annualized savings of $75.0 million, of which approximately $60.0 million was realized in 2003. The company has taken these steps in order to make its organizational structure, systems, and processes more efficient. The estimated restructuring charges associated with these actions total approximately $42.4 million, of which $37.9 million ($27.1 million net of related taxes or $.27 per share) was recorded in 2003. The remaining amount of approximately $4.5 million will be recorded over the next several quarters. Approximately $39.0 million of the total charge is expected to be spent in cash.

On February 17, 2004, the company announced, as part of on-going evaluations, a series of additional steps designed to enhance the company's operating efficiencies, primarily related to the elimination of corporate support functions. The net result is estimated to reduce the company's cost structure by an additional $15.0 million annually. Approximately 50% of this annual cost savings will begin in the first quarter of 2004, with the remaining 50% beginning late in the second quarter of 2004. The company expects to record a restructuring charge relating to these actions over several quarters in 2004 totaling $2.0 million to $5.0 million, before taxes.

Contractual Obligations

Payments due under contractual obligations at December 31, 2003 were as follows (in thousands):

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 debt of the joint ventures in the event that the joint ventures were unable to meet their obligations. At December 31, 2003, the company's pro-rata share of this debt was $7.3 million. The company believes there is sufficient equity in the joint ventures to cover this potential liability.

Off-Balance Sheet Arrangements

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

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

Critical Accounting Policies and Estimates

The company's financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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 estim ates 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:

Impact of Recently Issued Accounting Standards

In April 2002, the FASB issued Statement No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Statement No. 145 requires gains and losses on the extinguishment of debt to be classified as income or loss from continuing operations rather than as an extraordinary item as previously required. The company adopted this Statement effective January 1, 2003. All prior periods presented in the accompanying financial statements were restated to conform to the requirements of this Statement.

In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Statement No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The company adopted this Statement effective January 1, 2003. The adoption of this Statement did not have a material impact on the company's consolidated financial position and results of operations.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," ("FIN 45") which clarifies the required disclosures to be made by a guarantor in their interim and annual financial statements about its obligations under certain guarantees that it has issued. FIN 45 also requires a guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken. The company has adopted the disclosure requirements of FIN 45 for financial statements ending December 31, 2002 and has adopted prospectively the initial recognition and measurement provisions of this Interpretation for guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on the company's consolidated financial position and results of operations.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," ("FIN 46") which provides guidance on identifying and assessing interests in variable interest entities to decide whether to consolidate that entity. FIN 46 requires consolidation of existing unconsolidated variable interest entities if the entities do not effectively disperse risk among parties involved. On October 9, 2003, the FASB issued FASB Staff Position No. FIN 46-6, deferring the effective date for applying the provision of FIN 46 for variable interest entities created before February 1, 2003 to the fourth quarter of 2003. In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a revision which clarifies some provisions of FIN 46. The adoption of FIN 46R did not have a material impact on the company's consolidated financial position and results of operations.

In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This Statement establishes standards regarding how an issuer classifies, measures, and discloses certain types of financial instruments having characteristics of both liabilities and equity. It requires that an issuer classify a freestanding financial instrument that is within its scope as a liability. The adoption of this provision in the third quarter of 2003 did not have an impact on the company's consolidated financial position and results of operations. In addition, this Statement provides guidance on how to account for non-controlling interests of a limited-life subsidiary. This provision has been deferred and the company will continue to evaluate the impact upon further clarification from the FASB. The adoption of this provision is not anticipated to have a material impact on the company's consolidated financial position and results of operations.

Information Relating to Forward-Looking Statements

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

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 international 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, and Latin and South America. The company's policy is to hedge substantially all currency exposures for which natural hedges do not exist. Natural hedges exist when purchases and sales within a specific country are both denominated in the same currency and therefore no exposure exists to hedge with a foreign exchange forward or option contract (collectively, "foreign exchange contracts"). In 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 vs. 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, 2003 and 2002 was $222.7 million and $264.8 million, respectively. The carrying amounts, which are nominal, approximated fair value at December 31, 2003 and 2002. The translation of the financial statements of the non-North American operations is impacted by fluctuations in foreign currency exchange rates. Had the various average foreign currency exchange rate s remained the same during 2003 as compared with the average rates for 2002, sales and operating income would have been approximately $363.0 million and $17.5 million lower, respectively, than the reported results for 2003. Sales and operating income would have fluctuated by approximately $250.4 million and $9.8 million, respectively, if average foreign exchange rates changed by 10% in 2003. This amount was determined by considering the impact of a hypothetical foreign exchange rate on the sales and operating income of the company's international operations.

Interest Rate Risk

The company's interest expense, in part, is sensitive to the general level of interest rates in the Americas, Europe, and the Asia/Pacific region. The company historically has managed its exposure to interest rate risk through the proportion of fixed rate and floating rate debt in its total debt portfolio. In addition, the company has from time-to-time used interest rate swaps that convert certain fixed rate debt to floating rate debt, effectively hedging the change in fair value of the fixed rate debt resulting from fluctuations in interest rates. As a result, at December 31, 2003, approximately 76% of the company's debt was subject to fixed rates, and 24% of its debt was subject to floating rates. During 2002, as a result of

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Item 8.   Financial Statements and Supplementary Data.

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Arrow Electronics, Inc.

We have audited the accompanying consolidated balance sheet of Arrow Electronics, Inc. as of December 31, 2003 and 2002, and the related consolidated statements of operations, cash flows, and shareholders' equity for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and the schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arrow Electronics, Inc. at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 6 to the consolidated financial statements, on January 1, 2002, Arrow Electronics, Inc. adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".

/s/ ERNST & YOUNG LLP

New York, New York
February 16, 2004, except for Note 19,
as to which the date is February 25, 2004

The consolidated financial statements of Arrow Electronics, Inc. have been prepared by the company, which is responsible for their integrity and objectivity. These statements, prepared in accordance with accounting principles generally accepted in the United States, reflect our best use of judgment and estimates where appropriate. The company also prepared the other information in the annual report on Form 10-K and is responsible for its accuracy and consistency with the consolidated financial statements.

The company's system of internal controls is designed to provide reasonable assurance that company assets are safeguarded from loss or unauthorized use or disposition and that transactions are executed in accordance with management's authorization and are properly recorded. In establishing the basis for reasonable assurance, management balances the costs of the internal controls with the benefits they provide. The system contains self-monitoring mechanisms, and compliance is tested through an extensive program of site visits and audits by the company's operating controls (internal audit) staff.

The audit committee of the board of directors, consisting entirely of independent directors, meets regularly with the company's management, operating controls (internal audit) staff, and independent auditors and reviews audit plans and results, as well as management's actions taken in discharging it s responsibilities for accounting, financial reporting, and internal controls. Members of management, the operating controls (internal audit) staff, and the independent auditors have direct and confidential access to the audit committee at all times.

The company's independent auditors, Ernst & Young LLP, were engaged to audit the consolidated financial statements in accordance with auditing standards generally accepted in the United States. These standards include a study and evaluation of internal controls for the purpose of establishing a basis for reliance thereon relative to the scope of their audit of the consolidated financial statements.

/s/ William E. Mitchell              
William E. Mitchell
President and Chief Executive Officer


/s/ Paul J. Reilly                        
Paul J. Reilly
Vice President and Chief Financial Officer

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