10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

OR

o 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

ARROW ELECTRONICS, INC.

(Exact name of Registrant as specified in its charter)

New York	11-1806155
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

50 Marcus Drive, Melville, New York	11747
(Address of principal executive offices)	(Zip Code)

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

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  þ     No  o

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

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o     No  þ

There were 119,565,386 shares of Common Stock, $1 par value, outstanding as of October 26, 2005.

ARROW ELECTRONICS, INC.

INDEX

			Page
Part I.	Financial Information
	Item 1. Financial Statements
		Consolidated Statement of Operations	3
		Consolidated Balance Sheet	4
		Consolidated Statement of Cash Flows	5
		Notes to Consolidated Financial Statements	6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
	Item 3. Quantitative and Qualitative Disclosures about Market Risk		29
	Item 4. Controls and Procedures		29
Part II.	Other Information
	Item 6. Exhibits		30
Signature			31
EX-2: AGREEMENT FOR SALE AND PURCHASE OF SHARES
EX-31.I: CERTIFICATION
EX-31.II: CERTIFICATION
EX-32.I: CERTIFICATION
EX-32.II: CERTIFICATION

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

ARROW ELECTRONICS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands except per share data)

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2005		2004			2005			2004
Sales	$	2,710,168	$	2,619,143		$	8,204,586		$	7,923,391
Costs and expenses:
Cost of products sold		2,290,912		2,198,980			6,911,768			6,628,974
Selling, general and administrative expenses		290,376		301,973			903,454			913,865
Depreciation and amortization		10,530		12,412			36,550			41,501
Acquisition indemnification credit		-		(9,676	)		(1,672	)		(9,676	)
Restructuring charges		112		407			8,997			7,984
		2,591,930		2,504,096			7,859,097			7,582,648
Operating income		118,238		115,047			345,489			340,743
Equity in earnings of affiliated companies		1,373		1,566			3,013			2,912
Loss on prepayment of debt		1,123		911			3,209			31,692
Write-down of investments		-		1,318			3,019			1,318
Interest expense, net		22,291		24,350			70,766			79,563
Income before income taxes and minority interest		96,197		90,034			271,508			231,082
Provision for income taxes		32,399		26,392			91,770			70,474
Income before minority interest		63,798		63,642			179,738			160,608
Minority interest		275		245			575			827
Net income	$	63,523	$	63,397		$	179,163		$	159,781
Net income per share:
Basic	$	.54	$	.55		$	1.53		$	1.42
Diluted	$	.52	$	.52		$	1.48		$	1.36
Average number of shares outstanding:
Basic		118,594		115,175			117,265			112,217
Diluted		124,162		124,862			124,010			124,500

See accompanying notes.

3

ARROW ELECTRONICS, INC.

CONSOLIDATED BALANCE SHEET

(In thousands)

	September 30,			December 31,
	2005			2004
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	653,667		$	305,294
Short-term investments		-			158,600
Total cash and short-term investments		653,667			463,894
Accounts receivable, net		2,068,476			1,984,122
Inventories		1,382,718			1,486,478
Prepaid expenses and other assets		107,629			93,039
Total current assets		4,212,490			4,027,533
Property, plant and equipment at cost:
Land		35,951			40,340
Buildings and improvements		156,198			182,610
Machinery and equipment		412,593			420,455
		604,742			643,405
Less: accumulated depreciation and amortization		(383,732	)		(380,422	)
Property, plant and equipment, net		221,010			262,983
Investments in affiliated companies		36,580			34,302
Cost in excess of net assets of companies acquired		926,689			974,285
Other assets		188,019			209,998
Total assets	$	5,584,788		$	5,509,101
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,389,363		$	1,261,971
Accrued expenses		404,620			395,955
Short-term borrowings, including current portion of long-term debt		173,572			8,462
Total current liabilities		1,967,555			1,666,388
Long-term debt		1,154,900			1,465,880
Other liabilities		177,840			182,647
Shareholders’ equity:
Common stock, par value $1:
Authorized - 160,000 shares in 2005 and 2004
Issued - 119,740 shares in 2005 and 117,675 in 2004		119,740			117,675
Capital in excess of par value		846,524			797,828
Retained earnings		1,324,969			1,145,806
Foreign currency translation adjustment		14,289			190,595
		2,305,522			2,251,904
Less: Treasury stock (265 and 1,374 shares in 2005 and 2004, respectively), at cost		(7,093	)		(36,735	)
Unamortized employee stock awards		(3,007	)		(3,738	)
Other		(10,929	)		(17,245	)
Total shareholders’ equity		2,284,493			2,194,186
Total liabilities and shareholders’ equity	$	5,584,788		$	5,509,101

See accompanying notes.

4

ARROW ELECTRONICS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2005			2004
Cash flows from operating activities:
Net income	$	179,163		$	159,781
Adjustments to reconcile net income to net cash provided by (used for) operations:
Minority interest		575			827
Depreciation and amortization		36,550			41,501
Accretion of discount on zero coupon convertible debentures		7,166			13,459
Amortization of deferred financing costs and discount on notes		2,796			3,867
Amortization of restricted stock and performance awards		5,209			6,594
Equity in earnings of affiliated companies		(3,013	)		(2,912	)
Deferred income taxes		94			2,060
Acquisition indemnification credit, net of taxes		(1,267	)		(9,676	)
Restructuring charges, net of taxes		5,016			4,756
Loss on prepayment of debt, net of taxes		1,919			18,952
Write-down of investments		3,019			1,318
Change in assets and liabilities, net of effects of acquired businesses:
Accounts receivable		(152,656	)		(146,519	)
Inventories		57,221			(197,096	)
Prepaid expenses and other assets		(5,072	)		(492	)
Accounts payable		156,910			(32,498	)
Accrued expenses		1,977			5,636
Other		447			22,532
Net cash provided by (used for) operating activities		296,054			(107,910	)
Cash flows from investing activities:
Acquisition of property, plant and equipment, net		(19,789	)		(16,701	)
Proceeds from sale of facilities		18,353			8,616
Cash consideration paid for acquired businesses		(24,624	)		(34,725	)
Proceeds from notes receivable		1,113			8,333
Purchase of short-term investments		(230,456	)		(203,486	)
Proceeds from sale of short-term investments		389,056			203,486
Other		3,711			(140	)
Net cash provided by (used for) investing activities		137,364			(34,617	)
Cash flows from financing activities:
Change in short-term borrowings		9,036			(29,827	)
Change in long-term debt		(2,037	)		(1,904	)
Repurchase of senior notes		-			(268,399	)
Repurchase of zero coupon convertible debentures		(152,449	)		(262,172	)
Proceeds from common stock offering		-			312,789
Proceeds from exercise of stock options		69,355			13,900
Net cash used for financing activities		(76,095	)		(235,613	)
Effect of exchange rate changes on cash		(8,950	)		3,294
Net increase (decrease) in cash and cash equivalents		348,373			(374,846	)
Cash and cash equivalents at beginning of period		305,294			612,404
Cash and cash equivalents at end of period	$	653,667		$	237,558

See accompanying notes.

5

ARROW ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)
(Unaudited)

Note A — Basis of Presentation

The accompanying consolidated financial statements of Arrow Electronics, Inc. (the “company”) were prepared in accordance with accounting principles generally accepted in the United States and reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position and consolidated results of operations at and for the periods presented. The consolidated results of operations for the interim periods are not necessarily indicative of results for the full year.

These consolidated financial statements do not include all the information or notes necessary for a complete presentation and, accordingly, should be read in conjunction with the consolidated financial statements and accompanying notes included in the company’s Form 10-Q for the quarterly periods ended July 1, 2005 and April 1, 2005, as well as the audited consolidated financial statements and accompanying notes for the year ended December 31, 2004 as filed in the company’s Annual Report on Form 10-K.

Revenue Recognition

In the fourth quarter of 2004, based upon an evaluation of its business and accounting practices, the company determined that revenue related to the sale of service contracts should more appropriately be classified on an agency basis rather than a gross basis. While this change reduced reported sales and cost of sales, it had no impact on gross profit, operating income, net income, cash flow, or the balance sheet. All prior period sales and cost of sales have been reclassified to present the revenue related to the sale of service contracts on an agency basis. Sales and cost of sales were reduced by $49,558 and $171,004 for the third quarter and first nine months of 2004, respectively.

Reclassification

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

Stock-Based Compensation

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

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

6

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

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

	For the Three						For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Net income, as reported	$	63,523		$	63,397		$	179,163		$	159,781
Deduct: Impact of stock-based employee compensation expense determined under fair value method, for all awards, net of related taxes		(2,262	)		(1,946	)		(6,793	)		(5,619	)
Pro forma net income	$	61,261		$	61,451		$	172,370		$	154,162
Net income per share:
Basic-as reported	$	.54		$	.55		$	1.53		$	1.42
Basic-pro forma	$	.52		$	.53		$	1.47		$	1.37
Diluted-as reported	$	.52		$	.52		$	1.48		$	1.36
Diluted-pro forma	$	.50		$	.51		$	1.42		$	1.31

Note B — Impact of Recently Issued Accounting Standards

In December 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” (“Statement No. 123R”). Statement No. 123R addresses all forms of share-based payment (“SBP”) awards, including, but not limited to, shares issued under stock options, restricted stock, performance shares, and stock appreciation rights. Statement No. 123R will require the company to record compensation expense for SBP awards measured at fair value beginning on January 1, 2006. The company is currently evaluating the impact of applying the various provisions of Statement No. 123R.

Note C — Acquisitions/Disposition

On July 1, 2005, the company acquired the component distribution business of Connektron Pty. Ltd (“Connektron”), a leading passive, electromechanical, and connectors distributor in Australia and New Zealand. The acquisition of the component distribution business of Connektron has been accounted for as a purchase transaction, and accordingly, its results of operations have been included in the consolidated results of the company from the date of acquisition.

During the second quarter of 2005, the company closed on the sale of its Cable Assembly business, a business unit within the company’s North American Components group that supplies custom cable assembly and associated contract manufacturing services. The $1,300 loss resulting from this sale was reflected as a component of restructuring charges during the second quarter of 2005.

In July 2004, the company acquired Disway AG (“Disway”), an electronic components distributor in Italy, Germany, Austria, and Switzerland. The Disway acquisition has been accounted for as a purchase transaction, and accordingly, Disway’s results of operations have been included in the consolidated results of the company from the date of acquisition.

The impact of the above acquisitions and disposition, individually and in the aggregate, are not deemed to be material to the company’s consolidated financial position and consolidated results of operations.

7

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

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

During the first nine months of 2005, the company made a payment of $2,027, which was 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 Dicopel US and Dicopel SA (collectively, “Dicopel”) to 100%. During the first nine months of 2004, the company made a payment in the amount of $805, which was 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 Dicopel from 70% to 80%.

If the put or call options on outstanding agreements were exercised, such payments would be approximately $7,000 at September 30, 2005 and $11,000 at December 31, 2004, which would be capitalized as cost in excess of net assets of companies acquired partially offset by the carrying value of the related minority interest. As these payments are based on the future earnings of the acquired companies, the amounts will change as the performance of these subsidiaries changes.

Note D — Investments

Affiliated Companies

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

The following presents the company’s investment in Marubun/Arrow and the company’s investment and long-term note receivable in Altech Industries:

	September 30,		December 31,
	2005		2004
Marubun/Arrow	$	21,899	$	18,841
Altech Industries		14,681		15,461
	$	36,580	$	34,302

The equity in earnings of affiliated companies are as follows:

	For the Three				For the Nine
	Months Ended				Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
Marubun/Arrow	$	1,355	$	1,361	$	2,434	$	2,998
Altech Industries		18		205		579		(86	)
	$	1,373	$	1,566	$	3,013	$	2,912

8

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

Under the terms of the aforementioned joint venture agreements, the company would be required to pay its pro-rata share, based upon its ownership interests, of the third party debt of the joint ventures in the event that the joint ventures were unable to meet their obligations. At September 30, 2005 and December 31, 2004, the company’s pro-rata share of this debt was $11,705 and $7,750, respectively. The company believes there is sufficient equity in the joint ventures to cover this potential liability.

Investment Securities

The company has a 5% interest in World Peace Industrial Co., Ltd. (“WPI”) and an 8.4% interest in Marubun Corporation (“Marubun”), which are accounted for as available-for-sale securities.

The company accounts for these investments in accordance with FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“Statement No. 115”) and Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. Under Statement No. 115 and EITF Issue No. 03-1, if the fair value of an investment is less than the cost basis, the company must determine if an other-than-temporary decline has occurred based on its intent and ability to hold the investment until the cost is recovered and evidence indicates that the cost of the investment is recoverable within a reasonable period of time. If the company determines that an other-than-temporary decline has occurred, the cost basis of the investment must be written down to fair value as the new cost basis and the amount of the write-down is recognized as a loss.

At September 30, 2005, the cost basis of the company’s investment in WPI was $10,798, the fair value was $7,510, and the unrealized holding loss was $3,288. Although the fair value of the WPI investment was below the cost basis, the company concluded that an other-than-temporary decline had not occurred.

During the second quarter of 2005, in accordance with Statement No. 115 and EITF Issue No. 03-1, the company determined that an other-than-temporary decline in the fair value of Marubun had occurred and, accordingly, recorded a loss of $3,019 ($.03 per share) on the write-down of this investment. The new cost basis of the company’s investment in Marubun was $20,046. At September 30, 2005, the fair value was $26,908, and the unrealized holding gain was $6,862.

At December 31, 2004, the cost basis of the company’s investment in WPI and Marubun was $33,863, the fair value was $31,086, and the net unrealized holding loss was $2,777.

During the third quarter of 2004, the company determined that an other-than-temporary decline in the fair value of an investment had occurred and, accordingly, recorded a loss of $1,318 ($.01 per share) on the write-down of this investment.

The fair value of these investments are included in “Other assets” in the accompanying consolidated balance sheet and the related net unrealized holding gains and losses are included in “Other” in the shareholders’ equity section in the accompanying consolidated balance sheet.

Note E — Accounts Receivable

The company has a $550,000 asset securitization program (the “program”), which is conducted through Arrow Electronics Funding Corporation (“AFC”), a wholly-owned, bankruptcy remote, special purpose subsidiary. Any receivables held by AFC would likely not be available to creditors of the company in the event of bankruptcy or insolvency proceedings. At September 30, 2005 and December 31, 2004, 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.

9

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

Note F — Cost in Excess of Net Assets of Companies Acquired

Cost in excess of net assets of companies acquired, related to the company’s electronic components business segment, is as follows:

December 31, 2004	$	974,285
Acquisitions		7,512
Other (primarily foreign currency translation)		(55,108	)
September 30, 2005	$	926,689

All existing and future costs in excess of net assets of companies acquired are subject to an annual impairment test as of the first day of the fourth quarter of each year, or earlier if indicators of potential impairment exist.

Note G — Debt

In June 2005, the company amended and restated its revolving credit agreement and, accordingly, increased the facility size from $450,000 to $600,000. The $600,000 revolving credit facility matures in June 2010. The company had no outstanding borrowings under the revolving credit facility at September 30, 2005 and December 31, 2004.

In June 2004, the company entered into a series of interest rate swaps (the “2004 swaps”), with an aggregate notional amount of $300,000. The 2004 swaps modify the company’s interest rate exposure by effectively converting the fixed 9.15% senior notes and a portion of the fixed 6.875% senior notes to a floating rate based on the six-month U.S. dollar LIBOR plus a spread (an effective rate of 7.75% and 5.55% at September 30, 2005 and 6.53% and 3.80% at December 31, 2004, respectively) through their maturities. The 2004 swaps are classified as fair value hedges and had a fair value of $4,074 and $12,650 at September 30, 2005 and December 31, 2004, respectively.

In November 2003, the company entered into a series of interest rate swaps (the “2003 swaps”), with an aggregate notional amount of $200,000, in order to manage the company’s targeted mix of fixed and floating rate debt. 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 7.77% and 5.81% at September 30, 2005 and December 31, 2004, respectively) through their maturities. The 2003 swaps, which mature in June 2007, are classified as fair value hedges and had a negative fair value of $4,120 and $746 at September 30, 2005 and December 31, 2004, respectively.

The company recorded a loss on prepayment of debt of $1,123 ($672 net of related taxes or $.01 per share) and $911 ($545 net of related taxes or $.01 per share) for the third quarter of 2005 and 2004, respectively, and $3,209 ($1,919 net of related taxes or $.02 and $.01 per share on a basic and diluted basis, respectively) and $31,692 ($18,952 net of related taxes or $.17 and $.15 per share on a basic and diluted basis, respectively) for the nine months ended September 30, 2005 and 2004, respectively.

During the third quarter of 2005, the company repurchased, through a series of transactions, $57,800 accreted value of its zero coupon convertible debentures due in 2021, which could have been initially put to the company in February 2006 (“convertible debentures”). The related loss on the repurchases, including the premium paid and the write-off of related deferred financing costs, aggregated $1,123 ($672 net of related taxes or $.01 per share), of which $148 was cash, and is recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense will be reduced by approximately $205 from the dates of repurchase through the 2006 put date, based on interest rates in effect at the time of the repurchases.

10

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

During the first nine months of 2005, the company repurchased, through a series of transactions, $151,845 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 $3,209 ($1,919 net of related taxes or $.02 and $.01 per share on a basic and diluted basis, respectively), of which $604 was cash, and is recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense will be reduced by approximately $1,115 from the dates of repurchase through the earliest maturity date, based on interest rates in effect at the time of the repurchases.

During the third quarter of 2004, the company repurchased $19,841 accreted value of its convertible debentures. The related loss on the repurchase, including the premium paid and the write-off of related deferred financing costs, aggregated $911 ($545 net of related taxes or $.01 per share), of which $537 was cash, and was recognized as a loss on prepayment of debt. As a result of this transaction, interest expense will be reduced by approximately $930 from the date of repurchase through the 2006 put date, based on interest rates in effect at the time of the repurchase.

During the first nine months of 2004, the company repurchased, through a series of transactions, $253,422 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 $12,771 ($7,637 net of related taxes or $.07 and $.06 per share on a basic and diluted basis, respectively), of which $8,750 was cash. Also during the first nine months of 2004, the company repurchased and/or redeemed, through a series of transactions, $250,000 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 $18,921 ($11,315 net of related taxes or $.10 and $.09 per share on a basic and diluted basis, respectively), of which $18,399 was cash. The aggregate of these charges is recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense will be reduced by approximately $34,330 from the dates of repurchase and/or redemption through the earliest maturity date, based on interest rates in effect at the time of the repurchases.

Interest expense, net, includes interest income of $3,201 and $1,571 for the three months ended September 30, 2005 and 2004, respectively, and $8,572 and $7,439 for the nine months ended September 30, 2005 and 2004, respectively.

Note H — Restructuring, Integration, and Other Charges (Credits)

The company recorded net restructuring charges of $112 (a gain of $442 net of related taxes or $.01 per share) and $407 ($175 net of related taxes) in the third quarter of 2005 and 2004, respectively, and restructuring charges of $8,997 ($5,016 net of related taxes or $.03 per share) and $7,984 ($4,756 net of related taxes or $.05 and $.04 per share on a basic and diluted basis, respectively) for the nine months ended September 30, 2005 and 2004, respectively.

Restructurings

In the first quarter of 2005, the company announced that it would be taking additional actions to better optimize the use of its mainframe, reduce real estate costs, be more efficient in its distribution centers, and to be more productive. These actions are expected to further reduce costs by approximately $50,000 per annum with $40,000 to be realized in 2005. The restructuring charges associated with these 2005 actions which amounted to $143, net of a $1,463 gain on the sale of a facility, for the third quarter of 2005 and $8,663 for the first nine months of 2005 consisted primarily of personnel costs relating to the elimination of approximately 310 positions, or 3% of the prior year-end worldwide total of 11,500 positions, across multiple locations, segments, and functions. The majority of the total charge was spent in cash.

The company, during 2004 and 2003, announced a series of steps to make its organizational structure more efficient resulting in annualized savings in excess of $100,000. The restructuring charges associated

11

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

with these 2004 and 2003 actions total $48,541, of which $10 and $746 were recorded in the third quarter and first nine months of 2005, respectively, and $618 and $8,737 were recorded in the third quarter and first nine months of 2004, respectively. Approximately 85% of the total charge was spent in cash.

The aforementioned restructuring charges are comprised of the following at September 30, 2005:

	Personnel
	Costs			Facilities			Other			Total
December 31, 2004	$	2,828		$	2,573		$	371		$	5,772
Additions (a) (b) (c)		9,384			(1,073	)		1,098			9,409
Payments (d)		(8,142	)		995			(482	)		(7,629	)
Reclassification		(41	)		(25	)		66			-
Foreign currency translation		(84	)		(121	)		-			(205	)
Non-cash usage		(407	)		-			(240	)		(647	)
September 30, 2005	$	3,538		$	2,349		$	813		$	6,700

(a)	Personnel costs associated with the elimination of approximately 310 positions in the first nine months of 2005 across multiple locations, segments, and functions.
(b)	Additions include one-time restructuring charges of $1,300 resulting from the sale of the company’s Cable Assembly business during the second quarter of 2005 which primarily relates to personnel costs for accrued severance benefits and inventory valuation adjustments.
(c)	Facilities include the $1,463 gain on the sale of a facility in the third quarter of 2005.
(d)	Facilities include $1,463 of cash received in excess of the related net assets on the sale of a facility.

In mid-2001, the company took a number of significant steps related to cost containment and cost reduction actions. In the third quarter and first nine months of 2005, the company recorded a restructuring credit against the accrual related to the 2001 restructuring of $41 and $412, respectively. The restructuring charges and other charges recorded as of 2004 total $231,235, which includes a restructuring credit of $211 and $753 recorded in the third quarter and first nine months of 2004, respectively. As of September 30, 2005, cumulative cash payments of $31,569 ($552 and $2,064 in the third quarter and first nine months of 2005, respectively) and non-cash usage of $190,879 were recorded against the accrual. As of September 30, 2005 and December 31, 2004, the company had $8,375 and $10,851, respectively, of unused accruals of which $4,696 and $6,774, respectively, are required to address remaining real estate lease commitments. In addition, accruals of $3,679 and $4,077 at September 30, 2005 and December 31, 2004, respectively, primarily relate to the termination of certain customer programs.

12

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

Integration

As of September 30, 2005, the integration accrual was $6,742 relating to the acquisition of Disway in 2004 and the Industrial Electronics Division of Agilysys, Inc. in 2003, as well as numerous acquisitions made prior to 2001, for remaining contractual obligations as follows:

	Personnel
	Costs			Facilities			Other			Total
December 31, 2004	$	-		$	4,474		$	1,019		$	5,493
Additions (a)		1,144			984			143			2,271
Payments (b)		(723	)		89			(157	)		(791	)
Foreign currency translation		(9	)		(221	)		(1	)		(231	)
Reclassification		-			(60	)		60			-
September 30, 2005	$	412		$	5,266		$	1,064		$	6,742

(a)	Represents costs associated with the acquisition and integration of Disway.
(b)	Facilities include refunds received during the second quarter of 2005.

Restructuring and Integration Summary

The remaining balances of the restructuring and integration accruals aggregate $21,817 as of September 30, 2005, of which $17,393 is expected to be spent in cash, and will be utilized as follows:

- The personnel costs accruals of $3,950 will be utilized to cover costs associated with the termination of personnel, which are primarily expected to be spent by the end of 2005.

- The facilities accruals totaling $12,311 relate to terminated leases with expiration dates through 2010 of which $1,679 will be paid in 2005. The minimum lease payments for these leases are $4,588 in 2006, $2,088 in 2007, $2,255 in 2008, and $1,701 thereafter.

- The customer termination accrual of $3,679 relates to costs associated with the termination of certain customer programs primarily associated with services not traditionally provided by the company and is expected to be utilized over several years.

- Other of $1,877 primarily represents certain terminated contracts, the majority of which are expected to be utilized by the end of 2006.

The company’s restructuring and integration programs primarily impacted its electronic components business segment.

Acquisition Indemnification

During the first quarter of 2005, Tekelec Europe SA (“Tekelec”), a French subsidiary of the company, entered a settlement agreement with Tekelec Airtronic SA (“Airtronic”) pursuant to which Airtronic paid €1,510 (approximately $2,000) 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 $1,672 ($1,267 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 €3,429 in full settlement of a claim asserted by the French tax authorities relating to alleged fraudulent activities concerning value-added tax by Tekelec. The alleged occurred prior to the company’s purchase of Tekelec from Airtronic. The company recorded an acquisition indemnification credit of €7,898 ($9,676 at the exchange rate prevailing on August 12, 2004 or $.09 and $.08 per share on a basic and diluted basis, respectively), in the third quarter and first nine months of 2004, to reduce the liability

13

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

previously recorded (€11,327) to the required level (€3,429). In December 2004, Tekelec paid €3,429 ($4,648 at the exchange rate prevailing at year-end) in full settlement of this claim.

Note I — Net Income per Share

The following table sets forth the calculation of net income per share on a basic and diluted basis (shares in thousands):

	For the Three				For the Nine
	Months Ended				Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
Net income, as reported	$	63,523	$	63,397	$	179,163	$	159,781
Adjustment for interest expense on convertible debentures, net of tax		1,059		2,143		4,285		9,085
Net income, as adjusted	$	64,582	$	65,540	$	183,448	$	168,866
Net income per share:
Basic	$	.54	$	.55	$	1.53	$	1.42
Diluted (a)	$	.52	$	.52	$	1.48	$	1.36
Weighted average shares outstanding – basic		118,594		115,175		117,265		112,217
Net effect of various dilutive stock-based compensation awards		1,724		1,356		1,333		1,725
Net effect of dilutive convertible debentures		3,844		8,331		5,412		10,558
Weighted average shares outstanding – diluted		124,162		124,862		124,010		124,500

(a) The effect of options to purchase 1,108 and 2,484 shares for the three and nine months ended September 30, 2005, respectively, and the effect of options to purchase 6,013 and 4,683 shares for the three and nine months ended September 30, 2004, respectively, were excluded from the computation of net income per share on a diluted basis as their effect is anti-dilutive.

14

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

Note J — Comprehensive Income

Comprehensive income is defined as the aggregate change in shareholders’ equity excluding changes in ownership interests. The components of comprehensive income are as follows:

	For the Three					For the Nine
	Months Ended					Months Ended
	September 30,					September 30,
	2005		2004			2005			2004
Net income	$	63,523	$	63,397		$	179,163		$	159,781
Foreign currency translation adjustments (a)		6,385		(5,445	)		(176,306	)		(7,746	)
Unrealized gain (loss) on securities (b)		3,875		(3,058	)		6,351			2,131
Unrealized gain (loss) on employee benefit plan assets		98		-			(35	)		-
Unrealized gain (loss) on foreign exchange options		-		79			-			(612	)
Comprehensive income	$	73,881	$	54,973		$	9,173		$	153,554

(a)	The foreign currency translation adjustments have not been tax effected as investments in foreign affiliates are deemed to be permanent.
(b)	The unrealized gain (loss) on securities have not been tax effected as the company has sufficient capital loss carryforwards. The unrealized gain (loss) on securities is net of a reclassification adjustment of $3,019 for realized loss included in net income.

Note K — Employee Benefit Plans

The company maintains supplemental executive retirement plans and a defined benefit plan. The components of the net periodic benefit costs for these plans are as follows:

	For the Three						For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Components of net periodic benefit costs:
Service cost	$	475		$	437		$	1,425		$	1,311
Interest cost		2,068			1,966			6,204			5,898
Expected return on plan assets		(1,600	)		(1,548	)		(4,800	)		(4,644	)
Amortization of unrecognized net loss		740			654			2,220			1,962
Net periodic benefit costs	$	1,683		$	1,509		$	5,049		$	4,527

Note L — Contingencies

Reference is made to Note L to the consolidated financial statements and accompanying notes included in the company’s Form 10-Q for the quarterly periods ended July 1, 2005 and April 1, 2005 (“Note L”), as well as Note 16 to the audited consolidated financial statements and accompanying notes included in the company’s Annual Report on Form 10-K for the year ended December 31, 2004 (“Note 16”) in which the company has previously disclosed certain environmental contingencies and related litigation arising out of the company’s purchase of Wyle Electronics in 2000 and certain litigation and tax contingencies from its purchase of Tekelec in 2000.

15

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

As discussed in Note L and Note 16, Wyle Laboratories, Inc. (a purchaser of assets, including testing facilities, from Wyle Electronics), the company and the California Department of Toxic Substance Control (the “DTSC”) entered into a consent decree pertaining to the remediation of environmental conditions at the Wyle Laboratories, Inc. testing site at Norco, California. The implementation of a May 2004 Removal Action Work Plan has been ongoing at the site and the company currently estimates that the completion of the work will cost approximately $1,200. The implementation of a second Removal Action Work Plan, pertaining to the interim remediation of certain areas immediately adjacent to the site, is also under way, the total completion cost of which is currently estimated at $786.

In March 2005, the DTSC approved a Remedial Investigation Work Plan, covering the characterization of the remainder of the Norco site and potential off-site impacts. The company currently estimates the cost of completing the characterization under that plan at $1,000.

The complete scope of work under the consent decree, which will depend upon the ultimate characterization of the pollutants released at the site, their off-site impact, and the design and implementation of additional remedial actions, has not yet been finalized and the total associated costs have therefore not been determined.

The company and others are defendants in an action filed in January 2005 in the California Superior Court in Riverside County, California (Gloria Austin, et al. v. Wyle Laboratories, Inc. et al.) in which residents and owners of property near the Norco site have sued under a variety of legal theories for unquantified damages allegedly caused by environmental contamination at and around the site. An amended complaint, filed in July 2005, added VEBA Electronics, LLC and E.ON AG as defendants in this matter.

Wyle Laboratories, Inc. has demanded indemnification from the company with respect to the work at the Norco site, at a related site in Huntsville, Alabama, and in connection with the Riverside County litigation, and the company has, in turn, demanded indemnification from E.ON AG, which has assumed responsibility for the liabilities of VEBA Electronics, LLC (from which Arrow bought Wyle Electronics).

As is also discussed more fully in Note L and Note 16, the company continues to believe that any cost that it may incur in connection with potential remediation at the Wyle Laboratories, Inc. sites and any related litigation is covered by the indemnifications assumed by E.ON AG.

As discussed in Note L and Note 16, the company commenced an action against E.ON AG in federal court in Alabama to secure, among other things, payment of its obligations in connection with the Huntsville and Norco sites. In May 2005, the judge in that case dismissed the initial complaint, but did not rule on the then pending amended complaint and certain other matters. The case has since been transferred to the United States District Court for the Central District of California, where a motion to reconsider the dismissal of the first complaint has been made and 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. In October 2005, the company filed a related action against E.ON AG in the Frankfurt am Main Regional Court in Germany.

The company believes strongly in the merits of its actions against E.ON AG, and is pursuing them vigorously.

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.

16

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

Note M — Segment and Geographic Information

The company is engaged in the distribution of electronic components to original equipment manufacturers (“OEMs”) and contract manufacturers and computer products to value-added resellers and OEMs. As a result of the company’s philosophy of maximizing operating efficiencies through the centralization of certain functions, selected fixed assets and related depreciation, as well as borrowings, are not directly attributable to the individual operating segments. Computer products includes the Arrow Enterprise Computing Solutions businesses (formerly North American Computer Products), UK Microtronica, ATD (in Spain), and Arrow Computer Products (in France).

In the fourth quarter of 2004, based upon an evaluation of its business and accounting practices, the company determined that revenue related to the sale of service contracts should more appropriately be classified on an agency basis rather than a gross basis. While this change reduced reported sales and cost of sales, it had no impact on gross profit, operating income, net income, cash flow, or the balance sheet. All prior period sales and cost of sales have been reclassified to present the revenue related to the sale of service contracts on an agency basis. Sales and cost of sales were reduced by $49,558 and $171,004 for the third quarter and first nine months of 2004, respectively, for the company’s computer products segment in the United States.

Sales and operating income, by segment, are as follows:

	For the Three						For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Sales:
Electronic Components	$	2,078,106		$	1,991,625		$	6,249,784		$	6,068,807
Computer Products		632,062			627,518			1,954,802			1,854,584
Consolidated	$	2,710,168		$	2,619,143		$	8,204,586		$	7,923,391
Operating income:
Electronic Components	$	105,981		$	98,418		$	307,278		$	328,740
Computer Products		35,845			30,918			112,202			83,230
Corporate (a)		(23,588	)		(14,289	)		(73,991	)		(71,227	)
Consolidated	$	118,238		$	115,047		$	345,489		$	340,743

(a) Includes an acquisition indemnification credit of $1,672 for the nine months ended September 30, 2005, as well as restructuring charges of $112 and $8,997 for the three and nine months ended September 30, 2005, respectively. Also included is an acquisition indemnification credit of $9,676 for the three and nine months ended September 30, 2004, and restructuring charges of $407 and $7,984 for the three and nine months ended September 30, 2004, respectively.

Total assets, by segment, are as follows:

	September 30,		December 31,
	2005		2004
Electronic Components	$	4,255,983	$	4,312,345
Computer Products		715,438		747,777
Corporate		613,367		448,979
Consolidated	$	5,584,788	$	5,509,101

17

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

Sales, by geographic area, are as follows:

	For the Three				For the Nine
	Months Ended				Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
Americas (b)	$	1,546,331	$	1,510,399	$	4,656,888	$	4,551,927
EMEASA		778,367		807,060		2,532,481		2,513,836
Asia/Pacific		385,470		301,684		1,015,217		857,628
Consolidated	$	2,710,168	$	2,619,143	$	8,204,586	$	7,923,391

(b) Included in sales for the Americas related to the United States is $1,434,425 and $1,419,893 for the three months ended September 30, 2005 and 2004, respectively, and $4,325,791 and $4,281,420 for the nine months ended September 30, 2005 and 2004, respectively.

Total assets, by geographic area, are as follows:

	September 30,		December 31,
	2005		2004
Americas (c)	$	2,890,387	$	2,690,463
EMEASA		2,097,936		2,264,225
Asia/Pacific		596,465		554,413
Consolidated	$	5,584,788	$	5,509,101

(c) Included in total assets for the Americas related to the United States is $2,777,508 and $2,586,834 at September 30, 2005 and December 31, 2004, respectively.

Note N — Subsequent Events

On October 27, 2005, the company announced that it signed an agreement to acquire all of the issued share capital of DNSint.com AG (“DNS”) for an estimated €131,000 ($157,000), including the assumption of approximately €28,000 ($34,000) of net debt. DNS, which is headquartered in Munich, Germany, is a distributor of mid-range computer products in Central and Northern Europe and is one of the largest suppliers of Sun Microsystems products in Europe. Total DNS sales are expected to exceed €310,000 ($375,000) for 2005. This transaction is subject to customary closing conditions, including obtaining necessary government approvals, and is expected to be completed by the end of 2005.

In October 2005, the company entered into an agreement pursuant to which it will acquire the 49% minority interest in its Israeli subsidiary, Arrow/Rapac Ltd. The payment associated with this acquisition is expected to be approximately $7,000.

Also in October 2005, the company entered into a $200,000 cross-currency interest rate swap to hedge a portion of its net investment in euro denominated net assets. Accordingly, gains or losses from changes in the fair value of these instruments will be recorded in the foreign currency translation adjustment, which is included in the shareholders’ equity section, offsetting the changes in the value of the underlying euro denominated assets. This swap will also effectively convert the interest expense on $200,000 of long-term debt from U.S. dollars to euros.

18

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

In the fourth quarter of 2004, based upon an evaluation of its business and accounting practices, the company determined that revenue related to the sale of service contracts should more appropriately be classified on an agency basis rather than a gross basis. While this change reduced reported sales and cost of sales, it had no impact on gross profit, operating income, net income, cash flow, or the balance sheet. All prior period sales and cost of sales have been reclassified to present the revenue related to the sale of service contracts on an agency basis. Sales and cost of sales were reduced by $49.6 million and $171.0 million in the third quarter and first nine months of 2004, respectively.

Sales in the North American Components (“NAC”) businesses remained flat, compared with the second quarter of 2005. Sales in the EMEASA (Europe, Middle East, Africa, and South America) components businesses declined 8.1%, compared with the second quarter of 2005, a seasonal decline consistent with prior years. The increase in Asia/Pacific sales of 18.4%, compared with the second quarter of 2005, was due to the impact of sales initiatives across all of the Asia/Pacific regions as well as improved market conditions in China. Sales of computer products decreased 8.5%, compared with the second quarter of 2005, primarily due to a seasonal decline consistent with prior years.

Net income advanced to $63.5 million in the third quarter of 2005 compared with net income of $58.4 million in the second quarter of 2005 and $63.4 million in the third quarter of 2004. The increase in net income, compared with the second quarter of 2005, is due to the impact of efficiency initiatives reducing operating expenses, lower restructuring charges, and lower interest costs as a result of the prepayment of debt. The following items impact the comparability of the company’s results:

Three Months Ended September 30, 2005 and 2004

• an acquisition indemnification credit of $9.7 million in 2004;

• net restructuring charges of $.1 million (a gain of $.4 million net of related taxes) in 2005 and $.4 million ($.2 million net of related taxes) in 2004;

• a loss on the prepayment of debt of $1.1 million ($.7 million net of related taxes) in 2005 and $.9 million ($.5 million net of related taxes) in 2004; and

• a loss of $1.3 million on the write-down of an investment in 2004.

Nine Months Ended September 30, 2005 and 2004

• an acquisition indemnification credit of $1.7 million ($1.3 million net of related taxes) in 2005 and $9.7 million in 2004;

• restructuring charges of $9.0 million ($5.0 million net of related taxes) in 2005 and $8.0 million ($4.8 million net of related taxes) in 2004;

• a loss on the prepayment of debt of $3.2 million ($1.9 million net of related taxes) in 2005 and $31.7 million ($19.0 million net of related taxes) in 2004; and

• a loss of $3.0 million and $1.3 million on the write-down of investments in 2005 and 2004, respectively.

Sales

The company has two business segments: electronic components and computer products. Consolidated sales for the third quarter and first nine months of 2005 increased $91.0 million or 3.5% and $281.2 million or 3.5%, respectively, compared with the year-earlier periods. The increase in consolidated sales, over the third quarter of 2004, was driven primarily by an increase of $17.3 million, or 3.2%, in the Arrow Enterprise Computing Solutions businesses (formerly North American Computer Products) and an increase of $86.5 million, or 4.3%, in the worldwide components business. The increase in consolidated sales, over the first nine months of 2004, was driven primarily by an increase of $145.6 million, or 9.2%, in the Arrow Enterprise Computing Solutions businesses and an increase of $181.0 million, or 3.0%, in the worldwide components business.

19

The sales increase in the Arrow Enterprise Computing Solutions businesses during the third quarter and first nine months of 2005, compared with the year-earlier periods, is primarily due to a company initiative to grow certain strategic products, such as software, services, and storage, in its Enterprise Computing Solutions business and, to a lesser extent for the first nine months of 2005, a change by Hewlett-Packard Company (“HP”), during February 2004, in the business model used for the sale of their products.

The growth in the worldwide components business was primarily driven by the sales increase in Asia/Pacific of 27.8% and 18.4% during the third quarter and first nine months of 2005, respectively, the completion, during the third quarter of 2004, of the acquisition of Disway AG (“Disway”), and the impact of a weaker U.S. dollar on the translation of the company’s European financial statements for the first nine months of 2005. The increase in Asia/Pacific sales, compared with the year-earlier periods, was due to the region’s strong market growth coupled with the company’s initiative to expand its product offering and customer base. Sales in the EMEASA components businesses decreased by 2.2% in the third quarter of 2005, compared with the year-earlier period. Sales in the EMEASA components businesses increased by 2.9% in the first nine months of 2005, compared with the year-earlier period, primarily due to the impact of a weaker U.S. dollar on the translation of its financial statements and the acquisition of Disway. Sales in the NAC businesses increased by 1.4% and decreased by 1.6% in the third quarter and first nine months of 2005, respectively, when compared with the year-earlier periods, as product remains readily available.

The translation of the company’s international financial statements into U.S. dollars resulted in increased sales of $65.7 million for the first nine months of 2005, compared with the year-earlier period, due to a weaker U.S. dollar. The increase in consolidated sales, giving effect to the impact of the U.S. dollar, was 2.7% in the first nine months of 2005.

Sales of computer products increased by $4.5 million or less than 1% for the third quarter of 2005 and $100.2 million or 5.4% for the first nine months of 2005, compared with the year-earlier periods. The change in the business model with HP increased sales by an estimated $21.2 million for the first nine months of 2005. During February 2004, HP modified its agreement with distributors transforming the relationship from that of an agent to that of a distributor and thereby changing the method of recognizing revenue. Excluding the change related to HP, computer product sales would have increased by 4.3% for the first nine months of 2005. Sales in the Enterprise Computing Solutions business increased by 13.9% and 20.3% for the third quarter and first nine months of 2005, respectively, compared with the year-earlier periods, due to increased sales of services and storage. Sales of industrial related computer products to original equipment manufacturers decreased by 11.7% for the third quarter of 2005 and 11.4% for the first nine months of 2005, compared with the year-earlier periods, primarily due to the company’s decision in early 2005 to terminate certain low-margin customer engagements.

Gross Profit

The company recorded gross profit of $419.3 million in the third quarter of 2005 and $1.29 billion in the first nine months of 2005, compared with $420.2 million and $1.29 billion in the year-earlier periods. The gross profit margin for the third quarter and first nine months of 2005 decreased by approximately 50 basis points when compared with the year-earlier periods. The decrease in gross profit margin is primarily the result of pricing pressures in the marketplace relating to the worldwide components businesses and a larger portion of sales mix from Asia/Pacific and the Arrow Enterprise Computing Solutions businesses that have lower margins.

Restructuring, Integration, and Other Charges (Credits)

The company recorded net restructuring charges of $.1 million (a gain of $.4 million net of related taxes or $.01 per share) and $.4 million ($.2 million net of related taxes) in the third quarter of 2005 and 2004, respectively, and restructuring charges of $9.0 million ($5.0 million net of related taxes or $.03 per share) and $8.0 million ($4.8 million net of related taxes or $.05 and $.04 per share on a basic and diluted basis, respectively) for the nine months ended September 30, 2005 and 2004, respectively.

20

Restructurings

In the first quarter of 2005, the company announced that it would be taking additional actions to better optimize the use of its mainframe, reduce real estate costs, be more efficient in its distribution centers, and to be more productive. These actions are expected to further reduce costs by approximately $50.0 million per annum with $40.0 million to be realized in 2005. The restructuring charges associated with these 2005 actions which amounted to $.1 million, net of a $1.5 million gain on the sale of a facility, for the third quarter of 2005 and $8.7 million for the first nine months of 2005 consisted primarily of personnel costs relating to the elimination of approximately 310 positions, or 3% of the prior year-end worldwide total of 11,500 positions, across multiple locations, segments, and functions. The majority of the total charge was spent in cash.

The company, during 2004 and 2003, announced a series of steps to make its organizational structure more efficient resulting in annualized savings in excess of $100.0 million. The restructuring charges associated with these 2004 and 2003 actions total $48.5 million, of which $10 thousand and $.7 million were recorded in the third quarter and first nine months of 2005, respectively, and $.6 million and $8.7 million were recorded in the third quarter and first nine months of 2004, respectively. Approximately 85% of the total charge was spent in cash.

As of September 30, 2005, $6.7 million of the aforementioned charges were accrued but unused of which $3.5 million are for personnel costs, approximately $2.4 million are to address remaining facilities commitments, and $.8 million are for other remaining contractual obligations.

Also in the third quarter and first nine months of 2005, the company recorded a restructuring credit against the accrual related to the 2001 restructuring of $41 thousand and $.4 million, respectively. In the third quarter and first nine months of 2004, the company recorded a restructuring credit of $.2 million and $.8 million, respectively, against the accrual. As of September 30, 2005, $8.4 million was accrued but unused of which $4.7 million is to address remaining real estate lease commitments and $3.7 million primarily relate to the termination of certain customer programs.

Integration

As of September 30, 2005, the integration accrual was $6.7 million relating to the acquisition of Disway in 2004 and the Industrial Electronics Division (“IED”) of Agilysys, Inc. in 2003, as well as numerous acquisitions made prior to 2001, for remaining contractual obligations.

Restructuring and Integration Summary

The remaining balances of the restructuring and integration accruals aggregate $21.8 million as of September 30, 2005, of which $17.4 million is expected to be spent in cash, and will be utilized as follows:

- The personnel cost accruals of $4.0 million will be utilized to cover costs associated with the termination of personnel, which are primarily expected to be spent by the end of 2005.

- The facilities accruals totaling $12.3 million relate to terminated leases with expiration dates through 2010 of which approximately $1.6 million will be paid in 2005. The minimum lease payments for these leases are $4.6 million in 2006, $2.1 million in 2007, $2.3 million in 2008, and $1.7 million thereafter.

- The customer termination accrual of $3.7 million relates to costs associated with the termination of certain customer programs primarily associated with services not traditionally provided by the company and is expected to be utilized over several years.

- Other of approximately $1.8 million primarily represents certain terminated contracts, the majority of which are expected to be utilized by the end of 2006.

Acquisition Indemnification

During the first quarter of 2005, Tekelec Europe SA (“Tekelec”), a French subsidiary of the company, entered a settlement agreement with Tekelec Airtronic SA (“Airtronic”) pursuant to which Airtronic paid

21

€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 relating to alleged fraudulent activities concerning value-added tax by Tekelec. The alleged 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 the third quarter and first nine months of 2004, to reduce the liability previously recorded (€11.3 million) to the required level (€3.4 million). In December 2004, Tekelec paid €3.4 million ($4.6 million at the exchange rate prevailing at year-end) in full settlement of this claim.

Operating Income

The company recorded operating income of $118.2 million in the third quarter of 2005 and $345.5 million in the first nine months of 2005, as compared with operating income of $115.0 million and $340.7 million in the year-earlier periods.

Selling, general and administrative expenses decreased $11.6 million in the third quarter of 2005 and $10.4 million in the first nine months of 2005, compared with the year-earlier periods. The decrease in the third quarter and first nine months of 2005 is primarily due to a reduction in employee related expenses and the cost savings resulting from the company’s initiatives to be more efficiently organized, offset by the impact of foreign exchange rates and the impact of the acquisition of Disway in the third quarter of 2004.

Loss on Prepayment of Debt

The company recorded a loss on prepayment of debt of $1.1 million ($.7 million net of related taxes or $.01 per share) and $.9 million ($.5 million net of related taxes or $.01 per share) for the third quarter of 2005 and 2004, respectively, and $3.2 million ($1.9 million net of related taxes or $.02 and $.01 per share on a basic and diluted basis, respectively) and $31.7 million ($19.0 million net of related taxes or $.17 and $.15 per share on a basic and diluted basis, respectively) for the nine months ended September 30, 2005 and 2004, respectively.

During the third quarter of 2005, the company repurchased, through a series of transactions, $57.8 million accreted value of its zero coupon convertible debentures due in 2021, which could have been initially put to the company in February 2006 (“convertible debentures”). The related loss on the repurchases, including the premium paid and the write-off of related deferred financing costs, aggregated $1.1 million ($.7 million net of related taxes or $.01 per share), of which $.1 million was cash, and is recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense will be reduced by approximately $.2 million from the dates of repurchase through the 2006 put date, based on interest rates in effect at the time of the repurchases.

During the first nine months of 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), of which $.6 million was cash, and is recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense will be reduced by approximately $1.1 million from the dates of repurchase through the earliest maturity date, based on interest rates in effect at the time of the repurchases.

During the third quarter of 2004, the company repurchased, $19.8 million accreted value of its convertible debentures. The related loss on the repurchase, including the premium paid and the write-off of related deferred financing costs, aggregated $.9 million ($.5 million net of related taxes or $.01 per share), of which $.5 million was cash, and was recognized as a loss on prepayment of debt. As a result of this

22

transaction, interest expense will be reduced by approximately $.9 million from the date of repurchase through the 2006 put date, based on interest rates in effect at the time of the repurchase.

During the first nine months of 2004, the company repurchased, through a series of transactions, $253.4 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 $12.8 million ($7.6 million net of related taxes or $.07 and $.06 per share on a basic and diluted basis, respectively), of which $8.8 million was cash. Also during the first nine months of 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), of which $18.4 million was cash. The aggregate of these charges is recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense will be reduced by approximately $34.3 million from the dates of repurchase and/or redemption through the earliest maturity date, based on interest rates in effect at the time of the repurchases.

Write-down of Investments

The company recorded a loss of $3.0 million ($.03 per share) and $1.3 million ($.01 per share) on the write-down of investments, during the first nine months of 2005 and the third quarter and first nine months of 2004, respectively.

Interest Expense

Net interest expense decreased $2.1 million or 8.5% in the third quarter of 2005 and $8.8 million or 11.1% in the first nine months of 2005, compared with the year-earlier periods, primarily as a result of lower debt balances. During the first nine months of 2005, the company prepaid $151.8 million of debt. During 2004, the company prepaid approximately $570.0 million of debt.

Income Taxes

The company recorded an income tax provision of $32.4 million and $91.8 million on income before income taxes and minority interest of $96.2 million and $271.5 million for the third quarter and first nine months of 2005, respectively. In the comparable year-earlier periods, the company recorded an income tax provision of $26.4 million and $70.5 million on income before income taxes and minority interest of $90.0 million and $231.1 million, respectively.

The income taxes recorded for the third quarter and first nine months of 2005 and 2004 are impacted by the aforementioned restructuring charges and loss on prepayment of debt. The income taxes recorded for the first nine months of 2005 were also impacted by the aforementioned acquisition indemnification credit. There was no tax benefit provided on the aforementioned write-down of investments as these capital losses were not deductible for tax purposes. Also, the acquisition indemnification credit recorded in the third quarter of 2004 was not taxable 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’s tax rate in 2005 reflects the accelerating growth in earnings in the United States, which has one of the highest tax rates in the regions the company serves when United States federal and state income taxes are combined.

Net Income

The company recorded net income of $63.5 million in the third quarter of 2005 and $179.2 million in the first nine months of 2005, compared with $63.4 million and $159.8 million in the comparable year-earlier periods. Included in the results for the third quarter and first nine months of 2005 are the previously discussed restructuring gain of $.4 million and restructuring charges of $5.0 million, respectively, and loss on prepayment of debt of $.7 million and $1.9 million, respectively. Also included for the first nine months

23

of 2005 are the previously discussed acquisition indemnification credit of $1.3 million and loss of $3.0 million on the write-down of an investment. Included in the results for the third quarter and first nine months of 2004 are the previously discussed acquisition indemnification credit of $9.7 million, restructuring charges of $.2 million and $4.8 million, respectively, loss on prepayment of debt of $.5 million and $19.0 million, respectively, as well as a loss on investment of $1.3 million.

Liquidity and Capital Resources

At September 30, 2005 and December 31, 2004 the company had cash, cash equivalents, and short-term investments of $653.7 million and $463.9 million, respectively. The net amount of cash generated by the company’s operating activities during the nine months ended September 30, 2005 was $296.1 million primarily from earnings from operations, adjusted for non-cash items, and a reduction in net working capital as a percentage of sales. The increase in accounts receivable in the third quarter of 2005, resulting from increased sales, was offset by a decrease in inventories and an increase in accounts payable. The net amount of cash provided by investing activities during the nine months ended September 30, 2005 was $137.4 million, including $158.6 million for net proceeds from the sale of short-term investments, $18.4 million for proceeds from the sale of facilities and $3.7 million of other activities, offset, in part, by $24.6 million for consideration paid for acquired businesses and $19.8 million for various capital expenditures. The net amount of cash used for financing activities during the nine months ended September 30, 2005 was $76.1 million, including $152.4 million used to repurchase convertible debentures, offset, in part, by $69.4 million for proceeds from the exercise of stock options and a change in short-term borrowings of $9.0 million. The effect of exchange rate changes on cash was a decrease of $9.0 million.

The net amount of cash used for the company’s operating activities during the nine months ended September 30, 2004 was $107.9 million, primarily a result of higher working capital requirements resulting from increased sales offset by earnings from operations, adjusted for non-cash items, primarily reflecting depreciation and amortization, as well as the accretion of discounts. The net amount of cash used for investing activities during the nine months ended September 30, 2004 was $34.6 million, including $34.7 million for consideration paid for acquired businesses and $16.7 million for various capital expenditures, offset, in part, by $8.6 million of proceeds from the sale of a facility and proceeds of $8.3 million from a note receivable. The net amount of cash used for financing activities during the nine months ended September 30, 2004 was $235.6 million, primarily reflecting $268.4 million used to repay senior notes and $262.2 million used to repurchase convertible debentures, offset, in part, by the net proceeds of $312.8 million from the sale of common stock in February 2004.

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 61.8% and 63.0% at September 30, 2005 and December 31, 2004, respectively.

Net cash provided by operating activities increased by $404.0 million for the nine months ended September 30, 2005, as compared with the year-earlier period, primarily reflecting the company’s initiatives to manage working capital more efficiently. Working capital as a percentage of sales was 19.0% in the third quarter of 2005 compared with 22.2% in the third quarter of 2004.

Net cash used for operating activities increased by $247.9 million for the nine months ended September 30, 2004, as compared with the year-earlier period, primarily due to higher working capital requirements resulting from increased sales offset by earnings from operations, adjusted for non-cash items.

Cash Flows from Investing Activities

On July 1, 2005, the company acquired the component distribution business of Connektron Pty. Ltd (“Connektron”), a leading passive, electromechanical, and connectors distributor in Australia and New Zealand. The acquisition of the component distribution business of Connektron has been accounted for as a purchase transaction, and accordingly, its results of operations have been included in the consolidated results of the company from the date of acquisition.

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During the second quarter of 2005, the company closed on the sale of its Cable Assembly business, a business unit within the company’s NAC group that supplies custom cable assembly and associated contract manufacturing services. The $1.3 million loss resulting from this sale was reflected as a component of restructuring charges during the second quarter of 2005.

In July 2004, the company acquired Disway, an electronic components distributor in Italy, Germany, Austria, and Switzerland. The Disway acquisition has been accounted for as a purchase transaction, and accordingly, Disway’s results of operations have been included in the consolidated results of the company from the date of acquisition.

The impact of the above acquisitions and disposition, individually and in the aggregate, are not deemed to be material to the company’s consolidated financial position and consolidated results of operations.

As a result of certain acquisitions, the company may be contractually required to purchase the shareholder interest held by others in its majority (but less than 100%) owned subsidiaries. The payments for such purchases, which are dependent upon the exercise of a put or call option by either party, are based upon a multiple of earnings over a contractually determined period and, in certain instances, capital structure. There are no expiration dates for these agreements. The terms of these agreements generally provide no limitation to the maximum potential future payments; however, in most instances the amount to be paid will not be less than the pro-rata net book value (total assets minus total liabilities) of the subsidiary. During the first nine months of 2005, the company made a payment in the amount of $2.0 million to increase its ownership interest in Dicopel US and Dicopel SA (collectively, “Dicopel”) to 100%. During the first nine months of 2004, the company made a payment in the amount of $.8 million to increase its ownership interest in Dicopel from 70% to 80%. If the put or call options on outstanding agreements were exercised, such payments would be approximately $7.0 million at September 30, 2005 and $11.0 million at December 31, 2004. As these payments are based on the future earnings of the acquired companies, the amounts will change as the performance of these subsidiaries changes.

The company received proceeds of $18.4 million and $8.6 million during the first nine months of 2005 and 2004, respectively, on the sale of facilities. The company also received proceeds of $8.3 million from a note receivable during the first nine months of 2004.

The net amount of cash used for investing activities during the nine months ended September 30, 2004 included $12.2 million for consideration paid for the final payment related to the acquisition of IED.

Capital expenditures were $19.8 million in the first nine months of 2005 compared with $16.7 million in the first nine months of 2004.

In October 2005, the company entered into an agreement pursuant to which it will acquire the 49% minority interest in its Israeli subsidiary, Arrow/Rapac Ltd. The payment associated with this acquisition is expected to be approximately $7.0 million.

On October 27, 2005, the company announced that it signed an agreement to acquire all of the issued share capital of DNSint.com AG (“DNS”) for an estimated €131.0 million ($157.0 million), including the assumption of approximately €28.0 million ($34.0 million) of net debt. DNS, which is headquartered in Munich, Germany, is a distributor of mid-range computer products in Central and Northern Europe and is one of the largest suppliers of Sun Microsystems products in Europe. Total DNS sales are expected to exceed €310.0 million ($375.0 million) for 2005. This transaction is subject to customary closing conditions, including obtaining necessary government approvals, and is expected to be completed by the end of 2005.

Cash Flows from Financing Activities

Cash flow used for financing activities was $76.1 million in the first nine months of 2005. Cash flow used for financing activities was $235.6 million in the first nine months of 2004.

During the first nine months of 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

25

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), of which $.6 million was cash. As a result of these transactions, net interest expense will be reduced by approximately $1.1 million from the dates of repurchase through the earliest maturity date, based on interest rates in effect at the time of the repurchases. Also in the first nine months of 2005, the company received proceeds from the exercise of stock options of $69.4 million and the change in short-term borrowings was $9.0 million.

During the first nine months of 2004, the company repurchased, through a series of transactions, $253.4 million accreted value of its convertible debentures. The company made this repurchase primarily with a portion of the proceeds from the sale of common stock in February 2004. The related loss on the repurchases, including the premium paid and the write-off of related deferred financing costs, aggregated $12.8 million ($7.6 million net of related taxes or $.07 and $.06 per share on a basic and diluted basis, respectively), of which $8.8 million was cash. Also during the first nine months of 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), of which $18.4 million was cash. As a result of these transactions, net interest expense will be reduced by approximately $34.3 million from the dates of repurchase and/or redemption through the earliest maturity date, based on interest rates in effect at the time of the repurchases. Also in the first nine months of 2004, the company received proceeds from the exercise of stock options of $13.9 million and the change in short-term borrowings was $29.8 million.

The company has a $550.0 million asset securitization program (the “program”). At September 30, 2005 and December 31, 2004, there were no receivables sold to and held by third parties under the program, and as such, the company had no obligations outstanding under the program. The company has not utilized the program since June 2001. The program’s facility fee is .2%.

In June 2005, the company amended and restated its revolving credit agreement and, accordingly, increased the facility size from $450.0 million to $600.0 million. The company had no outstanding borrowings under the revolving credit facility at September 30, 2005 and December 31, 2004. The $600.0 million revolving credit facility matures in June 2010, for which the company pays a facility fee of .175% per annum.

The net amount of cash used for financing activities during the nine months ended September 30, 2004 included net proceeds of $312.8 million from the sale of common stock.

In October 2005, the company entered into a $200.0 million cross-currency interest rate swap to hedge a portion of its net investment in euro denominated net assets. Accordingly, gains or losses from changes in the fair value of these instruments will be recorded in the foreign currency translation adjustment, which is included in the shareholders’ equity section, offsetting the changes in the value of the underlying euro denominated assets. This swap will also effectively convert the interest expense on $200.0 million of long-term debt from U.S. dollars to euros.

Restructuring and Integration Activities

Based on the aforementioned restructuring and integration activities, at September 30, 2005, the company has a remaining accrual of $21.8 million, of which $17.4 million is expected to be spent in cash. The expected cash payments are approximately $6.0 million in 2005, $5.3 million in 2006, $2.1 million in 2007, $2.3 million in 2008, and $1.7 million thereafter.

Impact of Governmental Regulation

The company’s worldwide operations are subject to local laws and regulations. As previously reported, of particular note at this time are two European Union (“EU”) directives, the first of which is the Restriction of Certain Hazardous Substances Directive (“RoHS”). Effective July 1, 2006, this directive restricts the distribution of products within the EU containing certain substances, including lead. While the enabling legislation of some EU member countries has not yet been adopted, it is clear that the company will not be

26

able to sell non-RoHS compliant product to most customers who intend to sell their finished goods in the EU after the effective date. At the present time, some of the company’s inventory contains substances prohibited by the RoHS directive. Upon effectiveness of the RoHS legislation, some of the company’s inventory may become obsolete and unsaleable and, as a result, have to be written off. The company is working closely with its customers and suppliers to minimize this impact. The company is currently evaluating the financial impact, if any, of such obsolete inventory.

The second directive is the Waste Electrical and Electronic Equipment Directive (“WEEE”), which was effective August 13, 2005 in certain EU member countries. A number of member countries, however, have not yet enacted legislation or delayed their legislation’s effective date. Under WEEE, a manufacturer or importer will be required, at its own cost, to take back and recycle all of the products it manufactured in or imported into the EU. To date, there has not been a material impact to the company’s business due to the implementation of WEEE. Since WEEE has only recently been implemented in certain EU member countries and not yet implemented in others, it is unclear what business impact it will have on the company’s operations. Thus, it is not possible at this time to quantify the financial impact, if any, of WEEE on the company.

Both directives will affect the worldwide electronics, and electronic components industries, and collaborative efforts among suppliers, distributors and customers to develop compliant processes are continuing. Pending those developments, the full implementation of existing regulations, and the final enactment of enabling legislation for the remaining EU member countries, it is not possible at this time to estimate the cost of compliance, if any.

Contractual Obligations

The company has contractual obligations for long-term debt, interest on long-term debt, capital leases, operating leases, purchase obligations, and certain other long-term liabilities that were summarized in a table of Contractual Obligations in the company’s Annual Report on Form 10-K for the year ended December 31, 2004. There have been no material changes to the contractual obligations of the company, outside of the ordinary course of the company’s business, since December 31, 2004.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

The company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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 there have been no significant changes, during the quarterly period ended September 30, 2005, to the items disclosed as Critical Accounting Policies and Estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Impact of Recently Issued Accounting Standards

See Note B in the Notes to Consolidated Financial Statements for a full description of the recent accounting pronouncement including the anticipated date of adoption and effect on results of operations and financial condition.

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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, 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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in market risk for changes in foreign currency exchange rates and interest rates from the information provided in Item 7A – Quantitative and Qualitative Disclosures About Market Risk in the company’s Annual Report on Form 10-K for the year ended December 31, 2004, except as follows:

Foreign Currency Exchange Rate Risk

The notional amount of the foreign exchange contracts at September 30, 2005 and December 31, 2004 was $199.1 million and $224.7 million, respectively. The carrying amounts, which are nominal, approximated fair value at September 30, 2005 and December 31, 2004. 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 $65.7 million and increased operating income of $4.5 million for the nine months ended September 30, 2005, compared with the year-earlier period, based on 2004 sales at the average rate for 2005. Sales and operating income would have decreased by approximately $225.7 million and $9.7 million, respectively, if average foreign exchange rates had declined by 10% against the U.S. dollar in the first nine months of 2005. 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

At September 30, 2005, approximately 60% of the company’s debt was subject to fixed rates, and 40% of its debt was subject to floating rates. A one percentage point change in average interest rates would not have a material impact on interest expense, net of interest income, in the first nine months of 2005. 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.

Item 4. Controls and Procedures.

The company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the company’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2005. Based on such evaluation, they have concluded that, as of September 30, 2005, the company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

There were no changes in the company’s internal control over financial reporting or in other factors that has or are reasonably likely to materially affect the company’s internal control over financial reporting during the period covered by this quarterly report.

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PART II. OTHER INFORMATION

Item 6. Exhibits.

Exhibits

2		Agreement for Sale and Purchase of Shares of DNSint.com AG, dated as of October 26, 2005, by and between the company and the Sellers referred to therein.
31	(i)	Certification of William E. Mitchell, Chief Executive Officer, under Section 302 of the Sarbanes-Oxley Act of 2002.
31	(ii)	Certification of Paul J. Reilly, Chief Financial Officer, under Section 302 of the Sarbanes-Oxley Act of 2002.
32	(i)	Certification of William E. Mitchell, Chief Executive Officer, under Section 906 of the Sarbanes-Oxley Act of 2002.
32	(ii)	Certification of Paul J. Reilly, Chief Financial Officer, under Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ARROW ELECTRONICS, INC.
Date: October 28, 2005	By:	/s/ Paul J. Reilly
		Paul J. Reilly      Senior Vice President and Chief Financial Officer

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EX-2

Exhibit 2

S A L E  A N D  P U R C H A S E  A G R E E M E N T

relating to the shares in

DNSint.com AG
Fürstenfeldbruck/Germany

  - 1 -

between

1.	Seller 1, as defined in Exhibit P
2.	Seller 2, as defined in Exhibit P
		- Seller 1 and Seller 2 herein collectively referred
		to as the “Managing Shareholders” -
3.	Seller 3, as defined in Exhibit P
		- herein referred to as “IKB” -
4.	Seller 4, as defined in Exhibit P
5.	Seller 5, as defined in Exhibit P
6.	Seller 6, as defined in Exhibit P
7.	Seller 7, as defined in Exhibit P
8.	Seller 8, as defined in Exhibit P
9.	Seller 9, as defined in Exhibit P
		- Seller 4 to Seller 9 herein collectively referred
		to as the “Other Shareholders” -
		- Seller 1 to Seller 9 herein collectively
		referred to as the “Sellers” -
		- the Managing Shareholders and the Other Shareholders
		herein collectively referred to as the “Other Sellers” -

and

10.	Arrow Europe GmbH
	Im Gefierth 13 a
	63303 Dreieich
		- herein referred to as the “Purchaser” -
11.	Arrow Electronics, Inc.
	50 Marcus Drive

- 2 -

USA – 11747-4210 Melville, NY	- herein referred to as the
“Guarantor” -
	- the parties 1. to 11. herein collectively
	referred to as the “Parties” -

- Seller 2 – or such Other Seller as communicated to the Purchaser by the remaining Other Sellers
(such communication to be received by the Purchaser one week before the relevant time) – herein
also referred to as the “Other Sellers’ Representative” -

- the Other Sellers’ Representative and IKB herein collectively also referred to as the “Sellers’
Representative” -

- 3 -

Table of Contents

Recitals	4
Sec. 1 Definitions	5
Sec. 2 Sale and Assignment	8
Sec. 3 Purchase Price	8
Sec. 4 Closing	10
Sec. 5 Financial Guarantees	13
Sec. 5a Purchaser’s Guarantees, Guarantor	17
Sec. 6 Earn-out	18
Sec. 7 Sellers’ Guarantees	21
Sec. 8 Remedies	23
Sec. 9 Tax Indemnity	25
Sec. 10 Environmental Indemnity	27
Sec. 11 Indemnity for Product Liability	30
Sec. 12 Contest Provisions	31
Sec. 13 Statute of Limitations	31
Sec. 14 Conduct of Business after Signing	32
Sec. 15 Non-Compete	34
Sec. 16 Assignment, Set-off	35
Sec. 17 Notices	35
Sec. 18 Confidentiality, Communication	36
Sec. 19 Miscellaneous	37
Sec. 20 Severability	38
Sec. 21 Governing Law, Jurisdiction	38
Sec. 22 Expenses	38

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Recitals

1. The Sellers are the sole shareholders of

DNSint.com AG
with its seat in Fürstenfeldbruck/Germany
(herein referred to as the “Company”).

The Company is a stock corporation (Aktiengesellschaft) duly established and validly existing under the laws of Germany registered with the commercial register of the local court of München (Munich)/Germany under HRB 128267.

2. The DNS Group is engaged in the business of trading with products and delivering services in the field of network computing (herein referred to as the “DNS Business”).

3. (a) The registered share capital of the Company amounts to EUR 327,103. The Sellers hold a total of 327,103 registered non-par-value shares representing a partial amount of the registered share capital of EUR 1 each (herein collectively referred to as the “Shares”). No share certificates have been issued in respect of the Shares.

(b) The Company has never issued or granted or agreed to issue or grant and there are currently no employee stock options (Bezugsrechte an Arbeitnehmer und Mitglieder der Geschäftsführung der Gesellschaft oder eines verbundenen Unternehmens), warrants (Wandelschuldverschreibungen), options (Optionsschuldverschreibungen), participating bonds (Gewinnschuldverschreibungen), profit participation rights (Genussrechte) – each within the meaning of Secs. 192, 221 of the German Stock Corporation Code (Aktiengesetz, “AktG”) but excluding, for the avoidance of doubt, the silent participation of IKB (formerly: IKB Mezzanine GmbH & Co. KG) in the Company (herein referred to as the “Silent Participation”) – or any similar rights so that the Shares represent the share capital of the Company on a fully diluted basis.

4. In detail, the Shares are held by the Sellers as set forth in Exhibit 0.4.

- 5 -

5. The Company holds

(a)	all shares in Digital Network Services Deutschland GmbH with its seat in Fürstenfeldbruck/Germany, a limited liability company (Gesellschaft mit beschränkter Haftung) duly established and validly existing under the laws of Germany and registered with the commercial register of the local court of München (Munich)/Germany under HRB 102696 (herein referred to as “DNS Germany”), and
(b)	directly or indirectly shares in the companies listed in Exhibit 0.5 (herein collectively referred to as the “Foreign Subsidiaries”) as further specified therein.

DNS Germany and the Foreign Subsidiaries are herein collectively referred to as the “Subsidiaries”. The Company and the Subsidiaries are herein collectively referred to as the “DNS Group” or the “Companies”, as the case may be.

6. The Sellers decided to discontinue their activity in the DNS Business through the disposal of their total interest in the DNS Group, which the Purchaser wishes to acquire. To that end, the Sellers intend to sell and transfer, and the Purchaser intends to purchase and acquire, all of the Shares (herein referred to as the “Transaction”).

Therefore, the Parties agree as follows:

Sec. 1
Definitions

The following definitions shall have the meaning as referred to in the respective Sections.

2004 Financial Statements	Exhibit 7.1 II 2.1
2004/2005 Financial Statements	Exhibit 7.1 II 2.1
2005 Audit Date	Exhibit 7.1 II 2.1
2005 Interim Financial Statements	Exhibit 7.1 II 2.1
Accounting Principles	Sec. 5 para. 6 (ii)
Accounts Receivable	Exhibit 7.1 II 2.6
Additional Escrow Amount	Sec. 6 para. 7
Adjustment Amount	Sec. 6 para. 1 (d)
AktG	Recitals 3 (b)
AO	Exhibit 7.1 II 2.3
Articles of Association	Exhibit 7.1 II 1.5

- 6 -

AStG	Exhibit 7.1 II 2.3
Best Knowledge	Exhibit 7.1
BGB	Sec. 8 para. 2
Binding Rulings	Exhibit 7.1 II 11.3
Business Day	Sec. 19 para. 1
Capital Stock	Exhibit 7.1 II 10.2 (2)
Cash	Exhibit 6.1 (c)
Clean-up Standard	Sec. 10 para. 2 (a)
Closing	Sec. 4 para. 1
Closing Conditions	Sec. 4 para. 1
Closing Date	Sec. 4 para. 1
Closing Events	Sec. 4 para. 4
Companies	Recitals 5
Company	Recitals 1
DNS Business	Recitals 2
DNS Germany	Recitals 5 (a)
DNS Group	Recitals 5
Earn-Out	Sec. 6 para. 1 (a)
Earn-Out Amount	Sec. 3 para. 2
Earn-Out Auditor’s Statement	Sec. 6 para. 3 (c)
Earn-Out EBIT	Sec. 6 para. 1 (a)
Earn-Out Expert	Sec. 6 para. 4
Earn-Out Financial Statements	Sec. 6 para. 3 (a)
Earn-Out Objection Period	Sec. 6 para. 4
Earn-Out Period	Sec. 6 para. 1 (a)
Earn-Out Period Net Debt	Sec. 6 para. 1 (c)
EBIT	Sec. 6 para. 1 (a)
EC Merger Regulation	Sec. 4 para. 1 (a)
Environmental Authority	Sec. 10 para. 2 (b)
Environmental Laws	Sec. 10 para. 2 (c)
Environmental Matters	Sec. 10 para. 2 (d)
Escrow Account	Sec. 3 para. 3 (a)
Escrow Agent	Sec. 3 para. 3 (a)
Escrow Agreement	Sec. 3 para. 3 (b)
Escrow Amount	Sec. 3 para. 3 (a)
Escrow Balance	Sec. 3 para. 3 (b)
Essential Contracts	Exhibit 7.1 II 9.1
Financial Debt	Exhibit 6.1 (c)
Financial Guarantees Calculation	Sec. 5 para. 5
Financial Guarantees Calculation Expert	Sec. 5 para. 10
Financial Guarantees Calculation Rules	Sec. 5 para. 6 (ii)
Foreign Subsidiaries	Recitals 5 (b)
German GAAP	Sec. 5 para. 6 (ii)

- 7 -

Guarantees	Sec. 7 para. 1
Guarantor	Rubrum
Hazardous Materials	Sec. 10 para. 2 (e)
HGB	Exhibit 6.1 (c)
IKB	Rubrum
Increased Net Purchase Price	Sec. 7 para. 4 (b) (bb)
Indirect Damages	Sec. 8 para. 3
Industrial Property Rights	Exhibit 7.1 II 3.1
Inventory	Exhibit 7.1 II 2.5
Managing Shareholders	Rubrum
Managing Shareholders’ Account	Sec. 6 para. 6
Material Adverse Effect	Sec. 4 para. 1 (b)
Maximum Adjustment Amount	Sec. 6 para. 1 (d)
Merger Clearance	Sec. 4 para. 1 (a)
Net Assets	Sec. 5 para. 4
Net Purchase Price	Sec. 3 para. 2
Options	Exhibit 7.1 II 1.2
Other Sellers	Rubrum
Other Sellers’ Representative	Rubrum
Other Shareholders	Rubrum
Parties	Rubrum
Permits	Exhibit 7.1 II 4.1
Pre-Closing Environmental Liability	Sec. 10 para. 2 (f)
Pre-Closing Product Liability	Sec. 11 para. 2
Purchase Price	Sec. 3 para. 1
Purchaser	Rubrum
Purchaser’s Financial Guarantees Auditor	Sec. 5 para. 7
Quota	Sec. 5 para. 3
Remedial Action	Sec. 10 para. 2 (g)
Revised Financial Guarantees Calculation	Sec. 5 para. 8
R&W Claims	Sec. 3 para. 3 (b)
Sellers	Rubrum
Sellers’ Account	Sec. 3 para. 3 (c)
Sellers’ Affiliates	Exhibit 7.1 II 2.3
Sellers’ Financial Guarantees Auditor	Sec. 5 para. 7
Sellers’ Representative	Rubrum
Shares	Recitals 3
Signing	Sec. 4 para. 1 (b)
Signing Date	Sec. 10 para. 2 (c)
Silent Participation	Recitals 3
Statements	Sec. 7 para. 1
Subsidiaries	Recitals 5
Tax Authority	Sec. 9 para. 2

- 8 -

Tax Returns	Exhibit 7.1 II 11.1 (1)
Tax Savings	Sec. 9 para. 7
Tax Treatment and Tax Structure	Sec. 18 para. 3
Taxable Event	Sec. 9 para. 7
Taxes	Sec. 9 para. 1
Third Parties	Exhibit 6.1 (c) b) (ii)
Threshold	Sec. 8 para. 4
Total Escrow Amount	Sec. 7 para. 4 (a)
Transaction	Recitals 6
Working Capital	Sec. 5 para. 4

Sec. 2
Sale and Assignment

1.	Each Seller hereby sells all Shares held by him (whether listed in para. 4 of the Recitals or not, but at least in the amount listed) to the Purchaser, who accepts such sales, with economic effect as of the Closing.
2.	The sale of the Shares extends to any and all profits of the Company not yet distributed as of Closing.
3.	Each Seller herewith assigns the Shares to the Purchaser, who herewith accepts such assignments.
4.	The assignments are subject to the conditions precedent (aufschiebende Bedingungen) of (i) Merger Clearance and (ii) the disbursement of the Net Purchase Price to the Sellers’ Account in accordance with Sec. 4 para. 4 (e) and Sec. 3 para. 3.
5.	The Company, represented by its board of directors (Vorstand), has approved the assignment of the Shares to the Purchaser. A copy of such approval, as well as of the protocol of the underlying resolution of the Sellers at the extraordinary shareholders’ meeting of the Company, are attached to this Agreement as Exhibit 2.5.

Sec. 3
Purchase Price

1. The total purchase price to be paid by the Purchaser for the Shares shall be an amount of EUR 104,000,000 (one-hundred and four million euro) (herein referred to as the “Purchase Price”).

- 9 -

2.	The Purchase Price includes an amount of EUR 6,358,853.33 (six million three-hundred and fifty-eight thousand eight-hundred and fifty-three euro and thirty three cent) (herein referred to as the “Earn-Out Amount”) which is subject to the earn-out provided for in Sec. 6 (the amount of the Purchase Price less the Earn-Out Amount herein referred to as the “Net Purchase Price”).
3.	The Net Purchase Price, i.e. an amount of EUR 97,641,146.67 (ninety-seven million six-hundred and forty-one thousand one-hundred and forty-six euro and sixty-seven cent), shall be paid at Closing by the Purchaser as follows:

(a)	The Purchaser shall pay an amount of EUR 19,528,229.33 (nineteen million five-hundred and twenty-eight thousand two-hundred and twenty-nine euro and thirty-three cent) (herein referred to as the “Escrow Amount”) by wire transfer free of charges to the Escrow Account. The “Escrow Account” shall be an escrow account of a third party acting as joint escrow agent for the Sellers and the Purchaser (herein referred to as the “Escrow Agent”), to be agreed upon by the Purchaser and the Sellers’ Representative prior to the Closing Date.
(b)	(i) The Escrow Amount, (ii) the Additional Escrow Amount, if any, and (iii) the interest accrued on (i) and (ii), each (i) through (iii) as available on the Escrow Account from time to time (herein collectively referred to as the “Escrow Balance”), shall secure any claims of the Purchaser against the Sellers pursuant to Secs. 7 through 11 and 14 para. 6 (herein collectively referred to as the “R&W Claims”). The Sellers and the Purchaser shall irrevocably instruct the Escrow Agent at Closing to disburse the Escrow Balance as laid down in the escrow agreement a draft of which is attached to this Agreement as Exhibit 3.3 (b) (herein referred to as the “Escrow Agreement”). The Escrow Balance shall be released from the Escrow Account on the expiry of the limitation period set out in Sec. 13 para. 1 (e) or such other date as agreed between the Parties or as set out in this Agreement or in the Escrow Agreement.
(c)	The Purchaser shall pay the Net Purchase Price less the Escrow Amount, i.e. an amount of EUR 78,112,917.34 (seventy-eight million one-hundred and twelve thousand nine-hundred and seventeen euro and thirty-four cent), by wire transfer free of charges to the following bank account of Seller 1, Seller 2 and Seller 3 (or to such other account as notified by the Sellers’

- 10 -

Representative to the Purchaser no later than five (5) Business Days prior to the respective payment date) with debt releasing effect vis-à-vis all Sellers:

Account no. 110114501
IBAN DE 95 5022 0200 0110 1145 01
at LGT Bank in Liechtenstein & Co. OHG
in Frankfurt/Main
BIC BLFLDEFF,

(herein referred to as the “Sellers’ Account”).

Sec. 4
Closing

1. The Parties shall effect the consummation of the Transaction (herein referred to as the “Closing”) on the last Business Day in the month in which the Closing Condition set out in para. (a) has been satisfied or on such other date mutually agreed by the Sellers’ Representative and the Purchaser (herein referred to as the “Closing Date”), provided, however, that on such Closing Date all other Closing Conditions have been satisfied or waived. “Closing Conditions” shall be the following conditions precedent (aufschiebende Bedingungen):

(a)

The European Commission has, to the extent legally required, approved the Transaction. For the purpose of this provision, the approval by the European Commission (herein referred to as the “Merger Clearance”) shall be deemed to have occurred on the date (i) when the European Commission has declared the Transaction to be compatible with the common market pursuant to Articles 6 (1) (b), 8 (1) or 8 (2) of the Council Regulation (EC) No. 139/2004 (herein referred to as the “EC Merger Regulation”), or (ii) has not issued a decision within the required deadlines with the consequence that the Transaction is being deemed compatible with the common market pursuant to Article 10 (6) of the EC Merger Regulation.

(b)

No Statement (i) is at the signing of this Agreement (herein referred to as the “Signing”) incomplete, misleading or incorrect, or (ii) would be at the Closing Date – assumed that such Statement

- 11 -

	would be made as of the Closing Date – incomplete, misleading or incorrect or, in each case (i) and (ii) such incomplete, misleading or incorrect Statement has not lead and is not likely to lead to damages to the Purchaser or the Companies of at least EUR 10,000,000 (ten million euro) and has not had and is not likely to have a negative impact on the EBIT of the Companies of at least EUR 1,000,000 (one million euro) (herein referred to as the “Material Adverse Effect”).
(c)	(i) The Sellers have duly performed and complied with all of their covenants and obligations in this Agreement required to be so performed or complied with by them on or prior to the Closing Date, or, if not so, (ii) such failure of the Sellers to duly perform and comply with such covenants and obligations has not lead to, and not is likely to lead to, a Material Adverse Effect.
(d)	The reimbursement under Sec. 5 is not likely, from the view of a prudent businessman (ordentlicher Kaufmann), to exceed the limitation set out in Sec. 5 para. 2a.

2.	The Purchaser may waive any or all of the Closing Conditions except for the Closing Condition set out in para. 1 (a).
3.	Closing shall take place at 10:00 a.m. local time at the offices of Milbank, Tweed, Hadley and McCloy LLP, Munich, or at such other time or place as the Sellers’ Representative and the Purchaser may determine.
4.	At Closing, the Parties shall carry out the following actions (herein referred to as the “Closing Events”) and – regardless of the order of the Closing Events set out below – each Closing Event shall only be deemed to have been carried out once all Closing Events have been carried out:

(a) The Sellers shall deliver to the Purchaser resignation letters or offers to resign, as the case may be, in accordance with Exhibits 4.4 (a) (1) and (2) and effective as of the Closing, of the following members of

aa)	the supervisory board (Aufsichtsrat) of the Company:
	— Mr. Jürgen Venhofen and (resignation letter)
	— Dr. Andreas Oldenbourg (resignation letter).
	Mr. Helmut Schmitt is prepared to serve for at least another two years as member of the Supervisory Board;

- 12 -

bb)	the supervisory board of DNS Network Technologies A/S, Denmark:
	— Mr. Ole Norgaard (offer to resign)
cc)	the supervisory board of DNS Finland Oy:
	— Mr. Marten Aspelin (offer to resign)
dd)	the supervisory board of Digital Network Services Norway AS:
	— Mr. Vister Yohan Henrik (offer to resign)
ee)	the supervisory board of Digital Network Services Sweden AB:
	— Ms. Viktoria Svedeback (offer to resign).

(b)	The Managing Shareholders shall execute new employment and bonus agreements as members of the managing board of the Company in accordance with Exhibit 4.4 (b) (1) and (2).
(c)	The Sellers shall terminate, with effect as of Closing and without such terminations resulting in any liability, cost or other obligation of any of the Companies (except for the repayment of the nominal amount of the Silent Participation and the interest accrued thereon until Closing Date), all agreements between any Company of the DNS Group and IKB, IKB Mezzanine GmbH & Co. KG or any of their affiliates (verbundene Unternehmen), including but not limited to the silent participation agreement with IKB (formerly: IKB Mezzanine GmbH & Co. KG) dated 9 February 2004, which shall be terminated by IKB on Closing as set forth in Exhibit 4.4 (c), and the shareholders’ agreement with IKB dated 9 February 2004.
(d)	The Sellers, the Purchaser and the Escrow Agent shall sign the Escrow Agreement.
(e)	The Purchaser shall pay the Net Purchase Price in accordance with Sec. 3. para 3.

5. The Parties shall execute a closing protocol to confirm that (i) all Closing Conditions have been fulfilled or waived, (ii) all Closing Events have been carried out and (iii) Closing has occurred.

- 13 -

Sec. 5
Financial Guarantees

1.	The Sellers hereby guarantee to the Purchaser, subject to the requirements and limitations provided in this Sec. 5, by way of an independent promise of guarantee (selbständiges Garantieversprechen) in accordance with Sec. 311 para. 1 BGB that as of the Closing Date (i) the Working Capital does not fall short of the amount indicated as “Working Capital Target” in Exhibit 5.1 for the respective date and (ii) the Net Assets do not fall short of EUR 44,004,260 (forty-four million four thousand two-hundred and sixty euro), it being understood that such guarantee shall not constitute a quality guarantee concerning the object of the purchase within the meaning of Sec. 444 BGB (Garantie für die Beschaffenheit der Sache).
2.	The Sellers shall reimburse, at the Purchaser’s discretion, the Purchaser or any of the Companies on a euro per euro basis for the higher amount of (i) any shortfall of the Working Capital and (ii) any shortfall of the Net Assets under para. 1. Any amount payable under the forgoing sentence 1 shall carry interest of seven (7) % p.a. from the Closing Date and shall be paid by wire transfer free of charges to an account of the Purchaser or of any of the Companies (to be notified to the Sellers’ Representative by the Purchaser no later than three (3) Business Days prior to such payment) within ten (10) Business Days after the Financial Guarantees Calculation has become final and binding upon the Parties in accordance with this Sec. 5. This para. 2 shall constitute a conclusive system of regulations pursuant to Sec. 311 para. 1 BGB applying exclusively and exhaustively should the guarantee given in the above para. 1 be incomplete or incorrect.
2a.	The aggregate amount of all claims under this Sec. 5 shall be limited to EUR 40,000,000 (forty million euro).
3.	For claims under para. 2, the Sellers shall be liable as several debtors (Teilschuldner) pro rata their respective shareholding set forth in para. 4 of the Recitals (herein referred to as the “Quota”), provided that among each other, the Other Sellers shall be liable as joint debtors (Gesamtschuldner).
4.	“Working Capital” shall be the aggregate amount of the inventories and the trade receivables within the meaning of Sec. 298 para. 1 in conjunction with Sec. 266 para. 2 lit B I no. 1 through no. 3 and II no. 1 HGB as reflected in the Financial Guarantees Calculation. “Net Assets” shall be the net assets (Eigenkapital) within the meaning of Sec. 298 para. 1 in conjunction with Sec. 266 para. 3 lit A HGB, including the Silent Participation and disregarding the interest accrued thereon until and including Closing Date,

- 14 -

	as reflected in the Financial Guarantees Calculation. For the avoidance of doubt, the termination of the Silent Participation pursuant to Sec. 4 para. 4 (c) and its repayment shall not be accounted for as a reduction of the Net Assets as per Closing Date for the purpose of this Sec. 5.
5.	The Working Capital and the Net Assets shall be determined in accordance with para. 4 and on the basis of the audited, if so required by the Purchaser, consolidated group financial statements (balance sheet, profit and loss accounts and notes (Anhang) thereto) of the Company for the DNS Group as of the Closing Date together with (i) a statement listing the Working Capital and the Net Assets and (ii) a further explanation of the individual line items which are included under the Working Capital and the Net Assets (herein referred to as the “Financial Guarantees Calculation”).
6.	Unless expressly stated otherwise in this Agreement, the Financial Guarantees Calculation shall be

(i)

calculated using amounts as of the Closing Date (or as of 31 December 2005, if Closing occurs on 30 December 2005) and

(ii)

prepared in accordance with the accounting principles set forth in Exhibit 5.6 (herein referred to as the “Accounting Principles”) and, to the extent not conflicting with the Accounting Principles, generally accepted principles of accounting in preparation of annual accounts in Germany, as applicable on the Closing Date (or on 31 December 2005, if Closing occurs on 30 December 2005), and subject to utilizing and continuing the same capitalization, election rights, valuation and consolidation principles and the same interpretation of the accounting forms (Kontenrahmen) and line items (Bilanzstellen) consistently applied by the Company (herein referred to as the “German GAAP”, German GAAP and the Accounting Principles collectively as the “Financial Guarantees Calculation Rules”).

7. The Sellers shall until the Closing Date and the Purchaser after the Closing Date see to it (stehen dafür ein) that the Financial Guarantees Calculation shall be prepared by the Company for the DNS Group and, if the Purchaser so requires, no later than five (5) business days following receipt of the Financial Guarantees Calculation, upon instruction by the Sellers be audited (mit Prüfungsvermerk versehen) by Ernst & Young AG Wirtschaftsprüfungsgesellschaft (herein referred to as the “Sellers’ Financial Guarantees Auditor”). The Sellers shall until the Closing Date and the Purchaser shall after the Closing Date, use their best efforts that the management of each of the Companies effectively assists the Sellers’ Financial Guarantees Auditor

- 15 -

	in the review and the audit of the Financial Guarantees Calculation, in particular by providing all information and documentation that (i) is relevant for reviewing the Financial Guarantees Calculation and (ii) has been reasonably requested by the Sellers’ Financial Guarantees Auditor. The Financial Guarantees Calculation shall be delivered by the Sellers’ Financial Guarantees Auditor to the Purchaser and KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft, Frankfurt am Main, (herein referred to as the “Purchaser’s Financial Guarantees Auditor”) no later than thirty (30) days (or sixty (60) days, if Closing occurs on 30 December 2005) after the Closing Date. The Purchaser’s Financial Guarantees Auditor shall have the right, but not be obliged, to participate in the preparation of the Financial Guarantees Calculation by the Company and to observe such preparation as well as the auditing of the Financial Guarantees Calculation by the Sellers’ Financial Guarantees Auditor.
8.	The Managing Shareholders shall provide all necessary assistance to the Purchaser’s Financial Guarantees Auditor and the Sellers shall provide access to all relevant documentation necessary for the purpose of reviewing the Financial Guarantees Calculation, including the working papers of the Sellers’ Financial Guarantees Auditor subject to the Purchaser executing a release letter on reasonable terms which is to be submitted to the Sellers’ Financial Guarantees Auditor for the release of the working papers. The calculation of the Working Capital and the Net Assets existing as on the Closing Date (or as of 31 December 2005, if Closing occurs on 30 December 2005) shall be based on the Financial Guarantees Calculation, unless the Purchaser provides the Sellers’ Representative within thirty (30) days after the receipt of the Financial Guarantees Calculation or, if the Purchaser so requires, of the audit report issued by the Sellers’ Financial Guarantees Auditor, with a written report asserting that the Financial Guarantees Calculation received from the Sellers’ Financial Guarantees Auditor does not meet the provisions of this Agreement together with a statement specifying (i) his objections and (ii) listing the individual items Working Capital and Net Assets (herein referred to as the “Revised Financial Guarantees Calculation”). If the Revised Financial Guarantees Calculation is not provided in accordance with the foregoing sentence, then the Financial Guarantees Calculation shall be final and binding, subject to Sec. 319 BGB, on the Parties.
9.	The Sellers’ Financial Guarantees Auditor shall receive all necessary assistance and shall be given access to the management of the Companies and to all documentation relevant for reviewing the Revised Financial Guarantees Calculation, including the working papers of the Purchaser’s Financial Guarantees Auditor subject to the Sellers’ Representative

- 16 -

	executing a release letter at reasonable terms which is to be submitted to the Purchaser’s Financial Guarantees Auditor for the release of the working paper. If no written objections are raised by the Sellers’ Representative within ten (10) days following the receipt of the Revised Financial Guarantees Calculation, then the Revised Financial Guarantees Calculation shall be final and binding, subject to Sec. 319 BGB, on the Parties.
10.	If, after the Sellers’ Representative having raised in time and due form his objections against the Revised Financial Guarantees Calculation, the Sellers’ Representative and the Purchaser cannot agree on the changes to the Revised Financial Guarantees Calculation within ten (10) days following the receipt of the Objections, each of the Sellers’ Representative and the Purchaser shall be entitled to request PricewaterhouseCoopers AG, Munich branch, to act as an expert (Schiedsgutachter) (herein referred to as the “Financial Guarantees Calculation Expert”) to determine the correct amount of the Working Capital and the Net Assets existing on the Closing Date (or on 31 December 2005, if Closing occurs on 30 December 2005), if and to the extent such positions are in dispute between the Sellers’ Representative and the Purchaser.
11.	The Financial Guarantees Calculation Expert shall decide on the issues in dispute in accordance with the principles set out in Sec. 5.6 and in making its calculation of the correct amount of the matters in dispute, the Financial Guarantees Calculation Expert shall be bound by those items or amounts in the Revised Financial Guarantees Calculation in respect of which no Objections were raised or on which the Sellers’ Representative and the Purchaser have agreed in writing after a notice of Objections; accordingly, the Financial Guarantees Calculation Expert shall only review those items or amounts in the Revised Financial Guarantees Calculation as to which the Sellers’ Representative and the Purchaser disagree. The final decision of the Financial Guarantees Calculation Expert must not fall beyond or outside of the position taken by the Sellers’ Representative and the Purchaser. The Financial Guarantees Calculation Expert shall give the Sellers’ Representative and the Purchaser adequate opportunity to present their views in writing and at a hearing or hearings to be held in the presence of the Sellers’ Representative and the Purchaser and their respective advisors. The Financial Guarantees Calculation Expert shall give reasons for its decision and on all issues which are in dispute between the Sellers’ Representative and the Purchaser.
12.	The Sellers and the Purchaser shall bear the Financial Guarantees Calculation Expert’s costs and expenses as the Financial Guarantees Calculation Expert may determine in accordance with Sec. 91 German Civil

- 17 -

	Procedural Code (Zivilprozeßordnung). The Financial Guarantees Calculation as determined by the Financial Guarantees Calculation Expert shall be final and binding on the Parties subject to Sec. 319 BGB.
13.	For the purposes of the Financial Guarantees Calculation, circumstances existing on the Closing Date (or on 31 December 2005, if Closing occurs on 30 December 2005) but discovered only thereafter (wertaufhellende Tatsachen) shall be taken into consideration until the Financial Guarantees Calculation becomes final and binding in accordance with this Sec. 5.

Sec. 5a
Purchaser’s Guarantees, Guarantor

1.	The execution and delivery of this Agreement and the due consummation of the Transaction have been duly and validly authorized by all necessary corporate action on the part of the Purchaser. This Agreement constitutes (and each document and instrument contemplated by this Agreement, when executed and delivered in accordance with the provisions hereof, will constitute) a valid and legally binding agreement of the Purchaser enforceable in accordance with its terms.
2.	Except for the Merger Clearance no authorization of any governmental authority (Behörde) is required in connection with the Transaction by the Purchaser, except for such actions of any governmental authority the failure of which to be obtained or made will not materially impair the ability of the Purchaser to perform its obligations hereunder or prevent the consummation of the Transaction.
3.	The Guarantor hereby irrevocably guarantees to the Sellers the due and punctual performance of any payment obligations of the Purchaser under or in connection with this Agreement. The Guarantor hereby waives any rights which it may have to require the Sellers to proceed first against or claim payment from the Purchaser, so that as between the Sellers and the Guarantor the latter shall be liable as principal debtor as if it had entered into the undertaking to fulfill any payment obligation of the Purchaser under or in connection with this Agreement jointly and severally with the Purchaser. If and to the extent the Purchaser assigns its obligations hereunder pursuant to Sec. 16, this guarantee shall apply mutatis mutandis to the payment obligations of such assignee.

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Sec. 6
Earn-out

1. (a) The Managing Shareholders shall be entitled to an earn-out payment (herein referred to as the “Earn-Out”) in accordance with the consolidated earnings before interest and tax of DNS Group as calculated in accordance with Exhibit 6.1 (a) (herein referred to as the “EBIT”) for the period from 1 January 2006 through 31 December 2007 (herein referred to as the “Earn-Out Period” and the EBIT for the Earn-Out Period as the “Earn-Out EBIT”).

(b) The Earn-Out shall be 6.115 % of the balance amount of (i) the Earn-Out EBIT divided by two and multiplied by six (6) less (ii) the Earn-Out Period Net Debt, that is:

(c)	“Earn-Out Period Net Debt” shall be the balance amount of Financial Debt less Cash, each as defined in Exhibit 6.1 (c) and as set forth in the Earn-Out Financial Statements.
(d)	The amount of the Earn-Out according to this para. 1 (herein referred to as the “Adjustment Amount”) shall not exceed 200 % of the Earn-Out Amount (herein referred to as the “Maximum Adjustment Amount”).
(e)	In the event and to the extent that the Purchaser takes any actions or causes the Companies to take any actions affecting the Earn-Out to the disadvantage of the Managing Shareholders there will be an equitable adjustment to the Earn-Out (e.g. for investments made without a corresponding return during the Earn-Out Period or for any financing taken up by any of the Companies, which is not directly used for the business of the DNS Group).
(f)	In the event that the Purchaser, or any company affiliated with the Purchaser other than any of the Companies, levies a management fee on the Company (including the salary of any additional member of the managing board (Vorstand) of the Company appointed by the Purchaser, if any) or on a Subsidiary without providing services of equivalent value to the Company or to the Subsidiaries, such management fee shall not be taken into account for the determination of the Adjustment Amount.

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(g) Each of the Managing Shareholders shall, except in cases of para. 2, be entitled to 50 % of the Adjustment Amount.

2. (a) For each Managing Shareholder who ceases to be a member of the managing board (Vorstand) of the Company for a Good Reason as specified in Exhibit 6.2 the Adjustment Amount amounts to 50 % of the Maximum Adjustment Amount.

(b)	For each Managing Shareholder who ceases to be a member of the managing board (Vorstand) of the Company for a Bad Reason as specified in Exhibit 6.2 the Adjustment Amount amounts to zero (0).
(c)	For each Managing Shareholder who ceases to be a member of the managing board (Vorstand) of the Company due to his death or permanent disability (Berufsunfahigkeit) within the meaning of Sec. 240 (2) German Social Security Code Part VI (SGB VI) the Adjustment Amount amounts to 25 % of the Maximum Adjustment Amount.

3. (a) The Managing Shareholders shall procure (and the Purchaser shall allow so) that the Company prepares the consolidated balance sheet and the consolidated profit and loss statement for the DNS Group for the Earn-Out Period, (herein referred to as the “Earn-Out Financial Statements”).

(b)

The Earn-Out EBIT and the Earn-Out Period Net Debt shall each be calculated and stated in the Earn-Out Financial Statements. The Earn-Out Financial Statements shall be prepared in accordance with the Financial Guarantees Calculation Rules and calculated using average amounts of the twenty-four (24) monthly amounts of the Earn-Out Period for the Earn-Out Net Debt and amounts as of 31 December 2007 for all other items of the Earn-Out Financial Statements.

(c)

The Managing Shareholders shall ensure (and the Purchaser shall allow so) that, within three months following the end of the Earn-Out Period, the Company shall submit to the Purchaser the reports issued with the unqualified opinion by the Company’s auditor (currently Ernst & Young AG Wirtschaftsprüfungsgesellschaft) addressed to the Purchaser and to the Managing Shareholders and stating that the Earn-Out Financial Statements have been prepared in accordance with this para. 3 and that the Earn-Out EBIT and the Earn-Out Period Net Debt have each been calculated in

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accordance with Exhibits 6.1 (a) and (c) and the Financial Guarantees Calculation Rules (herein referred to as the “Earn-Out Auditor’s Statement”).

4. Within thirty (30) days following the receipt of the Earn-Out Auditor’s Statement (herein referred to as the “Earn-Out Objection Period”), the Managing Shareholders (acting jointly, except if the other Managing Shareholder has ceased to be a member of the managing board (Vorstand) of the Company) or the Purchaser may object to the Earn-Out Auditor’s Statement in writing to the respective other Parties, thereby specifying in detail the reason for the objection. If the Managing Shareholders (acting jointly, except if the other Managing Shareholder has ceased to be a member of the managing board (Vorstand) of the Company) and the Purchaser do not agree within further thirty (30) days on such objection, the Earn-Out EBIT and the Earn-Out Period Net Debt, upon request of either the Managing Shareholders (acting jointly, except if the other Managing Shareholder has ceased to be a member of the managing board (Vorstand) of the Company) or the Purchaser, shall be determined by PricewaterhouseCoopers AG, Munich branch, (herein referred to as the “Earn-Out Expert”) with final and binding effect.

(a)	The Earn-Out Expert shall act as an expert (Schiedsgutachter) and not as an arbitrator (Schiedsrichter).
(b)	The Earn-Out Expert shall be bound by those items upon which the Managing Shareholders and the Purchaser have agreed. In his decision on the points in dispute the Earn-Out Expert shall not go beyond the range of differences of opinion between the Managing Shareholders and the Purchaser concerning each individual item.
(c)	The Earn-Out Expert shall also award the costs of the decision in accordance with the outcome of the decision and the initial positions of the Managing Shareholders and the Purchaser, respectively.
(d)	The Earn-Out Expert shall be required to determine the matters in dispute within six weeks of his appointment.

5. The Earn-Out Expert shall be given full access to the books and records of the Company and the Subsidiaries, and the Managing Shareholders and the Purchaser, as the case may be, shall procure that the Earn-Out Expert is provided with all necessary information as requested by the Earn-Out Expert.

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6. At the 10^th Business Day after the Earn-Out EBIT and the Earn-Out Period Net Debt have become binding upon the Managing Shareholders and the Purchaser by (i) expiry of the Earn-Out Objection Period, (ii) subsequent agreement among the Managing Shareholders and the Purchaser, or (iii) decision of the Earn-Out Expert, the Purchaser shall pay to the Managing Shareholders by wire transfer to the following bank account of the Managing Shareholders the Adjustment Amount, if any:

Account no. 41102-0001
at B. Metzler seel. Sohn&Co. KGaA
BLZ: 502 307 00,

(herein referred to as the “Managing Shareholders’ Account”).

7. In the event that, at the time of payment of the Adjustment Amount pursuant to para. 6, a judicial or arbitrational proceeding (gerichtliches oder schiedsgerichtliches Verfahren) with regard to a R&W Claim is pending between the Purchaser and one or more of the Sellers and to the extent such R&W Claim exceeds, or can be reasonably expected to exceed, the Escrow Balance, the Adjustment Amount payable under para. 6 shall be reduced by the Additional Escrow Amount, and the Additional Escrow Amount shall be paid to the Escrow Account. The “Additional Escrow Amount” shall amount to 20 % of the Adjustment Amount but shall be no more than 20 % of the Earn-Out Amount.

Sec. 7
Sellers’ Guarantees

1. The Sellers hereby guarantee to the Purchaser, subject to the requirements and limitations provided in Sec. 8 or otherwise in this Agreement, by way of an independent promise of guarantee (selbständiges Garantieversprechen) in accordance with Sec. 311 para. 1 BGB (herein referred to as the “Guarantees”) that the statements set forth in Exhibit 7.1 (herein referred to as the “Statements”) are complete, correct and not misleading as of the Signing and, unless expressly stated differently, as of the Closing, it being understood that such statements shall not constitute a quality guarantee concerning the object of the purchase within the meaning of Sec. 444 BGB (Garantie für die Beschaffenheit der Sache).

2. The Sellers shall be liable as joint debtors (Gesamtschuldner) for R&W Claims if and to the extent such claims can be settled from the Escrow

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Account and, in excess of such amounts, as several debtors (Teilschuldner) among each other pro rata their shareholdings as set forth in para. 4 of the Recitals.

3.	(a)	The Escrow Balance serves as collateral for any possible R&W Claims, irrespective of the fact that the Sellers shall be liable as several debtors for certain claims as set out in para. 2.
	(b)	The Purchaser shall be entitled to make a R&W Claim directly against the Sellers only to the extent such claim is based on willful misconduct (vorsätzliches Handeln) or deceit (arglistige Täuschung), or cannot be settled by payment from the Escrow Account. For the avoidance of doubt, the foregoing shall not restrict the Purchaser’s right to claim payment from the Escrow Account for all possible R&W Claims.
	(c)	A R&W Claim which can only be made against a certain Seller individually, shall not be settled by payments from the Escrow Account in excess of the respective Seller’s portion thereof pro rata to his Quota.
4.	(a)	The liability of IKB for all R&W Claims shall, subject to (vorbehaltlich) (b) cc), (c) and (d), exclusively be settled by payments from the Escrow Account and in the aggregate be limited to the aggregate amount of (i) the Escrow Amount and (ii) the Additional Escrow Amount, if any, (such aggregate amount herein referred to as the “Total Escrow Amount”). R&W Claims against IKB which are based on a Statement set forth in Sec. I of Exhibit 7.1 are, in excess of the Total Escrow Amount, in the aggregate limited pro rata to IKB’s Quota.
	(b)	R&W Claims can, to the extent such claims exceed the Total Escrow Amount, only be asserted

aa)	against the Other Sellers if such claims are based on a Statement set forth in Secs. II paras. 1.2 through 1.11, 7 or 8 of Exhibit 7.1 or on Secs. 10 or 11, however, in the aggregate limited to an amount of 200 % of the Total Escrow Amount;
bb)	against the Other Sellers if such claims are based on Sec. 9 or on a Statement set forth in Sec. II para. 1.1 or 11 of Exhibit 7.1, however, in the aggregate limited to 74.9 % of the aggregate amount of (i) the Net Purchase Price and (ii) the Additional Escrow Amount, if any, (such aggregate amount herein referred to as the “Increased Net Purchase Price”); or

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cc) against the Sellers if such claims are based on a Statement set forth in Sec. I of Exhibit 7.1, however, in the aggregate limited to the Increased Net Purchase Price.

(c)	All R&W Claims shall, in respect of the entirety of the Sellers, in the aggregate be limited to the Increased Net Purchase Price.
(d)	For the avoidance of doubt, the limitations of the liability amounts provided for in this para. 4 shall take into account the amounts payable to settle all other R&W Claims, if any.
(e)	No limitation shall apply if and to the extent R&W Claims are based on willful misconduct (vorsätzliches Handeln) or deceit (arglistige Täuschung) attributable to the respective Seller.

Sec. 8
Remedies

1. Should any of the Statements turn out to be inaccurate, the Purchaser shall inform the Sellers’ Representative hereof in reasonable detail without undue delay after knowledge hereof. The Sellers shall, by way of specific performance (Erfüllung), put the Company, the respective Subsidiary or the Purchaser, as the case may be, in the position the Purchaser, the respective Subsidiary or the Company would have been in, had the Statement been accurate. If the Purchaser’s demand for specific performance is not fully met within a reasonable period but in any case within one month upon receipt of the demand, or, as the case may be, if the Sellers refuse specific performance, the Purchaser is entitled to demand damages to be paid, at the Purchaser’s discretion, to the Purchaser or any of the Companies. In the event that the Purchaser fails to comply with its obligations under the first sentence of this para. 1, any respective claims by the Purchaser shall only be excluded if and to the extent the Sellers have been prejudiced from such failure.

2. Secs. 439 para. 3, 275 paras. 2 and 3 BGB (German Civil Code, “BGB”) apply with the proviso that the Sellers shall only be obliged to specific performance if and to the extent such (partial) specific performance does not lead to costs, expenses or any other financial exposure for the Sellers in an aggregate amount exceeding the amount of damages otherwise payable.

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3. Claims against the Sellers under or in connection with this Agreement shall cover indirect or consequential damages (Folgeschäden) and loss of profit (entgangener Gewinn) (herein collectively referred to as “Indirect Damages”). However, claims against the Sellers for Indirect Damages at the level of the Purchaser shall be limited to an amount equal to six (6) times the amount that would be covered if such Indirect Damages had occurred at the level of the DNS Group. However, Indirect Damages at the level of the DNS Group shall not be limited in accordance with the foregoing sentence. For the avoidance of doubt, limitations according to other provisions of this Agreement (in particular according to Secs. 7 para. 4 and 8 para. 4) shall also apply in respect of any claims for Indirect Damages.

4. The Purchaser shall have claims against the Sellers under Secs. 7, 8, 10 and 11 only if and to the extent that the individual claim or a series of connected claims exceeds an amount of EUR 100.000 (one-hundred thousand euro) and, in addition, only if the aggregate of such claims exceeds EUR 2,000,000 (two million euro) (herein referred to as the “Threshold”). In case the Threshold is exceeded, the Purchaser is entitled to bring all individual claims exceeding EUR 100.000 in their entire amounts (Freigrenze). The foregoing shall not apply to any claims based on the Statements set out in Secs. I or II para. 1.1, 10 or 11 of Exhibit 7.1.

5. The right of the Purchaser to claim for losses or damages under Secs. 7 and 8 shall be excluded if and to the extent the information about the event, that causes the loss or the damage, has been specifically and fully disclosed to the Purchaser in this Agreement or in the Exhibits. Sec. 442 BGB does not apply.

6. No limitation provided for in this Agreement shall apply in favor of a Seller, if such Seller has acted intentionally (vorsätzlich) or has committed willful deceit (arglistige Täuschung).

7. The Parties are in agreement that Secs. 7 and 8 shall constitute a conclusive system of regulations pursuant to Sec. 311 para. 1 BGB applying exclusively and exhaustively should any of the Guarantees be incomplete or incorrect and that the Guarantees shall be construed as independent guarantees (selbständige Garantieversprechen). Nothing in this Agreement shall be construed as quality guarantee (Beschaffenheitsgarantie) within the meaning of Sec. 444 BGB.

8. Unless expressly stated otherwise in this Agreement, all statutory rights (gesetzlich begründete Ansprüche) of the Parties, including, but not limited to, subsequent performance (Nacherfüllung) or reduction of purchase price,

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rescission (Rücktritt), damages for non-performance, damages for incorrect statements during negotiations (culpa in contrahendo), avoidance of this Agreement due to the lack of substantial qualities (Anfechtung wegen des Fehlens einer wesentlichen Eigenschaft) or rescission or adjustment of this Agreement because of the lack of substantial elements (Wegfall der Geschäftsgrundlage) are expressly excluded, save for claims based on intentional acts (Vorsatz) or willful deceit (arglistige Täuschung) of the respective other party, provided that these latter claims may, however, not be satisfied out of the Escrow Account in excess of the portion attributable to the respective Seller pro rata to his Quota.

9. All remedies, including the claim for specific performance under this Agreement, shall be cumulative and not alternative, except as expressly agreed to the contrary between the Parties. The Purchaser, however, shall not be entitled to any R&W Claim to the extent that the fact or circumstance giving rise to such R&W Claim has resulted in a payment to the Purchaser or to any of the Companies pursuant to Sec. 5.2. However, any exclusion of a R&W Claim according to the foregoing sentence shall in the aggregate be limited to such amount paid pursuant to Sec. 5.2. For the avoidance of doubt, the Purchaser shall be entitled to claim a specific amount on the basis of a R&W Claim or Sec. 5.2 only once even if the fact or circumstance giving rise to such R&W Claim or claim under Sec. 5.2 would entitle him to claim such identical amount under more than one provision of this Agreement.

Sec. 9
Tax Indemnity

1. “Taxes” shall include all kinds of (i) taxes (Steuern), including corporate income tax, solidarity surcharge, trade tax, withholding tax, state tax, stamp duty, custom duty, registration tax, wealth tax, wage tax, value added tax, liability for third parties (Haftungssteuern), tax advances and auxiliary obligations (steuerliche Nebenleistungen), or similar assessments or charges within the meaning of Section 3 para. 1 to 4 AO, similar taxes, tax advances and auxiliary obligations levied by foreign authorities, or tax equivalents, including federal, statutory, and governmental duties and any other form of taxation, levy, duty, charge, surcharge, contribution, withholding or impose of whatever nature imposed by any German or foreign authority and any payments made to any other party pursuant to a tax allocation, sharing, indemnity or similar arrangement together with any interest, penalty, cost or expenses or addition to tax or additional amounts levied or imposed by any Tax Authority with respect to such amounts, no

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matter how they are levied or determined and (ii) all social security charges and contributions (Sozialversicherungsbeiträge) and public dues (öffentliche Abgaben) including any fine, penalty, surcharge, or interest relating thereto.

2. “Tax Authority” shall mean any authority, body, agency or official competent to impose any liability in respect of Taxes or responsible for the administration or collection of Taxes or the enforcement of any law in relation to Taxes.

3. Without prejudice to any of the Purchaser’s rights under this Agreement (in particular under Secs. 7 and 8), the Sellers shall indemnify and hold the Purchaser and/or, at the Purchaser’s discretion, any of the Companies harmless against any liability for Taxes (as defined in para. 1) payable by the Company or a Subsidiary which are attributable to any taxable period or portion thereof (based on an “as-if assessment”) ending on or before the Closing Date regardless of whether the respective Tax is due on, before or after the Closing Date. In case of an as-if-assessment, i.e. in case of any taxable period beginning before and ending after the Closing Date, the Tax which shall be deemed payable for and related to the portion of the taxable period ending on the Closing Date shall be equal to

(i)	the amount that would be payable if the taxable period ended on the Closing Date, or
(ii)	in cases in which an allocation pursuant to (i) is not possible, the amount of Taxes for the entire taxable period multiplied by a fraction in which the numerator is the number of days in the portion of the taxable period ending on the Closing Date and the denominator is the number of days in the entire taxable period.

4. If and to the extent a Tax liability is accounted for or a Tax accrual is made for Taxes in the Financial Guarantees Calculation binding on the Parties pursuant to Sec. 5, if and to the extent such accruals are consistent with past practice, the Purchaser shall be prevented from claiming indemnification under this Sec. 9 with respect to such Tax.

5. Payments to be made by the Sellers pursuant to para. 3 shall be made within ten (10) business days following the written notice by the Purchaser or the respective Company but not before the underlying liability for Taxes against the Company or the Subsidiary has become payable.

6. The Parties agree that all Payments made by the Sellers pursuant to para. 3 constitute adjustments to the Purchase Price (as concerns the Sellers, only

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the portion of the Purchase Price attributable to the Sellers shall be adjusted) and to the extent permitted by applicable tax law are also to be treated as such adjustments for tax purposes.

7. If and to the extent that a specific circumstance which triggers Taxes for which the Sellers have indemnified the Purchaser and/or any of the Companies pursuant to para. 3 (hereinafter referred to as a “Taxable Event”) results (i) in savings (including but not limited to savings resulting from timing differences (Phasenverschiebungen), such as extension of any amortization or depreciation periods or higher depreciation allowances) of Taxes or (ii) in a decrease of Taxes payable by another of the Companies (the amount of Taxes from (i) and (ii) hereinafter referred to as “Tax Savings”) relating to any taxable period or portion thereof commencing after the Closing Date, such Tax Savings shall be paid to the respective Sellers within ten (10) business days following the cash effective receipt by the Company or the relevant Subsidiary, provided, however, that no Tax Saving shall be paid if and to the extent that the Tax Saving resulting from the Taxable Event exceeds the Taxes triggered by the Taxable Event.

8. The Sellers and the Purchaser shall fully and reasonably cooperate in connection with the preparation and making of all Tax returns relating in whole or in parts to periods ending on, prior to or including the Closing Date.

Sec. 10
Environmental Indemnity

1. The Sellers shall, subject to the provisions in this Sec. 10, indemnify and hold harmless the Purchaser or, at the discretion of the Purchaser, the Companies from and against all Pre-Closing Environmental Liabilities.

2.	(a)	“Clean-up Standard” shall mean the lowest cost alternative if such alternative (i) is commercially reasonable and available, and (ii) is acceptable to the Environmental Authority with jurisdiction over such matters and according to applicable Environmental Laws.
	(b)	“Environmental Authority” shall mean any European Union, federal, national, state, regional, county, local or other authority and whose jurisdiction extends in whole or in part to Hazardous Materials or Environmental Laws.
	(c)	“Environmental Laws” shall mean, as in effect on the date of Signing (herein referred to as the “Signing Date”), any laws, statutes, rules,

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regulations, directives, decisions, recommendations, codes, ordinances, plans, permits, injunctions, judgments, orders, decrees, rulings and charges of, issued, promulgated or entered into by or with any governmental authority of any country where the DNS Group exercises its business concerning or relating to pollution or protection of the environment, natural resources, or public health and safety, employee and/or worker health and safety, or concerning or relating to any release, spill, emission, leaking, dumping, injection, pouring, deposit, disposal, discharge, dispersal, migration or cleanups of, or exposure to, Hazardous Materials in or into ambient air, surface water, ground water, soil, subsoil or lands or other-wise concerning or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials.

(d)	“Environmental Matters” shall mean any matter existing prior to or at Closing relating to (i) pollution or contamination or protection of the soil, the air, ground water, surface water or land surface by Hazardous Materials, (ii) any liabilities arising under any Environmental Law, (iii) any violation of, failure to comply with, or liability under (whether contingent or not), any Environmental Law or Permit required by Environmental Law.
(e)	“Hazardous Materials” shall mean (i) any contaminant, pollutant, waste, toxic or hazardous substance, hazardous material, hazardous waste, medical waste, biohazards or infectious waste, special waste or any material defined as hazardous or toxic by any Environmental Law; (ii) petroleum, petroleum-based or petroleum-derived products and their breakdown constituents; (iii) polychlorinated biphenyls; (iv) any substance exhibiting a hazardous waste characteristic, including, but not limited to, corrosivity, ignitability, radioactivity or explosiveness; (v) asbestos in any form; (vi) methylene chloride, tri-chloroethylene or any chlorinated solvents and their breakdown constituents; or (vii) electricity, heat, vibration, noise, or other radiation which may or is liable to cause harm.
(f)	“Pre-Closing Environmental Liability” shall mean any loss, cost, obligation, requirement, fine, penalty, attorneys fees, witness or consulting fees or any other expense resulting or arising from or relating to any Environmental Matters, Remedial Action, any measures needed to restore the operations of any of the Companies at any location to compliance with Environmental Laws and the requirements of applicable permits at any property formerly or currently owned or operated or used in other ways by any of the Companies on or prior to

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the Closing Date or that was impacted or affected by such ownership or operation.

(g) “Remedial Action” shall mean all actions necessary to mitigate, resolve, settle or otherwise address any release or threatened release of Hazardous Material, in each case being consisting of those efforts, programs and equipment reasonably necessary to satisfy the Clean-up Standards.

3. The Purchaser shall take and shall procure that the Companies take reasonable steps to avoid or mitigate any Pre-Closing Environmental Liabilities which may give rise to a claim under this Sec. 10.

4. If the Purchaser becomes aware of any circumstances which might give rise to a Pre-Closing Environmental Liability for which this indemnity may apply, the Purchaser shall inform the Sellers’ Representative in writing thereof without undue delay and the Purchaser shall take the lead in conducting any Remedial Actions necessary to resolve the subject Pre-Closing Environmental Liability and all such Remedial Actions shall be conducted in consultation with the Sellers’ Representative. The Sellers shall be given access at their own expense to the affected real property and records of the Companies – or their successors, as the case may be – to the extent that such access is reasonably necessary to assess any Pre-Closing Environmental Liability being alleged. The Purchaser may in its discretion choose to allow the Sellers’ Representative at its request to take the lead in conducting any Remedial Actions necessary to resolve the subject Pre-Closing Environmental Liability. In that event, the Sellers’ Representative shall provide the Purchaser with the opportunity to review and provide reasonable comments to any work plans, clean-up plans, site investigations, scope of work or correspondence to any Environmental Authority. The Sellers’ Representative shall take into account such comments by the Purchaser.

5. For the avoidance of doubt, all costs incurred by the Companies, or by the Purchaser if such costs were incurred by the Purchases for the Companies, in connection with the proceedings referred to in this Sec. 10 shall be borne by the Sellers according to para. 1 above.

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Sec. 11
Indemnity for Product Liability

1. The Sellers shall, subject to the provisions in this Sec. 11, indemnify and hold harmless the Purchaser or, at the discretion of the Purchaser, the Companies from and against all Pre-Closing Product Liabilities.

2. “Pre-Closing Product Liability” shall mean any loss, cost, expense, obligation, requirement, fine, penalty, attorneys fees, witness or consulting fees or any other expense resulting or arising from or relating to (including, for the avoidance of doubt any own or third-party expense relating to the repair of, replacement of or other action with regard to), (i) any products or services manufactured, sold or delivered by any of the Companies prior to the Closing Date which give rise to product liability or warranty or other claims, (ii) any obligation or liability based on product warranty or product liability existing as of the Closing Date and (iii) any product warranty or product liability claims asserted against any of the Companies for products or services manufactured, sold or delivered by any of the Companies prior to the Closing Date.

3. The Purchaser shall take and shall procure that the Companies take reasonable steps to avoid or mitigate any Pre-Closing Product Liability which may give rise to a claim under this Sec. 11.

4. If the Purchaser becomes aware of any circumstances which might give rise to a Pre-Closing Product Liability for which this indemnity may apply, the Purchaser shall inform the Sellers’ Representative in writing thereof without undue delay, and the Purchaser shall take the lead in conducting any actions necessary for the defense against subject Pre-Closing Product Liability, and all such actions shall be conducted in consultation with the Sellers’ Representative. The Sellers shall be given access at their own expense to the records of the Companies – or their successors, as the case may be – to the extent that such access is reasonably necessary to assess any Pre-Closing Product Liability being alleged. The Purchaser may in its discretion choose to allow the Sellers’ Representative at its request to take the lead in actions necessary for the defense against the subject Pre-Closing Product Liability. In that event, the Sellers’ Representative shall provide the Purchaser with the opportunity to review and provide reasonable comments to any defense. The Sellers’ Representative shall take into account such comments of the Purchaser.

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Sec. 12
Contest Provisions

1. The Purchaser shall procure that the Sellers’ Representative is notified without undue delay of any facts and circumstances which may trigger a claim by the Purchaser against the Sellers under Secs. 7 through 11. The Sellers, acting through the Sellers’ Representative are employing their own counsel at their expense and shall be entitled, to the extent such claim is related to a claim of a third party, to consult with the Purchaser with regard to the defense of such claim (including the filing of appeals). In this event, the Purchaser shall procure that the Sellers’ Representative is provided with any information reasonably requested by the Sellers’ Representative relating to such claim and shall take into account all commercially reasonable and practicable suggestions or concerns of the Sellers’ Representative with respect to such claim.

2. The Purchaser will inform the Sellers’ Representative without undue delay of any forthcoming tax audit regarding any of the Companies for any period or portion thereof ending on or before the Closing Date. The Purchaser shall procure that the Sellers and their advisers are granted the right to participate in all meetings with the tax auditors. The Purchaser shall procure that no agreements with the Tax Authorities are concluded for such period without the prior written consent of the Sellers’ Representative such consent not to be unreasonably withheld.

3. In the event that the Purchaser fails to comply with its obligations under paras. 1 and 2, any respective claims by the Purchaser shall be excluded to the extent the Purchaser proves that such failure to comply has not prevented the Sellers from an effective defense against such claims.

Sec. 13
Statute of Limitations

1. Any claims and other rights of the Purchaser under this Agreement shall become time-barred

(a)	ten (10) years after the Closing Date if such claim is based on a breach of a Statement made under Secs. I or II para. 1.1 of Exhibit 7.1;
(b)	five (5) years after the Closing Date for claims based on Sec. 10;

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(c)	three (3) years after the Closing Date for claims based on Sec. 11;
(d)	six (6) months after the date of the final, non-appealable assessment concerning the respective Tax has expired, with regard to any claims of the Purchaser arising under Sec. 9 or with regard to a breach of a Statement made under Sec. II para. 11 of Exhibit 7.1;
(e)	unless otherwise provided for by paras. (a) through (d), on 30 June 2007 with regard to all other claims based on Secs. 5, 7, 8 and 14 para. 6;
(f)	pursuant to statutory rules on time-limitation (gesetzliche Verjährungsfristen) with regard to all other claims and any other rights of the Purchaser pursuant to or relating to this Agreement.

2. The expiry period for any claims of the Purchaser under this Agreement shall be tolled (gehemmt) pursuant to Sec. 209 BGB by any timely demand for fulfillment pursuant to this Agreement, provided that the Purchaser commences judicial proceedings within six (6) months after the expiry of the relevant time limitation period as set out in para. 1. To the extent legally permissible, the application of Sec. 203 BGB shall not apply, unless the Purchaser and the Sellers’ Representative agree in writing that the expiry period shall be tolled on the bases of pending settlement negotiations.

Sec. 14
Conduct of Business after Signing

1. During the period of time from Signing until Closing, the Sellers shall procure, to the extent permissible under applicable law, that the Companies shall conduct their business operations in the ordinary course of business and substantially in the same manner as before and that, in particular, none of the Companies takes any of the actions set out in Exhibit 14.1, unless it has obtained the prior consent of the Purchaser in text form (Textform). Such prior consent shall be deemed to have been obtained if any of the Managing Shareholders has requested the Purchaser to consent to such action by email to ecoleman@arrow.com and cmorris@arrow.com (or to such other emails as previously notified to the Other Sellers’ Representative one week in advance), and the Purchaser has not objected in writing or by email to the Other Sellers’ Representative within two Business Days (for this purpose limited to Business Days on which banks are open for business in New York) following such request.

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2. During the period of time from Signing until Closing, the Sellers shall not, without the prior written consent of the Purchaser, (i) resolve on, or cause the Company to make, any distribution of profits of the Company or (ii) cause the Company to resolve on, or to cause any Subsidiary to make, any distribution of profits of any Subsidiary.

3. The Parties shall fully co-operate and use all reasonable efforts to ensure that the Merger Clearance occurs without delay after Signing. In particular, they shall provide each other with all information reasonably required. The work on the Merger Clearance is primarily entrusted to the Purchaser who shall take all necessary measures and make all necessary filings without delay. However, the Purchaser shall share and discuss all draft filings and submissions with the Sellers’ counsel prior to filing them with the antitrust authorities. The Purchaser undertakes that appropriate and reasonable remedies will be proposed to the relevant competent antitrust authorities to the extent necessary to alleviate potential concerns generated by the Transaction with the aim of enabling the completion of the Transaction as soon as possible and to the extent such remedies appear to be, in the Purchaser’s sole discretion, commercially reasonable and practical to the Purchaser. For the avoidance of doubt, under no circumstances shall the Purchaser be obliged to accept or to carry out any conditions (Auflagen oder Bedingungen), obligations, undertakings, commitments and/or modifications of any governmental or regulatory authority or other person relating to the Merger Clearance.

4. Should the Merger Clearance not have occurred within six (6) months following the Signing Date, the Sellers and the Purchaser shall each be entitled to rescind this Agreement by declaration vis-à-vis the Purchaser or the Sellers’ Representative, as the case may be, in the form as provided in Sec. 17.

5. The Managing Shareholders shall, to the extent practically possible, provide a list of all bank accounts of the Companies with the respective credit or debit amounts to the Purchaser two Business Days before the Closing Date.

6. The Sellers shall indemnify and hold harmless the Purchaser or, at the discretion of the Purchaser, the Companies for all damages or liabilities of the DNS Group or the Purchaser resulting from a breach of paras. 1 or 2.

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Sec. 15
Non-Compete

1. The Sellers, except for IKB and Mr. Arne Magnussen, undertake, and shall cause all of the Sellers’ Affiliates to undertake, for a period of three (3) years from the Closing Date, in any area in which any of the Companies currently conduct business, not to engage in any activity which would directly or indirectly compete with or result in competition with such present business operations. In particular, the Sellers shall not establish or acquire, or acquire shares in, any business or business entity which would, directly or indirectly, compete with the business operations of any of the Companies. It is understood, however, that the Sellers shall be entitled to acquire – for investment purposes – up to five (5) % of the share capital of any corporation listed on a stock exchange. In case of a breach of the covenant set forth in the foregoing sentences 1 through 3, the Seller in breach of such covenant shall be liable to pay to the Purchaser, or at the Purchaser’s discretion to one of the Companies, for each breach a contractual penalty (Vertragsstrafe) in the amount of EUR 250,000 (two-hundred and fifty thousand euro). In the event of a continuing violation, the Seller continuing violating the above covenant shall be liable to a pay further contractual penalty in the amount of EUR 250,000 (two-hundred and fifty thousand euro) for each additional month that the violation continues. The Purchaser reserves any other right it may have to claim further damages or to demand that the violation be discontinued.

2. The Sellers undertake and shall cause the Sellers’ Affiliates, to the extent legally permissible, to undertake for a period of three (3) years from the Closing Date not to solicit or entice away from any of the Companies, or to offer employment to or employ, or to offer or conclude any contractual services with, any person who was employed by any of the Companies at any time during the three (3) years prior to the Closing Date or who becomes an employee of any of the Companies on or after the Closing Date. Para. 1 sentences 4 through 6 shall apply accordingly.

3. The Purchaser shall inform the Other Sellers’ Representative without undue delay (unverzüglich) of any breach of paras. 1 or 2 he becomes aware of.

4. It is clarified that this Sec. 15 shall not impose any restrictions on the business activities of IKB or any affiliate or portfolio company of IKB.

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Sec. 16
Assignment, Set-off

1. No Seller may without the Purchaser’s consent, and the Purchaser may not without the consent of the Seller’s Representative, assign any rights or obligations under this Agreement to any third party with the exception that the Purchaser may assign his rights and obligations under this Agreement to an affiliate (verbundenes Unternehmen) of the Purchaser.

2. No Party shall be entitled to offset any claim it may have against the other Parties, whether under this Agreement or otherwise, against the claims of the other Parties, unless the claim to be offset has become final (rechtskräftig) or is undisputed. The same shall apply to the exercise of withholding rights (Zurückbehaltungsrechte) by the Parties.

Sec. 17
Notices

All notices, statements, declarations and other communications to be given under or in connection with this Agreement shall be in the English language and sent by registered mail or by facsimile transmission to the Parties at the addresses set forth in Exhibit P or at such other persons or addresses as shall be specified by registered mail or by facsimile transmission by the Parties to the respective other Parties from time to time:

1.	If to the Sellers or the Sellers’ Representative:
	to Seller 1, Seller 2, Seller 3, and Seller 4
	with a copy to:
	Oldenbourg Rechtsanwaltsgesellschaft mbH
	Attn. Dr. Andreas Oldenbourg and Dr. Simon Preisenberger
	Kardinal-Faulhaber-Straße 10
	D-80333 München
	Facsimile No. +49 89 237086-222
2.	If to the Other Sellers’ or the Other Sellers’ Representative:
	to Seller 1, Seller 2 and Seller 4

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	with a copy to:
	Oldenbourg Rechtsanwaltsgesellschaft
	Attn. Dr. Andreas Oldenbourg and Dr. Simon Preisenberger
	Kardinal-Faulhaber-Straße 10
	D-80333 München
	Facsimile No. +49 89 237086-222
3.	If to the Purchaser or to the Guarantor:
	c/o Arrow Electronics, Inc.
	Attn. Mr. Peter Brown
	Senior Vice President and General Counsel
	50 Marcus Drive
	Melville, NY 11747-4210
	United States of America
	with a copy to:
	Milbank, Tweed, Hadley & McCloy LLP
	Attn. Dr. Peter Nussbaum
	Maximilianstraße 15
	D-80539 München
	Facsimile No. +49 89 25559-3700

Sec. 18
Confidentiality, Communication

1. The Parties mutually undertake to keep the contents of this Agreement secret and confidential vis-à-vis any third party except to the extent that the relevant facts are publicly known or disclosure is required by law or relevant stock exchange regulation or by any trust arrangement existing at the Signing Date.

2. Immediately after conclusion of this Agreement, the Parties shall publish a statement to the employees of the Company and to the press in accordance with Exhibit 18.

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3. Notwithstanding anything herein to the contrary, the Parties (and any employee, representative, or other agent of the Parties) may disclose to any and all persons, without limitation of any kind, the U.S. federal tax treatment and tax structure of any proposed transaction and all materials of any kind (including opinions or other tax analyses) that are provided to it relating to such tax treatment and tax structure; provided, however, that such disclosure may not be made to the extent required to be kept confidential to comply with any applicable securities laws. “Tax treatment” and “Tax structure” shall mean any facts relevant to the United States federal income tax treatment of the Transaction but does not include information relating to the identity of the Parties.

Sec. 19
Miscellaneous

1. For the purposes of this Agreement, “Business Day” means a day on which banks are open for business in Frankfurt am Main.

2. Except as otherwise provided in this Agreement, each Party shall pay interest on any amounts becoming due and payable to the other Party, as the case may be, under this Agreement as from the respective due date until, but not including, the day of payment at the rate of ten (10) % p.a. on the basis of actual days elapsed and a 360-day year. The claiming of any default interest and further default-related damages shall remain unaffected.

3. This Agreement constitutes the entire agreement and supersedes all other prior agreements and undertakings both written and oral among the Parties. The Exhibits to this Agreement form an essential part of same.

4. In this Agreement, unless the contrary is expressly stated,

(a)	the section titles are meant solely for convenience and are of no significance for its contents and interpretation;
(b)	a reference to the singular includes a reference to the plural and vice versa; and
(c)	where a German word has been used to clarify the English text, the German word shall prevail in the event of (and to the extent of) any conflict with the English text,

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(d) any sentence or enumeration commencing with “in particular” or “including” or the like shall be conceived as exemplary and not as exclusive or exhaustive.

5. Any changes to this Agreement including, but not limited to, this clause shall only be valid if made in writing or, if necessary, in a stricter form.

Sec. 20
Severability

Should any of the provisions of this Agreement be or become fully or partly invalid or unenforceable, the validity of the other provisions of this Agreement shall not be affected thereby. The invalid or unenforceable provision shall be deemed to be replaced by such legally valid and enforceable provision which corresponds as closely as possible to the economic purpose intended by the Parties or what would have been the intention of the Parties according to the aim and purpose of this Agreement, had they recognized the invalidity or unenforceability of the respective provision. Any gaps in this Agreement shall be deemed to be filled by a provision which the Parties as prudent businessmen (ordentliche Kaufleute) would in good faith have agreed to, had they considered the matter not covered by this Agreement.

Sec. 21
Governing Law, Jurisdiction

This Agreement shall be governed by and construed in accordance with the laws of the Federal Republic of Germany excluding its conflict of law principles and the Uniform Code on the International Sale of Goods.

Sec. 22
Expenses

1. Except as specifically provided otherwise in this Agreement, each Party shall bear its own expenses and fees (including attorneys’, accountants’, consultants’ and advisors’ fees) in connection with this Agreement or the Transaction.

2. Fees and costs triggered by the implementation of this Agreement, any registration or publication fees as well as any fees and costs in connection with any merger control filing and the Escrow Account shall be borne by the Purchaser.

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Munich, this 26 October 2005

/s/ Seller 1

(Seller 1)

/s/ Seller 2

(Seller 2)

/s/ Seller 3

(Seller 3)

/s/ Seller 4

(Seller 4)

/s/ Seller 4

(Seller 5), represented by Seller 4 on the basis of a power of attorney

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/s/ Seller 2

(Seller 6), represented by Seller 2 on the basis of a power of attorney

/s/ Seller 2

(Seller 7), represented by Seller 2 on the basis of a power of attorney

/s/ Seller 2

(Seller 8), represented by Seller 2 on the basis of a power of attorney

/s/ Seller 2

(Seller 9), represented by Seller 2 on the basis of a power of attorney

/s/ Peter S. Brown

(Arrow Europe GmbH)

By: Peter S. Brown, acting on the basis of a

   power of attorney

/s/ Peter S. Brown

(Arrow Electronics, Inc.)

By: Peter S. Brown, Senior Vice President and

   General Counsel

EX-31.I

Exhibit 31(i)

Arrow Electronics, Inc.
Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

I, William E. Mitchell, President and Chief Executive Officer, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Arrow Electronics, Inc. (the “registrant”);
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
d)	disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 28, 2005	By:	/s/ William E. Mitchell
		William E. Mitchell           President and Chief Executive Officer

EX-31.II

Exhibit 31(ii)

Arrow Electronics, Inc.
Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

I, Paul J. Reilly, Senior Vice President and Chief Financial Officer, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Arrow Electronics, Inc. (the “registrant”);
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
d)	disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 28, 2005	By:	/s/ Paul J. Reilly
		Paul J. Reilly           Senior Vice President and Chief Financial Officer

EX-32.I

Exhibit 32(i)

Arrow Electronics, Inc.
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”)

In connection with the Quarterly Report on Form 10-Q of Arrow Electronics, Inc. (the “company”) for the period ended September 30, 2005 (the “Report”), I, William E. Mitchell, President and Chief Executive Officer of the company, certify, pursuant to the requirements of Section 906, that, to the best of my knowledge:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company.

Date: October 28, 2005	By:	/s/ William E. Mitchell
		William E. Mitchell           President and Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the company and will be retained by the company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.II

Exhibit 32(ii)

Arrow Electronics, Inc.
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (“Section 906”)

In connection with the Quarterly Report on Form 10-Q of Arrow Electronics, Inc. (the “company”) for the period ended September 30, 2005 (the “Report”), I, Paul J. Reilly, Senior Vice President and Chief Financial Officer of the company, certify, pursuant to the requirements of Section 906, that, to the best of my knowledge:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company.

Date: October 28, 2005	By:	/s/ Paul J. Reilly
		Paul J. Reilly           Senior Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the company and will be retained by the company and furnished to the Securities and Exchange Commission or its staff upon request.