SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2005

Commission File #1-4224

AVNET, INC.

Incorporated in New York

IRS Employer Identification No. 11-1890605

2211 South 47th Street, Phoenix, Arizona 85034

(480) 643-2000

      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 a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer 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

      The total number of shares outstanding of the registrant’s Common Stock (net of treasury shares) as of January 27,
2006—146,281,787 shares.

AVNET, INC. AND SUBSIDIARIES

INDEX

FORWARD-LOOKING STATEMENTS

      This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to the financial condition, results of operations and business of Avnet, Inc. and subsidiaries (“Avnet” or the “Company”). You can find many of these statements by looking for words like “believes,” “expects,” “anticipates,” “should,” “will,” “may,” “estimates” or similar expressions in this Report or in documents incorporated by reference in this Report.

      These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by the forward-looking statements include, but are not limited to, the following:

      Although management believes that the plans and expectations reflected in or suggested by these forward-looking statements are reasonable, management cannot assure you that the Company will achieve or realize these plans and expectations. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by them. Management cautions you not to place undue reliance on these statements, which speak only as of the date of this Report.

      Avnet does not undertake any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I

FINANCIAL INFORMATION

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

See notes to consolidated financial statements.

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See notes to consolidated financial statements.

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See notes to consolidated financial statements.

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments necessary, all of which are of a normal recurring nature, except for the acquisition and purchase price allocation adjustments discussed in Note 4, the debt extinguishment costs discussed in Note 6 and the restructuring and other charges and integration costs discussed in Note 13, to present fairly the Company’s financial position, results of operations and cash flows. For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 2, 2005.

   Certain reclassifications have been made to the prior period financial statements to conform to the current year presentation.

2. The results of operations for the second quarter and six months ended December 31, 2005 are not necessarily indicative of the results to be expected for the full year.

3. Stock-based Compensation

      Effective in the first quarter of fiscal 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payments (“SFAS 123R”), which revises SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, be measured at fair value and expensed in the consolidated statement of operations over the service period (generally the vesting period). Upon adoption, the Company transitioned to SFAS 123R using the modified prospective application, whereby compensation cost is only recognized in the consolidated statements of operations beginning with the first period that SFAS 123R is effective and thereafter, with prior periods’ stock-based compensation for option and employee stock purchase plan activity still presented on a pro forma basis. The Company continues to use the Black-Scholes option valuation model to value stock options. As a result of the adoption of SFAS 123R, the Company recognized pre-tax charges of $2,871,000 and $6,025,000, respectively, in the three and six months ended December 31, 2005, associated with the expensing of stock options and employee stock purchase plan activity. Additionally, the Company increased its grant activity under other stock-based compensation programs that have always been expensed in the Company’s consolidated statements of operations, which yielded incremental expense under these other programs amounting to $1,150,000 and $1,777,000, respectively, when compared with the second quarter of fiscal 2005 and first half of fiscal 2005. In the second quarter of fiscal 2006, the combination of these two changes resulting from the adoption of SFAS 123R resulted in incremental expenses of $4,021,000 pre-tax (included in selling, general and administrative expenses), $2,649,000 after tax or $0.02 per share on a diluted basis. In the first half of fiscal 2006, the incremental expense was $7,802,000 pre-tax (included in selling, general and administrative expenses), $4,935,000 after tax or $0.04 per share on a diluted basis.

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Reported and pro forma net income and earnings per share are as follows:

      The fair value of options granted is estimated on the date of grant using the Black-Scholes model based on the assumptions in the table below. The assumption for the expected life is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the US Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. The historical stock volatility of Avnet’s stock is used as the basis for the volatility assumption.

      At December 31, 2005, the Company had 14,698,033 shares of common stock reserved for stock option and stock incentive programs.

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The Company has four stock option plans with shares available for grant at December 31, 2005 as follows:

      Option grants under all four plans have a contractual life of ten years. Option grants vest 25% on each anniversary of the grant date, commencing with the first anniversary.

      The following is a summary of the changes in outstanding options for the six months ended December 31, 2005:

      The weighted-average grant-date fair values of share options granted during the first six months of fiscal 2006 and 2005, were $11.86 and $8.36, respectively. The total intrinsic values of share options exercised during the first six months of fiscal 2006 and 2005, were $653,000 and $109,000, respectively.

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following is a summary of the changes in non-vested shares for the six months ended December 31, 2005:

      As of December 31, 2005, there was $19,035,000 of total unrecognized compensation cost related to non-vested awards granted under the option plans, which is expected to be recognized over a weighted-average period of 3.2 years. The total fair values of shares vested during the first half of fiscal 2006 and 2005 were $9,933,000 and $11,540,000, respectively.

      Cash received from option exercises during the first half of fiscal 2006 and 2005 totaled $21,224,000, and $668,000, respectively. The impact of these cash receipts are included in Other, net, financing activities in the accompanying consolidated statements of cash flows.

      In October 1995, the Company implemented the Avnet Employee Stock Purchase Plan (“ESPP”). Under the terms of the ESPP, eligible employees of the Company are offered options to purchase shares of Avnet common stock at a price equal to 85% of the fair market value on the first or last day, whichever is lower, of each monthly offering period. The Company uses the actual fair market value as determined at the end of the 30 days to calculate compensation expense for the ESPP. The pre-tax compensation expense recognized under the ESPP during the second quarter and first half of fiscal 2006 with the adoption of SFAS 123R was $177,000 and $465,000, respectively. In January 2006, the Company amended the ESPP to allow for purchase of shares at 95% of fair market value as of the last day of the month. As a result of these amended terms, Avnet will not be required to record expense in the consolidated statements of operations related to the ESPP subsequent to this amendment.

      The Company has a policy of repurchasing shares on the open market to satisfy shares purchased under the ESPP, and expects future repurchases during fiscal 2006 to be consistent with repurchases made during fiscal 2005, based on current estimates of participation in the program. During the first six months of fiscal 2006 and 2005, respectively, there were 108,212 and 148,416 shares of common stock issued under the ESPP program.

      The Company has an Incentive Stock Program wherein, at December 31, 2005, a total of 1,312,152 shares were still available for award based upon operating achievements. Delivery of incentive shares, and the associated compensation expense, is spread equally over a five-year period and is subject to the employee’s continued employment by the Company. As of December 31, 2005, 799,128 shares previously awarded have not yet been delivered. Pre-tax compensation expense associated with this program was $1,765,000 and $488,000, respectively, for the first six months of fiscal 2006 and 2005.

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Beginning in fiscal 2006, eligible employees, including Avnet’s executive officers, may receive a portion of their long-term equity-based incentive compensation through the performance share program under Avnet’s 2003 Stock Compensation Plan, which allows for the award of stock based upon performance-based criteria(“Performance Shares”). These Performance Shares will be awarded under the terms of the Company’s existing stock incentive plans. The Performance Shares will provide for payment to each grantee of a number of shares of Avnet’s common stock at the end of a three-year period based upon the Company’s achievement of performance goals established by the Compensation Committee of the Board of Directors for each three-year period. These performance goals are based upon a three-year cumulative increase in the Company’s absolute economic profit, as defined, over the prior three-year period and the increase in the Company’s economic profit relative to the increase in the economic profit of a peer group of corporations. During the first six months of fiscal 2006, the Company granted 194,530 performance shares, to be awarded to participants in the Performance Share program in three years. The actual amount of Performance Shares issued at the end of the three year period will be determined based upon the level of achievement of the defined performance goals. During the second quarter and six months ended December 31, 2005, the Company recognized pre-tax compensation expense associated with the Performance Shares of $500,000.

      Prior to the second quarter of fiscal 2006, the Company had a program whereby non-employee directors were awarded shares equal to $20,000 of Avnet common stock upon their re-election each year, as part of their director compensation package. Directors may elect to receive this compensation in the form of common stock under the Outside Director Stock Bonus Plan or they may elect to defer their compensation to be paid in common stock at a later date. Shares under this plan were issued in January of each year and the number of shares was calculated by dividing $20,000 by the average of the high and low price of Avnet common stock on the first business day of January. During the second quarter of fiscal 2006, this plan was amended such that directors are awarded shares equal to $75,000, to be applied effective with the January 2006 award. The increase in the value of shares awarded to directors of the Company was part of a change in director’s compensation, which also eliminated the granting of options to the non-employee directors. As of December 31, 2005, 21,361 shares were reserved for issuance under this plan.

      On July 5, 2005, the Company acquired Memec Group Holdings Limited (“Memec”), a global distributor that markets and sells a portfolio of semiconductor devices from industry-leading suppliers in addition to providing customers with engineering expertise and design services. Memec, with sales of $2.28 billion for the twelve months ended July 4, 2005, is anticipated to be fully integrated into the Electronics Marketing group (“EM”) of Avnet by the end of fiscal 2006, with a substantial portion of the integration having been completed at the end of the second quarter of fiscal 2006.

      The consideration for the Memec acquisition consisted of stock and cash valued at approximately $506,293,000, including transaction costs, plus the assumption of $239,960,000 of Memec’s net debt (debt less cash acquired). All but $27,343,000 of this acquired net debt was repaid upon the closing of the acquisition. Under the terms of the purchase, Memec investors received 24,011,000 shares of Avnet common stock plus $63,957,000 of cash. The shares of Avnet common stock were valued at $17.42 per share, which represents the five-day average stock price beginning two days before the acquisition announcement on April 26, 2005.

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The Memec acquisition is accounted for as a purchase business combination. Assets acquired and liabilities assumed are recorded in the accompanying consolidated balance sheet at their estimated fair values as of July 5, 2005. A preliminary allocation of purchase price to the assets acquired and liabilities assumed at the date of acquisition is presented in the following table. This allocation is based upon a preliminary valuation using management’s estimates and assumptions. This preliminary allocation is subject to adjustment as the Company has not yet completed its evaluation of the fair value of assets and liabilities acquired, including the valuation of any potential amortizable intangible assets created through the acquisition. Furthermore, the assets and liabilities in the following table include preliminary estimates of severance for Memec workforce reductions, write-downs in value of Memec owned facilities and lease commitments of leased facilities that will no longer be used or for which the use will be substantially changed in the combined business, write-offs or write-downs in value of certain Memec information technology assets that will have limited or no use in the combined business, and write-downs of acquired inventory to net realizable value (see Preliminary acquisition-related activity accounted for in purchase accounting included in this Note 4). These estimates are also subject to further adjustment as the Company finalizes the actions that will be taken and the charges associated with the integration of Memec into Avnet’s operations. The Company expects these adjustments will be completed within the purchase price allocation period, which is generally within one year of the acquisition date.

      The acquisition of Memec will expand EM in each of the three major economic regions. The combination of Memec’s Asian operations with Avnet’s industry-leading position, based on sales, in the Asia region will provide Avnet with a stronger position in this key growth region. Memec’s already established position in Japan — the only U.S.-based distributor with such a presence in the Japanese market — also represents an opportunity by providing entry into this major electronic component marketplace. Because Memec’s operations and business model is similar to Avnet’s, management has been able to achieve significant operating expense synergies through the integration efforts to date, with further synergies to be realized as the integration efforts are completed in the second half of fiscal 2006. The combination of these factors are the drivers behind the excess of purchase price paid over the value of assets and liabilities acquired.

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The consideration paid in excess of Memec net assets is reflected as a preliminary estimate of goodwill in the preceding table. As stated previously, the Company has not completed its valuation of any potential amortizable intangible assets created as a result of the acquisition. Any amortizable intangible assets identified by management and valued as a result of this process will affect the final determination of goodwill. A portion of the goodwill generated by the Memec acquisition is expected to be deductible for tax purposes, although the Company has not yet quantified the deductible portion.

      As a result of the acquisition, the Company established and approved plans to integrate the acquired operations into all three regions of the Company’s EM operations, for which the Company recorded $99,164,000 in preliminary purchase accounting adjustments during the first half of fiscal 2006. These purchase accounting adjustments consist primarily of severance, lease and other contract termination costs, write-downs in value of Memec owned facilities, write-offs or write-downs in value of certain Memec information technology assets, and write-downs of acquired inventory to net realizable value.

      The following table summarizes the adjustments that have been preliminarily established through purchase accounting and the related activity that has occurred during the first half of fiscal 2006:

      Total amounts utilized during the first six months of fiscal 2006 consisted of $23,119,000 in cash payments and $44,173,000 in non-cash write-downs.

      The purchase accounting reserves established for severance are for reductions of workforce acquired from Memec relating to over 700 personnel primarily in the Americas and EMEA regions, including reductions in senior management, administrative, finance and certain operational functions. These reductions are based on management’s assessment of redundant Memec positions compared with existing Avnet positions and are driven primarily by completed and current consolidations of Memec facilities into Avnet facilities. Severance reserves, particularly those estimated to date for the EMEA region, may be adjusted during the purchase price allocation period because these costs are subject to local regulations and approvals.

      The costs associated with the consolidation of over 60 Memec facilities are presented in the Facility Exit Reserves/ Write-downs in the table above and include estimated future payments for non-cancelable leases, early lease termination costs, the write-down to fair value for three Memec owned properties in EMEA, and write-downs or write-offs of Memec owned assets in these facilities, including capitalized equipment and leasehold improvements. These actions relate primarily to facilities located in the Americas and EMEA. These reserves are subject to adjustment based on final analyses of the ultimate liabilities.

      The IT-related reserves relate primarily to the write-offs or write-downs in the value of certain Memec information technology assets, including financial information systems, that were made redundant in the combined Memec and Avnet business through the continued use of Avnet’s existing systems. Other reserves relate primarily to the write-down of certain Memec inventory lines to estimated net realizable value as of the

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

acquisition date based on anticipated demand, supplier return and stock rotation privileges, age analysis and other known factors that existed as of the acquisition date.

      Estimated purchase accounting adjustments may change as the Company continues to execute its integration plan, particularly as it relates to EMEA severance and facility exit costs. However, the Company expects to complete all actions encompassed in the plan by the end of fiscal 2006. Cash payments for severance are expected to be substantially paid out before the end of fiscal 2007, whereas reserves for other contractual commitments, particularly for certain lease commitments, will extend into fiscal 2010. In addition, the Company is in the process of evaluating tax assets acquired with Memec and the related valuation allowance needs as well as potential amortizable intangible assets resulting from the acquisition. As a result, goodwill as estimated through purchase accounting adjustments is considered to be preliminary and subject to change.

      Unaudited pro forma financial information is presented below as if the acquisition of Memec occurred at the beginning of fiscal 2005. The pro forma information presented below does not purport to present what actual results would have been had the acquisition in fact occurred at the beginning of fiscal 2005, nor does the information project results for any future period. Pro forma financial information is not presented for fiscal 2006 because the acquisition occurred on July 5, 2005, which was three days after the beginning of the Company’s fiscal year 2006. As a result, the accompanying consolidated statement of operations for the quarter and six months ended January 1, 2005 effectively includes Memec’s results of operations for comparative purposes.

      The combined results for Avnet and Memec for the second quarter and six months ended January 1, 2005 were adjusted for the following in order to create the pro forma results in the table above:

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Pro forma results above exclude any benefits that may result from the acquisition due to synergies that were derived from the elimination of any duplicative costs. In addition, the pro forma results have not been adjusted to remove the following Memec costs, which management considers to be non-recurring:

      The following table presents the carrying amount of goodwill, by reportable segment, for the three months ended December 31, 2005:

      The additions in EM relate to the Memec acquisition (see Note 4) and the purchase of shares held by a minority interest holder in one of the Company’s Israeli subsidiaries. The additions in Technology Solutions (“TS”) relate primarily to a final earnout payment made in the first quarter of fiscal 2006 to the former owners of DNS Slovakia, which was acquired by Avnet in fiscal 2005.

      Short-term debt consists of the following:

      Bank credit facilities consist of various committed and uncommitted lines of credit with financial institutions utilized primarily to support the working capital requirements of foreign operations, including bank credit facilities in Japan assumed as part of the acquisition of Memec (see Note 4). The weighted average interest rates on the bank credit facilities at December 31, 2005 and July 2, 2005 were 3.5% and 4.0%, respectively. Although interest rates generally rose during the six month period ended December 31, 2005, the weighted average rate at December 31, 2005 is lower than at July 2, 2005 primarily due to the mix of the Company’s outstanding borrowings amongst its different bank credit facilities. Specifically, at December 31,

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2005, more than 25% of borrowings on bank credit facilities were drawn on the Japanese facility acquired with Memec in the first quarter of fiscal 2006. The interest rates for borrowings under this facility average less than 1%.

      As of July 2, 2005, the Company had an accounts receivable securitization program (the “Program”) with two financial institutions that allowed the Company to sell, on a revolving basis, an undivided interest of up to $350,000,000 in eligible U.S. receivables while retaining a subordinated interest in a portion of the receivables. At July 2, 2005, the Program qualified for sale treatment under SFAS 140. The Company had no drawings outstanding under the Program at July 2, 2005.

      During the first quarter of fiscal 2006, the Company amended the Program to, among other things, increase the maximum amount available for borrowing from $350,000,000 to $450,000,000. In addition, the amended Program now provides that drawings under the Program no longer qualify as off-balance sheet financing. As a result, the receivables and related debt obligation will remain on the Company’s consolidated balance sheet when amounts are drawn on the Program. The Program, as amended, has a one year term which expires in August 2006. There were no drawings outstanding under the Program at December 31, 2005.

      Long-term debt consists of the following:

      As of July 2, 2005, the Company had an unsecured $350,000,000 credit facility with a syndicate of banks (the “Credit Facility”), expiring in June 2007.

      During the second quarter of fiscal 2006, the Company amended and restated the Credit Facility to, among other things, increase the borrowing capacity from $350,000,000 to $500,000,000, and increase the maximum amount of the total facility that can be used for letters of credit from $75,000,000 to $100,000,000 (the “Amended Credit Facility”). In addition, the Amended Credit Facility has a five-year term that matures in October 2010. The Company may still select from various interest rate options, currencies and maturities under the Amended Credit Facility. The Amended Credit Facility contains certain covenants, all of which the Company was in compliance with as of December 31, 2005. There were no borrowings under the Amended Credit Facility at December 31, 2005 or the Credit Facility at July 2, 2005.

      In August 2005, the Company issued $250,000,000 of 6.00% Notes due September 1, 2015 (the “6% Notes”). The proceeds from the offering, net of discount and underwriting fees, were $246,483,000. The Company used these proceeds, plus cash and cash equivalents on hand, to fund the tender and repurchase of $250,000,000 of the 8.00% Notes due November 15, 2006 (the “8% Notes”), at a price of $1,045 per $1,000 principal amount of Notes. In addition, the Company also repurchased $4,095,000 of the 8% Notes at a premium of approximately $1,038 per $1,000 principal amount of Notes. As a result of the tender and repurchases, the Company incurred debt extinguishment costs of $11,665,000 pre-tax, $7,052,000 after tax or $0.05 per share on a diluted basis, relating primarily to premiums and other transaction costs. In December

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2005, the Company repurchased an additional $2,230,000 of the 8% Notes at a premium of approximately $1,026 per $1,000 principal amount of Notes.

      The Company’s $300,000,000 of 2% Convertible Senior Debentures due March 15, 2034 (the “Debentures”) are convertible into Avnet common stock at a rate of 29.5516 shares of common stock per $1,000 principal amount of Debentures. The Debentures are only convertible under certain circumstances, including if: (i) the closing price of the Company’s common stock reaches $45.68 per share (subject to adjustment in certain circumstances) for a specified period of time; (ii) the average trading price of the Debentures falls below a certain percentage of the conversion value per Debenture for a specified period of time; (iii) the Company calls the Debentures for redemption; or (iv) certain corporate transactions, as defined, occur. Upon conversion, the Company will deliver cash in lieu of common stock as the Company made an irrevocable election in December 2004 to satisfy the principal portion of the Debentures, if converted, in cash. The Company may redeem some or all of the Debentures for cash any time on or after March 20, 2009 at the Debentures’ full principal amount plus accrued and unpaid interest, if any. Holders of the Debentures may require the Company to purchase, in cash, all or a portion of the Debentures on March 15, 2009, 2014, 2019, 2024 and 2029, or upon a fundamental change, as defined, at the Debentures’ full principal amount plus accrued and unpaid interest, if any.

      At July 2, 2005, the Company had two interest rate swaps with a total notional amount of $400,000,000 in order to hedge the change in fair value of the 8% Notes related to fluctuations in interest rates. These contracts were classified as fair value hedges with a November 2006 maturity date. The interest rate swaps modified the Company’s interest rate exposure by effectively converting the fixed rate on the 8% Notes to a floating rate (6.4% at July 2, 2005) based on three-month U.S. LIBOR plus a spread through their maturities. During the first quarter of fiscal 2006, the Company terminated the interest rate swaps which hedged the 8% Notes due to the repurchase of $254,095,000 of the $400,000,000 8% Notes, as previously discussed. The termination of the swaps resulted in net proceeds to the Company, of which, $1,273,000 was netted in debt extinguishment costs in the first quarter of fiscal 2006 based on the pro rata portion of the 8% Notes that were repurchased. The remaining proceeds of $764,000, which represent the pro rata portion of the 8% Notes that have not been repurchased, have been capitalized in other long-term debt and are being amortized over the maturity of the remaining 8% Notes.

      The Company has three additional interest rate swaps with a total notional amount of $300,000,000 in order to hedge the change in fair value of the 9 ³/4% Notes due February 15, 2008 (the “9 ³/4% Notes”) related to fluctuations in interest rates. These hedges are classified as fair value hedges and mature in February 2008. These interest rate swaps modify the Company’s interest rate exposure by effectively converting the fixed rate on the 9 ³/4% Notes to a floating rate (10.7% at December 31, 2005) based on three-month U.S. LIBOR plus a spread through their maturities.

      The hedged fixed rate debt and the interest rate swaps are adjusted to current market values through interest expense in the accompanying consolidated statements of operations. The Company accounts for the hedges using the shortcut method as defined under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Hedging Activities. Due to the effectiveness of the hedges since inception, the market value adjustments for the hedged debt and the interest rate swaps directly offset one another. The fair value of the interest rate swaps at December 31, 2005 and July 2, 2005 was a liability of $9,500,000 and an asset of $910,000, respectively, and is included in other long-term liabilities and other long-term assets, respectively, in the accompanying consolidated balance sheets. Additionally, included in long-term debt is a comparable fair value adjustment decreasing long-term debt by $9,500,000 at December 31, 2005 and increasing long-term debt by $910,000 at July 2, 2005.

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      From time to time, the Company may become liable with respect to pending and threatened litigation, tax, environmental and other matters. The Company has been designated a potentially responsible party or has become aware of other potential claims against it in connection with environmental clean-ups at several sites. Based upon the information known to date, the Company believes that it has appropriately reserved for its share of the costs of the clean-ups and management does not anticipate that any contingent matters will have a material adverse impact on the Company’s financial condition, liquidity or results of operations.

      The Company’s noncontributory defined benefit pension plan (the “Plan”) covers substantially all domestic employees. Components of net periodic pension costs during the second quarter and first six months of fiscal 2006 and 2005 were as follows:

      During the first quarter of fiscal 2006, the Company made contributions to the Plan totaling $58,638,000. Management does not anticipate making any further contributions to the Plan during fiscal 2006.

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The 4.5% Convertible Notes, which matured in September 2004, are excluded from the computation of earnings per share as the effects were antidilutive. The Debentures, due March 2034, are also excluded from the computation of earnings per share for the quarter and six months ended December 31, 2005 as a result of the Company’s election to satisfy the principal portion of the Debentures, if converted, in cash (see Note 6). Shares issuable upon conversion of the Debentures were also excluded from the computation of earnings per share in the second quarter and six months ended January 1, 2005 because the contingent condition for their conversion had not been met.

      The effects of certain stock options and unvested stock awards are also excluded from the determination of the weighted average common shares for diluted earnings per share in each of the periods presented as the effects were antidilutive because the exercise price for the outstanding options exceeded the average market price for the Company’s stock. Accordingly, in the second quarters of fiscal 2006 and 2005, the effects of 2,745,000 and 7,218,000 shares, respectively, are excluded from the computation above, all of which relate to options for which the exercise prices were greater than the average market price of the Company’s common stock. In the first six months of fiscal 2006 and 2005, the effects of 2,629,000 and 7,218,000 shares, respectively, are excluded from the computation above, all of which relate to options for which the exercise prices were greater than the average market price of the Company’s common stock. In addition, the Performance Shares, which were issued during fiscal 2006, are accounted for as contingently issuable shares in determining the impact on diluted earnings per share. For the second quarter and six months ended December 31, 2005, the Performance Shares have been excluded from the computation above because none of the necessary conditions for including contingently issuable shares in diluted earnings per share have been met.

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Other non-cash and other reconciling items consist of the following:

      Other, net, cash flows from financing activities are comprised primarily of proceeds from the exercise of stock options (see Note 3), including tax effects relating to stock-based compensation costs with the corresponding offset in cash from operating activities.

      Interest and income taxes paid in the six months ended December 31, 2005 and January 1, 2005, respectively, were as follows:

      Non-cash activity during the first half of fiscal 2006 that was a result of the Memec acquisition (see Note 4) consisted of $418,206,000 of common stock issued as part of the consideration, $430,356,000 of liabilities assumed and $27,343,000 of debt assumed.

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      During the second quarter and six months ended December 31, 2005, the Company incurred certain restructuring charges and integration costs primarily as a result of the acquisition of Memec on July 5, 2005 (see Note 4), which is being integrated into the Company’s existing Electronic Marketing operations in all three regions. As a result of the acquisition integration efforts, the Company established and approved plans to restructure certain of Avnet’s existing operations to accommodate the merger of the two businesses. In addition, the Company incurred other charges relating to certain cost reduction actions taken by TS in the EMEA region, and charges for the write-down of certain owned facilities, which are unrelated to the Memec integration efforts. The following table summarizes the activity relating to these fiscal 2006 charges:

      The restructuring and other charges incurred during the second quarter of fiscal 2006 totaled $23,168,000 pre-tax and $15,263,000 after-tax, or $0.10 per share on a diluted basis. Of this total pre-tax charge, $7,536,000 related to inventory write-downs associated with certain terminated inventory lines. This portion of

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the pre-tax charge was included in cost of sales in the accompanying consolidated statement of operations. The remaining second quarter pre-tax charge of $15,632,000, which is included in restructuring and other charges in the accompanying consolidated statement of operations, consisted of $9,785,000 for severance costs ($9,257,000 related to EM resulting from the Memec integration and $528,000 related to certain personnel reductions in TS EMEA), facility exit costs of $2,320,000 ($2,062,000 in EM and $258,000 in TS) and $3,645,000 for other charges in EM. These other charges included impairment charges related to two owned but vacant Avnet buildings totaling $2,671,000. Finally, a reversal of $118,000 in excess remaining restructuring reserves recorded in prior fiscal years in TS EMEA was recorded in the second quarter of fiscal 2006 (see Fiscal 2004 and 2003 in this Note 13 for further discussion).

      The restructuring and other charges incurred during the six months ended December 31, 2005 totaled $30,492,000 pre-tax ($23,074,000 included in the preceding table and $7,536,000 recorded in cost of sales as discussed below, net of a reversal of $118,000 included in the table covering fiscal 2004 and 2003 charges in this Note 13) and $20,567,000 after-tax, or $0.14 per share on a diluted basis. The pre-tax charges consisted of inventory write-downs for terminated lines amounting to $7,536,000 and recorded through cost of sales in the accompanying consolidated statement of operations. The remaining pre-tax charge of $22,956,000, which was included in restructuring and other charges in the accompanying consolidated statement of operations, includes $13,880,000 for severance costs ($12,739,000 in EM resulting primarily from the Memec integration and $1,141,000 for the reduction of certainTS personnel in EMEA), facility exit costs of $3,103,000 ($2,845,000 in EM and $258,000 in TS EMEA, both related to remaining lease reserves), $2,335,000 for the write-down of certain capitalized IT-related initiatives, primarily in the Americas, and $3,756,000 for other charges. These other charges included impairment charges related to two owned but vacant Avnet buildings totaling $2,671,000. The Company also recorded a reversal of $118,000 in excess remaining restructuring reserves recorded in prior fiscal years in TS EMEA during the six months ended December 31, 2005 (see Fiscal 2004 and 2003 reserve discussion in this Note 13).

      The charge for terminated inventory lines relates to a strategic decision during the second quarter of fiscal 2006 to exit certain product lines within EM in the Americas. As a result, management recorded a write-down of the related inventory on hand to fair market value due to the lack of contractual return privileges when a line is terminated by Avnet. Severance charges incurred during the first and second quarters of fiscal 2006 related to work force reductions of over 200 personnel primarily in administrative and support functions in the EMEA and Americas regions. The majority of the positions eliminated were Avnet personnel that were deemed redundant by management with the merger of Memec into Avnet and also includes a small number of primarily administrative staff in TS’s operations in EMEA who were identified as redundant based upon the realignment of certain job functions in that region. The facility exit charges relate to liabilities for remaining non-cancelable lease obligations and the write-down of property, plant and equipment at two facilities in the Americas. The facilities, which supported administrative and support functions, and some sales functions, were identified for consolidation based upon the termination of certain personnel discussed above and the relocation of other personnel into other existing Avnet facilities. The IT-related charges resulted from management’s review of certain capitalized systems and hardware as part of the integration effort. A substantial portion of this write-off, which was recorded in the first quarter of fiscal 2006, relates to mainframe hardware that was scrapped due to the purchase of new, higher capacity hardware to handle the increased capacity needs with the addition of Memec. Similarly, certain capitalized IT assets were written off when they became redundant either to other acquired systems or new systems under development in the first quarter of fiscal 2006 as a result of the acquisition of Memec. Other charges in the six months ended December 31, 2005 related primarily to certain contract and lease termination charges associated with the redundant employees identified in TS EMEA.

      The asset impairment charges relate to two owned facilities, one in EMEA and one in the Americas, that Avnet has vacated. The write-down to fair value was based upon management’s estimates of the current market values and possible selling price, net of selling costs, for these properties.

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The restructuring charges are presented on the consolidated statement of operations as a separate component of operating expenses, with the exception of the charge to cost of sales for inventory write-downs for terminated lines. Of the total amounts recorded to expense during the six months ended December 31, 2005, $12,945,000 represented non-cash write-downs, which consisted primarily of the charge to cost of sales and the previously discussed write-down to fair value of the owned facilities in EMEA and the Americas. The remaining charges in the six months ended December 31, 2005 required or will require the use of cash, of which $9,522,000 was paid during the six months ended December 31, 2005.

      As of December 31, 2005, remaining reserves related to the restructuring actions taken in the first half of fiscal 2006 total $8,118,000, of which $5,037,000 relates to severance reserves, the majority of which management expects to utilize before the end of fiscal 2006, facility exit costs of $2,534,000, the majority of which management expects to utilized by fiscal 2010, and other costs of $547,000, the majority of which management expects to utilize by 2009.

      Also resulting from the Memec acquisition and its subsequent integration into Avnet, the Company incurred certain costs during the second quarter of fiscal 2006, amounting to $9,255,000 pre-tax, $6,097,000 after tax or $0.04 per share on a diluted basis. Including activity during the first quarter of fiscal 2006, integration costs during the six months ended December 31, 2005 totaled $15,717,000 pre-tax, $10,799,000 after-tax and $0.07 per share on a diluted basis. The integration costs relate to incremental salary costs, primarily of Memec personnel, who were retained by Avnet for extended periods following the close of the acquisition, solely to assist in the integration of Memec’s IT systems, administrative and logistics operations into those of Avnet. These identified personnel have no other meaningful day-to-day operational responsibilities outside of the integration effort. Also included in integration costs are certain professional fees, travel, meeting, marketing and communication costs that were incrementally incurred solely related to the Memec integration efforts. Integration costs are presented on the consolidated statement of operations as a separate component of operating expenses. All integration costs represent amounts incurred and paid during the second quarter of fiscal 2006.

      During fiscal 2004 and 2003, the Company recorded a number of restructuring charges which related to the reorganization of operations in each of the three major regions of the world in which the Company operates, generally taken in response to business conditions at the time of the charge and as part of the efforts of the Company to return to the profitability levels enjoyed by the business prior to the industry and economic downturn that commenced in fiscal 2001.

      The following table summarizes the activity during the six months ended December 31, 2005 in the remaining accrued liability and reserve accounts in these prior year restructuring reserves:

      The Company expects to utilize the majority of the remaining reserves for severance costs by the end of fiscal 2006. The Company expects to utilize most of the remaining reserves for contractual lease commit-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ments, shown under Facility Exit Costs above, by the end of fiscal 2007, although a small portion of the remaining reserves relate to lease payouts that extend as late as fiscal 2010. The other remaining reserves relate primarily to remaining contractual commitments, the majority of which the Company expects to utilize during fiscal 2006.

      Included in adjustments for the six months ended December 31, 2005 is a reversal of $118,000, which was recorded through restructuring and other charges in the accompanying consolidated statement of operations. The reversal relates primarily to a reserve established in TS EMEA prior to fiscal 2006 for a long-term maintenance contract that expired in fiscal 2006. Therefore, the remaining reserves were deemed excessive and reversed. Also included in adjustments is an addition to Facility Exit Costs related to an overpayment made on a long-term lease obligation on a vacated property in EMEA. The overpayment was refunded to the Company but was added back to the reserve as the amount will still be paid back to the lessor over the remaining term of the lease contract.

      During the second quarter of fiscal 2006, the Company announced two transactions, both of which closed subsequent to December 31, 2005 and both of which relate to the TS business in the Americas. First, the Company has agreed to contribute the net assets of its Avnet Enterprise Solutions (“AES”) business in the Americas, plus some cash, into a joint venture with Calence, Inc. in exchange for an investment in the joint venture, called Calence LLC. AES specializes in selling network lifecycle solutions directly to end-users and represents less than $200 million annual sales for Avnet. Avnet’s equity investment in Calence LLC will be recorded under the equity method. This transaction closed in February 2006.

      Avnet also announced an agreement to sell its US-based business focused on the sale of Hewlett Packard enterprise products to end users to Logicalis, Inc. Concurrent with that transaction, TS Americas and Logicalis entered into an exclusive distribution agreement whereby Logicalis will procure all of its HP and IBM enterprise computing products from Avnet for a five-year contract period. Sales over the five year contract period to Logicalis are expected to exceed $1 billion. The sale to Logicalis for approximately $12 million closed in January 2006.

      Neither of these transactions is expected to have a material impact on Avnet’s third quarter fiscal 2006 operating results.

      For a description of the Company’s critical accounting policies and an understanding of the significant factors that influenced the Company’s performance during the quarters ended December 31, 2005 and January 1, 2005, this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the consolidated financial statements, including the related notes, appearing in Item 1 of this Report, as well as the Company’s Annual Report on Form 10-K for the year ended July 2, 2005.

      There are numerous references to the impact of foreign currency translation in the discussion of the Company’s results of operations that follow. Over the past several years, the exchange rates between the US Dollar and many foreign currencies, especially the Euro, have fluctuated significantly. For example, the US Dollar has strengthened against the Euro by approximately 2.6% when comparing the second quarter of fiscal 2006 to the first quarter of fiscal 2006. On a year-over-year basis (second quarter fiscal 2006 compared to second quarter fiscal 2005), the US Dollar has strengthened against the Euro by approximately 9.2%. When the stronger US Dollar exchange rates of the current year are used to translate the results of operations of Avnet’s subsidiaries denominated in foreign currencies, the resulting impact is a decrease, in US Dollars, of reported results. In the discussion that follows, this is referred to as the translation impact of changes in foreign currency exchange rates.

      In addition to disclosing financial results that are determined in accordance with US generally accepted accounting principles (“GAAP”), the Company also discloses certain non-GAAP financial information such as income or expense items as adjusted for the impact of foreign currency exchange rate fluctuations, as discussed above. Management believes that providing this additional information is useful to the reader to better assess and understand operating performance, especially when comparing results with previous periods or forecasting performance for future periods, primarily because management typically monitors the business both including and excluding these adjustments to GAAP results. Management also uses the non-GAAP measures to establish operational goals and, in some cases, for measuring performance for compensation purposes.

      As further discussed in the Overview below, during the first quarter of fiscal 2006, Avnet completed the acquisition of Memec Group Holdings Limited (“Memec”), a global distributor that markets and sells a portfolio of semiconductor devices from industry-leading suppliers, in addition to providing customers with engineering expertise and design services. Memec recorded sales of $2.28 billion in the twelve months prior to the July 5, 2005 close of the acquisition, which makes this Avnet’s largest acquisition to date, based on sales. The consideration paid for the Memec acquisition consisted of stock and cash valued at approximately $506.3 million, including transaction costs, plus the assumption of $240.0 million of Memec’s net debt (debt less cash acquired). All but $27.3 million of this acquired net debt was repaid upon the closing of the acquisition. Under the terms of the purchase, Memec investors received 24.011 million shares of Avnet common stock plus $64.0 million of cash. The shares of Avnet common stock were valued at $17.42 per share, which represents the five-day average stock price beginning two days before the acquisition announcement on April 26, 2005.

      Within this MD&A, management occasionally discusses certain prior year sales of Avnet combined with the historical results of Memec for the corresponding period. Although the Memec acquisition is accounted for as a purchase business combination and, therefore, the results of Memec are only included in Avnet’s results subsequent to the July 5, 2005 close of the acquisition, management believes that comparative analysis of sales to historical periods, as if Memec were a part of Avnet’s operations, helps investors relate current year results to historical periods prior to the close of the acquisition. Management uses similar pro forma data to analyze performance for internal operational goal setting and performance management. Furthermore, the combined results of Avnet and Memec in prior periods provide one of the bases by which management evaluates its achievement of synergy targets resulting from the merger as discussed further herein. In the discussion that follows, mention of Avnet and Memec or Electronics Marketing and Memec combined data is referred to as pro forma combined results.

      Analysis of results and outlook on a non-GAAP basis should be used as a complement to, and in conjunction with, data presented in accordance with GAAP.

OVERVIEW

Organization

      Avnet, Inc. and its subsidiaries (the “Company” or “Avnet”) is the world’s largest industrial distributor, based on sales, of electronic components, enterprise computer products and embedded subsystems. Avnet creates a vital link in the technology supply chain that connects over 300 of the world’s leading electronic component and computer product manufacturers and software developers as a single source for multiple products for a global customer base of over 100,000 original equipment manufacturers (“OEMs”), contract manufacturers, original design manufacturers, value-added resellers (“VARs”) and end-users. Avnet distributes electronic components, computer products and software as received from its suppliers or with assembly or other value added by Avnet. Additionally, Avnet provides engineering design, materials management and logistics services, system integration and configuration, and supply chain advisory services.

      The Company consists of two operating groups — Electronics Marketing (“EM”) and Technology Solutions (“TS”) — each with operations in the three major economic regions of the world: the Americas, EMEA (Europe, Middle East and Africa) and Asia/ Pacific. A brief summary of each operating group is provided below:

Results of Operations

      The acquisition of Memec on July 5, 2005 has had notable impacts on the financial results in fiscal 2006, including significant revenue growth in the EM business and for Avnet as a whole, when compared to prior periods. The integration of Memec into Avnet’s ongoing operations has also had a significant positive impact on the Company’s profitability in fiscal 2006. These impacts are further described in detail throughout this MD&A.

      Avnet’s consolidated sales in the second quarter of fiscal 2006 were $3.76 billion, up 30.4% over the second quarter of fiscal 2005 sales of $2.88 billion. The Memec acquisition is the most significant reason for

this year-over-year growth. Consolidated sales for the second quarter of fiscal 2006 were up 9.6% as compared with the Avnet and Memec pro forma combined sales in the second quarter of fiscal 2005, which totaled $3.43 billion. See Sales for further detail of the prior year quarter including Memec’s sales on a pro forma basis. Sequentially, Avnet’s consolidated sales increased by 15.0% over the first quarter of fiscal 2006 sales of $3.27 billion.

      The second quarter of fiscal 2006 was the twelfth consecutive quarter for year-over-year growth in consolidated sales for Avnet. The year-over-year growth in the current year second quarter was driven by both operating groups. EM sales in the second quarter of fiscal 2006 totaled $2.26 billion, which is an increase of 52.7% as compared to second quarter of fiscal 2005 (11.5% increase on a pro forma combined basis) and a sequential improvement over the first quarter of fiscal 2006 of 6.9%. All three geographic regions contributed to this growth as EM exited a somewhat weaker than normal summer season in the first quarter of the current fiscal year. The Asia region exhibited the most strength for EM, with 87.9% year-over-year sales growth (26.0% on a pro forma combined basis) and 15.4% sequential growth. Asia continues to be the highest growth region for EM, with the current quarter growth primarily a function of strong seasonal demand for digital consumer products. The Americas and EMEA regions also had meaningful growth both year-over-year and sequentially, driven primarily by strengthening in these regions’ industrial segments. TS, which normally has a strong December quarter resulting from the typical calendar-year budgeting cycle of its primary customer base, yielded record quarterly sales of $1.50 billion in the second quarter of fiscal 2006. This strong performance represented an increase in sales of 6.9% as compared to TS results for the second quarter of fiscal 2005 and a 29.8% sequential improvement as compared with the first quarter of the current fiscal year. The strength of TS business is derived most significantly from a continued strong performance by its enterprise computing businesses worldwide. Enterprise computing sales improved by 21.2%, when comparing calendar year 2005 to calendar year 2004. TS also has grown its software and storage sales year-over-year, both of which have outpaced growth in hardware sales.

      With the improvement in sales performance being one of the driving forces, gross profit in the second quarter of fiscal 2006 has increased substantially over the prior year. However, gross profit margins have declined to 12.3% in the second quarter of fiscal 2006 (which includes a $7.5 million, or 0.2% of sales, impact of charges related to the Company’s termination of certain supplier product lines) as compared with gross profit margins of 13.0% in the second quarter of fiscal 2005. A number of factors contributed to this decline in gross profit margins. First, Avnet’s geographic mix of business, resulting in part from the Memec acquisition, can have a significant impact on consolidated gross profit margins. The Asia region, particularly in EM’s business, has continued to grow, representing 18.2% of Avnet’s consolidated sales in the second quarter of fiscal 2006 as compared with 13.2% in the prior year second quarter. EM Asia typically yields lower gross profit margin, but also a much lower level of operating costs and higher asset velocity than the other geographic regions. Competitive pricing pressures, most notably in EM’s business, and a higher percentage of lower margin software sales in the TS business also contributed to the decrease in the gross profit margins.

      The year-over-year decline in gross profit margins was more than offset by improvement in key operating expense metrics in the second quarter of fiscal 2006. Although selling, general and administrative expenses increased in the second quarter of fiscal 2006 as compared with the second quarter of fiscal 2005, these expenses as a percentage of sales and as a percentage of gross profit have improved substantially. Selling, general and administrative expenses were 9.1% of sales and 73.9% of gross profit in the second quarter of fiscal 2006. These metrics were 10.1% and 77.5%, respectively, in the second quarter of fiscal 2005. The significant improvement in these key metrics has resulted primarily from the Company’s success to date in executing its integration strategy with respect to the Memec acquisition. The integration is progressing on schedule and management estimates that actions had been completed by the end of the second quarter of fiscal 2006 to remove over $100 million of annualized operating expenses, or $25 million on a quarterly basis, from the ongoing operations of the combined Avnet and Memec business. Management also projects that the full $150 million of annualized synergies that were earlier disclosed will still be achieved by the Company prior to the end of fiscal 2006.