UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

|(Mark One) |  |                                                                                         
|---------- |  | ----------------------------------------------------------------------------------------
|ý          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|           |  | For the fiscal year ended December 31, 2004                                             
|           |  | 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 1-12432

AMERICAN POWER CONVERSION CORPORATION(Exact name of registrant as specified in its charter)

|MASSACHUSETTS                                                                                                                     |  | 04-2722013                                   
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------
|(State or other jurisdiction of
incorporation or organization)                                                                    |  | (I.R.S. employer identification no.)         
|132 FAIRGROUNDS ROAD, WEST KINGSTON, RHODE ISLAND 02892
401-789-5735(Address and telephone number of principal executive offices)
|Securities registered pursuant to Section 12(b) of the Act:                                                                      
|Title of Each Class                                                                                                               |  | Name of Each Exchange on Which Registered    
|Common Stock, $0.01 par value                                                                                                     |  | Pacific Exchange, Inc.
Nasdaq National Market
|Securities registered pursuant to Section 12(g) of the Act: None                                                                 

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past
90 days. YES ý    NO o

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). YES ý    NO o

The aggregate market value of the outstanding common stock, other than shares held by persons who may be deemed affiliates of the registrant, as of the last
business day of the registrant's most recently completed second fiscal quarter was approximately $3,500,000,000. The number of shares outstanding of the registrant's common stock, $0.01 par value, on
March 1, 2005 was 192,543,000.

Documents Incorporated by Reference

Portions of the registrant's definitive Proxy Statement in connection with the 2005 Annual Meeting of the Shareholders are incorporated by reference in
Part III hereof.



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Part I

Item 1. Business

American Power Conversion Corporation

Founded in 1981, American Power Conversion (APC) is a leading provider of global, end-to-end infrastructure availability solutions. APC's
comprehensive products and services offering, which is designed for both home and corporate environments, improves the availability, manageability and performance of sensitive electronic, network,
communication and industrial equipment of all sizes.

APC
designs, develops, manufactures, and markets solutions for computer, communications, and electronic applications worldwide. Our products include:



These
products are primarily used with sensitive electronic devices which rely on electric utility power including, but not limited to, home electronics, PCs,
high-performance computer workstations, servers, networking equipment, communications equipment, Internetworking equipment, storage systems, data centers, mainframe computers, and
facilities.

Our
UPS products regulate the flow of utility power to ensure safe and clean power to the protected equipment, and provide seamless back-up power in the event of the loss of
utility power. The back-up power lasts for a period of time sufficient to enable the user to continue computer operations, conduct an orderly shutdown of the protected equipment, preserve
data, work through short power outages or continue operating for several hours or longer.

Our
surge protection devices and power conditioning products provide protection from electrical power surges and noise in the flow of utility power. APC's cooling equipment regulates
temperature and humidity and provides air distribution. Our DC-power systems monitor and isolate equipment from utility voltage fluctuations, frequency variations, and electrical noise. In the event
of a power failure, the DC products provide back-up power for communications networks. Our management tools enhance monitoring, management, and performance of our products; our racks and
enclosures provide a
high-availability environment for integrating and housing information technology equipment; our service offerings assist the end-user with the installation, configuration, and
maintenance of our products; and our network, desktop and notebook PC and mobile accessories provide a range of power, connectivity and productivity enhancing products.

Additionally,
APC has pioneered integrated systems for network-critical physical infrastructure (NCPI). NCPI is the foundation upon which Information Technology (IT) and
telecommunication networks reside. It is the "backbone" of the business, as its elements provide the power, cooling, physical housing, cabling and other elements which allow the IT to function. APC
offers stand-alone products within several of the NCPI categories. Additionally, we offer the industry's first integrated NCPI system, sold under the InfraStruXure architecture.

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Segments

APC operates primarily within one industry consisting of three reportable operating segments by which we manage our business and from which various offerings are
commonly combined to develop a total solution for the customer. These efforts primarily incorporate the design, manufacture, and marketing of power protection equipment and related software and
accessories for computer, communications, and related equipment. Our three segments are: Small Systems, Large Systems, and "Other." Each of these segments addresses global markets.

Small Systems.The Small Systems segment develops power devices and accessories for servers and
networking equipment commonly used in local area and wide area networks and for personal computers and sensitive electronics. Major product offerings include the Back-UPS®,
Smart-UPS®, and Symmetra® Power Array® single-phase family of UPSs. Also included are SurgeArrest® surge suppressors as well as cabling and
connectivity products. Additional accessories and software products are offered to enhance the management of these networks, including APC's PowerChute® software and
NetShelter® server enclosures. Products are sold to home and commercial users primarily through an indirect selling model consisting of computer distributors and dealers, value-added
resellers, mass merchandisers, catalog merchandisers, E-commerce vendors, and strategic partnerships.

Large Systems.The Large Systems segment provides systems, products and services that primarily
provide back-up power, power distribution and cooling for data centers, facilities, and communications equipment for both commercial and industrial applications. Product offerings include
major components of InfraStruXure systems, Silcon® UPSs, NetworkAIR® precision cooling equipment, DC and broadband power systems, and services. Products are sold to
commercial users through both a direct and indirect selling model consisting of value-added resellers and strategic partnerships. Additionally, APC utilizes manufacturer representatives to identify
and secure projects.

"Other" Segment.The Other segment principally consists of desktop and notebook computer accessories
and replacement batteries. The distribution model of products in the Other segment is consistent with that of the Small Systems segment.

Information
on reportable operating segment net sales, profit from operations, and depreciation for each of the last three years is located in Note 12 of Notes to Consolidated
Financial Statements in Item 8 of this Report.

APC
was incorporated under the laws of the Commonwealth of Massachusetts on March 11, 1981. Executive offices are located at 132 Fairgrounds Road, West Kingston, RI 02892, our
telephone number is (401) 789-5735 and our Internet Web site iswww.apc.com.

APC
is required to file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (SEC). Investors may read and copy
any document that APC files, including this Annual Report on Form 10-K, at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet Web site at www.sec.govthat contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the SEC, from
which investors can electronically access APC's SEC filings.

APC
makes available free of charge on or through its Internet Web site (www.apc.com), its Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after it electronically files such material with, or furnishes the material to, the SEC. The information on APC's
Internet Web site is not, and shall not be deemed to be, a part of this Report or incorporated into any other filings APC makes with the SEC.

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Market Overview

The growth of the power protection industry has been fueled by the demand for information systems to be accessible as much as 24 hours a day to support the
proliferation of microprocessor-based equipment and related systems in the corporate marketplace and in the small office/home office environment. PCs and servers have become an integral part of the
overall business strategy of companies worldwide. Businesses store, manipulate, and transfer data via local area and wide area networks as well as via corporate intranets and the Internet.
Additionally, there is a growing need to support the high-availability power and cooling requirements of centralized data centers as well as networking and communications equipment.

We
believe that the increased awareness of the costs and lost productivity associated with downtime, caused by power problems and other environmental issues, has increased demand for
power protection and related products. Complete failures, surges, or sags in the electrical power supplied by a utility can cause computers and electronic systems to malfunction, resulting in costly
downtime, damaged or lost data files, and damaged hardware. A UPS protects against these power disturbances by providing continuous power automatically and virtually instantaneously after the electric
power supply is interrupted. UPSs also provide line filtering and protection against surges or sags while the electric utility is available. The products also enhance productivity through the
continued availability of networks, sensitive electronics, and even facilities during power outages. In international regions, power quality often results in varied levels of distortions and, as a
result, these areas provide us with additional opportunities for our products.

Additionally,
the rapid deployment of information technology with smaller form factors, such as rack-optimized and blade servers, generate increasingly large amounts of heat.
APC's precision cooling products regulate temperature and humidity to maintain temperatures within the equipments' tolerance to help prevent product degradation and failure.

Products

APC's strategy is to design and manufacture products that incorporate high-performance and quality at competitive prices, while offering our customers
appropriate technology for their applications. Our products are designed to fit seamlessly into the computer, networking, and communications environments of businesses, homes, small offices/home
offices, and outdoor installations. APC engineers and tests these products for compatibility with leading information, communications and building management technology hardware and software.

UPS.We currently manufacture a broad range of standard domestic and international UPS products. Our
UPSs are designed for multiple applications with the principal differences among the products being the amount of power which can be supplied during an outage, the length of time for which
battery power can be supplied, the level of intelligent network interfacing capability, the number of brownout and over-voltage correction features and the design approach used (Standby,
Line Interactive, Double Conversion On-Line and Delta Conversion On-line). UPSs range from 325 volt-amps (VA), suitable for a PC, to 1.6 megawatt, or MW, suitable
for data centers, mainframe computers, industrial applications or facilities. Estimated resale prices to end-users range from $29.99 to approximately $250,000.

Surge Suppressors.We also offer a line of surge protection products to protect against power and
data-line spikes and surges. The principal differences among the surge suppressor models are the level of protection available, feature sets of the products, and the applications for which
they are designed. Estimated resale prices range from approximately $10 to approximately $2,850.

Power Distribution Units (PDUs).APC offers a wide variety of Power Distribution Units (PDUs) to
distribute power within an IT rack or through an entire data center. Our single-phase PDUs are designed to occupy little or no space in a rack while distributing basic, metered or controllable power

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outlets
for rack-mount equipment. 3-Phase or InfraStruXure PDUs are designed to increase flexibility and agility of data center power distribution through a design that does
not require a raised floor. Estimated resale prices range from $89 to $25,000.

Management Tools.APC also offers software and hardware management tools for UPS management,
network-critical physical infrastructure management, server access and environmental monitoring. These products provide power and environmental monitoring and management of information technology
systems. Basic monitoring tools are included free of charge with the purchase of many APC solutions, while estimated resale prices for additional offerings range from approximately $100 to $10,000 to
end-users.

Racks and Enclosures.APC offers a full line of rack enclosures and accessories sold under the
NetShelter product family. These enclosures are designed to house a broad range of IT hardware manufacturers' equipment, as well as APC's InfraStruXure systems. Estimated resale prices for accessories
and enclosures range from approximately $20 to $2,500.

Cooling Solutions.Additionally, APC offers a line of cooling solutions for environmental control and
air distribution. Products include air distribution/fan systems, portable, floor and ceiling-mounted precision cooling systems used in a variety of applications including server rooms, data centers,
and communication stations. Estimated resale prices range from approximately $500 to approximately $35,000.

Service Programs

Warranties.APC provides service programs and warranties to our customers for a wide range of our
products. Typical programs include both in-warranty and out-of-warranty repair or replacement as well as product-based services and professional services.
Product-based services include on-site services, installation services, remote monitoring services, preventive maintenance and extended warranty options. APC professional services include
project management, needs assessment, and network integration services. Depending on the product, we principally offer standard warranties ranging from one to three years, for which extended warranty
periods can generally be purchased, as well as programs to upgrade older and competitive units to new or refurbished condition.

Equipment Protection Policy.APC offers an Equipment Protection Policy in the U.S., Canada, Europe,
and Australia. Depending on the model and country, the policy provides up to $150,000, £50,000, or €100,000 for repair or replacement of customers' hardware should a surge
or lightning strike pass through an APC unit. Certain restrictions may apply. Customers can also register the ProtectNet® line of dataline surge suppressors for a "Double-Up"
Supplemental Equipment Protection Policy, under which the total recoverable limit under the Equipment Protection Policy may be doubled (U.S. and Canada only).

Except
in relation to the 2003 product recall discussed below, APC has generally experienced satisfactory field operating results, and warranty and Equipment Protection Policy costs
incurred to date have not had a significant impact on our consolidated results of operations.

In
early 2003, APC announced a product recall of Back-UPS CS 350 and 500 models, due to potential safety issues. Prior to announcing the recall, APC received eight reports
worldwide of units overheating, resulting in the melting of the unit's outer casing, six of which occurred in the United States. Three of the reported incidents resulted in minor property damage; no
injuries have been reported. The total number of affected devices recalled worldwide is approximately 2.1 million with approximately 900,000 devices recalled in the United States. The recall is
limited to two specific models in APC's Back-UPS CS product line, the Back-UPS CS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt
models. The affected units were manufactured between November 2000 and December 2002 and were sold primarily through computer and electrical distribution, catalog and retail outlets
worldwide.

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Distribution Channels

APC markets its products to businesses, small offices/home offices, and home users around the world through a variety of distribution channels. These channels
include:



We
also sell directly to some large value-added resellers, which typically integrate our products into specialized computer systems and then market turnkey systems to selected vertical
markets. Certain select products are sold directly to manufacturers for incorporation into products manufactured or packaged by them. Additionally, APC utilizes manufacturer representatives to
identify and secure projects.

Two
computer distributor customers, Tech Data Product Management and Ingram Micro, accounted for approximately 12.7% and 8.9%, respectively, of net sales in 2004, 14.1% and 10.0%,
respectively, of net sales in 2003, and 14.4% and 13.2%, respectively, of net sales in 2002. The majority of our sales to Tech Data Product Management and Ingram Micro are included in the Small
Systems segment.

Sales and Marketing

APC's sales and marketing organizations are primarily responsible for four activities: sales, marketing, customer service, and technical support. Our sales force
is responsible for relationships with our distribution channels and end-users as well as developing new distribution channels, particularly in geographic and product application areas into
which we are expanding. Additionally, our sales force targets sales of the full range of APC products and services to specific customer groups.

Our
marketing activities include customer education and awareness programs, market research, product planning, trade shows, sales and pricing strategies, and product sales literature. At
various times, we utilize direct marketing efforts domestically and internationally, including direct mailings and print, online/Internet, radio, and television advertising, as well as exhibiting at
computer trade shows and hosting customer focused events. Customer service is responsible for technical product inquiries and customer support. APC has developed a number of programs and techniques to
support the distribution channels. These include, but are not limited to, toll-free phone assistance, online product and technical information, formal product demonstrations, as well as
live and online trainings and webinars.

Supply Chain ManagementManufacturing, Quality, Raw Materials, and Distribution

Manufacturing.APC's manufacturing operations are located in the United States, Brazil, China,
Denmark, India, Ireland, the Philippines, and Switzerland. APC differentiates itself in the market by maintaining a low-cost, high-volume manufacturing footprint owned and
operated by APC. We believe that our long-term success depends on, among other things, the ability to control our costs. We utilize lean "cell" based manufacturing processes, automated
manufacturing techniques, and extensive quality control in order to minimize costs and maximize product reliability. In addition, the design of products and the commonality of parts allow for
efficient circuit board component mounting or insertion, wave soldering, and in-process testing. Quality control procedures are performed at the component, sub-assembly, and
finished product levels. We are committed to an ongoing effort to enhance the overall productivity of our manufacturing facilities.

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Quality and Environmental.APC has been ISO 14001 and ISO 9001-2000 certified by the
International Organization for Standardization. Our systems have been audited to the stringent ISO 14001 and ISO 9001-2000 levels at our manufacturing facilities in the United States,
China, India, Ireland, and the Philippines as well as at our Design Center in Denmark. The International Organization for Standardization has also certified our Research and Development Center in
Massachusetts and our manufacturing facility in Brazil to the ISO 9001-2000 level.

Raw Materials.We generally purchase devices and components from more than one source where
alternative sources are available; however, we do use sole source suppliers for certain components and certain finished products. We believe that alternative components for these sole source items
could be incorporated into our products, if necessary. While we have been able to obtain adequate supplies of components from sole source suppliers, the future unavailability of components from these
suppliers could disrupt production and delivery of products until an alternative source is identified.

Order Management and Distribution.APC continues to invest in a worldwide distribution network that
delivers our products and services to our customers. We own or lease distribution centers and engage third party logistics service providers in numerous countries across the globe. All distribution
centers are connected to our customer service operations via APC's Enterprise Resource Planning system, which enables orders received from any customer or country to be fulfilled from any distribution
center throughout the world. To support the demands of our growing systems business, we are also adding light manufacturing and postponement capabilities to our distribution centers, enabling final
configuration for each Customer order. As part of our continuing e-Commerce initiative, APC utilizes a variety of electronic methods to interact with our Customers, including the use of
Electronic Data Interchange transactions between APC and our Distributors for receipt of orders, acknowledgement of orders, and confirmation of shipments. Additionally, we utilize a suite of Web tools
that allows Consumers and Resellers to view product information, gain access to pricing information, and place their orders via the Web.

Product Development.APC's research and development (R&D) staff includes engineers and support
persons who develop new products and provide engineering support for existing products. Our R&D efforts are also aimed at reducing cost and total cycle time and improving product and component
quality. APC's R&D staff is located around the world with most of these employees in the United States and additional resources located in Denmark, India, Ireland, and Taiwan. Employees devoted to the
improvement and development of software products are located in the United States and Ireland. We believe that the technical expertise of our R&D staff is very important to our growth as technological
change is rapid in our markets.

During
2004, APC actively supported its new InfraStruXure architecture with additional InfraStruXure compatible solutions. Additions to the InfraStruXure family included new cooling
offerings, integrated power generation, and the InfraStruXure Expressa mobile data center solution built on APC's InfraStruXure architecture. At the same time, our Smart-UPS
line continued to expand with new VA points and SKUs for server and networking applications. For the consumer, APC introduced new Back-UPS products as well as a line of mobile computing
accessories, surge protection and power conditioning battery backup for the audio visual market.

In
early 2003, APC introduced InfraStruXure, an expansion of the PowerStruXure architecture introduced in 2002. InfraStruXure is a patent-pending, systematic approach to building
network-critical physical infrastructure for data centers. This entirely new approach to data center support simplifies the design, building and management of data center infrastructure with an
innovative, fully engineered and tested system. InfraStruXure incorporates standardized components including modular, scalable, N+1 redundant UPSs; zoned, intelligent power distribution; and precision
cooling in a rack form factor.

In
2003, new features and new products were added to our Smart-UPS and Back-UPS lines for corporate and home users; a new line of SurgeArrest surge suppressors
was introduced; new power

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management
software for new operating systems and management platforms, such as Microsoft Windows Server 2003, were made available; new precision cooling offerings were added; and additions to APC's
growing line of mobile accessories were made. APC has continued to invest in research and development to drive innovation in the market with new products, new product categories and lower priced
solutions.

In
2002, we introduced PowerStruXure, the initial building block of APC's InfraStruXure architecture. Our Back-UPS and Smart-UPS lines were also enhanced with new
models that highlight longer run time, smaller footprints and lower price points. New hardware and software management tools were also announced and we added new products for notebook and desktop PCs.

R&D
expenditures were $85.6 million or 5.0% of net sales in 2004, $67.6 million or 4.6% of net sales in 2003, and $60.1 million or 4.6% of net sales in 2002. We
continue to commit resources to support our investment in research and development. We believe that continued product innovation through development is necessary for our existing products to remain
competitive in our markets, as well as creating opportunities from new product introductions. The increases in total 2004 R&D spending primarily reflect increased numbers of software and hardware
engineers and costs associated with new product development and engineering support.

Intellectual Property

We seek patent protection for those inventions and improvements likely to be incorporated into our products, systems, solutions and services or where patent
protection will improve our competitive position. APC's focus is to deliver innovation to the market place. As part of that commitment, we have made significant investments in building our
intellectual property portfolio. United States patents generally have a term of twenty years from the filing date of the patent application. The remaining terms of our patents vary since our patent
portfolio has been built over time. While our patents are important in maintaining the competitive differentiation of our products, systems, solutions and services, no single patent is in itself
essential to our business as a whole. We also license from others intellectual property rights relating to UPS technology. With respect to protection of those areas of our technology for which patent
protection has not been sought, we rely on the complexity of our technology, trade secrecy law, and employee confidentiality agreements.

APC
has numerous trademarks registered in the United States and in many foreign countries. We also have trademark applications pending domestically and internationally. The trademark
"APC" is of principal importance to us. In addition, a number of other trademarks owned by us have significant importance.

Seasonality

Our Small Systems and "Other" segments are favorably impacted by summer weather conditions in North America and Europe. The summer season typically brings more
weather events, particularly thunderstorms and high temperatures that may disrupt utility power or result in high electricity usage that can cause brownouts and blackouts. These events in turn create
more awareness and demand for our products.

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Competition

We believe that we are one of less than ten global companies providing a full range of UPS products and services worldwide. Many of our competitors offer
competitive products in both the Small and Large systems markets, while some focus on only one segment.

Our
principal competitors in the Small Systems segment include:



Our
principal competitors in the Large Systems segment include:



We
also compete with a number of other U.S. and non-U.S. based companies that offer power protection and other products similar to ours in all of our segments. Some
competitors have greater financial and other resources than APC. We compete in the sale of our products on the basis of several factors, including product innovation, performance and quality,
marketing, access to distribution channels, customer service, product design, and price.

International Operations

APC has established an extensive international presence consisting of manufacturing, service, engineering, sales, marketing and administrative operations. With a
full line of internationally positioned products available, we continue to introduce products and staff personnel to serve geographical markets of interest. Our manufacturing operations outside of the
United States are located in Brazil, Denmark, China, India, Ireland, the Philippines, and Switzerland. A significant
portion of products in our Small Systems and Large Systems reportable operating segments are built internationally, particularly in the Philippines and India. We believe that the production of these
products could be redeployed to other regions if necessary.

Our
primary sales offices outside of the United States are located in Europe and the Far East. These offices, together with offices in other locations worldwide, provide sales and
technical support to our customers across the globe. APC also utilizes a combination of company run and sub-contracted distribution centers in numerous countries worldwide to distribute
our products to our international customers.

Financial Information About Foreign and Domestic Operations

The information required under this section is included in Note 12 of Notes to Consolidated Financial Statements in Item 8 of this Report and is
incorporated herein by reference.

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Employees

As of December 31, 2004, APC had approximately 6,455 full-time employees worldwide. APC also engages other personnel on a part-time
basis.

APC's Executive Officers

APC's executive officers are elected annually and hold office until the next Annual Meeting of the Board of Directors and until their successors are duly elected
and qualified. As of March 1, 2005, APC's executive officers were:

|Name                   |  | Age |  | Positions                                                                   
|---------------------- |  | --- |  | ----------------------------------------------------------------------------
|Rodger B. Dowdell, Jr. |  | 55  |  | Chairman of the Board of Directors, President, and Chief Executive Officer  
|Neil E. Rasmussen      |  | 50  |  | Senior Vice President, Chief Technical Officer and Director                 
|Edward W. Machala      |  | 50  |  | Senior Vice President, Operations, and Chief Operations Officer             
|Donald M. Muir         |  | 48  |  | Senior Vice President, Finance & Administration, and Chief Financial Officer
|Emanuel E. Landsman    |  | 68  |  | Vice President and Director                                                 
|Aaron L. Davis         |  | 38  |  | Vice President, Marketing Communications                                    
|Edward D. Bednarcik    |  | 47  |  | Vice President, Global Sales                                                

Rodger
B. Dowdell, Jr. has been President and a Director of APC since 1985 and Chairman of APC's Board of Directors since 1988. During the first three quarters of 1985,
Mr. Dowdell worked for APC as a consultant, developing a marketing and production strategy for UPS products. From 1978 to 1984 he was President of Independent Energy, Inc., a
manufacturer of electronic temperature controls.

Neil
E. Rasmussen became Senior Vice President in 2001 and previously was Vice President since our inception. In 1997, he was appointed Chief Technical Officer of APC and has been a
Director of APC since our inception. From 1979 to 1981, Mr. Rasmussen worked in the Energy Systems Engineering Group at Massachusetts Institute of Technology's Lincoln Laboratory.

Edward
W. Machala was named Senior Vice President, Operations, and Chief Operations Officer in 2001. Mr. Machala joined APC in 1989 as Vice President, Operations. From 1985 to
1989, Mr. Machala was Director of Manufacturing and Engineering Technology for GTECH, a manufacturer of electronic lottery and gaming terminals, where he was responsible for manufacturing and
engineering functions.

Donald
M. Muir has been Senior Vice President, Finance & Administration since 2001 and Chief Financial Officer since joining APC in 1995. Mr. Muir served as Treasurer from
2001 to February 2004, and as Vice President, Finance and Administration and Chief Financial Officer from 1998 to 2001. From 1993 to 1995, Mr. Muir was the Treasurer of Stratus
Computer, Inc. where he was responsible for managing investor relations, treasury services, corporate taxation, and risk management. Prior to his appointment as Treasurer at Stratus
Computer, Inc., Mr. Muir held the position of Director of Finance and Administration from 1991 to 1993 and Controller, Worldwide Sales and Service from 1988 to 1991.

Emanuel
E. Landsman has been Vice President and a Director of APC since our inception and served as Clerk from our inception until 2001. From 1966 to 1981, Dr. Landsman worked at
Massachusetts Institute of Technology's Lincoln Laboratory, where he was in the Space Communications Group from 1966 to 1977 and the Energy Systems Engineering Group from 1977 to 1981.

Aaron
L. Davis was named Vice President, Marketing Communications in June 2003. Mr. Davis served as Vice President, Marketing and Communications from 2001 to June 2003, Vice
President, Small Systems Group from 1999 to 2001, Vice President, Marketing and Communications from 1997 to 1999, and Vice President of Marketing Communications from 1995 to 1997. Mr. Davis
joined APC as Director of Marketing Communications in 1989. Mr. Dowdell is the uncle of Mr. Davis.

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Edward
D. Bednarcik was named Vice President, Global Sales in July 2003. Mr. Bednarcik joined APC in 1997 as General Manager of APC's Network Power Solutions Group and
subsequently served as Vice President, General Manager of APC's Business Network Solutions Group from 2001 to July 2003. Prior to joining APC, Mr. Bednarcik was Senior Vice President and
General Manager of CrossComm Inc.'s Internet Access Division from 1996 to 1997; Vice President and General Manager, Networks Products Division of Promptus Communications Inc., a
subsidiary of GTI Inc., from 1994 to 1996; and Vice President, North American Sales and Marketing at Molecular Simulations Inc. (MSI), a privately held company based in Massachusetts,
from 1991 to 1994.

Corporate Governance

Corporate governance is typically defined as the system that allocates duties and authority among a company's stockholders, board of directors and management. The
stockholders elect the board and vote on extraordinary matters; the board is the company's governing body, responsible for hiring, overseeing and evaluating management, particularly the chief
executive officer; and management runs the company's day-to-day operations.

The
current Board members include five independent directors and three members of APC's senior management. The Board members include Rodger B. Dowdell, Jr., Chairman,
President and Chief Executive Officer of APC; James D. Gerson, a private investor who is a retired Vice President of Fahnestock & Co.; John G. Kassakian, MIT Professor of Electrical Engineering
and Director, MIT Laboratory for Electromagnetic and Electronic Systems; John F. Keane, Sr., Founder and Chairman of the Board of Directors, Keane, Inc.; Emanuel E.
Landsman, Vice President of APC; Ervin F. Lyon, Retired, MIT Lincoln Labs; Neil E. Rasmussen, Senior Vice President and Chief Technical Officer of APC; and Ellen B. Richstone,
Chief Financial Officer, Sonus Networks, Inc.

"Independent" Directors.Each of APC's directors, other than Messrs. Dowdell, Landsman and
Rasmussen, qualify as "independent" in accordance with the published listing requirements of The Nasdaq Stock Market (Nasdaq). The Nasdaq independence definition includes a series of objective tests,
such as that the director is not an employee of APC and has not engaged in various types of business dealings with APC. In addition, as further required by the Nasdaq rules, the Board of Directors has
made a subjective determination as to each independent director that no relationships exist which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying
out the responsibilities of a director. In making these determinations, the directors reviewed and discussed information provided by the directors and APC with regard to each director's business and
personal activities as they may relate to APC and APC's management.

The
Audit Committee is comprised of the following directors: James D. Gerson, John F. Keane, Sr., Ervin F. Lyon, and Ellen B. Richstone. All of the
members of the Audit Committee of the Board qualify as "independent" under special standards established by the U.S. Securities and Exchange Commission (SEC) for members of audit committees and the
Audit Committee includes at least one member who is determined by the Board to meet the qualifications of an "audit committee financial expert" in accordance with SEC rules. Ellen B. Richstone
is the independent director who has been determined to be an audit committee financial expert. Stockholders should understand that this designation is a disclosure requirement of the SEC related to
Ms. Richstone's experience and understanding with respect to certain accounting and auditing matters. The designation does not impose on Ms. Richstone any duties, obligations or
liability that are greater than are generally imposed on her as a member of the Audit Committee and Board of Directors, and her designation as an audit committee financial expert pursuant to this SEC
requirement does not affect the duties, obligations or liability of any other member of the Audit Committee or Board of Directors.

Board Committees and Charters.The Board currently has, and appoints the members of, standing
(i) Audit, (ii) Compensation and Stock Option and (iii) Corporate Governance and Nominating Committees. Each member of these Committees is an independent director in accordance
with Nasdaq standards described above. Each of the Board committees has a written charter approved by the Board.

10

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Copies
of each charter, and other corporate governance matters, are posted on APC's web site atwww.apc.comunder the "Corporate Governance" link
contained in the "Investors" section.

Corporate Governance Guidelines.The Board has adopted a set of Corporate Governance Guidelines, and
the Board's Corporate Governance and Nominating Committee is responsible for overseeing the Guidelines and reporting and making recommendations to the Board concerning corporate governance matters.
The Guidelines are posted on APC's web site atwww.apc.comunder the "Corporate Governance" link contained in the "Investors" section.

Item 2. Properties

APC's principal properties are located in the United States, Brazil, China, Denmark, England, India, Ireland, the Philippines, and Switzerland. In addition, we
own or lease sales offices and other space at various locations throughout the United States and outside the United States. APC also owns or leases such machinery and equipment as are necessary in our
operations. In general, our properties are in good condition, are considered to be adequate for the uses to which they are being put, and, except for one facility under lease in England, are
substantially in regular use. The lease on the facility in England will expire in the second quarter of 2005. Also refer to Note 2 of Notes to Consolidated Financial Statements in Item 8
of this Report.

|Location of
Principal
Properties |               | Sales,
Marketing &
Administration |         | Manufacturing |         | R&D |        | Warehouse |         | Total |         | Segment
|-------------------------------- | ------------- | --------------------------------- | ------- | ------------- | ------- | --- | ------ | --------- | ------- | ----- | ------- | -------
|
|- OWNED -                       
|United States                    |               |                                   |         |               |         |     |        |           |         |       |         |        
|                                 | Rhode Island  |                                   | 167,850 |               | 98,930  |     |       |           | 4,980   |       | 271,760 |        
|Europe                           |               |                                   |         |               |         |     |        |           |         |       |         |        
|                                 | Ireland       |                                   | 49,975  |               | 229,895 |     | 5,840  |           | 105,000 |       | 390,710 |        
|                                 | Denmark       |                                   | 24,000  |               | 28,000  |     | 58,650 |           |        |       | 110,650 |        
|Far East                         |               |                                   |         |               |         |     |        |           |         |       |         |        
|                                 | Philippines   |                                   | 31,175  |               | 191,070 |     |       |           | 36,905  |       | 259,150 |        
|- LEASED -                      
|United States                    |               |                                   |         |               |         |     |        |           |         |       |         |        
|                                 | Rhode Island  |                                   | 29,775  |               | 182,830 |     | 7,935  |           | 304,940 |       | 525,480 |        
|                                 | Massachusetts |                                   |        |               |        |     | 77,300 |           |        |       | 77,300  |        
|                                 | Missouri      |                                   | 19,010  |               |        |     | 42,320 |           |        |       | 61,330  |        
|                                 | Texas         |                                   | 2,640   |               |        |     | 21,130 |           | 2,640   |       | 26,410  |        
|Europe                           |               |                                   |         |               |         |     |        |           |         |       |         |        
|                                 | England       |                                   | 17,690  |               | 55,630  |     | 7,290  |           | 9,130   |       | 89,740  |        
|                                 | Switzerland   |                                   | 16,870  |               | 20,690  |     | 540    |           | 8,610   |       | 46,710  |        
|                                 | Ireland       |                                   |        |               |        |     |       |           | 31,850  |       | 31,850  |        
|Far East                         |               |                                   |         |               |         |     |        |           |         |       |         |        
|                                 | China         |                                   | 27,640  |               | 139,935 |     |       |           | 33,345  |       | 200,920 |        
|                                 | India         |                                   | 14,175  |               | 105,655 |     | 9,175  |           | 14,085  |       | 143,090 |        
|Latin America                    |               |                                   |         |               |         |     |        |           |         |       |         |        
|                                 | Brazil        |                                   | 4,420   |               | 67,330  |     |       |           | 18,180  |       | 89,930  |        

11

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Item 3. Legal Proceedings

On January 10, 2003, Powerware Corporation filed in the United States District Court for the Eastern District of North Carolina (the "Court") a complaint
alleging infringement of three United States patents. On May 7, 2003, Powerware Corporation filed with the Court an amended complaint modifying its allegations of infringement regarding the
Powerware Patents. APC was served with the amended complaint on May 9, 2003. Powerware Corporation is seeking unspecified damages and injunctive relief. On May 28, 2003, APC filed its
answer to the amended complaint and on June 17, 2003 APC filed its first amended answer and counterclaims alleging infringement by Powerware Corporation of three United States patents owned by
APC. On July 3, 2003, Powerware Corporation filed its answer to counterclaims. On March 18, 2004, Powerware Corporation amended its complaint to add an additional patent to the
litigation. On or about October 27, 2004, Powerware Corporation changed its corporate name to Eaton Power Quality Corporation. On January 31, 2005, the Court issued a Markman ruling
construing the patent claims at issue in the case.

On
December 23, 2004, APC filed a patent infringement suit against Eaton Power Quality Corporation in the United States District Court for the District of Delaware charging Eaton
Power Quality Corporation with infringement of one United States patent. On January 26, 2005, Eaton Power Quality Corporation filed a motion to dismiss APC's complaint on procedural grounds. On
February 9, 2005, APC filed an answering brief in opposition to Eaton Power Quality Corporation's motion to dismiss.

As
previously reported in APC's Form 8-K dated March 2, 2005, on February 24, 2005, Eaton Power Quality Corporation and its parent corporation, Eaton
Corporation (collectively "Eaton"), entered into a binding memorandum of understanding with APC to settle the two patent infringement suits pending in the United States District Court for the Eastern
District of North Carolina and the United States District Court for the District of Delaware. In addition to settling all outstanding patent litigation, APC and Eaton agreed to cross-license multiple
patents that were involved in the litigation. APC and Eaton also agreed to a ten-year covenant prohibiting the companies from filing against each other any additional patent infringement
suits related to products of the other that are based on U.S. patent claims which are directed to electronic hardware that performs double conversion for power electronics. Eaton and APC are working
toward finalizing a definitive agreement. Neither party will pay the other any monetary compensation in connection with the settlement.

As
previously reported in APC's Form 10-Q for the quarter ended September 26, 2004, on February 5, 2004, Liebert Corporation and Zonatherm
Products, Inc., Liebert's sales representative firm in the Chicago area, filed a lawsuit in the Circuit Court of Cook County, Illinois, Chancery Division (the "Court") against APC, Aerico, LLC,
a sales representative firm formed by former employees of Zonatherm Products, and the former employees of Zonatherm Products who formed Aerico, LLC. The lawsuit alleged willful violation of the
Illinois Trade Secrets Act, tortious interference with contract, tortious interference with prospective economic advantage, civil conspiracy and conspiracy to breach fiduciary duties. Liebert and
Zonatherm are seeking compensatory and punitive damages and injunctive relief. On February 18, 2004, the Court denied plaintiffs' motion for a temporary restraining order. On July 16,
2004, the Court dismissed without prejudice all claims except the Illinois Trade Secret Act claim. On August 6, 2004, plaintiffs filed a second amended complaint reasserting the claims
dismissed by the Court on July 16, 2004. On August 20, 2004, the Court denied plaintiffs' motion for preliminary injunction as to violation of the Illinois Trade Secrets Act. On
September 21, 2004, plaintiffs filed a Notice of Appeal of the August 20, 2004 ruling with the Illinois Appellate Court. On January 12, 2005, the Court dismissed without prejudice
all claims against APC except the Illinois Trade Secret Act claim. On March 1, 2005 the Illinois Appellate Court issued an opinion on the appeal pursuant to which it affirmed the Court
on the issue of non-trade secret nature of plaintiff's customer lists, and remanded the matter for the Court to enter an injunction against one of the individual former employees of
Zonatherm from using certain pricing books. On March 16, 2005, plaintiffs filed a third amended

12

---



complaint
reasserting claims substantially similar to those dismissed by the Court in its January 12, 2005 ruling.

In
addition, APC is involved in various other claims and legal actions arising in the ordinary course of business.

While
management currently believes that resolving all pending legal matters, individually or in aggregate, will not have a material adverse impact on APC's financial position, the
litigation and other claims noted above are subject to inherent uncertainties, including the risk of an unfavorable outcome, and management's view of these matters may change in the future. An
unfavorable outcome could include monetary damages or, in cases where injunctive relief is sought, an injunction prohibiting certain activities. Were an unfavorable final outcome to occur, there
exists the possibility of a material adverse impact on APC's financial position, cash flows and results of operations for the period in which the effect becomes reasonably estimable.

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

We did not submit any matters to a vote of our security-holders during the three months ended December 31, 2004.

Part II

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

APC's Common Stock is traded over-the-counter on The Nasdaq Stock Market under the symbol APCC and on the Pacific Exchange, Inc.
under the symbol ACC. The following table sets forth the range of high and low bid quotations on The Nasdaq Stock Market per share of Common Stock for the years 2004 and 2003. These quotations reflect
inter-dealer prices, without retail mark up, mark down, or commission and may not necessarily represent actual transactions.

2004

2003High

Low

High

LowFirst Quarter

$
27.42

$
20.82

$
17.14

$
13.90Second Quarter

$
25.25

$
16.21

$
17.50

$
13.72Third Quarter

$
20.10

$
14.55

$
18.86

$
15.20Fourth Quarter

$
21.77

$
15.70

$
24.69

$
16.65


On
March 1, 2005, the closing sale price for APC's common stock was $22.15 per share. As of March 1, 2005, there were approximately 1,793 holders of record of APC's common
stock.

In
June 2003, APC's Board of Directors approved initiation of a quarterly cash dividend of $0.08 per share of common stock. Dividends of $0.08 per share were declared and paid in each
subsequent quarter through the second quarter of 2004. In June 2004, APC's Board of Directors approved a 25% increase in its quarterly cash dividend raising the payout to $0.10 per share.
Dividends of $0.10 per share were declared and paid in the third and fourth quarters of 2004. On February 15, 2005, a quarterly dividend of $0.10 per share was declared, payable on
March 16, 2005 to shareholders of record as of February 28, 2005. It is the intention of the Board of Directors to pay a comparable quarterly dividend on a going forward basis contingent
upon continued capital availability and a determination that cash dividends continue to be in the best interests of APC and its shareholders.

The
information required under this section related to APC's stock-based compensation plans is included in Note 10 of Notes to Consolidated Financial Statements in Item 8 of this
Report and is incorporated herein by reference.

13

---



Item 6. Selected Financial Data

All amounts are in dollars except for outstanding shares. Dollars are in thousands except for basic and diluted earnings per share. Shares are in thousands.

In
June 2003, APC's Board of Directors approved initiation of a quarterly cash dividend of $0.08 per share of common stock. Dividends of $0.08 per share were declared and paid in each
subsequent quarter through the second quarter of 2004. In June 2004, APC's Board of Directors approved a 25% increase in its quarterly cash dividend raising the payout to $0.10 per share.
Dividends of $0.10 per share were declared and paid in the third and fourth quarters of 2004. On February 15, 2005, a
quarterly dividend of $0.10 per share was declared, payable on March 16, 2005 to shareholders of record as of February 28, 2005. APC did not declare any cash dividends for the three year
period 2000 to 2002.

APC
invests its excess cash principally in certificates of deposit, corporate bonds and notes, and U.S. government agency securities. APC also invests in auction rate securities. Auction
rate securities have long-term underlying maturities, however the market is highly liquid and the interest rates reset every seven, 28 or 35 days. In prior years, APC classified a
portion of its auction rate securities as cash equivalents, however such amounts have been reclassified as short term available-for-sale securities for all periods presented in
this Report$80.1 million, $110.9 million, and $83.4 million at December 31, 2004, 2003 and 2002, respectively.

APC
adopted Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets, on January 1, 2002.
In connection with its adoption of Statement 142, APC recorded a non-cash charge equal to the goodwill balance associated with its Large Systems segment of approximately $50 million
(approximately $35 million on an after-tax basis). This charge was recognized as the cumulative effect of a change in accounting principle net of income taxes, included in APC's
results as of January 1, 2002, and had no effect on APC's liquidity.

The
results of operations of companies acquired in 2000 are included from their respective dates of acquisition. In the fourth quarter of 2000, APC acquired privately-held
Airflow Company, a Maryland-based manufacturer of precision cooling equipment primarily used in data center, Internet, and telecommunications applications, for approximately $21.6 million in
cash plus expenses, of which $3.1 million remains to be paid following the resolution of an indemnity claim brought by APC in 2003 against the surviving selling company as well as the former
shareholders of Airflow Company's parent corporation as a result of a claim brought against APC by a former sales representative of Airflow. Early in the second quarter of 2000, APC acquired
privately-held Advance Power Ltd., a U.K.-based manufacturer of DC-based power solutions used in communications and Internet applications, for $75.0 million in
cash plus expenses. Also early in the second quarter of 2000, APC acquired privately-held ABL Electronics Corporation (ABL), a North American provider of computer and network cables,
switches, and other connectivity products, for $8.0 million paid in a combination of cash and stock, plus expenses. APC's cash outlays associated with these acquisitions were financed from
operating cash.

14

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|                                                                               |  | 2004 |           | 2003 |   | 2002      |  | 2001 |           | 2000
|------------------------------------------------------------------------------ |  | ---- | --------- | ---- | - | --------- |  | ---- | --------- | ----
|Net sales                                                                      |  | $    | 1,699,877 |      | $ | 1,464,798 |  | $    | 1,300,025 |     
|Cost of goods sold                                                             |  |      | 1,017,981 |      |   | 852,615   |  |      | 816,318   |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Gross profit                                                                   |  |      | 681,896   |      |   | 612,183   |  |      | 483,707   |     
|Operating expenses                                                             |  |      | 477,447   |      |   | 383,068   |  |      | 332,760   |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Operating income                                                               |  |      | 204,449   |      |   | 229,115   |  |      | 150,947   |     
|Other income, net                                                              |  |      | 9,711     |      |   | 9,990     |  |      | 10,889    |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Earnings before income taxes and cumulative effect of accounting change        |  |      | 214,160   |      |   | 239,105   |  |      | 161,836   |     
|Income taxes                                                                   |  |      | 32,705    |      |   | 62,167    |  |      | 45,314    |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Earnings before cumulative effect of accounting change                         |  |      | 181,455   |      |   | 176,938   |  |      | 116,522   |     
|Cumulative effect of accounting change, net of income taxes of $15,459 in 2002 |  |      |          |      |   |          |  |      | 34,500    |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Net income                                                                     |  | $    | 181,455   |      | $ | 176,938   |  | $    | 82,022    |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Basic earnings per share:                                                      |  |      |           |      |   |           |  |      |           |     
|Basic earnings per share before cumulative effect of accounting change         |  | $    | 0.92      |      | $ | 0.90      |  | $    | 0.59      |     
|Cumulative effect of accounting change, net of tax                             |  |      |          |      |   |          |  |      | 0.17      |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Basic earnings per share                                                       |  | $    | 0.92      |      | $ | 0.90      |  | $    | 0.42      |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Basic weighted average shares outstanding                                      |  |      | 196,799   |      |   | 197,402   |  |      | 195,927   |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Diluted earnings per share:                                                    |  |      |           |      |   |           |  |      |           |     
|Diluted earnings per share before cumulative effect of accounting change       |  | $    | 0.90      |      | $ | 0.88      |  | $    | 0.59      |     
|Cumulative effect of accounting change, net of tax                             |  |      |          |      |   |          |  |      | 0.17      |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Diluted earnings per share                                                     |  | $    | 0.90      |      | $ | 0.88      |  | $    | 0.42      |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Diluted weighted average shares outstanding                                    |  |      | 201,658   |      |   | 201,517   |  |      | 196,993   |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Cash dividends per share                                                       |  | $    | 0.36      |      | $ | 0.16      |  |      |          |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Cash and cash equivalents                                                      |  | $    | 72,721    |      | $ | 141,214   |  | $    | 125,922   |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Short term investments                                                         |  | $    | 642,853   |      | $ | 607,109   |  | $    | 514,386   |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Long term investments                                                          |  | $    | 5,542     |      | $ | 58,525    |  | $    | 56,293    |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Working capital                                                                |  | $    | 1,279,196 |      | $ | 1,217,471 |  | $    | 999,102   |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Total assets                                                                   |  | $    | 1,843,872 |      | $ | 1,805,966 |  | $    | 1,604,580 |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Short term debt                                                                |  |      |          |      |   |          |  |      |          |     
|                                                                               |  |      |           |      |   |           |  |      |           |     
|Long term debt                                                                 |  |      |          |      |   |          |  |      |          |     
|                                                                               |  |      |           |      |   |           |  |      |           |     

15

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

We begin Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with a discussion of our business outlook for 2005. We also
provide a discussion of our Results of Operations for 2004 compared to 2003, and for 2003 compared to 2002. This discussion includes an overview of our operating results and the directions in which
our markets, segments, and geographies are moving. We then provide a Liquidity and Financial Resources discussion of the significant changes in our balance sheet during 2004, and cash flows for 2004
compared to 2003, and for 2003 compared to 2002, as well as our contractual obligations and foreign currency activity. This is followed by a discussion of the Critical Accounting Policies that we
believe are important to our business operations and understanding of our results of operations. We conclude with information about factors that may affect our future results.

This
MD&A should be read in conjunction with the other sections of this Annual Report on Form 10-K, including "Item 1: Business;" "Item 6: Selected
Financial Data;" "Item 8: Financial Statements and Supplementary Data;" and "Item 9A: Controls and Procedures."

In
addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual
results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this
Form 10-K.

BUSINESS OUTLOOK

While there continues to be uncertainty around interest rate levels, energy costs and, in general, macroeconomic conditions and their potential impact on
corporate investment and consumer spending, we enter 2005 with a cautious but optimistic outlook for our business. We are also pleased with the progress we made and momentum we created during our 2004
fiscal year. We had strong performance across all segments of the business and we are particularly proud of the progress we have made in the data center space, as sales of InfraStruXure nearly doubled
in 2004 from 2003. The commitment we have made to educate the market and drive adoption of the technology we believe is paying off as customers are embracing the modular, standardized approach APC has
pioneered in network-critical physical infrastructure, or NCPI, and they are excited about it.

The
statements below do not include any impact related to the expensing of stock options according to Statement of Financial Accounting Standards No. 123R, Share-Based Payment, which will be effective
for APC for the third and fourth fiscal quarters of 2005. The pro forma earnings impact of expensing of
stock options on our results of operations for 2004 is described in Note 1 of Notes to Consolidated Financial Statements in Item 8 of this Report.

Against
this background, we are planning for continued growth in annual revenue and increasing gross profit and operating profit dollars in 2005. We believe that we are very well
positioned competitively, financially and strategically going into 2005. We will continue to be focused on empowering IT professionals with the knowledge, tools and solutions they need to effectively
design, build and manage network-critical physical infrastructure. Our objective is for APC to become a trusted, global partner for the long term, committed to solving our customers' network-critical
physical infrastructure problems of today, and helping them anticipate their challenges of tomorrow, thereby allowing them to focus on their core competencies. We believe that we can accomplish this
by dramatically reducing our customers' level of complexity involved in designing, building, and managing the network-critical physical infrastructure that is at the very core of maintaining business
continuity, application availability, and network reliability.

As
we look ahead to 2005, we are currently planning for growth in annual revenue in all three of our reportable segments: Small Systems, Large Systems and "Other." Similar to 2004, we
expect the

16

---



rate
of growth of our Large Systems segment to be greater than the growth expected for Small Systems due to the assumed continued success of our overall strategy and the acceptance of our products in
specific market segments.

Overall
gross margins for 2005 are currently expected to be impacted by a shift in product mix toward the faster-growing, lower-margin Large Systems products. Gross margins, particularly
for Small Systems products, are expected to be impacted by planned price reductions which we anticipate will be partially offset by the favorable impact of the expected reduction of the unit costs of
our products, particularly material costs, as a result of assumed unit volume growth and our continued efforts to improve manufacturing cost efficiencies. We also expect, albeit to a lesser degree
than in 2004, favorable pricing arrangements with our suppliers. Gross margin variability could result from changing revenue levels, which are dependent on unit volumes, prices and currency trends as
well as the mix of products sold, unit costs and yield issues associated with production at our factories, excess manufacturing capacity, excess inventory, inventory obsolescence and variations in
inventory valuation.

We
have dedicated significant efforts to optimize our overall manufacturing capacity and locations over recent years and we will continue to plan for future capacity requirements based
on the assumed continued acceptance and demand for our products in the specific market segments they were designed to address. We currently expect that capital spending will be between
$30 million and $40 million in
2005, compared to $29.3 million in 2004. We expect that most of the capital spending for 2005 will go toward the maintaining, upgrading and expansion of current manufacturing capacity, as well
as investments to upgrade current hardware and software office technologies.

We
spent nearly 30% more on research and development in 2004 vs. 2003, investing $86 million in advancing our NCPI systems in addition to ensuring our
end-to-end offering is the best in the industry. We are committed to sustaining our R&D efforts to meet the future needs of our customers across all segments and potentially
expanding into emerging, high-growth areas. We will remain focused on aggressively driving our growth of our network-critical physical infrastructure solutions, which will require
sustaining and increasing our operating expense investments in sales and marketing, as well as making incremental investments in global customer education initiatives.

In
2004 alone we trained nearly one hundred thousand customers and partners on InfraStruXure, significantly more than we trained in 2003 and our goals for 2005 are even higher. Our
investment posture remains intact and we are firmly committed to supporting the level of sales and marketing spending necessary to educate customers and channel partners on the inherent performance
and total cost of ownership benefits of a modular, standardized solution such as InfraStruXure.

We
currently expect our tax rate to be approximately 24% for 2005, excluding the potential tax impact of the repatriation of offshore earnings discussed below. The estimated effective
tax rate is based on current tax law and the current expected income. The tax rate may be affected by the jurisdictions in which profits are determined to be earned and taxed, our ability to
successfully implement additional tax savings planning opportunities and our ability to realize deferred tax assets. In October 2004, the American Jobs Creation Act of 2004 was enacted. This Act
repealed the tax code's extraterritorial income (ETI) exclusion in response to the World Trade Organization's challenge that the ETI exclusion was a prohibited tax subsidy. The repeal will be phased
in through 2006. The Act replaced the ETI exclusion with a 3% domestic deduction for domestic production activities effective for APC's 2005 tax year. The Act also provides for an elective
tax-favored repatriation of offshore earnings, provided that the dividends are invested in the United States under a properly approved domestic reinvestment plan. The election to apply an
85% dividends-received deduction against cash dividends made by APC's offshore subsidiaries can be made in either 2004 or 2005. We are currently reviewing the Act to determine its impact on APC. APC
expects to determine the amounts and sources of foreign earnings to be repatriated, if any, during the third quarter of fiscal 2005.

17

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We
are currently a party to various legal proceedings and claims. The expected costs to litigate such matters were significant in 2004 and we expect such costs in 2005 to be less than
the levels incurred during the prior year, as a result of the our entering into a binding memorandum of understanding to settle two patent infringement suits. We currently do not believe that the
ultimate outcome of these legal proceedings and claims will have a material adverse effect on our financial position or overall trends in results of operations. However, litigation is subject to
inherent uncertainties, including the risk
of an unfavorable outcome, and management's view of these matters may change in the future. An unfavorable outcome could include monetary damages or, in cases where injunctive relief is sought, an
injunction prohibiting certain activities. If an unfavorable outcome were to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations of
that period or future periods. We believe that, given our current liquidity and cash and investment balances, even an adverse judgment would not have a material impact on cash and investments or
liquidity.

RESULTS OF OPERATIONS

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

The following table sets forth key data, expressed as a percentage of net sales, for the years ended December 31, 2004, 2003 and 2002.

2004

2003

2002Net sales

100.0
%
100.0
%
100.0
%Cost of goods sold

59.9

58.2

62.8Gross profit

40.1

41.8

37.2Marketing, selling, general & administrative expenses

23.1

21.6

21.0Research & development

5.0

4.6

4.6Operating income

12.0

15.6

11.6Other income, net

0.6

0.7

0.8Earnings before income taxes and cumulative effect of accounting change

12.6

16.3

12.4Earnings before cumulative effect of accounting change

10.7

12.1

9.0Net income

10.7

12.1

6.3


Revenues

Net sales in fiscal year 2004 of $1.700 billion increased by 16.0% over 2003; net sales in fiscal year 2003 of $1.465 billion increased by 12.7%
over 2002. These increases were attributable to strength in our major product segments, the Small and Large System segments, as well as growth across our major geographies. Demand for information
technology hardware continued to be healthy in 2004. Our product segment growth reflected ongoing advancement of our data center initiatives. Management believes that our investments in technology and
demand generation continue to drive the adoption of APC's network-critical physical infrastructure solution, InfraStruXure. Our core uninterruptible power supply (UPS) offerings also
contributed solid growth during each of 2004 and 2003. For further information about revenues by segment, refer to theSegment Resultssection below.

Sales
of new products contributed to overall net sales in 2004, 2003 and 2002. Sales of products introduced during 2004, 2003 and 2002 represented approximately 7%, 11%, and 9%,
respectively, of net sales in those years.

18

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Revenues by Geography.The following table summarizes our revenues on a geographic basis for the
years ended December 31, 2004, 2003 and 2002.

|                                           |  | 2004 |         | % of
Total |       | 2003 |   | % of
Total |  | 2002  |   | % of
Total |        
|------------------------------------------ |  | ---- | ------- | ---------- | ----- | ---- | - | ---------- |  | ----- | - | ---------- | -------
|
|U.S.                                       |  | $    | 751.7   |            | 44.2  | %    | $ | 658.7      |  | 45.0  | % | $          | 625.3  
|Canada and Latin America                   |  |      | 91.3    |            | 5.4   | %    |   | 78.8       |  | 5.3   | % |            | 85.2   
|                                           |  |      |         |            |       |      |   |            |  |       |   |            |        
|Total Americas                             |  |      | 843.0   |            | 49.6  | %    |   | 737.5      |  | 50.3  | % |            | 710.5  
|Europe, the Middle East, and Africa (EMEA) |  |      | 547.3   |            | 32.2  | %    |   | 467.2      |  | 31.9  | % |            | 372.6  
|Asia                                       |  |      | 309.6   |            | 18.2  | %    |   | 260.1      |  | 17.8  | % |            | 216.9  
|                                           |  |      |         |            |       |      |   |            |  |       |   |            |        
|Total Net Sales                            |  | $    | 1,699.9 |            | 100.0 | %    | $ | 1,464.8    |  | 100.0 | % | $          | 1,300.0
|                                           |  |      |         |            |       |      |   |            |  |       |   |            |        
|Total Net Sales Outside U.S.               |  | $    | 948.2   |            | 55.8  | %    | $ | 806.1      |  | 55.0  | % | $          | 674.7  
|                                           |  |      |         |            |       |      |   |            |  |       |   |            |        

The
Americas (North and Latin America) increased 14.3% in 2004 over 2003, and also increased 3.8% in 2003 over 2002. EMEA increased 17.1% in 2004 over 2003, and also increased 25.4% in
2003 over 2002. Finally, Asia increased 19.0% in 2004 over 2003, and also increased 19.9% in 2003 over 2002.

In
fiscal year 2004, on a constant currency basis, EMEA increased 10.6% and Asia increased 14.3% from 2003. In fiscal year 2003, on a constant currency basis, EMEA increased 13.5% and
Asia increased 13.2% over 2002. In 2004, 2003 and 2002, on a constant currency basis, EMEA's revenues would have been lower by $30.6 million, $44.3 million, and $13.3 million
respectively, principally due to strengthening of the Euro and British pound. In 2004 and 2003, on a constant currency basis, Asia's revenues would have been lower by $12.4 million and
$14.5 million, respectively, principally due to strengthening of the Japanese yen and Australian dollar. In 2002, Asia's revenues would have been higher by $2.9 million, principally due
to weakening of the Japanese yen. In total, the impact of currency exchange rate changes worldwide added $43.7 million, $59.5 million, and $10.4 million to net sales in fiscal
year 2004, 2003 and 2002, respectively. We believe constant currency information is useful for an understanding of our operating results. Revenues on a constant currency basis differ from revenues
presented in accordance with United States generally accepted accounting principles. Also refer to Note 12 of Notes to Consolidated Financial Statements in Item 8 of this Report.

Cost of Goods Sold

Cost of goods sold was $1.018 billion or 59.9% of net sales in fiscal year 2004 compared to $852.6 million or 58.2% of net sales in fiscal year 2003
and $816.3 million or 62.8% of net sales in fiscal year 2002. Gross margins for fiscal year 2004 were 40.1% of net sales, approximately 170 basis points lower than in fiscal year 2003. Gross
margins for fiscal year 2003 were 41.8% of net sales, approximately 460 basis points higher than in fiscal year 2002. Gross margins in 2004 and 2003 were negatively impacted by pricing actions and, to
a lesser extent, product mix shifts, notably within our Small Systems segment toward lower-margin products combined with strong sales growth in our lower-margin Large Systems segment. The downward
pressure of these factors was substantially offset by cost reductions, particularly in the Small Systems segment, from declining material costs and select product transitions to low cost manufacturing
locations, but not to the extent of prior periods, as well as the favorable pricing impact of a weakening U.S. dollar, particularly in Europe. For further information about gross margins by segment,
refer to theSegment Resultssection below.

Provision for Excess Inventory.Additionally, third quarter 2004 gross margins included the effects
of a $11.5 million incremental charge for excess inventory related to specifically-identified finished goods and raw materials inventories deemed obsolete as the result of recently commenced
efforts to reduce the number of unique product offerings in several of our product lines, as well as the result of

19

---



new
product introductions. There were no additional inventory charges, other than APC's standard provisioning, during the fourth quarter of 2004 or during fiscal years 2003 and 2002.

Product Recall.Gross margins in 2003 and 2002 included the effects of a fourth quarter 2002
provision for and third quarter 2003 update of estimated costs associated with the product recall of Back-UPS CS 350 and 500 models. In early 2003, APC announced a product recall of
Back-UPS CS 350 and 500 models, due to potential safety issues. Prior to announcing the recall, APC received eight reports worldwide of units overheating, resulting in the melting of the
unit's outer casing, six of which occurred in the United States. Three of the reported incidents resulted in minor property damage; no injuries have been reported. The total number of affected devices
recalled worldwide is approximately 2.1 million with approximately 900,000 devices recalled in the United States. The recall is limited to two specific models in APC's Back-UPS CS
product line, the Back-UPS CS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt models. The affected units were manufactured
between November 2000 and December 2002 and were sold primarily through computer and electrical distribution, catalog and retail outlets worldwide. In the fourth quarter of 2002, APC accrued a current
liability and recognized additional warranty expense, classified in cost of goods sold, of $19.6 million. Based upon repair cost and return rate experience to-date as well as
then-current estimates of remaining costs to be incurred, APC projected that aggregate costs for the recall would be less than originally estimated. To reflect this change, cost of goods
sold was reduced by $5.5 million in the third quarter of 2003. The original charge and subsequent credit to warranty expense have not been allocated to our operating segments, but rather have
been classified in indirect operating expenses for segment reporting consistent with our classification for our internal
financial reporting; also refer to Note 12 of Notes to Consolidated Financial Statements in Item 8 of this Report. As of December 31, 2004, APC had incurred approximately 82% of
currently estimated total recall costs. Our estimation of remaining recall costs of $2.4 million, comprised of $0.9 million for the U.S. and $1.5 million for international
geographies, continues to be subject to actual return rates and per unit repair costs (which can vary by country) as well as estimates for other recall-related costs expected to be incurred. We expect
that future amounts will not differ materially from our current estimates. Also refer to Note 8 of Notes to Consolidated Financial Statements in Item 8 of this Report.

Intellectual Property Settlement.Fiscal year 2003 gross margins also included the effects of a
fourth quarter charge associated with the settlement of a claim for the infringement of intellectual property of $4.0 million. This charge has not been allocated to our operating segments, but
rather has been classified as an indirect operating expense for segment reporting consistent with our classification for our internal financial reporting; also refer to Note 12 of Notes to
Consolidated Financial Statements in Item 8 of this Report. This charge was the result of events or assessments that occurred during the fourth quarter of 2003.

2002 Restructuring and Impairment of Assets.Fiscal year 2002 gross margins also included the effects
of a fourth quarter charge for impairment of assets held for sale of approximately $3.2 million, and first quarter charges for restructuring costs of approximately $4.8 million
associated with our first quarter 2002 global headcount reductions. These actions impacted personnel worldwide, principally in the U.S., U.K., Ireland, and the Philippines, throughout a broad range of
functions within the organization. The majority of these terminations were the result of our decision to consolidate our Philippines-based manufacturing operations. These restructuring costs were the
result of events or assessments that occurred during the first quarter of 2002 and included the effects of approximately 941 employee terminations, principally 54% in manufacturing, 14% in sales and
13% in R&D, based on severance agreements, as well as facilities closures, and the related impairment of tangible assets, principally buildings and manufacturing equipment, based on management's
assessment of market data. These charges have not been allocated to our operating segments, but rather have been classified as indirect operating expenses for segment reporting consistent with our
classification for our internal financial reporting; also refer to Note 12 of Notes to Consolidated Financial Statements in Item 8 of

20

---



this
Report. These charges were the result of events or assessments that occurred during the respective quarters of 2002. Our 2002 restructuring actions were announced and substantially completed
during 2002. APC's executive management approved these actions for immediate implementation; substantially all related restructuring costs were incurred in the first quarter of 2002, the period in
which the restructuring actions were first approved and implemented. In connection with APC's decision to consolidate its Philippines-based manufacturing operations, APC closed manufacturing
facilities located in the Philippines province of Laguna, in Maryland, and also in the U.K. APC marketed its Philippines property with an intent to sell these assets in 2003. However, APC was unable
to complete this sale as a result of an unfavorable real estate market. In accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, in the second quarter of 2003 the Philippines building and equipment were
reclassified at their fair values, which aggregated $3.0 million, to held-for-use property, plant, and equipment and depreciation re-commenced. APC sold a
building in Maryland to a third party in October 2002. Also, in connection with the closure of a leased facility in the U.K., APC recognized a lease liability during the first quarter of 2002;
this lease will expire in 2005. Due to the timing of the facilities closures and contractual or regulatory obligations to certain workers, the financial benefits of these actions did not commence
until the second quarter of 2002 with most of the full benefit being realized by the close of 2002. Ongoing operating expenses of the closed facilities were approximately $20 million annually,
substantially all of which we expect will result in future annual savings. Also refer to Note 2 of Notes to Consolidated Financial Statements in Item 8 of this Report.

Inventory Reserves.Total inventory reserves at December 31, 2004 were $39.4 million
compared to $38.8 million at December 31, 2003. This increase was due primarily to the aforementioned charge for excess inventory as well as routine provisioning that was necessary as a
result of applying APC's inventory reserve methodology throughout the year, partially offset by the physical disposition of inventories covered by APC's inventory reserves. APC's reserve estimate
methodology involves quantifying the total inventory position having potential loss exposure. Loss exposure generally results from several business factors, including product or component
discontinuance, unplanned changes in demand, product design changes, and factory transitions. Quantifying such loss exposure is the result of combining the cost of inventories specifically identified
as having little or no opportunity for sale or use (thus available for physical disposition) plus the cost of inventories having a high risk of no future sale or use based upon an analysis of
on-hand quantities compared to historical and
anticipated future sale or use. APC maintains an on-going business process for the physical disposition of inventories previously identified. Inventory write-offs occur at the
time of physical disposition. Inventories, once reserved, are not written back up as such reserve adjustments are considered to be a permanent decrease to the cost basis of the excess or obsolete
inventory.

21

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Segment Results (Also refer to Note 12 of Notes to Consolidated Financial Statements in Item 8 of this Report for important information regarding APC's reportable
segments)

2004

2003

2002(In thousands)Segment net salesSmall Systems

$
1,299,816

$
1,146,799

$
1,056,140Large Systems


322,148


240,007


182,074Other


66,070


69,142


54,773Total segment net sales


1,688,034


1,455,948


1,292,987Shipping and handling revenues


11,843


8,850


7,038Total net sales

$
1,699,877

$
1,464,798

$
1,300,025Segment profitsSmall Systems

$
626,724

$
552,291

$
484,899Large Systems


63,590


48,480


17,626Other


40,425


40,277


30,475Total segment profits


730,739


641,048


533,000Shipping and handling net costs


37,343


30,237


21,705Provision for excess inventory


11,500





Provision for intellectual property infringement claim





4,000


Product recall provision (update)





(5,500
)

19,600Restructuring charges








7,202Impairment of assets held-for-sale








3,203Other indirect operating expenses


477,447


383,196


330,343Other income, net


9,711


9,990


10,889Earnings before income taxes and cumulative effect of accounting change

$
214,160

$
239,105

$
161,836


Small Systems.Net sales for products in the Small Systems segment, which provides power protection,
UPS and management products for the PC, server and networking markets, increased in fiscal year 2004 by 13.3% over 2003, and also increased in fiscal year 2003 by 8.6% over 2002. Strength in NCPI and
InfraStruXure related products drove solid 2004 performance in this segment, which also benefited from strong sales of APC's core UPSs, the Back-UPS and Smart-UPS lines. The
2003 improvement over the prior year also reflected increased demand for Back-UPS and Smart-UPS worldwide, combined with increased sales of rack enclosures and management
solutions.

Gross
margins for the Small Systems segment improved in each of 2004 and 2003 over the respective prior year levels. The factors favorably influencing the gross margins of this segment
included product cost reductions and favorable currency trends. Our Small Systems cost reductions were achieved through a combination of product transitions to low cost manufacturing locations and
material cost reductions from our supplier base. Our product cost reductions were driven principally by material cost improvements and favorably impacted gross margins in the Small Systems segment by
approximately 240 basis points and 320 basis points in the fiscal years 2004 and 2003, respectively. Partially offsetting the favorable product cost and currency trends were the impact of pricing
actions and product mix shifts within the segment.

Large Systems.Net sales for products in the Large Systems segment, consisting primarily of
3-phase UPS, services, precision cooling and ancillary products for data centers, facilities and communication applications, increased 34.2% in fiscal year 2004 over 2003, and also
increased 31.8% in

22

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fiscal
year 2003 over 2002. With approximately 72% of InfraStruXure revenue included in the Large Systems segment, InfraStruXure sales were a major contributor to the
year-over-year growth of this segment. On a product level, Symmetra 3-phase, the primary power component of an InfraStruXure system, our industrial products, and
services were leading growth drivers. The improvement in 2003 over the prior year also reflected growing sales of our cooling products.

Gross
margins for the Large Systems segment declined in 2004 from the prior year as a result of increased costs within our service business, particularly in the U.S. and Europe, as well
as increasing material costs on select product lines, including cooling and Silcon products. These increases were partially offset by volume-driven cost improvements on Symmetra 3-phase
products.
Symmetra's increasing share of Large Systems revenue further enhanced the favorable impact of these cost improvements. Gross margins for the Large Systems segment improved in 2003 over the prior year
principally due to a lowering of product costs, particularly lower manufacturing costs resulting from volume efficiencies achieved through factory consolidations, and capacity rationalization efforts
that commenced in late 2001 as well as through material cost reductions from APC's supplier base. Our 2003 product cost reductions accounted for approximately 400 basis points of the gross margin
improvements in 2003 in the segment and were driven by material cost improvements and, to a lesser extent, manufacturing cost efficiencies.

"Other" Segment.Net sales for products in the Other segment, consisting principally of mobile
accessories and replacement batteries, decreased 4.4% in fiscal year 2004 from 2003 due to a decrease in sales volumes of mobile accessories, partially offset by an increase in sales of replacement
batteries. Net sales for this segment increased 26.2% in 2003 over 2002 due mainly to organic growth of existing products, particularly replacement batteries, as well as growth from new mobile
accessory products.

Gross
margins for the Other segment improved in 2004 over the prior year. Strength in replacement battery sales and product cost reductions drove the
year-over-year improvement. These cost reductions favorably impacted gross margins in the Other segment by approximately 199 basis points in fiscal year 2004. Gross margins for
this segment also improved in 2003 over the prior year as a result of volume related efficiencies in cost, including improved efficiencies of recently introduced products, as well as a mix shift
within the segment.

In
addition, revenue and gross margin improvements in 2004 and 2003 over the respective prior years were enhanced in each of the operating segments by the favorable pricing impact of a
weakening U.S. dollar, particularly in Europe.

Operating Expenses

Marketing, Selling, General, and Administrative (SG&A) Expenses.SG&A expenses in fiscal year 2004
were $391.8 million or 23.1% of net sales in fiscal year 2004 compared to $315.4 million or 21.6% of net sales in fiscal year 2003 and $272.7 million or 21.0% of net sales in
fiscal year 2002. We continue to support our data center initiatives, with a primary focus on increasing the awareness of our existing and prospective customers, particularly in relation to our
InfraStruXure architecture. The increases in total spending in 2004 and 2003 reflected ongoing sales and promotional efforts which involve expanding our sales and support teams, developing new
channels such as manufacturer representatives and engineering contractors, and increasing sales and marketing support of our core reseller channels, as well as funding our educational efforts through
high-level customer and partner events. Also contributing to the increases in total spending were higher professional service costs in support of ongoing litigation and Sarbanes-Oxley
compliance.

The
allowance for bad debts was 4.7% of gross accounts receivable at December 31, 2004 compared to 6.7% at December 31, 2003. Accounts receivable balances outstanding over
60 days represented 11.7% of total receivables at December 31, 2004 compared to 13.5% at December 31, 2003. We continue to experience strong collection performance.
Write-offs of uncollectable accounts

23

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represent
less than 1% of net sales. Commencing in August 2004, we expanded APC's receivables insurance coverage to include U.S.-based sales. As a result of this increased coverage, in the
third quarter of 2004 we were able to reduce our allowance for doubtful accounts by approximately $1.5 million. A majority of international customer balances continue to be covered by
receivables insurance.

Research and Development (R&D).R&D expenditures were $85.6 million or 5.0% of net sales in
fiscal year 2004, $67.6 million or 4.6% of net sales in fiscal year 2003, and $60.1 million or 4.6% of net sales in fiscal year 2002. We continue to commit resources to support our
investment in research and development with a primary focus on driving product innovation through increasing engineering efforts. We believe that continued product innovation through development is
necessary for our existing products to remain competitive in our markets, as well as creating opportunities from new product introductions. The increases in total R&D spending primarily reflect
increased numbers of software and hardware engineers and costs associated with new product development and engineering support.

Other Income, Net and Income Taxes

Other Income, Net.Other income is comprised principally of interest income. Although global interest
income for fiscal year 2004 was lower than for 2003, such income increased in the fourth quarter of 2004 over the fourth quarter of 2003 as a result of increasing interest rates and investments in
foreign-sourced commercial paper. On a full year basis, the decrease reflected our strategic purchase of additional tax-exempt securities as well as an overall decline in the bond market.
Although average cash balances available for investment rose during fiscal year 2003, interest income decreased from 2002 to 2003 due to lower short term interest rates throughout 2003.

At
December 31, 2004, APC had $721.1 million of total cash and investments, down from $806.8 million at December 31, 2003, all of which are stated at fair
value. This decrease reflected APC's third quarter repurchase on the open market of approximately 9.3 million shares of its common stock, at an average price of $16.09 per share totaling
$150 million, completing a program approved by APC's Board of Directors in June 2004. We manage APC's cash and investment balances to preserve principal and liquidity while maximizing
our return on the total investment portfolio. We diversify our investment portfolio by investing in multiple types of investment-grade securities with multiple investment brokers.
Based on APC's investment portfolio and interest rates, at December 31, 2004, a 100 basis point increase or decrease in interest rates would have resulted in an increase or decrease of
approximately $7 million in our annual interest income.

Income Taxes.Our effective income tax rates were approximately 15.3%, 26.0%, and 28.0% in 2004, 2003
and 2002, respectively. The substantial decrease in fiscal year 2004 from 2003 was principally attributable to a net tax credit of approximately $20.8 million associated with the reversal of
income tax provisioning resulting from the favorable outcome of recent tax audits by U.S. federal and state taxing authorities. In connection with the completion of the examination of its
2000-2002 U.S. federal tax returns, APC adjusted certain income tax related reserves established in prior years due to the expiration of the statute of limitations primarily related to
transfer pricing reserves established for the Philippine operations, offset by the additional tax due agreed to as a result of the examination, as well as an upward revision of reserves for years
remaining open under the statute of limitations. This revision relates primarily to transfer pricing matters concerning our manufacturing subsidiaries in India and China and our sales subsidiaries in
Europe. In addition, APC recorded an additional tax credit to the third quarter tax rate with respect to the reversal of a tax reserve established for potential state taxes. APC prevailed on a
1996-1997 state tax appeal concerning a sales apportionment matter and this, along with the expiration of the statue of limitations for all years through 2000, resulted in this tax credit.

24

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The
decrease from 2002 to 2004 also reflected tax savings from an increasing portion of taxable earnings anticipated to be generated from APC's operations in jurisdictions currently
having lower income tax rates than the present U.S. statutory income tax rate. This shift resulted partially from our product transitions to lower cost, lower tax, manufacturing locations. APC has tax
holidays in China, India, and the Philippines, which reduce or eliminate the income taxes paid in those countries. A substantial portion of APC's tax holiday in the Philippines expired in the third
quarter of 2003. Although this will have the effect of increasing APC's foreign taxes, APC's effective income tax rate will remain considerably lower than the U.S. statutory federal corporate tax rate
of 35%.

American Jobs Creation Act of 2004Repatriation of Foreign Earnings.In
October 2004, the American Jobs Creation Act of 2004 was enacted. This Act repealed the tax code's extraterritorial income (ETI) exclusion in response to the World Trade Organization's
challenge that the ETI exclusion was a prohibited tax subsidy. The repeal will be phased in through 2006. The Act replaced the ETI exclusion with a 3% domestic deduction for domestic production
activities effective for APC's 2005 tax year. The Act also provides for a temporary 85% dividends received deduction on certain foreign earnings repatriated during a one-year period. The
deduction would result in an approximate 5.25% federal tax rate on the repatriated earnings. To qualify for the deduction, the earnings must be reinvested in the United States pursuant to a domestic
reinvestment plan established by a company's chief executive officer and approved by its board of directors. Certain other criteria in the Jobs Act must be satisfied as well. The maximum amount of
APC's foreign earnings that qualify for the temporary deduction is $500 million. For APC, the one-year period during which the qualifying distributions can be made is 2004 or 2005.
No qualifying distributions were made during 2004.

APC
is in the process of evaluating whether it will repatriate any foreign earnings under the repatriation provisions of the Jobs Act and, if so, the amount that it will repatriate. The
range of reasonably possible amounts that APC is considering for repatriation, which would be eligible for the temporary deduction, is zero to $500 million. APC is awaiting the issuance of
further regulatory guidance and passage of statutory technical corrections with respect to certain provisions in the Jobs Act prior to determining the amounts it will repatriate. If such regulatory
guidance or technical corrections are favorable, APC is likely to repatriate amounts in the high end of our range. APC expects to determine the amounts and sources of foreign earnings to be
repatriated, if any, during the third quarter of fiscal 2005. Use of the funds will be governed by a domestic reinvestment plan, as required by the Jobs Act.

Repatriation
of the maximum amount eligible for the temporary deduction, which is $500 million, could result in additional United States federal income tax expense, which APC
currently estimates to be between zero and $38.2 million, in fiscal 2005. Repatriation also would substantially increase liquidity in the United States, although use of the additional liquidity
would be restricted by the domestic reinvestment plan. There would be a corresponding reduction in liquidity at APC's foreign subsidiaries. Some foreign subsidiaries may be required to borrow in order
to repatriate their earnings to the U.S.

Effects of Inflation

Management believes that inflation has not had a material effect on APC's operations.

25

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LIQUIDITY AND FINANCIAL RESOURCES

Working Capital

Working capital at December 31, 2004 was $1.279 billion compared to $1.217 billion at December 31, 2003. Our cash, cash equivalents,
and short-term investments position decreased to $715.6 million at December 31, 2004 from $748.3 million at December 31, 2003. APC's continued positive
operating results allowed us to repurchase on the open market approximately 9.3 million shares of our common stock, at an average price of $16.09 per share totaling $150 million, in the
third quarter of 2004, as well as pay quarterly dividends and continue to internally finance the capital investment, R&D, sales and marketing spending required to expand our operations.

Cash Flows

The table below summarizes our cash flows for the years ended December 31, 2004, 2003 and 2002.

APC
invests its excess cash principally in certificates of deposit, corporate bonds and notes, and U.S. government agency securities. APC also invests in auction rate securities. Auction
rate securities have long-term underlying maturities, however the market is highly liquid and the interest rates reset every seven, 28 or 35 days. In prior years, APC classified a
portion of its auction rate securities as cash equivalents, however such amounts have been reclassified as short term available-for-sale securities for all periods presented in
this Report$80.1 million, $110.9 million, and $83.4 million at December 31, 2004, 2003 and 2002, respectively.

2004

2003

2002(In thousands)Net cash provided by operating activities


141,236


119,599


312,920Net cash used in investing activities


(11,263
)

(116,564
)

(480,185
)Net cash (used in) provided by financing activities


(198,466
)

12,257


4,977Net change in cash and cash equivalents


(68,493
)

15,292


(162,288
)Cash and cash equivalents at beginning of year


141,214


125,922


288,210Cash and cash equivalents at end of year

$
72,721

$
141,214

$
125,922


Cash Flows from Operating Activities.Our cash flows from operations for fiscal years 2004 and 2003
reflected higher profit levels as well as the favorable impact of increasing accounts payable and other liabilities, partially offset by increased inventory and higher accounts receivable balances
consistent with our strong sales growth.

Cash Flows from Investing Activities.Our investing activities cash flows were used mainly for the
purchase of available-for-sale and held-to-maturity securities and for capital spending, principally manufacturing and office equipment, purchased
software applications, and building improvements. Cash available from operations resulted in net purchases of investments in fiscal years 2003 and 2002, including the purchase of additional
tax-exempt securities. Our investment approach and the composition of our investment
portfolio remained relatively constant overall with no investments having maturity dates greater than two years, except for the aforementioned auction rate securities.

Cash Flows from Financing Activities.Our cash flows from financing activities included the
aforementioned $150 million stock repurchase during the third quarter of 2004 as well as the payment of common stock dividends of approximately $70.5 million and $31.8 million
during fiscal years 2004 and 2003, respectively. These outflows were partially offset in 2004, and more than offset in 2003 and 2002, by proceeds from issuances of common stock relating to employee
stock plans during each of the periods presented.

26

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Inventories

Worldwide inventories were $465.9 million at December 31, 2004, up from $402.2 million at December 31, 2003. Higher levels of
on-hand raw materials and finished goods were required during 2004 and 2003 to meet increasing current and anticipated demand, particularly InfraStruXure demand, as well as to manage the
supply chain requirements associated with continuing transfers of production of a wide range of Small and Large Systems products to and among our low cost manufacturing regions. In addition, we
increased our inventory levels of price-sensitive materials to hedge against the risk of current and anticipated commodity cost trends, as well as to support continuing new product introductions.
Despite increasing inventory levels, inventory levels as a percentage of quarterly sales were 91% in the fourth quarter of 2004, down from 105% in the third quarter of 2004 and 93% in the fourth
quarter of 2003.

Provision for Excess Inventory.Additionally, third quarter 2004 gross margins included the effects
of a $11.5 million incremental charge for excess inventory related to specifically-identified finished goods and raw materials inventories deemed obsolete as the result of recently commenced
efforts to reduce the number of unique product offerings in several of our product lines, as well as the result of new product introductions. There were no additional inventory charges, other than
APC's standard provisioning, during the fourth quarter of 2004 or during fiscal years 2003 and 2002.

Product Recall.In early 2003, we announced a product recall of Back-UPS CS 350
and 500 models, due to potential safety issues. Prior to announcing the recall, APC received eight reports worldwide of units overheating, resulting in the melting of the unit's outer casing, six of
which occurred in the United States. Three of the reported incidents resulted in minor property damage; no injuries have been reported. The total number of affected devices recalled worldwide is
approximately 2.1 million with approximately 900,000 devices recalled in the United States. The recall is limited to two specific models in APC's Back-UPS CS product line,
the Back-UPS CS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt
models. The affected units were manufactured between November 2000 and December 2002 and were sold primarily through computer and electrical distribution, catalog and retail outlets
worldwide. In the fourth quarter of 2002, APC accrued a current liability and recognized additional warranty expense, classified in cost of goods sold, of $19.6 million. Based upon repair cost
and return rate experience to-date as well as then-current estimates of remaining costs to be incurred, APC projected that aggregate costs for the recall would be less than
originally estimated. To reflect this change, cost of goods sold was reduced by $5.5 million in the third quarter of 2003. As of December 31, 2004, APC had incurred approximately 82% of
currently estimated total recall costs. Our estimation of remaining recall costs of $2.4 million, comprised of $0.9 million for the U.S. and $1.5 million for international
geographies, continues to be subject to actual return rates and per unit repair costs (which can vary by country) as well as estimates for other recall-related costs expected to be incurred. We expect
that future amounts will not differ materially from our current estimates.

Contractual Obligations

The following table summarizes our significant contractual obligations at December 31, 2004, and the effect such obligations are expected to have on our
liquidity and cash flows in future periods. This table excludes amounts already recorded on our balance sheet as current liabilities at December 31, 2004.

|                            |  | Payments Due By Period
|--------------------------- |  | ----------------------
|
|
|Operating Lease Obligations |  | $                     

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APC's
non-cancelable operating leases, primarily for warehousing and office space, expire at various dates through 2011. These leases contain renewal options for periods
ranging from one to seven years and require APC to pay its proportionate share of utilities, taxes, and insurance. APC is not able to determine the aggregate amount of purchase orders that represent
contractual obligations for the purchase of goods and services, as such purchase orders may represent authorizations to purchase rather than binding agreements. For the purposes of this disclosure,
contractual obligations for the purchase of goods and services are defined as agreements that are enforceable and legally binding on APC and that specify all significant terms, including: fixed or
minimum quantities to be purchased; fixed, minimum, or variable price provisions; the approximate timing of the transaction, and contain no provisions allowing for cancellation without significant
penalty. Our purchase orders for raw materials or purchased finished products are based on our current manufacturing needs and/or demand forecasts and are fulfilled by our vendors within short time
horizons. We do not have significant agreements for the purchase of raw materials or finished products specifying minimum quantities or set prices that exceed our expected requirements for three
months.

Capital Expenditures and Capital Commitments

During 2004 and 2003, our capital expenditures, net of capital grants, amounted to approximately $29.3 million and $21.6 million, respectively,
consisting primarily of manufacturing and office equipment, purchased software applications, and building improvements. Capital spending in 2004 and 2003 focused on funding additional equipment needs
and improving existing factories, principally in the U.S., India, Ireland, the Philippines, Denmark, and China, as well as continuing investment in information technologies. Capital spending in 2002
decreased from prior year levels, reflecting our focused efforts to control and reduce capital spending and rationalize our overall production capacity which included our first quarter 2002 decision
to consolidate our Philippines based manufacturing operations in the province of Cavite. Substantially all of APC's net capital expenditures were financed from available operating cash. Also refer to
Note 12 of Notes to Consolidated Financial Statements in Item 8 of this Report.

We
have dedicated significant efforts to rationalize our overall manufacturing capacity over the past three years and we will continue to plan for future capacity requirements based on
the assumed continued acceptance and demand for our products in the specific market segments they were designed to address. We currently expect that capital spending will be between $30 million
and $40 million in 2005, compared to $29.3 million in 2004. We expect that most of the capital spending for 2005 will go toward maintaining, upgrading, and expanding current
manufacturing capacity, as well as investing to upgrade current hardware and software office technologies.

We
had no material capital commitments during fiscal years 2004, 2003 and 2002, or at December 31, 2004 and 2003.

APC
has agreements with the Industrial Development Authority of Ireland, otherwise known as the IDA. Under these agreements, we receive grant monies for costs incurred for machinery,
equipment,
and building improvements for our Galway and Castlebar facilities. These grants are equal to 40% and 60%, respectively, of such costs up to a maximum of $13.1 million for Galway and
$1.3 million for Castlebar. Such grant monies are subject to APC meeting certain employment goals and maintaining operations in Ireland until termination of the respective agreements. Under
separate agreements with the IDA, we receive direct reimbursement of training costs at our Galway and Castlebar facilities for up to $3,000 and $12,500, respectively, per new employee hired. Also
refer to Note 16 of Notes to Consolidated Financial Statements in Item 8 of this Report.

APC
also has an agreement with the IDA for a research and development grant towards the costs of a project for the development of software products. The availability of the grant is
contingent on meeting certain milestones in the progress of the project as well as meeting certain employment goals on the project within the Galway facility. The amount of grant assistance available
on satisfaction of all

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conditions
is 28% of the eligible expenditure to a maximum of €714,588. At December 31, 2004, no grant claims had been claimed or received.

Borrowing Facilities and Financial Commitments

At December 31, 2004 and 2003, APC had available for future borrowings $65.0 million under an unsecured, non-committed line of credit
agreement at a floating interest rate equal to the bank's cost of funds rate plus 0.625%. No borrowings were outstanding under this facility during fiscal years 2004, 2003 and 2002, or at
December 31, 2004 and 2003.

APC
had no significant financial commitments, other than those required in the normal course of business, during fiscal years 2004, 2003 and 2002, or at December 31, 2004 and
2003.

Off-Balance-Sheet Arrangements

APC had no significant off-balance sheet arrangements during fiscal years 2004, 2003 and 2002, or at December 31, 2004 and 2003.

American Jobs Creation Act of 2004Repatriation of Foreign Earnings.In October 2004, the
American Jobs Creation Act of 2004 was enacted. This Act repealed the tax code's extraterritorial income (ETI) exclusion in response to the World Trade Organization's challenge that the ETI exclusion
was a prohibited tax subsidy. The repeal will be phased in through 2006. The Act replaced the ETI exclusion with a 3% domestic deduction for domestic production activities effective for APC's 2005 tax
year. The Act also provides for a temporary 85% dividends received deduction on certain foreign earnings repatriated during a one-year period. The deduction would result in an approximate
5.25% federal tax rate on the repatriated earnings. To qualify for the deduction, the earnings must be reinvested in the United States pursuant to a domestic reinvestment plan established by a
company's chief executive officer and approved by its board of directors. Certain other criteria in the Jobs Act must be satisfied as well. The maximum amount of APC's foreign earnings that qualify
for the temporary deduction is $500 million. For APC, the one-year period during which the qualifying distributions can be made is 2004 or 2005. No qualifying distributions were
made during 2004.

APC
is in the process of evaluating whether it will repatriate any foreign earnings under the repatriation provisions of the Jobs Act and, if so, the amount that it will repatriate. The
range of reasonably possible amounts that APC is considering for repatriation, which would be eligible for the temporary deduction, is zero to $500 million. APC is awaiting the issuance of
further regulatory guidance and passage of statutory technical corrections with respect to certain provisions in the Jobs Act prior to determining the amounts it will repatriate. If such regulatory
guidance or technical corrections are favorable, APC is likely to repatriate amounts in the high end of our range. APC expects to determine the amounts and sources of foreign earnings to be
repatriated, if any, during the third quarter of fiscal 2005. Use of the funds will be governed by a domestic reinvestment plan, as required by the Jobs Act.

Repatriation
of the maximum amount eligible for the temporary deduction, which is $500 million, could result in additional United States federal income tax expense, which APC
currently estimates to be between zero and $38.2 million, in fiscal 2005. Repatriation also would substantially increase liquidity in the United States, although use of the additional liquidity
would be restricted by the domestic reinvestment plan. There would be a corresponding reduction in liquidity at APC's foreign subsidiaries. Some foreign subsidiaries may be required to borrow in order
to repatriate their earnings to the U.S.

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Quarterly Cash Dividends

In June 2003, APC's Board of Directors approved initiation of a quarterly cash dividend of $0.08 per share of common stock. Dividends of $0.08 per share were
declared and paid in each subsequent quarter through the second quarter of 2004. In June 2004, APC's Board of Directors approved a 25% increase in its quarterly cash dividend raising the payout to
$0.10 per share. Dividends of $0.10 per share were declared and paid in the third and fourth quarters of 2004. On February 15, 2005, a quarterly dividend of $0.10 per share was declared,
payable on March 16, 2005 to shareholders of record as of February 28, 2005. It is the intention of the Board of Directors to pay a comparable quarterly dividend on a going forward basis
contingent upon continued capital availability and a determination that cash dividends continue to be in the best interests of APC and its shareholders.

APC
has historically generated annual cash flows from operating activities as a result of strong operating results and, at times, improvement in working capital. We believe that current
internal cash flows together with available cash, available credit facilities or, if needed, the proceeds from the sale of additional equity, will be sufficient to support anticipated capital
spending, dividend payments, and other working capital requirements for the foreseeable future.

Stock Repurchase Program

During the third quarter of 2004, APC repurchased on the open market approximately 9.3 million shares of its common stock, at an average price of $16.09
per share totaling $150 million, completing a program approved by APC's Board of Directors in June 2004. No further repurchases will be made under this program. The repurchased shares
have been deemed authorized but unissued shares. In March 2004, APC also returned its 250,000 treasury shares to an authorized but not issued status.

Foreign Currency Activity

We invoice our customers in various currencies. Realized and unrealized transaction gains or losses are included in the results of operations and are measured
based upon the effect of changes in exchange
rates on the actual or expected amount of functional currency cash flows. Transaction gains and losses were not material to the results of operations in 2004, 2003 and 2002.

The
table below summarizes information on balances that are sensitive to foreign currency exchange rates and presents such amounts in U.S. dollar equivalents.

|                                |  | December 31, 2004 |        | December 31, 2003
|------------------------------- |  | ----------------- | ------ | -----------------
|
|
|U.S. dollar functional currency |  | $                 | 97,640 |                  
|Swiss franc functional currency |  | $                 | 17,218 |                  

APC
also had non-trade receivables denominated in Euros of approximately U.S.$0.8 million and U.S.$0.9 million at December 31, 2004 and 2003,
respectively.

We
continually review our foreign exchange exposure and consider various risk management techniques, including the netting of foreign currency receipts and disbursements, rate protection
agreements with customers/vendors and derivatives arrangements, including foreign exchange contracts. We presently do not utilize rate protection agreements or derivative arrangements.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to

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make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The U.S. Securities and
Exchange Commission has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results and which require our most difficult, complex
or subjective judgments or estimates. Based on this definition, we have identified the policies below as critical to our business operations and the understanding of our results of operations. The
impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where
such policies affect our reported and expected financial results. For all financial statement periods presented, there have been no material modifications to the application of these critical
accounting policies. For a detailed discussion on the application of these and other accounting policies, also refer to Note 1 of Notes to Consolidated Financial Statements in Item 8 of this
Report.

On
an on-going basis, we evaluate the judgments and estimates underlying all of our accounting policies, including those related to revenue recognition, product returns, bad
debts, inventories, impairment of long-lived assets, deferred tax valuation allowances, restructuring reserves and contingencies, and litigation. We base our 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. Materially different results in the amount and timing of our actual results for any period could occur if we made different judgments or
utilized different estimates. Actual results may differ from those estimates.

Our
critical accounting policies are as follows:

Revenue Recognition.We follow very specific and detailed guidelines in measuring revenue; however,
certain judgments affect the application of our revenue policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results
to vary significantly from quarter to quarter. In general, revenue is recognized when title has passed at the time of delivery of product for all of our operating segments as stipulated by the
delivery terms for the sales transactions. In addition, prior to revenue recognition, we require persuasive evidence of the arrangement, that the price is fixed or determinable, and that
collectibility is reasonably assured. Installation is not applicable for Small Systems and "Other" segment products based on the nature of the products sold. Generally, revenue associated with Large
Systems sales is also recognized at the time of delivery and/or installation pursuant to the delivery and/or installation terms. Delivery terms vary,
but often include origin-based terms (e.g., FOB Shipping Point and Ex-works) and destination-based terms (e.g., DDU/DDP (delivered duty unpaid/delivered duty paid)).

Certain
Large Systems product lines and, at times, one product line included in the Small Systems segment, require electrical hardwire installation or duct installation which is
performed by the customer or their contracted licensed contractor/electrician. Where we do not perform such installation, revenue recognition at the time of delivery is proper as customer acceptance
of the unit is not required. Also, payment by the customer is not contingent upon installation of the product.

We
offer additional services to customers depending on the type of product the customer has purchased, including on-site services, installation consulting services, remote
monitoring services, power audit services, and network integration services. Revenue is recognized at the time services are provided or is deferred and recognized over the service period (where
applicable). The fair value of these services are based upon the rates that we charge customers in separately negotiated transactions and such services are not essential to the functionality of the
delivered product.

For
all sales, except those completed over the Internet, we use a binding purchase order as evidence of an arrangement. For sales over the Internet, we use a credit card authorization as
evidence

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of
an arrangement. Sales through certain customers are evidenced by a master agreement governing the relationship together with binding purchase orders on a transaction by transaction basis.

Our
arrangements do not generally include acceptance clauses. However, if an arrangement includes a customer specified acceptance provision, acceptance generally occurs at our factory
prior to delivery. As we continue to introduce new products in 2005, we anticipate that installation and customer acceptance provisions may become more common, and therefore increasingly significant
for determining delivery and performance and consequently our entitlement to recognize revenue.

Estimating Valuation Allowances and Accrued LiabilitiesAllowances for Sales Returns, Doubtful Accounts, Inventory
Obsolescence and Product Recall, and Assessment of the Probability of the Outcome of our Current Litigation.Significant management judgments that affect the
application of our revenue policy also include estimates of potential future product returns related to current period product revenue. We analyze historical returns, current economic trends, and
channel inventories when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the
sales returns and other allowances in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized
different estimates.

We
provide limited rights of return to distributors and retailers for our Small Systems product lines. We provide appropriate reserves for returns at the time that related revenue is
recognized, based on historical patterns of returns and contractual provisions in accordance with the provisions of Statement of Financial Accounting Standards No. 48, Revenue Recognition When Right of Return
Exists, and U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 104. Returns of Large
Systems products generally do not occur. Historically, returns have represented approximately 3% of gross sales and have not differed significantly from prior estimates.

Similarly,
we must make estimates of the uncollectability of our accounts receivable. Management specifically analyzes accounts receivable balances in view of customer credit-worthiness,
customer concentrations, historical bad debts, current economic trends, and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Commencing in
August 2004, we expanded APC's receivables insurance coverage to include U.S.-based sales. A majority of international customer balances continue to be covered by receivables insurance.
Historically, bad debts have been less than 1% of net sales.

Our
inventory reserve estimate methodology involves quantifying the total inventory position having potential loss exposure. Loss exposure generally results from several business
factors, including product or component discontinuance, unplanned changes in demand, product design changes, and factory transitions. Quantifying such loss exposure is the result of combining the cost
of inventories specifically identified as having little or no opportunity for sale or use (thus available for physical disposition) plus the cost of inventories having a high risk of no future sale or
use based upon an analysis of on-hand quantities compared to historical and anticipated future sale or use. We maintain an on-going business process for the physical
disposition of inventories previously identified. Inventory write-offs occur at the time of physical disposition. Inventories, once reserved, are not written back up as such reserve
adjustments are considered to be a permanent decrease to the cost basis of the excess or obsolete inventory. If actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.

In
early 2003, we announced a product recall of Back-UPS CS 350 and 500 models, due to potential safety issues. Prior to announcing the recall, APC received eight
reports worldwide of units overheating, resulting in the melting of the unit's outer casing, six of which occurred in the United States. Three of the reported incidents resulted in minor property
damage; no injuries have been reported. The total number of affected devices recalled worldwide is approximately 2.1 million with approximately 900,000 devices recalled in the United States.
The recall is limited to two specific models

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in
APC's Back-UPS CS product line, the Back-UPS CS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt models.
The affected units were manufactured between November 2000 and December 2002 and were sold primarily through computer and electrical distribution, catalog and retail outlets worldwide.
In the fourth quarter of 2002, APC accrued a current liability and recognized additional warranty expense, classified in cost of goods sold, of $19.6 million. Based upon repair cost and return
rate experience to-date as well as then-current estimates of remaining costs to be incurred, APC projected that aggregate costs for the recall would be less than originally
estimated. To reflect this change, cost of goods sold was reduced by $5.5 million in the third quarter of 2003. As of December 31, 2004, APC had incurred approximately 82% of currently
estimated total recall costs. Our estimation of remaining recall costs of $2.4 million, comprised of $0.9 million for the U.S. and $1.5 million for international geographies,
continues to be subject to actual return rates and per unit repair costs (which can vary by country) as well as estimates for other recall-related costs expected to be incurred. The most significant
risks associated with our return rate assumptions include varying degrees of product recall regulation by geography as well as varying consumer awareness levels and access to timely recall
information. Actual per unit repair cost includes principally transportation costs which will be influenced by the proximity of customer locations to the service center location as well as the
priority level of delivery requirements. We expect that actual future amounts will not differ materially from our current estimates.

We
are, and may in the future become, involved in litigation involving our business, products or operations. For pending claims for which there is an estimatable range of loss greater
than zero, we record the best estimate of liability within the range. If no point within the range is considered the best estimate, we record the minimum estimated liability. Because of uncertainties
related to the identifiable range of loss on any pending claims, we may be unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional
information becomes available, we assess the potential liability related to our pending claims and revise our estimates. Such revisions in our estimates of the potential liability could materially
impact our results of operation and financial position. The litigation process is inherently uncertain and includes the risk of an unexpected, unfavorable result. We may be materially adversely
impacted by any such litigation.

Valuation of Long-lived Tangible and Intangible Assets including Goodwill.We assess the
impairment of long-lived tangible and intangible assets on an ongoing basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Should
our assessment of long-lived and amortizable intangible assets suggest impairment, we would determine recoverability based on an estimate of future undiscounted cash flows resulting from
our use of the asset and its eventual disposition. Factors we consider that could trigger an impairment review include the following:



We
evaluate each of our reporting units with goodwill during the fourth quarter of each fiscal year or more frequently if impairment indicators arise. Impairment losses are determined
based upon the excess of carrying amounts over discounted expected future cash flows of the underlying business.

Accounting for Income Taxes.As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and

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accounting
purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax
assets will be recovered from future taxable income. Expectations about future taxable income incorporate numerous assumptions about actions, elections and strategies to minimize income taxes in
future years. Our ability to take such actions, make preferred elections and implement tax-planning strategies may be adversely impacted by enacted changes in tax laws and/or tax rates, as
well as successful challenges by tax authorities resulting from differing interpretations of tax laws and regulations.

American Jobs Creation Act of 2004Repatriation of Foreign Earnings.In October 2004, the
American Jobs Creation Act of 2004 was enacted. This Act repealed the tax code's extraterritorial
income (ETI) exclusion in response to the World Trade Organization's challenge that the ETI exclusion was a prohibited tax subsidy. The repeal will be phased in through 2006. The Act replaced the ETI
exclusion with a 3% domestic deduction for domestic production activities effective for APC's 2005 tax year. The Act also provides for a temporary 85% dividends received deduction on certain foreign
earnings repatriated during a one-year period. The deduction would result in an approximate 5.25% federal tax rate on the repatriated earnings. To qualify for the deduction, the earnings
must be reinvested in the United States pursuant to a domestic reinvestment plan established by a company's chief executive officer and approved by its board of directors. Certain other criteria in
the Jobs Act must be satisfied as well. The maximum amount of APC's foreign earnings that qualify for the temporary deduction is $500 million. For APC, the one-year period during
which the qualifying distributions can be made is 2004 or 2005. No qualifying distributions were made during 2004.

APC
is in the process of evaluating whether it will repatriate any foreign earnings under the repatriation provisions of the Jobs Act and, if so, the amount that it will repatriate. The
range of reasonably possible amounts that APC is considering for repatriation, which would be eligible for the temporary deduction, is zero to $500 million. APC is awaiting the issuance of
further regulatory guidance and passage of statutory technical corrections with respect to certain provisions in the Jobs Act prior to determining the amounts it will repatriate. If such regulatory
guidance or technical corrections are favorable, APC is likely to repatriate amounts in the high end of our range. APC expects to determine the amounts and sources of foreign earnings to be
repatriated, if any, during the third quarter of fiscal 2005. Use of the funds will be governed by a domestic reinvestment plan, as required by the Jobs Act.

Repatriation
of the maximum amount eligible for the temporary deduction, which is $500 million, could result in additional United States federal income tax expense, which APC
currently estimates to be between zero and $38.2 million, in fiscal 2005. Repatriation also would substantially increase liquidity in the United States, although use of the additional liquidity
would be restricted by the domestic reinvestment plan. There would be a corresponding reduction in liquidity at APC's foreign subsidiaries. Some foreign subsidiaries may be required to borrow in order
to repatriate their earnings to the U.S.

APC
is routinely under audit by federal, foreign, state, or local authorities in the areas of income taxes and the remittance of sales and use taxes. These audits include questioning the
timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal, foreign, state, and local tax laws. In evaluating the exposure associated with various
tax filing positions, we often accrue for probable exposures. To the extent APC were to prevail in matters for which accruals have been established or were to be required to pay amounts in excess of
reserves, APC's effective tax rate in a given financial statement period could be materially affected.

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To the extent we believe that recovery of deferred tax assets is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision in the consolidated statements of income. Significant management judgment is required in determining our provision for income
taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. At December 31, 2004 and 2003, we provided a valuation allowance on
certain of our deferred tax assets, primarily consisting of net operating losses generated in 2001 through 2004 for the start up and continuing operations of Brazilian operations, because of
uncertainty regarding their realizability. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets
will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance which could
materially impact our financial position and results of operations.

RECENTLY ISSUED ACCOUNTING STANDARDS

Share-Based Payment.In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment, which is a revision of Statement No. 123 as
amended by No. 148,Accounting for Stock-Based Compensation. Statement No. 123(R) supercedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. Generally, the approach in Statement 123(R) is similar to the approach described in
Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on
their fair values at the date of grant. Pro forma disclosure is no longer an alternative. This Statement is effective for fiscal periods beginning after June 15, 2005 and will be effective for
APC for the third and fourth fiscal quarters of 2005.

Statement 123(R)
permits public companies to adopt its requirements using one of two methods. The "modified prospective" method requires compensation cost to be recognized
beginning with the Statement's effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the
requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. The "modified retrospective"
method includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for
purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

APC
has yet to determine which method to use in adopting Statement 123(R). As permitted by Statement 123, APC currently accounts for share-based payments to employees using APB Opinion
No. 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)'s fair value method will have a
significant impact on APC's results of operations, although it will have no impact on APC's overall financial position. APC is evaluating Statement 123(R) and has not yet determined the amount of
stock option expense which will be incurred in future periods.

Inventory Costs.In November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151,Inventory Costs. Statement 151 requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling
costs always be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of
the production facilities. This Statement is effective for fiscal years beginning after June 15, 2005; we will adopt this Statement on January 1, 2006. The adoption of this Statement is
not expected to have a material impact on our consolidated financial position or results of operations.

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American Jobs Creation Act of 2004Repatriation of Foreign Earnings.FASB Staff Position
(FSP) No. 109-2,Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004, provides guidance under Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes, with
respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the Jobs Act) on enterprises' income tax expense and deferred tax liability. The
Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the
Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying Statement No. 109. APC has not yet completed evaluating the impact of the repatriation
provisions. Accordingly, as provided for in FSP 109-2, APC has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.

FACTORS THAT MAY AFFECT FUTURE RESULTS

This document contains forward-looking statements that involve risks and uncertainties, particularly in theBusiness
Outlooksection of this MD&A. You can identify forward-looking statements by the use of forward-looking terminology including "believes," "expects," "may," "will," "should,"
"seeks," "approximately," "intends," "plans," "pro forma," "estimates," or "anticipates" or the negative of these words and phrases or other variations of these words and phrases or comparable
terminology. Our actual results could differ materially from those anticipated in these forward looking statements as a
result of certain factors, including the risks faced by us described below and elsewhere in this document.

We
caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation to publicly update or
revise any such statements to reflect any change in our expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual
results will differ from those set forth in the forward-looking statements.

Our annual and quarterly results are likely to be volatile.Our annual and quarterly operating
results may fluctuate as a result of a number of factors, including:



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We currently compete with several firms providing power protection and related products and services and expect competition to increase in
the future, which could affect our revenue and profitability.We believe that we are one of less than ten global companies providing a full range of UPS products
and services worldwide. The UPS, power protection and related industries, however, are highly competitive on both a worldwide basis and a regional geographic basis. We compete, and will continue to
compete, with several U.S. and foreign firms, both on a worldwide basis and in various geographical regions, and within individual product and application niches. We expect competition to increase in
the future from existing competitors and a number of companies that may enter our existing or future markets. Increased competition could adversely affect our revenue and profitability through price
reductions and loss of market share.

The
principal competitive factors in our products include:



Some
of our current and potential competitors may have substantially greater financial, technical, sales and marketing resources than we have. We may not be able to continue to compete
successfully with our existing competitors or with new competitors.

Technological innovation, or failure to alter our products to meet the demands of technological innovation, could seriously harm our
business.The market for our products is characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. Current
competitors or new market entrants may develop new products with features that could adversely affect the competitive position of our products. We may not be successful in selecting, developing,
manufacturing and marketing new products or enhancing our existing products or in responding effectively to technological changes, new standards or product announcements by competitors. The timely
availability of new products and enhancements, and their acceptance by customers are important to our future success. Delays in such availability or a lack of market acceptance could have an adverse
effect on our business. Additionally, there may be technological innovation that eliminates or reduces the need for our products.

Defects in our products could seriously harm our business.Our products may have defects despite
testing internally or by current or potential customers. These defects could result in product returns or recalls and loss or delay in market acceptance, which could have a material adverse effect
upon our business, operating results, or financial condition.

In
early 2003, APC announced a product recall of Back-UPS CS 350 and 500 models, due to potential safety issues. Prior to announcing the recall, APC received eight reports
worldwide of units

37

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overheating,
resulting in the melting of the unit's outer casing, six of which occurred in the United States. Three of the reported incidents resulted in minor property damage; no injuries have been
reported. The total number of affected devices recalled worldwide is approximately 2.1 million with approximately 900,000 devices recalled in the United States. The recall is limited to two
specific models in APC's Back-UPS CS product line, the Back-UPS CS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt models. The
affected units were manufactured between November 2000 and December 2002 and were sold primarily through computer and electrical distribution, catalog and retail outlets worldwide. In
the fourth quarter of 2002, APC accrued a current liability and recognized additional warranty expense, classified in cost of goods sold, of $19.6 million. Based upon repair cost and return
rate experience to-date as well as then-current estimates of remaining costs to be incurred, APC projected that aggregate costs for the recall would be less than originally
estimated. To reflect this change, cost of goods sold was reduced by $5.5 million in the third quarter of 2003. As of December 31, 2004, APC had incurred approximately 82% of currently
estimated total recall costs. Our estimation of remaining recall costs of $2.4 million, comprised of $0.9 million for the U.S. and $1.5 million for international geographies,
continues to be subject to actual return rates and per unit repair costs (which can vary by country) as well as estimates for other recall-related costs expected to be incurred. We expect that future
amounts will not differ materially from our current estimates.

Loss of any of our key personnel could seriously harm our business.Our success depends to a
significant degree upon the continuing contributions of key management, sales, marketing, research and development and manufacturing personnel, many of whom we would have difficulty replacing. We
believe that our future success will depend in large part upon our ability to attract and retain highly-skilled hardware and software engineers, and management, sales, and marketing personnel.
Competition for such personnel is intense, and we may not be successful in attracting and retaining such personnel. Failure to attract and retain key personnel could have a material adverse effect on
our business, operating results, or financial condition.

Because we depend on foreign operations and revenues, we are exposed to currency fluctuations, import barriers and other risks related to
conducting foreign operations.We manufacture and market our products worldwide through several foreign subsidiaries, distributors, and resellers. Our worldwide
operations are subject to the risks normally associated with foreign operations including, but not limited to:



International
sales, which are both direct and indirect sales to customers outside the U.S., accounted for approximately 55.8%, 55.0%, and 51.9%, of our net sales in 2004, 2003 and 2002,
respectively. We anticipate that international sales will continue to account for a significant portion of our revenue. We invoice our customers in various currencies. To date, we do not use any rate

38

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protection
agreements or derivative agreements to hedge any foreign exchange exposure. Accordingly, we may be exposed to exchange losses based upon currency exchange rate fluctuations, which losses
could have a materially adverse effect on our operating results.

A
significant portion of products in our Small Systems and Large Systems reportable operating segments are manufactured in foreign locations, particularly developing countries such as
Brazil, China, India, and the Philippines, which subject APC to a number of economic and other risks. The Small Systems have particular exposure to the Philippines, a country which is experiencing
political and financial instability. Disruption of manufacturing efforts in these international facilities could materially adversely impact our ability to fulfill customer orders and potentially
result in the loss of business.

Because our business relies upon a variety of computer systems to operate effectively, the failure or disruption of, or latent defects in
these systems could have a material adverse effect on our business.APC is a highly automated company whose efficient and effective operation relies on a variety
of information systems, including e-mail, enterprise resource planning, electronic data interchange, customer resource management and e-commerce systems. Disruption in the
operation of these systems, or difficulties in maintaining or upgrading these systems, could have an adverse effect on our business. Difficulties that we have encountered, or may encounter, in
connection with our implementation and use of our computer systems, including human error or our reliance on, or a failure or disruption of, or latent defects in, such systems, could adversely affect
our order management and fulfillment, financial reporting and supply chain management processes, and any such difficulties could have a material adverse effect on our business.

Our reliance on sole source suppliers may result in product delays or price increases.We currently
obtain certain components of our products and certain finished products from sole sources. In the future, our suppliers may not be able to meet our demand for components and products in a timely and
cost-effective manner. Our inability to secure and qualify alternative sources of supply in a timely manner may disrupt our ability to fulfill customer orders. We generally purchase these
sole
source components and products using purchase orders and have no guaranteed supply arrangements with the suppliers. In addition, the availability of many of these components and products is dependent
in part on our ability to provide the suppliers with accurate forecasts of our future requirements. However, our operating results and customer relationships could be materially adversely affected by
either an increase in prices for, or an interruption or reduction in supply of, any key components and products.

We have a limited ability to protect our intellectual property rights; others could infringe on or misappropriate our propriety rights and
information.Our success will depend, to a large extent, on our ability to protect our proprietary technology. We rely on a combination of contractual rights,
trade secrets, patents, trademarks, and copyrights to protect our proprietary rights. Although we own certain patents, and we have applied, and in the future we may apply, for patents, our
intellectual property protection may not be sufficient to prevent competitors from developing similar technology. Moreover, in the absence of patent protection, our business may be adversely affected
by competitors which independently develop functionally equivalent technology.

Our products may infringe on the intellectual property rights of others.We attempt to ensure that
our products and processes do not infringe upon third party patents and other proprietary rights, but from time to time third parties have alleged, and in the future may allege, such infringement. If
third parties allege or determine infringement, we may not prevail in such a challenge. Furthermore, if infringement is determined, we may not be able to obtain the necessary licenses on acceptable
terms, if at all.

If we are unable to identify and successfully integrate acquisitions, our ability to expand and our financial results could
suffer.We have limited experience in integrating acquired companies or technologies into our operations. We may from time to time pursue the acquisition of other
companies, assets, products or technologies. We may not be able to integrate successfully products, technologies,

39

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distribution
channels, key personnel and businesses of acquired companies into our business or product offerings. In addition, the integration of acquired companies may adversely affect our business,
operating results, or financial condition. Further, these acquired companies, assets, products or technologies may not contribute significantly to our sales or earnings, and the sales and earnings
from acquired businesses may be adversely affected by the integration process or other factors. If we are not successful in the integration of such acquired businesses, our financial results could be
adversely impacted. In addition, we may not be able to identify and consummate suitable acquisition transactions in the future.

Our stock price could be volatile, which could cause you to lose part or all of your investment.The
market price of our common stock has been, and may continue to be, extremely volatile. The trading price of our common stock could be subject to wide fluctuations in response to:



In
addition, the stock market has from time to time experienced extreme price and volume fluctuations which have particularly affected the market price for many
high-technology companies and which often have been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our
common stock.

Our tax rate depends on earnings derived from certain foreign manufacturing operations.Our tax rate
is heavily dependent upon the proportion of earnings that we derive from our Ireland and Philippines manufacturing operations and our ability to reinvest those earnings permanently outside the United
States. If the earnings of these operations as a percentage of our total earnings were to decline significantly from anticipated levels, or should our ability to reinvest these earnings be reduced,
our effective tax rate would exceed the currently estimated rate for 2005. We have tax holidays in China, India, and the Philippines, which reduce or eliminate the income taxes paid in those
countries. A substantial portion of our tax holiday in the Philippines expired in the third quarter of 2003. Although this will have the effect of increasing our foreign taxes, our effective income
tax rate will remain considerably lower than the U.S. statutory federal corporate tax rate of 35%. In addition, we believe that further tax savings can be achieved by implementing further tax planning
strategies. If we are unable to successfully implement such strategies, our overall effective tax rate could increase. In addition, should our intercompany transfer pricing with respect to our Ireland
or Philippines manufacturing operations require significant adjustment due to audits or regulatory changes, our overall effective tax rate could increase.

Failure to maintain effective internal control over financial reporting may materially adversely impact our
business.Effective internal controls are necessary for APC to provide reasonable assurance with respect to its financial reports and to effectively prevent fraud.
If APC cannot provide reasonable assurance with respect to its financial reports and effectively prevent fraud, our brand and operating results could be harmed. Pursuant to the Sarbanes-Oxley Act of
2002, we are required to furnish a report by management on internal control over financial reporting, including management's assessment of the effectiveness of such control. Internal control over
financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud.
Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any
evaluation of effectiveness of internal control over financial

40

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reporting
to future periods are subject to the risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate. If APC fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, or if APC experiences difficulties in their
implementation, APC's business and operating results could be harmed, APC could fail to meet its reporting obligations, and there could be a material adverse effect on APC's stock price.

We cannot provide any assurance that current laws, or any laws enacted in the future, will not have a material adverse effect on our
business.Our operations are subject to laws, rules, regulations, including environmental regulations, government policies and other requirements in each of the
jurisdictions in which we conducts business. Changes in such laws, rules, regulations, policies or requirements could result in the need to modify our products and could affect the demand for our
products, which may have an adverse impact on our future operating results. In addition, we must comply with new regulations restricting APC's ability to include lead and certain other substances in
its products. If APC does not comply with applicable laws, rules and regulations, APC could be subject to costs and liabilities and its business may be adversely impacted.

We are, and may become, involved in litigation, which could materially harm our business.We are, and
may in the future become, involved in litigation involving our business, products or operations. The litigation process is inherently uncertain and includes the risk of an unexpected, unfavorable
result. Were an unfavorable result to occur, it is possible that we could be materially adversely impacted by any such litigation.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

APC, in the normal course of business, is exposed to market risks relating to fluctuations in foreign currency exchange rates. The information required under this
section related to such risks is included in
theForeign Currency Activitysection of Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Report
and is incorporated herein by reference.

APC,
in the normal course of business, is also exposed to market risks relating to fluctuations in interest rates and the resulting rates of return on investments in marketable
securities. The information required under this section related to such risks is included in theOther Income, Netsection of Management's Discussion
and Analysis of Financial Condition and Results of Operations in Item 7 of this Report and is incorporated herein by reference.

41

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Item 8. Financial Statements and Supplementary Data

AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        December 31, 2004 and 2003        In thousands except per share amount

|                                                                                                                      |  | 2004 |           | 2003 |  
|--------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | -
|ASSETS                                                                                                                |  |      |           |      |  
|Current assets:                                                                                                       |  |      |           |      |  
|Cash and cash equivalents                                                                                             |  | $    | 72,721    |      | $
|Short term investments (Note 3)                                                                                       |  |      | 642,853   |      |  
|Accounts receivable, less allowance for doubtful accounts
of $16,180 in 2004 and $18,987 in 2003 (Note 4)             |  |      | 327,547   |      |  
|Inventories (Note 5)                                                                                                  |  |      | 465,927   |      |  
|Prepaid expenses and other current assets                                                                             |  |      | 39,294    |      |  
|Deferred income taxes (Note 9)                                                                                        |  |      | 57,018    |      |  
|                                                                                                                      |  |      |           |      |  
|Total current assets                                                                                                  |  |      | 1,605,360 |      |  
|                                                                                                                      |  |      |           |      |  
|Property, plant, and equipment:                                                                                       |  |      |           |      |  
|Land, buildings, and improvements                                                                                     |  |      | 69,371    |      |  
|Machinery and equipment                                                                                               |  |      | 217,462   |      |  
|Office equipment, furniture, and fixtures                                                                             |  |      | 92,452    |      |  
|Purchased software                                                                                                    |  |      | 40,817    |      |  
|                                                                                                                      |  |      |           |      |  
|                                                                                                                      |  |      | 420,102   |      |  
|Less accumulated depreciation and amortization                                                                        |  |      | 265,251   |      |  
|                                                                                                                      |  |      |           |      |  
|Net property, plant, and equipment                                                                                    |  |      | 154,851   |      |  
|Long term investments (Note 3)                                                                                        |  |      | 5,542     |      |  
|Goodwill (Note 6)                                                                                                     |  |      | 7,179     |      |  
|Other intangibles, net (Note 6)                                                                                       |  |      | 39,627    |      |  
|Deferred income taxes (Note 9)                                                                                        |  |      | 28,687    |      |  
|Other assets                                                                                                          |  |      | 2,626     |      |  
|                                                                                                                      |  |      |           |      |  
|Total assets                                                                                                          |  | $    | 1,843,872 |      | $
|                                                                                                                      |  |      |           |      |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                  |  |      |           |      |  
|Current liabilities:                                                                                                  |  |      |           |      |  
|Accounts payable                                                                                                      |  | $    | 132,213   |      | $
|Accrued compensation                                                                                                  |  |      | 43,869    |      |  
|Accrued sales and marketing programs                                                                                  |  |      | 43,209    |      |  
|Accrued warranty (Note 8)                                                                                             |  |      | 13,092    |      |  
|Other accrued expenses                                                                                                |  |      | 46,929    |      |  
|Deferred revenue                                                                                                      |  |      | 35,522    |      |  
|Income taxes payable                                                                                                  |  |      | 11,330    |      |  
|                                                                                                                      |  |      |           |      |  
|Total current liabilities                                                                                             |  |      | 326,164   |      |  
|Deferred tax liability (Note 9)                                                                                       |  |      | 15,449    |      |  
|                                                                                                                      |  |      |           |      |  
|Total liabilities                                                                                                     |  |      | 341,613   |      |  
|                                                                                                                      |  |      |           |      |  
|Shareholders' equity (Notes 10 and 11):                                                                               |  |      |           |      |  
|Common stock, $0.01 par value;
authorized 450,000 shares in 2004 and 2003;
issued 192,137 in 2004 and 199,982 in 2003 |  |      | 1,921     |      |  
|Additional paid-in capital                                                                                            |  |      | 60,081    |      |  
|Retained earnings                                                                                                     |  |      | 1,437,691 |      |  
|Treasury stock, 250 shares, at cost in 2003                                                                           |  |      |          |      |  
|Accumulated other comprehensive income                                                                                |  |      | 2,566     |      |  
|                                                                                                                      |  |      |           |      |  
|Total shareholders' equity                                                                                            |  |      | 1,502,259 |      |  
|                                                                                                                      |  |      |           |      |  
|COMMITMENTS AND CONTINGENCIES (Notes 8, 13, 15 and 16)                                                                |  |      |           |      |  
|Total liabilities and shareholders' equity                                                                            |  | $    | 1,843,872 |      | $
|                                                                                                                      |  |      |           |      |  

See accompanying notes to consolidated financial statements.

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AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF INCOME        Years ended December 31, 2004, 2003 and 2002        In thousands except per
share amounts

|                                                                               |  | 2004 |           | 2003 |   | 2002     
|------------------------------------------------------------------------------ |  | ---- | --------- | ---- | - | ---------
|Net sales (Note 12)                                                            |  | $    | 1,699,877 |      | $ | 1,464,798
|Cost of goods sold                                                             |  |      | 1,017,981 |      |   | 852,615  
|                                                                               |  |      |           |      |   |          
|Gross profit                                                                   |  |      | 681,896   |      |   | 612,183  
|Operating expenses:                                                            |  |      |           |      |   |          
|Marketing, selling, general, and administrative                                |  |      | 391,829   |      |   | 315,429  
|Research and development                                                       |  |      | 85,618    |      |   | 67,639   
|                                                                               |  |      |           |      |   |          
|Total operating expenses                                                       |  |      | 477,447   |      |   | 383,068  
|                                                                               |  |      |           |      |   |          
|Operating income                                                               |  |      | 204,449   |      |   | 229,115  
|Other income, net                                                              |  |      | 9,711     |      |   | 9,990    
|                                                                               |  |      |           |      |   |          
|Earnings before income taxes and cumulative effect of accounting change        |  |      | 214,160   |      |   | 239,105  
|Income taxes (Note 9)                                                          |  |      | 32,705    |      |   | 62,167   
|                                                                               |  |      |           |      |   |          
|Earnings before cumulative effect of accounting change                         |  |      | 181,455   |      |   | 176,938  
|Cumulative effect of accounting change, net of
income taxes of $15,459 in 2002 |  |      |          |      |   |         
|                                                                               |  |      |           |      |   |          
|Net income                                                                     |  | $    | 181,455   |      | $ | 176,938  
|                                                                               |  |      |           |      |   |          
|Basic earnings per share:                                                      |  |      |           |      |   |          
|Basic earnings per share before cumulative effect of
accounting change         |  | $    | 0.92      |      | $ | 0.90     
|Cumulative effect of accounting change, net of tax                             |  |      |          |      |   |         
|                                                                               |  |      |           |      |   |          
|Basic earnings per share                                                       |  | $    | 0.92      |      | $ | 0.90     
|                                                                               |  |      |           |      |   |          
|Basic weighted average shares outstanding                                      |  |      | 196,799   |      |   | 197,402  
|                                                                               |  |      |           |      |   |          
|Diluted earnings per share:                                                    |  |      |           |      |   |          
|Diluted earnings per share before cumulative effect of accounting change       |  | $    | 0.90      |      | $ | 0.88     
|Cumulative effect of accounting change, net of tax                             |  |      |          |      |   |         
|                                                                               |  |      |           |      |   |          
|Diluted earnings per share                                                     |  | $    | 0.90      |      | $ | 0.88     
|                                                                               |  |      |           |      |   |          
|Diluted weighted average shares outstanding                                    |  |      | 201,658   |      |   | 201,517  
|                                                                               |  |      |           |      |   |          

See
accompanying notes to consolidated financial statements.

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AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY        Years ended December 31, 2004, 2003 and 2002        In
thousands

|                                                             |  | $0.01 Par,
Common stock |   |   |       |   |   | Treasury Stock,
at Cost |   |   |           |   |     
|------------------------------------------------------------ |  | ----------------------- | - | - | ----- | - | - | ----------------------- | - | - | --------- | - | ----
|
|
|Balances at December 31, 2001                                |  | 196,025                 |   | $ | 1,960 |   | $ | 126,365                 |   | $ | 1,099,541 |   | (250
|Net income                                                   |  |                         |   |   |       |   |   |                         |   |   | 82,022    |   |     
|Foreign currency translation adjustment                      |  |                         |   |   |       |   |   |                         |   |   |           |   |     
|Net unrealized loss on investments                           |  |                         |   |   |       |   |   |                         |   |   |           |   |     
|Comprehensive income                                         |  |                         |   |   |       |   |   |                         |   |   |           |   |     
|Exercises of stock options                                   |  | 305                     |   |   | 3     |   |   | 3,167                   |   |   |           |   |     
|Tax benefit from exercises of stock options                  |  |                         |   |   |       |   |   | 490                     |   |   |           |   |     
|Shares issued to Employee Stock Purchase Plan                |  | 166                     |   |   | 2     |   |   | 1,805                   |   |   |           |   |     
|                                                             |  |                         |   |   |       |   |   |                         |   |   |           |   |     
|Balances at December 31, 2002                                |  | 196,496                 |   |   | 1,965 |   |   | 131,827                 |   |   | 1,181,563 |   | (250
|Net income                                                   |  |                         |   |   |       |   |   |                         |   |   | 176,938   |   |     
|Foreign currency translation adjustment                      |  |                         |   |   |       |   |   |                         |   |   |           |   |     
|Net unrealized gain on investments                           |  |                         |   |   |       |   |   |                         |   |   |           |   |     
|Comprehensive income                                         |  |                         |   |   |       |   |   |                         |   |   |           |   |     
|Common stock dividends                                       |  |                         |   |   |       |   |   |                         |   |   | (31,768   | ) |     
|Exercises of stock options                                   |  | 3,340                   |   |   | 34    |   |   | 42,170                  |   |   |           |   |     
|Tax benefit from exercises of stock options                  |  |                         |   |   |       |   |   | 6,749                   |   |   |           |   |     
|Shares issued to Employee Stock Purchase Plan                |  | 146                     |   |   | 1     |   |   | 1,820                   |   |   |           |   |     
|                                                             |  |                         |   |   |       |   |   |                         |   |   |           |   |     
|Balances at December 31, 2003                                |  | 199,982                 |   |   | 2,000 |   |   | 182,566                 |   |   | 1,326,733 |   | (250
|Net income                                                   |  |                         |   |   |       |   |   |                         |   |   | 181,455   |   |     
|Foreign currency translation adjustment                      |  |                         |   |   |       |   |   |                         |   |   |           |   |     
|Comprehensive income                                         |  |                         |   |   |       |   |   |                         |   |   |           |   |     
|Common stock dividends                                       |  |                         |   |   |       |   |   |                         |   |   | (70,497   | ) |     
|Exercises of stock options                                   |  | 1,582                   |   |   | 16    |   |   | 19,862                  |   |   |           |   |     
|Tax benefit from exercises of stock options                  |  |                         |   |   |       |   |   | 4,942                   |   |   |           |   |     
|Shares issued to Employee Stock Purchase Plan                |  | 136                     |   |   | 1     |   |   | 2,152                   |   |   |           |   |     
|Compensation expenseRestricted Stock Units                  |  |                         |   |   |       |   |   | 2,014                   |   |   |           |   |     
|Common stock repurchases                                     |  | (9,313                  | ) |   | (93   | ) |   | (149,907                | ) |   |           |   |     
|Treasury shares returned to authorized but not issued status |  | (250                    | ) |   | (3    | ) |   | (1,548                  | ) |   |           |   | 250 
|                                                             |  |                         |   |   |       |   |   |                         |   |   |           |   |     
|Balances at December 31, 2004                                |  | 192,137                 |   | $ | 1,921 |   | $ | 60,081                  |   | $ | 1,437,691 |   |    
|                                                             |  |                         |   |   |       |   |   |                         |   |   |           |   |     

See accompanying notes to consolidated financial statements.

44

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AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        Years ended December 31, 2004, 2003 and 2002        In thousands

|                                                                                 |                                           | 2004 |            | 2003    |   | 2002       |        
|-------------------------------------------------------------------------------- | ----------------------------------------- | ---- | ---------- | ------- | - | ---------- | -------
|Cash flows from operating activities                                             |                                           |      |            |         |   |            |        
|Net income                                                                       |                                           | $    | 181,455    |         | $ | 176,938    |        
|Adjustments to reconcile net income to net cash provided by operating activities |                                           |      |            |         |   |            |        
|Depreciation and amortization of property, plant, and equipment                  |                                           |      | 36,826     |         |   | 35,619     |        
|Loss (gain) on sale of property, plant, and equipment                            |                                           |      | 776        |         |   |           |        
|Amortization of other intangibles                                                |                                           |      | 11,661     |         |   | 11,831     |        
|Provision for doubtful accounts                                                  |                                           |      | (1,500     | )       |   | 5,279      |        
|Provision for inventories                                                        |                                           |      | 17,376     |         |   | 6,600      |        
|Compensation expenseRestricted Stock Units                                      |                                           |      | 2,014      |         |   |           |        
|Deferred income taxes                                                            |                                           |      | (981       | )       |   | (6,403     | )      
|Cumulative effect of accounting change                                           |                                           |      |           |         |   |           |        
|Restructuring charges                                                            |                                           |      |           |         |   |           |        
|Impairment of assets held-for-sale                                               |                                           |      |           |         |   |           |        
|Other non-cash items, net                                                        |                                           |      | 1,431      |         |   | 2,887      |        
|Changes in operating assets and liabilities:                                     |                                           |      |            |         |   |            |        
|                                                                                 | Accounts receivable                       |      |            | (61,329 | ) |            | (32,918
|                                                                                 | Inventories                               |      |            | (81,081 | ) |            | (88,851
|                                                                                 | Prepaid expenses and other current assets |      |            | (13,998 | ) |            | (751   
|                                                                                 | Other assets                              |      |            | (1,794  | ) |            | (667   
|                                                                                 | Accounts payable                          |      |            | 29,413  |   |            | 2,817  
|                                                                                 | Accrued compensation                      |      |            | 4,503   |   |            | 6,337  
|                                                                                 | Accrued sales and marketing programs      |      |            | 13,262  |   |            | 7,542  
|                                                                                 | Accrued warranty                          |      |            | 1,383   |   |            | (15,474
|                                                                                 | Other accrued expenses                    |      |            | 12,783  |   |            | 3,845  
|                                                                                 | Deferred revenue                          |      |            | 11,192  |   |            | 5,195  
|                                                                                 | Income taxes payable                      |      |            | (22,156 | ) |            | (227   
|                                                                                 |                                           |      |            |         |   |            |        
|Net cash provided by operating activities                                        |                                           |      | 141,236    |         |   | 119,599    |        
|                                                                                 |                                           |      |            |         |   |            |        
|Cash flows from investing activities                                             |                                           |      |            |         |   |            |        
|Purchases of held-to-maturity securities                                         |                                           |      | (862,277   | )       |   | (484,980   | )      
|Maturities of held-to-maturity securities                                        |                                           |      | 723,006    |         |   | 405,854    |        
|Purchases of available-for-sale securities                                       |                                           |      | (2,762,575 | )       |   | (3,149,112 | )      
|Sales of available-for-sale securities                                           |                                           |      | 2,919,085  |         |   | 3,133,283  |        
|Capital expenditures, net of capital grants                                      |                                           |      | (29,289    | )       |   | (21,609    | )      
|Proceeds from sale of property, plant, and equipment                             |                                           |      | 787        |         |   |           |        
|Proceeds from disposals of property, plant, and equipment                        |                                           |      |           |         |   |           |        
|                                                                                 |                                           |      |            |         |   |            |        
|Net cash used in investing activities                                            |                                           |      | (11,263    | )       |   | (116,564   | )      
|                                                                                 |                                           |      |            |         |   |            |        
|Cash flows from financing activities                                             |                                           |      |            |         |   |            |        
|Purchases of common stock                                                        |                                           |      | (150,000   | )       |   |           |        
|Proceeds from issuances of common stock                                          |                                           |      | 22,031     |         |   | 44,025     |        
|Dividends paid on common stock                                                   |                                           |      | (70,497    | )       |   | (31,768    | )      
|                                                                                 |                                           |      |            |         |   |            |        
|Net cash (used in) provided by financing activities                              |                                           |      | (198,466   | )       |   | 12,257     |        
|                                                                                 |                                           |      |            |         |   |            |        
|Net change in cash and cash equivalents                                          |                                           |      | (68,493    | )       |   | 15,292     |        
|Cash and cash equivalents at beginning of year                                   |                                           |      | 141,214    |         |   | 125,922    |        
|                                                                                 |                                           |      |            |         |   |            |        
|Cash and cash equivalents at end of year                                         |                                           | $    | 72,721     |         | $ | 141,214    |        
|                                                                                 |                                           |      |            |         |   |            |        
|Supplemental cash flow disclosures                                               |                                           |      |            |         |   |            |        
|Cash paid during the year for:                                                   |                                           |      |            |         |   |            |        
|Income taxes (net of tax refunds)                                                |                                           | $    | 53,309     |         | $ | 56,168     |        
|                                                                                 |                                           |      |            |         |   |            |        

NON-CASH TRANSACTIONS: In 2002, APC recorded restructuring charges and impairment of assets
held-for-sale that included a non-cash component of $7,080 (Note 2).

See accompanying notes to consolidated financial statements.

45

---





AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        Years ended December 31, 2004, 2003 and 2002

1.     Summary of Significant Accounting Policies

Nature of Business

American Power Conversion Corporation and its subsidiaries (APC) designs, develops, manufactures, and markets power protection and management solutions for
computer, communications and electronic applications worldwide. APC's products include uninterruptible power supply products (UPSs), electrical surge protection devices, power conditioning products,
cooling equipment, and associated software, services, and accessories. These products are primarily used with sensitive electronic devices which rely on electric utility power including, but not
limited to, home electronics, personal computers (PCs), high-performance computer workstations, servers, networking equipment, communications equipment, Internetworking equipment, data
centers, mainframe computers, and facilities. APC's principal markets are in North America, Europe, and the Far East.

Principles of Consolidation

The consolidated financial statements include the accounts of American Power Conversion Corporation and all of its majority-owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.

Revenue Recognition

Revenue from sales of APC's products, including UPS products, electrical surge protection devices, power conditioning products, cooling equipment, and associated
accessories, is recognized when title has passed at the time of delivery of product as stipulated by the delivery terms for the sales transactions. In addition, prior to revenue recognition, APC
requires persuasive evidence of the arrangement, that the price is fixed or determinable, and that collectibility is reasonably assured. APC offers additional services to customers depending on the
type of product the customer has purchased, including on-site services, installation consulting services, remote monitoring services, power audit services, and network integration
services. Revenue is recognized at the time services are provided or is deferred and recognized ratably over the service period where applicable, typically one to three years. APC's arrangements do
not generally include acceptance clauses. However, if an arrangement includes a customer specified acceptance provision, acceptance generally occurs at APC's factory prior to delivery. Provisions for
potential liabilities resulting from sales returns and allowances, warranties, and uncollectible accounts are made at the time that related revenue is recognized, based on historical patterns of
returns and contractual provisions in accordance with the provisions of Statement of Financial Accounting Standards No. 48,Revenue Recognition When Right of Return
Exists, and U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 104.

Cash and Cash Equivalents

Cash and cash equivalents consist of funds on deposit, money market savings accounts, and short-term commercial paper with original maturities of
three months or less.

Investments

APC classifies as short term its investments with original maturities greater than three months and less than or equal to one year, and as long term its
investments with remaining maturities greater than

46

---



one
year and less than or equal to two years. APC has no investments with maturity dates greater than two years, except for auction rate securities. Held-to-maturity securities
are carried at amortized cost. Available-for-sale securities are recorded at fair value with net unrealized gains and losses reported, net of income taxes, in other
comprehensive income. Management determines the appropriate classification of securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Securities
are classified as held-to-maturity when APC has the positive intent and ability to hold such securities to maturity. APC invests its excess cash principally in certificates of
deposit, corporate bonds and notes, and U.S. government agency securities. APC also invests in auction rate securities. Auction rate securities have long-term underlying maturities,
however the market is highly liquid and the interest rates reset every seven, 28 or 35 days. In prior years, APC classified a portion of its auction rate securities as cash equivalents, however
such amounts have been reclassified as short term available-for-sale securities for all periods presented in this Report.

Inventories

Inventories are stated at the lower of cost or market; cost being determined using the first-in, first-out (FIFO) method.

Property, Plant, and Equipment

Property, plant, and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives indicated
below. Leasehold improvements are amortized over the shorter of the lease term or estimated useful life of the asset.

Land improvements

15-40 yearsBuildings and improvements

30-40 yearsMachinery and equipment

3-10 yearsOffice equipment, furniture, and fixtures

3-10 yearsPurchased software

3 years


Grant Monies

Grant monies are provided to certain of APC's subsidiaries located in Ireland to reimburse qualifying capital expenditures and for hiring and maintaining certain
employment levels within Ireland. Grant monies received for costs incurred for property, plant and equipment are recorded as a reduction to the basis of the corresponding depreciable assets. Grant
monies received for employee levels are recorded as a reduction of payroll expense in the period in which the employee levels required by the grant are reached. Grant monies are received subject to
"clawback" provisions that would obligate APC to repay the grant monies received should its employment levels fall below established levels. At the end of each fiscal quarter, APC evaluates current
conditions relating to the status of on-going operations and related employment levels in Ireland to assess the possibility that grant monies will need to be repaid and, if deemed
necessary, to accrue a repayment liability. Since the inception of its grant agreements in 1994, APC has not assessed the need to accrue a repayment liability and, based upon a current evaluation of
its significant investment in Ireland and on-going operational requirements, APC believes the possibility that the clawback provisions will become effective is remote.

Goodwill and Other Intangibles

Goodwill represents the excess of cost over the fair value of the net tangible assets and identifiable intangible assets of businesses acquired. Prior to
January 1, 2002, APC's goodwill was being amortized on a straight-line basis over 15 years. On January 1, 2002, APC adopted Statement of Financial Accounting Standards
No. 142,Goodwill and Other Intangible Assets. Statement 142 requires that

47

---



companies
no longer amortize goodwill and other intangible assets with indefinite lives, but instead test goodwill impairment at least annually or more frequently if impairment indicators arise. In
connection with its adoption of Statement 142, APC recorded a non-cash charge equal to the goodwill balance associated with its Large Systems segment of approximately $50 million
(approximately $35 million on an after-tax basis). This charge was recognized as the cumulative effect of a change in accounting principle net of income taxes, included in APC's
results as of January 1, 2002, and had no effect on APC's liquidity. APC's remaining goodwill was associated with its Small Systems segment. APC evaluates each of its reporting units with
goodwill during the fourth quarter of each fiscal year or more frequently if impairment indicators arise.

Statement
142 also provides for other intangible assets with definite useful lives to be amortized over their respective estimated useful lives to their estimated residual values and to
be reviewed for impairment in accordance with the provisions of Statement of Financial Accounting Standards No. 144,Impairment on Disposal of Long-Lived
Assets. APC's other intangible assets consist principally of technology and licensed patent rights relating to uninterruptible power supply technology. With the adoption of
Statement 142, APC reduced the estimated useful lives of its other intangible assets with definite useful lives from a weighted average life of approximately 15 years to a weighted average life
of approximately 6 years. There are no expected residual values related to these intangible assets.

Long-lived Assets

APC accounts for long-lived assets, excluding goodwill, in accordance with the provisions of Statement 144,Impairment
on Disposal of Long-Lived Assets. Statement 144 sets forth criteria to determine when a long-lived asset is held for sale. Such criteria specify
that the asset must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets. In addition, the sale of the asset must be
probable, and its transfer expected to qualify for recognition as a completed sale, generally within one year. Statement 144 requires recognition of an impairment loss only if the carrying amount of a
long-lived asset is not recoverable from its undiscounted cash flows. An impairment loss is measured as the difference between the carrying amount and fair value of the asset. APC
evaluates its long-lived assets if impairment indicators arise.

Research and Development

Expenditures for research and development (R&D) are expensed in the period incurred.

Warranties

APC offers limited warranties ranging from one to three years varying by product. The provision for potential liability resulting from warranty claims is made at
the time that related revenue is recognized, based on historical patterns of returns and contractual provisions in accordance with the provisions of Statement of Financial Accounting Standards
No. 48,Revenue Recognition When Right of Return Exists, and U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 104.
Customers can extend the basic warranty period of select products, at an additional charge, for a period of one or three additional years. Recognition of revenue associated with extended warranty
programs commences on the date the extended warranty becomes effective and is recognized ratably over the extended warranty period. In addition, APC offers an Equipment Protection Policy in the U.S.,
Canada, and Europe. Depending on the model and country, the policy provides up to $150,000, £50,000, or €100,000 for repair or replacement of customers' hardware should a
surge or lightning strike pass through an APC unit. Other restrictions also apply. Customers can also register the ProtectNet line of data line surge suppressors for a "Double-Up"
Supplemental Equipment Protection Policy, under which the total recoverable limit under the Equipment Protection Policy may be doubled (U.S. and Canada only). Most surge suppressor products come with
a lifetime product warranty. Except in relation to the product recall discussed below, APC has generally experienced satisfactory field

48

---



operating
results, and warranty and Equipment Protection Policy costs incurred to date have not had a significant impact on APC's results of operations.

In
early 2003, APC announced a product recall of Back-UPS CS 350 and 500 models. APC's methodology for estimating costs associated with this product recall involved
estimating future costs to be incurred to replace the recalled products based on expected returns and the costs to conduct the recall, particularly repair and transportation costs; also refer to
Note 8.

Income Taxes

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Deferred
income taxes have not been provided for the undistributed earnings of APC's foreign subsidiaries which aggregated approximately $640 million at December 31, 2004.
APC plans to reinvest all such earnings for future expansion. If such earnings were distributed, taxes would increase by approximately $180 million. Additionally, APC has tax holidays in China,
India, and the Philippines, which reduce or eliminate the income taxes paid in those countries. A substantial portion of APC's tax holiday in the Philippines expired in the third quarter of 2003.
Based on the currently enacted regular corporate income tax rates in these countries, the benefit to APC of these tax holidays was approximately $7.2 million, or $0.04 per diluted share, for
the year ended December 31, 2004; $10.2 million, or $0.05 per diluted share, for the year ended December 31, 2003; and $7.5 million, or $0.04 per diluted share, for the
year ended December 31, 2002.

FASB
Staff Position (FSP) No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,
provides guidance under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, with respect to recording the potential impact of the repatriation provisions of the
American Jobs Creation Act of 2004 (the Jobs Act) on enterprises' income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that
an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of
applying Statement No. 109. APC has not yet completed evaluating the impact of the repatriation provisions. Accordingly, as provided for in FSP 109-2, APC has not adjusted its tax
expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.

Earnings per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per
share is computed by dividing net income by the weighted average number of common shares and dilutive potential common shares outstanding during the period. Under the treasury stock method, the
unexercised options are assumed to be exercised and the unvested restricted stock units are assumed to be vested, at the beginning of the period or at issuance, if later. The assumed proceeds are then
used to purchase common shares at

49

---



the
average market price during the period. Potential common shares for which inclusion would have the effect of increasing diluted earnings per share (i.e., antidilutive) are excluded from the
computation.

2004

2003

2002(In thousands)Basic weighted average shares outstanding

196,799

197,402

195,927Net effect of dilutive potential common shares outstanding based on the treasury stock method using the average market price

4,859

4,115

1,066Diluted weighted average shares outstanding

201,658

201,517

196,993Antidilutive potential common shares excluded from the computation above

2,945

3,133

8,882


Stock-Based Compensation

On June 10, 2004, APC's shareholders approved APC's 2004 Long-Term Incentive Plan (2004 LTI Plan), which replaced the 1997 Stock Option Plan.
At December 31, 2004, APC had one active stock-based compensation plan, the aforementioned 2004 LTI Plan, and an employee stock purchase plan, which are described more fully in Note 10.
As permitted by Statement of Financial Accounting Standards No. 123 as amended by No. 148,Accounting for Stock-Based Compensation, APC
accounts for those plans under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if APC had applied the fair value recognition provisions of Statement 123
to stock-based employee compensation:

|                                                                                                                                            |  |             |  | 2004 |         | 2003 |   | 2002   
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- |  | ---- | ------- | ---- | - | -------
|
|Net income                                                                                                                                  |  | As reported |  | $    | 181,455 |      | $ | 176,938
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |  | Pro forma   |  |      | 10,136  |      |   | 23,175 
|                                                                                                                                            |  |             |  |      |         |      |   |        
|Net income                                                                                                                                  |  | Pro forma   |  | $    | 171,319 |      | $ | 153,763
|                                                                                                                                            |  |             |  |      |         |      |   |        
|Basic earnings per share                                                                                                                    |  | As reported |  | $    | 0.92    |      | $ | 0.90   
|                                                                                                                                            |  | Pro forma   |  | $    | 0.87    |      | $ | 0.78   
|Diluted earnings per share                                                                                                                  |  | As reported |  | $    | 0.90    |      | $ | 0.88   
|                                                                                                                                            |  | Pro forma   |  | $    | 0.85    |      | $ | 0.76   

The
pro forma effect on net income for 2004, 2003 and 2002 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro
forma compensation expense related to stock option grants made prior to 1995.

50

---



The
weighted average fair value of stock options granted during 2004, 2003 and 2002 was $10.93, $8.18, and $7.07, respectively. APC estimates the fair value of each option as of the date
of grant using the Black-Scholes pricing model with the following weighted average assumptions used for grants in 2004, 2003 and 2002:

2004

2003

2002Expected volatility

64
%
67
%
74
%Dividend yield

2
%
2
%
Risk-free interest rate

3.6
%
2.5
%
3.2
%Expected life

6 years

5 years

6 years


Also
under the aforementioned 2004 LTI Plan, on October 25, 2004, APC's Board of Directors approved the award of 951,825 restricted stock units (RSU). The weighted average fair
value of such units granted during the fourth quarter of 2004 was $16.25 per unit. Under the recognition and measurement principles of APB Opinion No. 25,Accounting for
Stock Issued to Employees, and related Interpretations, approximately $2.0 million of stock-based employee compensation cost was reflected in net income for such units
in the fourth quarter of 2004. The RSU awards will vest, and the underlying common stock will concurrently issue, ratably over four years, whereby one-fourth of the shares will vest on
each of June 30, 2005, June 30, 2006, June 30, 2007, and June 30, 2008.

APC
accounts for its non-employee stock-based compensation awards in which goods or services are the consideration received for the equity instruments issued based on the
fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Compensation cost recognized for non-employees under
these plans in the accompanying consolidated financial statements is not material.

In
December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based
Payment, which is a revision of Statement No. 123 as amended by No. 148,Accounting for Stock-Based Compensation.
Statement No. 123(R) supercedes APB Opinion No. 25. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires
all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant. Pro forma disclosure is no
longer an alternative. This Statement is effective for fiscal periods beginning after June 15, 2005 and will be effective for APC for the third and fourth fiscal quarters of 2005.

Statement
123(R) permits public companies to adopt its requirements using one of two methods. The "modified prospective" method requires compensation cost to be recognized beginning with
the Statement's effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of
Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. The "modified retrospective" method includes the
requirements of the modified prospective method described above, but also permits entities to restate based on the amounts
previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

APC
has yet to determine which method to use in adopting Statement 123(R). As permitted by Statement 123, APC currently accounts for share-based payments to employees using
APB Opinion No. 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)'s fair value
method will have a significant impact on APC's results of operations, although it will have no impact on APC's overall financial position. APC is evaluating Statement 123(R) and has not yet
determined the amount of stock option expense which will be incurred in future periods.

51

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Advertising Costs

Advertising costs are expensed as incurred and reported in marketing, selling, general, and administrative expenses in the accompanying consolidated statements of
income. Such costs of advertising, advertising production, trade shows, and other activities are designed to enhance demand for APC's products. Advertising costs were $50.4 million in 2004,
$46.8 million in 2003, and $40.8 million in 2002. There are no capitalized advertising costs in the accompanying consolidated balance sheets.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results may differ from those estimates.

2.     Restructuring

In early 2002, APC announced global headcount reductions which impacted personnel worldwide, principally in the U.S., U.K., Ireland, and the Philippines,
throughout a broad range of functions within the organization. The majority of these terminations were the result of APC's decision to consolidate
its Philippines-based manufacturing operations, resulting in the closing of APC's manufacturing facility in the province of Laguna. Such restructuring actions were announced during the first quarter
of 2002 and substantially completed by the end of 2002.

In
2002, APC recorded $7.2 million of related restructuring costs of which $4.7 million and $2.5 million were classified in cost of goods sold and operating
expenses, respectively. These costs included the effects of approximately 941 employee terminations, principally 54% in manufacturing, 14% in sales and 13% in R&D, based on severance agreements, as
well as facilities closures in the Philippines, U.S. and U.K., and the related impairment of tangible assets, principally buildings and manufacturing equipment, based on management's assessment of
market data. These costs were not allocated to APC's operating segments, but rather were classified as indirect operating expenses for segment reporting consistent with APC's classification for its
internal financial reporting; also refer to Note 12.

In
connection with APC's decision to consolidate its Philippines-based manufacturing operations, APC closed manufacturing facilities located in the Philippines province of Laguna, in
Maryland, and also in the U.K. APC marketed its Philippines property with an intent to sell these assets in 2003. However, APC was unable to complete this sale as a result of an unfavorable real
estate market. In accordance with the provisions of Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of
Long-Lived Assets, in the second quarter of 2003 the Philippines building and equipment previously classified as assets held-for-sale were
reclassified to held-for-use property, plant, and equipment at their fair values, which aggregated $3.0 million, and depreciation re-commenced. APC sold a
building in Maryland to a third party in October 2002. Also, in connection with the closure of a leased facility in the U.K., APC recognized a lease liability during the first quarter of 2002;
this lease will expire in the second quarter of 2005.

52

---



A summary of the related 2002 restructuring liabilities during 2004, 2003 and 2002 is outlined below. APC expects all such restructuring liabilities at December 31, 2004 to be
settled by the end of the second quarter of 2005.

|                                                  |  | 2002 Restructuring Plans
|------------------------------------------------- |  | ------------------------
|
|
|2004                                              |  |                         
|Employee terminations                             |  | $                       
|Termination of U.K. lease                         |  |                         
|                                                  |  |                         
|                                                  |  | $                       
|                                                  |  |                         
|2003                                              |  |                         
|Employee terminations                             |  | $                       
|Termination of U.K. lease                         |  |                         
|                                                  |  |                         
|                                                  |  | $                       
|                                                  |  |                         
|2002                                              |  |                         
|Employee terminations                             |  | $                       
|                                                  |  |                         
|Impairment of Philippines manufacturing equipment |  |                         
|Impairment of Maryland building                   |  |                         
|Impairment of U.K. assets                         |  |                         
|Termination of U.K. lease                         |  |                         
|                                                  |  |                         
|Total facilities closures                         |  |                         
|                                                  |  |                         
|                                                  |  | $                       
|                                                  |  |                         

53

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3.     Investments

|                                  |  | Amortized
Cost |         | Gross
Unrealized
Holding
Gains |   | Gross
Unrealized
Holding
Losses |  | Fair
Value
|--------------------------------- |  | -------------- | ------- | ------------------------------ | - | ------------------------------- |  | ----------
|
|At December 31, 2004              |  |                |         |                                |   |                                 |  |           
|Held-to-maturity                  |  |                |         |                                |   |                                 |  |           
|Certificates of deposit           |  | $              | 127,241 |                                | $ |                                |  | $         
|Corporate bonds and notes         |  |                | 283,573 |                                |   | 6                               |  |           
|U.S. government agency securities |  |                | 35,000  |                                |   |                                |  |           
|                                  |  |                |         |                                |   |                                 |  |           
|                                  |  |                | 445,814 |                                |   | 6                               |  |           
|                                  |  |                |         |                                |   |                                 |  |           
|Available-for-sale                |  |                |         |                                |   |                                 |  |           
|Auction rate securities           |  |                | 202,075 |                                |   |                                |  |           
|Equity investments                |  |                | 506     |                                |   |                                |  |           
|                                  |  |                |         |                                |   |                                 |  |           
|                                  |  |                | 202,581 |                                |   |                                |  |           
|                                  |  |                |         |                                |   |                                 |  |           
|                                  |  | $              | 648,395 |                                | $ | 6                               |  | $         
|                                  |  |                |         |                                |   |                                 |  |           
|At December 31, 2003              |  |                |         |                                |   |                                 |  |           
|Held-to-maturity                  |  |                |         |                                |   |                                 |  |           
|Certificates of deposit           |  | $              | 209,814 |                                | $ |                                |  | $         
|Corporate bonds and notes         |  |                | 42,112  |                                |   | 237                             |  |           
|Municipal bonds and notes         |  |                | 18,593  |                                |   | 67                              |  |           
|U.S. government agency securities |  |                | 36,024  |                                |   | 5                               |  |           
|                                  |  |                |         |                                |   |                                 |  |           
|                                  |  |                | 306,543 |                                |   | 309                             |  |           
|                                  |  |                |         |                                |   |                                 |  |           
|Available-for-sale                |  |                |         |                                |   |                                 |  |           
|Auction rate securities           |  |                | 358,651 |                                |   |                                |  |           
|Equity investments                |  |                | 440     |                                |   |                                |  |           
|                                  |  |                |         |                                |   |                                 |  |           
|                                  |  |                | 359,091 |                                |   |                                |  |           
|                                  |  |                |         |                                |   |                                 |  |           
|                                  |  | $              | 665,634 |                                | $ | 309                             |  | $         
|                                  |  |                |         |                                |   |                                 |  |           

Proceeds
from the sales of investment securities available-for-sale were $2.919 billion in 2004, $3.133 billion in 2003 and $1.264 billion in
2002; gross realized losses were approximately $575,000 in 2003 and $224,000 in 2002.

APC
invests its excess cash principally in certificates of deposit, corporate bonds and notes, and U.S. government agency securities. APC also invests in auction rate securities. Auction
rate securities have long-term underlying maturities, however the market is highly liquid and the interest rates reset every seven, 28 or 35 days. In prior years, APC classified a
portion of its auction rate securities as cash equivalents, however such amounts have been reclassified as short term available-for-sale securities for all periods presented in
this Report$80.1 million, $110.9 million, and $83.4 million at December 31, 2004, 2003 and 2002, respectively.

At
December 31, 2004, APC's held-to-maturity investments included $440.3 million with contractual maturities of one year or less and
$5.5 million with contractual maturities between one to two years; APC's available-for-sale auction rate debt securities included $95.0 million with contractual
maturities between approximately 14 to 40 years.

54

---



4.     Accounts Receivable

Accounts receivable are generally not concentrated in any geographic region or industry. Collateral is usually not required except for certain international
transactions for which APC requires letters of credit to secure payment. APC estimates an allowance for doubtful accounts based on the credit worthiness of its customers as well as general economic
conditions. Consequently, an adverse change in those factors could affect APC's estimate of its bad debts.

5.     Inventories

December 31,
2004

December 31,
2003(In thousands)Raw materials

$
212,883

$
185,431Work in process


9,382


10,679Finished goods


243,662


206,112Total inventories

$
465,927

$
402,222


6.     Goodwill and Other Intangible Assets

At December 31, 2004 and 2003, goodwill of $7.2 million and $6.7 million, respectively, was associated with the Small Systems segment.
Amortized intangible assets were as follows:

|                                  |  |         |  | December 31, 2004 |        | December 31, 2003
|--------------------------------- |  | ------- |  | ----------------- | ------ | -----------------
|
|
|
|Technology                        |  | 6 years |  | $                 | 81,040 |                  
|Customer lists                    |  | 5 years |  |                   | 8,900  |                  
|Tradenames                        |  | 5 years |  |                   | 3,157  |                  
|                                  |  |         |  |                   |        |                  
|Total amortized intangible assets |  | 6 years |  | $                 | 93,097 |                  
|                                  |  |         |  |                   |        |                  

Aggregate
amortization expense related to APC's other intangible assets for 2004, 2003 and 2002 was $11.7 million, $11.8 million and $11.9 million, respectively.
Estimated aggregated amortization for each of the next five succeeding fiscal years is $11.8 million for 2005, $11.8 million for 2006, $9.6 million for 2007, $5.2 million
for 2008, and $1.2 million for 2009. There are no expected residual values related to these intangible assets.

7.     Revolving Credit Agreements and Short Term Debt

At December 31, 2004 and 2003, APC had available for future borrowings $65.0 million under an unsecured, non-committed line of credit
agreement at a floating interest rate equal to the bank's cost of funds rate plus 0.625%. No borrowings were outstanding under this facility during fiscal years 2004, 2003 and 2002, or at
December 31, 2004 and 2003.

55

---



8.     Warranty Liability and Product Recall

Product
Warranty
Liability at
Beginning
of Year

Accruals for
Product
Warranties
Issued During
the Year

Adjustments
to Accruals
for Preexisting
Warranties

Warranty
Payments

Product
Warranty
Liability at
End of
Year(In thousands)2004

$
11,709

$
26,761

$


$
(25,378
)
$
13,0922003

$
27,183

$
24,454

$
(5,500
)
$
(34,428
)
$
11,7092002

$
6,846

$
41,798

$
(167
)
$
(21,294
)
$
27,183


In
early 2003, APC announced a product recall of Back-UPS CS 350 and 500 models, due to potential safety issues. Prior to announcing the recall, APC received eight reports
worldwide of units overheating, resulting in the melting of the unit's outer casing, six of which occurred in the United States. Three of the reported incidents resulted in minor property damage; no
injuries have been reported. The total number of affected devices recalled worldwide is approximately 2.1 million with approximately 900,000 devices recalled in the United States. The recall is
limited to two specific models in APC's Back-UPS CS product line, the Back-UPS CS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt
models. The affected units were manufactured between November 2000 and December 2002 and were sold primarily through computer and electrical distribution, catalog and retail outlets
worldwide. In the fourth quarter of 2002, APC accrued a current liability and recognized additional warranty expense, classified in cost of goods sold, of $19.6 million. Based upon repair cost
and return rate experience to-date as well as then-current estimates of remaining costs to be incurred, APC projected that aggregate costs for the recall would be less than
originally estimated. To reflect this change, cost of goods sold was reduced by $5.5 million in the third quarter of 2003.

As
of December 31, 2004, APC had incurred approximately 82% of currently estimated total recall costs. Our estimation of remaining recall costs of $2.4 million, comprised
of $0.9 million for the U.S. and $1.5 million for international geographies, continues to be subject to actual return rates and per unit repair costs (which can vary by country) as well
as estimates for other recall-related costs expected to be incurred. We expect that future amounts will not differ materially from our current estimates.

9.     Income Taxes

Total federal, state, and foreign income tax expense (benefit) from continuing operations for the years ended December 31, 2004, 2003 and 2002 consists of
the following:

Current

Deferred

Total(In thousands)2004Federal

$
(4,270
)
$
1,366

$
(2,904
)State


1,970


(1,974
)

(4
)Foreign


35,986


(373
)

35,613$
33,686

$
(981
)
$
32,7052003Federal

$
32,880

$
(7,284
)
$
25,596State


7,938


166


8,104Foreign


28,748


(281
)

28,467$
69,566

$
(7,399
)
$
62,1672002Federal

$
33,502

$
(5,657
)
$
27,845State


7,287


(1,063
)

6,224Foreign


12,978


(1,733
)

11,245$
53,767

$
(8,453
)
$
45,314


56

---



Income
tax expense attributable to continuing operations amounted to $32.7 million in 2004, $62.2 million in 2003, and $45.3 million in 2002,
(effective rates of 15.3%, 26.0%, and 28.0%, respectively). The actual expense for 2004, 2003 and 2002 differs from the "expected" tax expense (computed by applying the U.S. statutory federal
corporate tax rate of 35% to earnings before income taxes) as follows:

|                                                                                                         |  | 2004 |         | 2003 |   | 2002    |  
|-------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|
|Computed "expected" tax expense                                                                          |  | $    | 74,956  |      | $ | 83,687  |  
|State income taxes, net of federal income tax benefit                                                    |  |      | (3      | )    |   | 6,702   |  
|Foreign earnings taxed at rates lower than U.S. statutory rate (principally Ireland and the Philippines) |  |      | (22,367 | )    |   | (26,088 | )
|Extraterritorial income exclusion                                                                        |  |      | (1,102  | )    |   | (1,740  | )
|Resolution of tax contingencies                                                                          |  |      | (20,860 | )    |   |        |  
|Other                                                                                                    |  |      | 2,081   |      |   | (394    | )
|                                                                                                         |  |      |         |      |   |         |  
|                                                                                                         |  | $    | 32,705  |      | $ | 62,167  |  
|                                                                                                         |  |      |         |      |   |         |  

In
fiscal 2004, the tax rate benefited from net favorable adjustments to previously estimated liabilities of $20.8 million, which decreased the provision for taxes by
approximately $0.10 per share. Excluding these adjustments, our tax rate for the year would have been 25.0%. The most significant favorable adjustments related to the resolution of an IRS audit
through 2002.

The
domestic and foreign components of earnings before income taxes were $11.9 million and $202.3 million, respectively, for 2004; $51.9 million and
$187.2 million, respectively, for 2003; and
$89.3 million and $72.5 million, respectively, for 2002. Total income tax expense for the years ended December 31, 2004, 2003 and 2002 was allocated as follows:

|                                                                                                                                 |  | 2004 |        | 2003 |   | 2002   |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|
|Income from continuing operations                                                                                                |  | $    | 32,705 |      | $ | 62,167 |  
|Shareholders' equity, for compensation expense for tax purposes in excess of amounts recognized for financial statement purposes |  |      | (4,942 | )    |   | (6,749 | )
|Shareholders' equity, for unrealized loss in investments                                                                         |  |      |       |      |   |       |  
|Cumulative effect of accounting change                                                                                           |  |      |       |      |   |       |  
|                                                                                                                                 |  |      |        |      |   |        |  
|                                                                                                                                 |  | $    | 27,763 |      | $ | 55,418 |  
|                                                                                                                                 |  |      |        |      |   |        |  

57

---



At
December 31, 2004 and 2003, deferred income tax assets and liabilities result from temporary differences in the recognition of income and expense for tax and financial
reporting purposes. The sources and tax effects of these temporary differences are presented below:

|                                                    |  | 2004 |        | 2003 |  
|--------------------------------------------------- |  | ---- | ------ | ---- | -
|
|Deferred tax assets                                 |  |      |        |      |  
|Intangible assets                                   |  | $    | 32,642 |      | $
|Intercompany inventory profits                      |  |      | 11,737 |      |  
|Inventory obsolescence reserve                      |  |      | 10,777 |      |  
|Accrual for compensation and compensated absences   |  |      | 11,507 |      |  
|Deferred revenue                                    |  |      | 2,911  |      |  
|Allowance for doubtful accounts                     |  |      | 3,240  |      |  
|Allowances for sales and marketing programs         |  |      | 3,335  |      |  
|Reserve for warranty and product recall costs       |  |      | 3,894  |      |  
|Additional costs inventoried for tax purposes       |  |      | 2,495  |      |  
|Other                                               |  |      | 8,828  |      |  
|                                                    |  |      |        |      |  
|Total gross deferred tax assets                     |  |      | 91,366 |      |  
|Less valuation allowance                            |  |      | (5,661 | )    |  
|                                                    |  |      |        |      |  
|Net deferred tax assets                             |  |      | 85,705 |      |  
|                                                    |  |      |        |      |  
|Deferred tax liabilities                            |  |      |        |      |  
|Excess of tax over financial statement depreciation |  |      | 12,548 |      |  
|Other                                               |  |      | 2,901  |      |  
|                                                    |  |      |        |      |  
|Total deferred tax liabilities                      |  |      | 15,449 |      |  
|                                                    |  |      |        |      |  
|Net deferred income taxes                           |  | $    | 70,256 |      | $
|                                                    |  |      |        |      |  

In
assessing the realizability of deferred tax assets, APC considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. At
December 31, 2004 and 2003, APC provided a valuation allowance on certain of its deferred tax assets, primarily consisting of net operating losses generated in 2004, 2003 and 2002 for the start
up and continuing operations of Brazilian operations, because of uncertainty regarding their realizability.

American Jobs Creation Act of 2004Repatriation of Foreign Earnings.The American Jobs
Creation Act of 2004 (the Jobs Act), enacted on October 22, 2004, provides for a temporary 85% dividends received deduction on certain foreign earnings repatriated during a one-year
period. The deduction would result in an approximate 5.25% federal tax rate on the repatriated earnings. To qualify for the deduction, the earnings must be reinvested in the United States pursuant to
a domestic reinvestment plan established by a company's chief executive officer and approved by the company's board of directors. Certain other criteria in the Jobs Act must be satisfied as well. The
maximum amount of APC's foreign earnings that qualify for the temporary deduction is $500 million. For APC, the one-year period during which the qualifying distributions can be made
is 2004 or 2005. No qualifying distributions were made during 2004.

APC
is in the process of evaluating whether it will repatriate foreign earnings under the repatriation provisions of the Jobs Act, and if so, the amount that will be repatriated. The
range of reasonably possible amounts that APC is considering for repatriation, which would be eligible for the temporary deduction, is zero to $500 million. APC is awaiting the issuance of
further regulatory guidance and passage of statutory technical corrections with respect to certain provisions in the Jobs Act prior to determining the amounts it will repatriate. If such regulatory
guidance or technical corrections are favorable, APC is likely to repatriate amounts in the high end of its range. APC expects to determine the amounts and sources of foreign earnings to be
repatriated, if any, during the third quarter of 2005.

58

---



APC is not yet in a position to determine the impact of a qualifying repatriation, should it choose to make one, on its income tax expense for 2005, the amount of its indefinitely
reinvested foreign earnings, or the amount of its deferred tax liability with respect to foreign earnings. If APC were to plan to repatriate the maximum amount eligible for the temporary deduction,
which is $500 million, from foreign earnings which were previously indefinitely reinvested, APC estimates it would accrue additional tax expense in fiscal 2005 of between zero and
$38.2 million.

10.   Stock-Based Compensation

At December 31, 2004, APC had one active stock-based compensation plan and an employee stock purchase plan, described below.

Stock-based Compensation Plans

On June 10, 2004, APC's shareholders approved APC's 2004 Long-Term Incentive Plan (2004 LTI Plan), which replaced APC's 1997 Stock Option Plan
(1997 Plan). The 2004 LTI Plan will enable APC to utilize shares previously not distributed under the 1997 Plan. No further grants will be made from the 1997 Plan. Awards under the 2004 LTI Plan may
be in the form of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, performance restricted stock, performance restricted stock units, or any
other equity-based interests as the Compensation Committee of APC's Board of Directors shall determine. The number of shares of common stock that may be delivered in satisfaction of awards granted
under the 2004 LTI Plan shall be equal to (a) the number of shares of common stock that remain available for grant under the 1997 Plan as of June 10, 2004, plus (b) any shares of
common stock underlying outstanding awards under the 1997 Plan that after June 10, 2004 expire or terminate without being exercised or that would otherwise again become available for issuance
under the 1997 Plan, and in no event shall exceed an aggregate of 15 million shares. At December 31, 2004, there were 10.3 million shares available for future grants under the
2004 LTI Plan.

On
April 21, 1997, APC's shareholders approved the 1997 Stock Option Plan and on June 19, 1987 approved the 1987 Stock Option Plan (collectively the 1997 and 1987 Plans).
The 1997 and 1987 Plans authorized the grant of options for up to 12.0 million shares and 21.6 million shares, respectively, of common stock. On June 11, 2002 and May 7,
1999, APC's shareholders authorized an additional 9.5 million shares and 12.0 million shares, respectively, under the 1997 Stock Option Plan, resulting in an
aggregate of 33.5 million shares available for grant under the 1997 Stock Option Plan. At December 31, 2003 and 2002, there were 11.7 million shares and 11.1 million
shares, respectively, available for future grants under the 1997 Stock Option Plan.

Options
granted under APC's stock-based compensation plans are either (a) options intended to constitute incentive stock options (ISOs) under the Internal Revenue Code of 1986
(the Code) or (b) non-qualified options. Incentive stock options may be granted under the Plans to employees or officers of APC. Non-qualified options may be granted to
consultants, directors (whether or not they are employees), employees or officers of APC.

ISOs
granted under APC's stock-based compensation plans may not be granted at a price less than the fair market value of the common stock on the date of grant (or 110% of fair market
value in the case of employees or officers holding 10% or more of the voting stock of APC). The aggregate fair market value of shares, for which ISOs granted to any employee are exercisable for the
first time by such employee during any calendar year (under all stock option plans of APC and any related corporation), may not exceed $100,000. Non-qualified options granted under the
Plan may not be granted at a price less than the lesser of (a) the book value per share of common stock as of the end of the fiscal year of APC immediately preceding the date of such grant, or
(b) 50% of the fair market value of the common stock on the date of grant.

59

---



Options
granted under the 1997 and 1987 Plans before December 1, 1995 vested 25% at the end of the first year and 12.5% at the end of each six month period thereafter. Options
granted after December 1, 1995 and before February 14, 1997 vested 20% at the end of the second year and 20% at the end of each year thereafter. Options granted after February 14,
1997 vest 25% at the end of the first year and 12.5% at the end of each six month period thereafter. Options granted under the 2004 LTI Plan, generally vest 25% at the end of each year.

On
April 21, 1997, APC's shareholders approved the 1997 Non-employee Director Stock Option Plan and on May 20, 1993 approved the 1993 Non-employee
Director Stock Option Plan (collectively the Director Plans). The 1997 and 1993 Director Plans authorized the grant of options for up to 400,000 shares and 80,000 shares of common stock, respectively.
In 2004, 2003 and 2002, all non-employee directors were entitled to participate in the 1997 Non-Employee Director Stock Option Plan, with each receiving no option grants in
2004, and grants of options as of February 12, 2003 and February 12, 2002 for 20,000 shares and 20,000 shares at an exercise price of $15.00 and $13.01, respectively.

Options
granted under the 1997 Director Plan, and the options granted on August 9, 2001 under the 1997 Stock Option Plan, vest 25% at the end of the second year and 9.375% at the
end of each six
month period thereafter. Options granted under the 1993 Director Plan vested 25% at the end of the first year and 25% annually thereafter.

Options
granted under all stock-based compensation plans after January 1, 1993 expire not more than ten years from the date of grant (five years in the case of ISOs granted to ten
percent shareholders). The outstanding options at December 31, 2004 expire at various dates through 2014. Options granted terminate within a specified period of time following termination of an
optionee's employment or position as a director or consultant with APC.

A
summary of the status of stock options outstanding under APC's stock-based compensation plans as of December 31, 2004, 2003 and 2002, and changes during the years ending on
those dates is presented below:

|                                 |  | 2004   |   | 2003 |       | 2002
|-------------------------------- |  | ------ | - | ---- | ----- | ----
|
|
|Outstanding at beginning of year |  | 16,182 |   | $    | 14.66 |     
|Granted                          |  | 531    |   | $    | 20.47 |     
|Exercised                        |  | (1,582 | ) | $    | 12.42 |     
|Terminated                       |  | (50    | ) | $    | 17.61 |     
|                                 |  |        |   |      |       |     
|Outstanding at end of year       |  | 15,081 |   | $    | 15.04 |     
|                                 |  |        |   |      |       |     
|Exercisable at end of year       |  | 12,220 |   | $    | 15.43 |     
|                                 |  |        |   |      |       |     

60

---



The following table summarizes information about stock options outstanding at December 31, 2004:

|                  |  | Options Outstanding |  | Options Exercisable
|----------------- |  | ------------------- |  | -------------------
|
|
|$  4.56 - $  6.82 |  | 165                 |  | 1.2                
|$  8.30 - $11.69  |  | 4,133               |  | 6.5                
|$12.43 - $17.71   |  | 7,395               |  | 5.0                
|$19.30 - $24.80   |  | 3,233               |  | 5.9                
|$29.00 - $31.13   |  | 155                 |  | 5.1                
|                  |  |                     |  |                    
|                  |  | 15,081              |  | 5.6                
|                  |  |                     |  |                    

Stock Purchase Plan

On April 21, 1997, APC's shareholders approved an Employee Stock Purchase Plan (the Plan) to provide substantially all employees an opportunity to purchase
shares of its common stock through payroll deductions, in an aggregate amount up to 10% of eligible compensation. Semiannually, participant account balances are used to purchase shares of stock at the
lesser of 85% of the fair market value of shares on the grant date or the exercise date. The aggregate number of shares purchased by an employee may not exceed 3,000 shares annually (subject to
limitations imposed by the Internal Revenue Code). The employee stock purchase plan expires on February 11, 2007. A total of 2.0 million shares are available for purchase under the Plan.
During 2004, under the Plan, 64,772 shares were issued at $15.95 per share and 70,827 shares were issued at $15.81 per share. During 2003, under the Plan, 77,171 shares were issued at $11.64 per share
and 68,331 shares were issued at $13.51 per share. During 2002, under the Plan, 86,131 shares were issued at $10.92 per share and 79,838 shares were issued at $10.85 per share.

Restricted Stock Units

Also under the aforementioned 2004 LTI Plan, on October 25, 2004, APC's Board of Directors approved the award of 951,825 restricted stock units (RSU).
Under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations,
stock-based employee compensation cost was reflected in net income for such units beginning in the fourth quarter of 2004. The RSU awards will vest, and the underlying common stock will concurrently
issue, ratably over four years, whereby one-fourth of the shares will vest on each of June 30, 2005, June 30, 2006, June 30, 2007, and June 30, 2008.

11.   Retirement Benefits

Employee Savings Plan

On May 1, 1997, APC established an employee savings plan (the Savings Plan) that qualifies as a deferred salary arrangement under Section 401(k) of
the Internal Revenue Code of 1986, as amended, covering substantially all North American employees. The Savings Plan allows eligible employees to contribute up to 15% of their compensation on a
pre-tax basis subject to certain limitations. APC matches, with its common stock, 100% of the first 3% of employee contributions plus 50% of the next 3% of employee contributions.
Employees are fully vested in their employer matching contributions. Employees may diversify employer matching contributions to other investment options available under

61

---



the
Savings Plan. Effective July 1, 2003, APC's Employee Stock Ownership Plan (ESOP) covering substantially all employees in North America was merged into the Savings Plan.

Employee Stock Ownership Plans

At December 31, 2004, APC had a noncontributory ESOP covering substantially all employees in Ireland. Contributions to the ESOP are based on a percentage
of eligible compensation and are determined by APC's Board of Directors at its discretion, subject to the limitations established by Ireland tax laws. The Ireland ESOP held 155,094, 167,766 shares,
and 179,238 shares, of common stock at December 31, 2004, December 31, 2003, and December 31, 2002, respectively. No shares were contributed to the ESOP in 2004, 2003 or 2002.

APC
also contributes to Company sponsored and government sponsored pension and retirement programs in several foreign locations.

APC's
pension and retirement benefit contributions in 2004, 2003 and 2002 amounted to approximately $11.2 million, $10.4 million, and $7.9 million, respectively.

12.   Operating Segment and Geographic Information

Segment accounting policies are the same as policies described in Note 1.

Basis for Presentation

APC operates primarily within one industry consisting of three reportable operating segments by which it manages its business and from which various offerings are
commonly combined to develop a total solution for the customer. These efforts primarily incorporate the design, manufacture, and marketing of power protection equipment and related software and
accessories for computer, communications, and related equipment. APC's three segments are: Small Systems, Large Systems, and "Other." Each of these segments address global markets.

Small Systems.The Small Systems segment develops power devices and accessories for servers and
networking equipment commonly used in local area and wide area networks and for personal computers and sensitive electronics. Major product offerings include the Back-UPS,
Smart-UPS, and Symmetra Power Array single-phase family of UPSs. Also included are SurgeArrest surge suppressors as well as cabling and connectivity products. Additional accessories and
software products are offered to enhance the management of these networks, including APC's PowerChute software and NetShelter server enclosures. Products are sold to home and commercial users
primarily through an indirect selling model consisting of computer distributors and dealers, value-added resellers, mass merchandisers, catalog merchandisers, E-commerce vendors, and
strategic partnerships.

Large Systems.The Large Systems segment provides systems, products and services that primarily
provide back-up power, power distribution and cooling for data centers, facilities, and communications equipment for both commercial and industrial applications. Product offerings include
major components of InfraStruXure systems, Silcon UPSs, NetworkAIR precision cooling equipment, DC and broadband power systems, and services. Products are sold to commercial users through both a
direct and indirect selling model consisting of value-added resellers and strategic partnerships. Additionally, APC utilizes manufacturer representatives to identify and secure projects.

"Other" Segment.The Other segment principally consists of desktop and notebook computer accessories
and replacement batteries. The distribution model of products in the Other segment is consistent with that of the Small Systems segment.

APC
measures the profitability of its segments based on gross margin. Segment gross margins exclude certain expenses which are managed outside the reportable segments. Costs excluded
from

62

---



segment
profit are operating expenses, primarily consisting of R&D, selling and corporate expenses, and income taxes. In addition, our 2004 excess inventory provision, a charge in 2003 associated with
the settlement of a claim for the infringement of intellectual property; 2003 and 2002 product recall provision; 2002 restructuring charges; and 2002 impairment of assets
held-for-sale have not been allocated to our operating segments, but rather have been classified as indirect operating expenses for segment reporting consistent with our
classification for our internal financial reporting. Expenditures for additions to long-lived assets are not tracked or reported by the operating segments, although depreciation expense is
allocated to and reported by the operating segments.

APC
closely monitors the credit worthiness of its customers, adjusting credit policies and limits as deemed necessary. Two computer distributor customers, Tech Data Product Management
and Ingram Micro, accounted for approximately 12.7% and 8.9%, respectively, of net sales in 2004, 14.1% and 10.0%, respectively, of net sales in 2003, and 14.4% and 13.2%, respectively, of net sales
in 2002. The majority of our sales to Tech Data Product Management and Ingram Micro are included in the Small Systems segment.

Summary
operating segment information is as follows:

|                                                                        |  | 2004 |           | 2003 |   | 2002     
|----------------------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|
|Segment net sales                                                       |  |      |           |      |   |          
|Small Systems                                                           |  | $    | 1,299,816 |      | $ | 1,146,799
|Large Systems                                                           |  |      | 322,148   |      |   | 240,007  
|Other                                                                   |  |      | 66,070    |      |   | 69,142   
|                                                                        |  |      |           |      |   |          
|Total segment net sales                                                 |  |      | 1,688,034 |      |   | 1,455,948
|Shipping and handling revenues                                          |  |      | 11,843    |      |   | 8,850    
|                                                                        |  |      |           |      |   |          
|Total net sales                                                         |  | $    | 1,699,877 |      | $ | 1,464,798
|                                                                        |  |      |           |      |   |          
|Segment profits                                                         |  |      |           |      |   |          
|Small Systems                                                           |  | $    | 626,724   |      | $ | 552,291  
|Large Systems                                                           |  |      | 63,590    |      |   | 48,480   
|Other                                                                   |  |      | 40,425    |      |   | 40,277   
|                                                                        |  |      |           |      |   |          
|Total segment profits                                                   |  |      | 730,739   |      |   | 641,048  
|Shipping and handling net costs                                         |  |      | 37,343    |      |   | 30,237   
|Provision for excess inventory                                          |  |      | 11,500    |      |   |         
|Provision for intellectual property infringement claim                  |  |      |          |      |   | 4,000    
|Product recall provision (update)                                       |  |      |          |      |   | (5,500   
|Restructuring charges                                                   |  |      |          |      |   |         
|Impairment of assets held-for-sale                                      |  |      |          |      |   |         
|Other indirect operating expenses                                       |  |      | 477,447   |      |   | 383,196  
|Other income, net                                                       |  |      | 9,711     |      |   | 9,990    
|                                                                        |  |      |           |      |   |          
|Earnings before income taxes and cumulative effect of accounting change |  | $    | 214,160   |      | $ | 239,105  
|                                                                        |  |      |           |      |   |          
|Segment depreciation                                                    |  |      |           |      |   |          
|Small Systems                                                           |  | $    | 14,488    |      | $ | 15,607   
|Large Systems                                                           |  |      | 6,303     |      |   | 5,500    
|Other                                                                   |  |      | 262       |      |   | 412      
|                                                                        |  |      |           |      |   |          
|Total segment depreciation                                              |  |      | 21,053    |      |   | 21,519   
|Corporate                                                               |  |      | 15,773    |      |   | 14,100   
|                                                                        |  |      |           |      |   |          
|Total depreciation                                                      |  | $    | 36,826    |      | $ | 35,619   
|                                                                        |  |      |           |      |   |          

63

---



Summary
geographic information is as follows:

|                                                |  | 2004 |           | 2003 |   | 2002     
|----------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|
|Net sales                                       |  |      |           |      |   |          
|United States                                   |  | $    | 751,685   |      | $ | 658,672  
|North and Latin America excluding United States |  |      | 91,308    |      |   | 78,852   
|Europe, Middle East, and Africa                 |  |      | 547,246   |      |   | 467,150  
|Far East                                        |  |      | 309,638   |      |   | 260,124  
|                                                |  |      |           |      |   |          
|                                                |  | $    | 1,699,877 |      | $ | 1,464,798
|                                                |  |      |           |      |   |          

Sales are attributed to geographic regions based on location of customer. No individual foreign country is material in relation to total net
sales.

|                     |  | 2004 |         | 2003 |   | 2002   
|-------------------- |  | ---- | ------- | ---- | - | -------
|
|Capital expenditures |  |      |         |      |   |        
|United States        |  | $    | 16,545  |      | $ | 10,809 
|Ireland              |  |      | 2,781   |      |   | 1,218  
|Denmark              |  |      | 1,064   |      |   | 2,165  
|Other Europe         |  |      | 1,160   |      |   | 1,176  
|India                |  |      | 4,569   |      |   | 2,616  
|Philippines          |  |      | 1,699   |      |   | 1,332  
|China                |  |      | 809     |      |   | 1,307  
|Japan                |  |      | 210     |      |   | 328    
|Other Far East       |  |      | 146     |      |   | 103    
|Latin America        |  |      | 306     |      |   | 555    
|                     |  |      |         |      |   |        
|                     |  | $    | 29,289  |      | $ | 21,609 
|                     |  |      |         |      |   |        
|Long-lived assets    |  |      |         |      |   |        
|United States        |  | $    | 80,609  |      | $ | 128,537
|Europe               |  |      | 65,122  |      |   | 86,323 
|Philippines          |  |      | 33,190  |      |   | 36,315 
|Other Far East       |  |      | 26,047  |      |   | 25,022 
|Latin America        |  |      | 4,857   |      |   | 5,578  
|                     |  |      |         |      |   |        
|                     |  | $    | 209,825 |      | $ | 281,775
|                     |  |      |         |      |   |        

13.   Litigation

On January 10, 2003, Powerware Corporation filed in the United States District Court for the Eastern District of North Carolina (the "Court") a complaint
alleging infringement of three United States patents. On May 7, 2003, Powerware Corporation filed with the Court an amended complaint modifying its allegations of infringement regarding the
Powerware Patents. APC was served with the amended complaint on May 9, 2003. Powerware Corporation is seeking unspecified damages and injunctive relief. On May 28, 2003, APC filed its
answer to the amended complaint and on June 17, 2003 APC filed its first amended answer and counterclaims alleging infringement by Powerware Corporation of three United States patents owned by
APC. On July 3, 2003, Powerware Corporation filed its answer to counterclaims. On March 18, 2004, Powerware Corporation amended its complaint to add an additional patent to the
litigation. On or about October 27, 2004, Powerware Corporation changed its corporate name to Eaton Power Quality Corporation. On January 31, 2005, the Court issued a Markman ruling
construing the patent claims at issue in the case.

64

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On
December 23, 2004, APC filed a patent infringement suit against Eaton Power Quality Corporation in the United States District Court for the District of Delaware charging Eaton
Power Quality Corporation with infringement of one United States patent. On January 26, 2005, Eaton Power Quality Corporation filed a motion to dismiss APC's complaint on procedural grounds. On
February 9, 2005, APC filed an answering brief in opposition to Eaton Power Quality Corporation's motion to dismiss.

As
previously reported in APC's Form 8-K dated March 2, 2005, on February 24, 2005, Eaton Power Quality Corporation and its parent corporation, Eaton
Corporation (collectively "Eaton"),
entered into a binding memorandum of understanding with APC to settle the two patent infringement suits pending in the United States District Court for the Eastern District of North Carolina and the
United States District Court for the District of Delaware. In addition to settling all outstanding patent litigation, APC and Eaton agreed to cross-license multiple patents that were involved in the
litigation. APC and Eaton also agreed to a ten-year covenant prohibiting the companies from filing against each other any additional patent infringement suits related to products of the
other that are based on U.S. patent claims which are directed to electronic hardware that performs double conversion for power electronics. Eaton and APC are working toward finalizing a definitive
agreement. Neither party will pay the other any monetary compensation in connection with the settlement.

As
previously reported in APC's Form 10-Q for the quarter ended September 26, 2004, on February 5, 2004, Liebert Corporation and Zonatherm
Products, Inc., Liebert's sales representative firm in the Chicago area, filed a lawsuit in the Circuit Court of Cook County, Illinois, Chancery Division (the "Court") against APC, Aerico, LLC,
a sales representative firm formed by former employees of Zonatherm Products, and the former employees of Zonatherm Products who formed Aerico, LLC. The lawsuit alleged willful violation of the
Illinois Trade Secrets Act, tortious interference with contract, tortious interference with prospective economic advantage, civil conspiracy and conspiracy to breach fiduciary duties. Liebert and
Zonatherm are seeking compensatory and punitive damages and injunctive relief. On February 18, 2004, the Court denied plaintiffs' motion for a temporary restraining order. On July 16,
2004, the Court dismissed without prejudice all claims except the Illinois Trade Secret Act claim. On August 6, 2004, plaintiffs filed a second amended complaint reasserting the claims
dismissed by the Court on July 16, 2004. On August 20, 2004, the Court denied plaintiffs' motion for preliminary injunction as to violation of the Illinois Trade Secrets Act. On
September 21, 2004, plaintiffs filed a Notice of Appeal of the August 20, 2004 ruling with the Illinois Appellate Court. On January 12, 2005, the Court dismissed without prejudice
all claims against APC except the Illinois Trade Secret Act claim. On March 1, 2005 the Illinois Appellate Court issued an opinion on the appeal pursuant to which it affirmed the Court
on the issue of non-trade secret nature of plaintiff's customer lists, and remanded the matter for the Court to enter an injunction against one of the individual former employees of
Zonatherm from using certain pricing books. On March 16, 2005, plaintiffs filed a third amended complaint reasserting claims substantially similar to those dismissed by the Court in its
January 12, 2005 ruling.

In
addition, APC is involved in various other claims and legal actions arising in the ordinary course of business.

While
management currently believes that resolving all pending legal matters, individually or in aggregate, will not have a material adverse impact on APC's financial position, the
litigation and other claims noted above are subject to inherent uncertainties, including the risk of an unfavorable outcome, and management's view of these matters may change in the future. An
unfavorable outcome could include monetary damages or, in cases where injunctive relief is sought, an injunction prohibiting certain activities. Were an unfavorable final outcome to occur, there
exists the possibility of a material adverse impact on APC's financial position, cash flows and results of operations for the period in which the effect becomes reasonably estimable.

65

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14.   Fair Value of Financial Instruments

The carrying amounts of cash, cash equivalents, short term investments, accounts receivable, short-term debt, accounts payable, and accrued
liabilities approximate their fair values because of the short duration of these instruments.

15.   Commitments

APC has several non-cancelable operating leases, primarily for warehousing and office space, expiring at various dates through 2011. These leases
contain renewal options for periods ranging from one to seven years and require APC to pay its proportionate share of utilities, taxes, and insurance. Rent expense under these leases for 2004, 2003
and 2002 was $9.6 million, $8.4 million, and $8.0 million, respectively.

Future
minimum lease payments under these non-cancelable leases are: 2005$8.4 million; 2006$6.7 million;
2007$5.6 million; 2008$4.6 million; 2009$3.2 million; and $1.6 million thereafter.

16.   Contingencies

APC has agreements with the Industrial Development Authority of Ireland (IDA) under which it receives grant monies for costs incurred for machinery, equipment,
and building improvements for its Galway and Castlebar facilities equal to 40% and 60%, respectively, of such costs up to a maximum of $13.1 million for Galway and $1.3 million for
Castlebar. Such grant monies are subject to APC meeting certain employment goals and maintaining operations in Ireland until termination of the respective agreements. The total cumulative amounts of
capital grant claims submitted and received through December 31, 2004 for the Galway facility were approximately $10.9 million and $10.9 million, respectively. The total
cumulative amount of capital grant claims submitted through December 31, 2004 for the Castlebar facility was $0.4 million; no capital grant claims had been received for the Castlebar
facility. Under separate agreements with the IDA, APC receives direct reimbursement of training costs at its Galway and Castlebar facilities for up to $3,000 and $12,500, respectively, per new
employee
hired. The total cumulative amounts of training grant claims submitted and received through December 31, 2004 for the Galway facility were approximately $1.2 million and
$1.2 million, respectively. The total cumulative amount of training grant claims submitted and received through December 31, 2004 for the Castlebar facility were approximately
$1.2 million and $0.9 million, respectively.

APC
also has an agreement with the IDA for a research and development grant towards the costs of a project for the development of software products. The availability of the grant is
contingent on meeting certain milestones in the progress of the project as well as meeting certain employment goals on the project within the Galway facility. The amount of grant assistance available
on satisfaction of all conditions is 28% of the eligible expenditure to a maximum of €714,588. At December 31, 2004, no grant claims had been claimed or received.

In
addition, APC executed agreements in 1994 with an unrelated company to acquire the 280,000 square foot manufacturing and distribution facility presently occupied in Galway, Ireland
for one (1) Irish Pound (equivalent to approximately $1.50). As additional consideration for the facility, APC assumed a contingent liability of approximately
€4.4 million (US$6.0 million) as part of APC's agreement with the IDA. The contingent liability is canceled upon successful completion of the terms of the agreement.

66

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17.   Quarterly Financial Data (Unaudited)

The following is a summary of quarterly results of operations in thousands except per share amounts:

|                                            |  | Q1 |         | Q2 |   | Q3      |  | Q4
|------------------------------------------- |  | -- | ------- | -- | - | ------- |  | --
|2004                                        |  |    |         |    |   |         |  |   
|Net sales                                   |  | $  | 351,751 |    | $ | 395,663 |  | $ 
|Gross profit                                |  | $  | 149,092 |    | $ | 149,522 |  | $ 
|Net income                                  |  | $  | 34,678  |    | $ | 26,763  |  | $ 
|Basic earnings per share                    |  | $  | 0.17    |    | $ | 0.13    |  | $ 
|Basic weighted average shares outstanding   |  |    | 199,903 |    |   | 200,234 |  |   
|Diluted earnings per share                  |  | $  | 0.17    |    | $ | 0.13    |  | $ 
|Diluted weighted average shares outstanding |  |    | 206,106 |    |   | 204,992 |  |   
|2003                                        |  |    |         |    |   |         |  |   
|Net sales                                   |  | $  | 308,975 |    | $ | 331,496 |  | $ 
|Gross profit                                |  | $  | 125,914 |    | $ | 136,012 |  | $ 
|Net income                                  |  | $  | 29,979  |    | $ | 33,109  |  | $ 
|Basic earnings per share                    |  | $  | 0.15    |    | $ | 0.17    |  | $ 
|Basic weighted average shares outstanding   |  |    | 196,397 |    |   | 196,717 |  |   
|Diluted earnings per share                  |  | $  | 0.15    |    | $ | 0.17    |  | $ 
|Diluted weighted average shares outstanding |  |    | 199,765 |    |   | 199,993 |  |   

18.   Subsequent Event

On February 15, 2005, a quarterly dividend of $0.10 per share was declared, payable on March 16, 2005 to shareholders of record as of
February 28, 2005. It is the intention of the Board of Directors to pay a comparable quarterly dividend on a going forward basis contingent upon continued capital availability and a
determination that cash dividends continue to be in the best interests of APC and its shareholders.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

(A)  Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, management carried out an evaluation, under the supervision and with the participation of APC's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures as defined in Rules 13a-15(e) of the Securities Exchange Act of 1934, as
amended. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report, APC's disclosure controls and
procedures were effective in timely alerting them to material information required to be included in APC's periodic filings with the U.S. Securities and Exchange Commission.

(B)  Report of Management regarding Internal Control over Financial Reporting.

APC's management is responsible for establishing and maintaining adequate internal control over financial reporting. APC's internal control system was designed to
provide reasonable assurance to APC's management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with generally accepted
accounting principles. A

67

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company's
internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have
a material effect on the financial statements.

All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation. Because of its inherent limitations due to, for example, the potential for human error or circumvention of controls, internal controls over
financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

APC's
management assessed the effectiveness of APC's internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal ControlIntegrated Framework. Based on our
assessment, management believes that, as of December 31, 2004, APC's internal control over financial reporting is effective based on those criteria.

APC's
independent registered public accounting firm, KPMG LLP, has issued a report on our assessment of APC's internal control over financial reporting. This report appears below.

(C)  Attestation Report of the Registered Public Accounting Firm

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Shareholders
American Power Conversion Corporation:

We
have audited management's assessment, included in the accompanying Report of Management regarding Internal Control over Financial Reporting, that American Power Conversion Corporation
and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established inInternal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). American Power Conversion Corporation's
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for

68

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external
purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, management's assessment that American Power Conversion Corporation and subsidiaries maintained effective internal control over financial reporting as of
December 31, 2004, is fairly stated, in all material respects, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, American Power Conversion Corporation and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established inInternal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of American Power Conversion
Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2004, and our report dated March 11, 2005 expressed an unqualified opinion on those consolidated financial statements.



Providence,
Rhode Island
March 11, 2005

(D)  Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting during APC's last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, APC's internal control over financial reporting.

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Part III

Item 10. Directors and Executive Officers of the Registrant

The information set forth under the captions "Number and Election of Directors," "Corporate Governance" and "Section 16 Requirements" appearing in APC's
definitive Proxy Statement for the 2005 Annual Meeting of Shareholders is incorporated herein by reference. The information under the captions "APC's Executive Officers" and "Corporate Governance" in
Item 1 of this Form 10-K is incorporated herein by reference.

Our
policy governing transactions in our securities by directors, officers and employees permits our officers, directors and employees to enter into trading plans complying with
Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. We have been advised that two executive officers who are also members of our Board of Directors, Neil E.
Rassmussen and Emmanuel E. Landsmen, and one executive officer, Donald M. Muir, have each entered into a trading plan in accordance with Rule 10b5-1. We anticipate
that, as permitted by Rule 10b5-1, some or all of our officers, directors and employees may establish trading plans in the future. We intend to disclose the names of executive
officers and directors who establish a trading plan in compliance with Rule 10b5-1 in our future quarterly and annual reports on Form 10-Q and 10-K
filed with the U.S. Securities and Exchange Commission. However, we undertake no obligation to update or revise the information provided herein,
including for revision or termination of an established trading plan, other than in such current quarterly and annual reports as required by laws or regulations.

Code of Ethics.APC has adopted a Code of Ethics and Business Conduct that applies to all of our
employees, officers and directors (including our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions), and has
posted the text of the Code of Ethics and Business Conduct on our web site atwww.apc.comunder the "Corporate Governance" link contained in the
"Investors" section. We intend to disclose on this web site future amendments to certain provisions of our Code of Ethics and Business Conduct, and waivers of such provisions granted to our principal
executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions.

Item 11. Executive Compensation

The information set forth under the captions "Executive Compensation," "Compensation of Directors," "Report of the Compensation and Stock Option Committee,"
"Employment Contract and Change-in-Control Agreements," "Performance Graph" and "Section 16 Requirements" appearing in APC's definitive Proxy Statement for the 2005
Annual Meeting of Shareholders is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information set forth under the captions "Management and Principal Holders of Voting Securities" and "Equity Compensation Plan Information" appearing in APC's
definitive Proxy Statement for the 2005 Annual Meeting of Shareholders is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The information set forth under the caption "Certain Relationships and Related Transactions" appearing in APC's definitive Proxy Statement for the 2005 Annual
Meeting of Shareholders is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information set forth under the caption "Ratification of Appointment of Independent Auditors" appearing in APC's definitive Proxy Statement for the 2005
Annual Meeting of Shareholders is incorporated herein by reference.

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Part IV

Item 15. Exhibits and Financial Statement Schedules

APC's
consolidated financial statements have been included in Item 8 of this report.



|Schedule Number |  | Description                                    |  | Page Number
|--------------- |  | ---------------------------------------------- |  | -----------
|II              |  | Valuation and Qualifying Accounts and Reserves |  | 78         

Schedules
other than those listed above have been omitted since they are either not required or the information required is included in the consolidated financial statements or the notes
thereto.

KPMG
LLP's reports with respect to the above listed consolidated financial statements and consolidated financial statement schedule are included herein on pages 74 and 75.

71

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|Exhibit
Number |  | Description                                                                                                                                              
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|3.01           |  | Articles of Organization of APC, as amended                                                                                                              
|3.02           |  | By-Laws of the registrant, as amended and restated                                                                                                       
|4.01           |  | Shareholder Rights Agreement, dated as of September 2, 1999, between APC and BankBoston, N.A.                                                            
|10.01          |  | 1987 Stock Option Plan of APC (X)                                                                                                                        
|10.02          |  | Form of Incentive Stock Option Agreement under APC's 1987 Stock Option Plan (X)                                                                          
|10.03          |  | Form of the Non-Qualified Stock Option Agreement under APC's 1987 Stock Option Plan (X)                                                                  
|10.04          |  | Employment Agreement dated June 16, 1986 between APC and Rodger B. Dowdell, Jr. (X)                                                                      
|10.05          |  | Unsecured, non-committed line of credit agreement dated June 29, 1991 between APC and Rhode Island Hospital Trust National Bank                          
|10.06          |  | Unsecured, non-committed line of credit agreement dated December 30, 1991 between APC and Fleet National Bank                                            
|10.07          |  | Amendment dated December 30, 1992 to line of credit agreement between APC and Fleet National Bank                                                        
|10.08          |  | Grant agreement dated February 16, 1994 between APC and Industrial Development Authority of Ireland                                                      
|10.09          |  | Contract for Sale dated January 31, 1994 between APC and Digital Equipment International                                                                 
|10.10          |  | Management Agreement dated January 31, 1994 between APC and Digital Equipment International                                                              
|10.11          |  | License Agreement dated January 31, 1994 between APC (Grantor) and Digital Equipment International (Licensee)                                            
|10.12          |  | Grant of Options Agreement dated January 31, 1994 between APC and Digital Equipment International                                                        
|10.13          |  | Memorandum Agreement dated January 31, 1994 between APC and Digital Equipment International                                                              
|10.14          |  | Letter Agreement dated June 22, 1995 to amend line of credit agreement dated December 30, 1991 by and between APC and Fleet National Bank                
|10.15          |  | Letter Agreement dated October 11, 1995 to amend line of credit agreement dated December 30, 1991 by and between APC and Fleet National Bank             
|10.16          |  | American Power Conversion Corporation B.V. Profit Sharing Scheme dated September 25, 1996 (X)                                                            
|10.17          |  | 1997 Non-Employee Director Stock Option Plan of APC (X)                                                                                                  
|10.18          |  | Amended and Restated 1997 Stock Option Plan of APC (X)                                                                                                   
|10.19          |  | 1997 Employee Stock Purchase Plan of APC (X)                                                                                                             
|10.20          |  | Form of Change-in-Control Severance Agreement dated as of July 5, 2000 entered into by APC with each of Rodger B. Dowdell, Jr. and Neil E. Rasmussen. (X)
|               |  |                                                                                                                                                          

72

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|10.21 |  | Form of Change-in-Control Severance Agreement dated as of July 5, 2000 entered into by APC with each of Donald M. Muir, Aaron L. Davis, and Edward D. Bednarcik, and dated as of February 7, 2001 entered into by APC with Edward M. Machala. (X)
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.22 |  | 2004 Long-Term Incentive Plan (X)                                                                                                                                                                                                                
|10.23 |  | Form of Restricted Stock Unit Agreement (X)                                                                                                                                                                                                      
|21    |  | Subsidiaries of APC                                                                                                                                                                                                                              
|23    |  | Consent of KPMG LLP                                                                                                                                                                                                                              
|31.1  |  | Certification of Rodger B. Dowdell, Jr., Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)    
|31.2  |  | Certification of Donald M. Muir, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)            
|32.1  |  | Certification of Rodger B. Dowdell, Jr., Chief Executive Officer, pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)    
|32.2  |  | Certification of Donald M. Muir, Chief Financial Officer, pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)            

---

73

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Shareholders

American
Power Conversion Corporation:

We
have audited the accompanying consolidated balance sheets of American Power Conversion Corporation and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Power Conversion Corporation and
subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of American Power Conversion Corporation's
internal control over financial reporting as of December 31, 2004, based on criteria established inInternal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 11, 2005
expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.

| |  |             
| |  | ------------
| |  | /s/ KPMG LLP

Providence,
Rhode Island

March 11,
2005

74

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Shareholders

American
Power Conversion Corporation:

Under
date of March 11, 2005, we reported on the consolidated balance sheets of American Power Conversion Corporation and subsidiaries as of December 31, 2004 and 2003, and
the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2004, which are
contained in the annual report on Form 10-K for the year 2004. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related
financial statement schedule listed in Item 15(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial
statement schedule based on our audits.

In
our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects,
the information set forth therein.

| |  |             
| |  | ------------
| |  | /s/ KPMG LLP

Providence,
Rhode Island

March 11,
2005

75

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

AMERICAN POWER CONVERSION CORPORATION

|    |  |                                                                                                                 |  |                     
|--- |  | --------------------------------------------------------------------------------------------------------------- |  | --------------------
|By: |  | /s/DONALD M. MUIRDonald M. Muir,
Senior Vice President, Finance and Administration,
and Chief Financial Officer |  | Date: March 16, 2005

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on
the date indicated.

|    |  |                                                                                                                                                              |  |                     
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------
|By: |  | /s/RODGER B. DOWDELL, JR.Rodger B. Dowdell, Jr.,
Chairman, President,
Chief Executive Officer and Director
(principal executive officer)                     |  | Date: March 16, 2005
|By: |  | /s/DONALD M. MUIRDonald M. Muir,
Senior Vice President, Finance and Administration,
and Chief Financial Officer
(principal financial and accounting officer) |  | Date: March 16, 2005
|    |  | /s/NEIL E. RASMUSSENNeil E. Rasmussen,
Senior Vice President, Chief Technology Officer and Director                                                          |  | Date: March 16, 2005
|    |  | /s/EMANUEL E. LANDSMANEmanuel E. Landsman,
Vice President and Director                                                                                       |  | Date: March 16, 2005
|    |  | /s/ERVIN F. LYONErvin F. Lyon,
Director                                                                                                                      |  | Date: March 16, 2005
|    |  |                                                                                                                                                              |  |                     

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| |  | /s/JAMES D. GERSONJames D. Gerson,
Director       |  | Date: March 16, 2005
| |  | ------------------------------------------------- |  | --------------------
| |  | /s/ John G. KassakianJohn G. Kassakian,
Director  |  | Date: March 16, 2005
| |  | /s/ John F. Keane, Sr.John F. Keane, Sr.
Director |  | Date: March 16, 2005
| |  | /s/ Ellen B. RichstoneEllen B. Richstone
Director |  | Date: March 16, 2005

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Schedule II

AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES    Valuation and Qualifying Accounts and Reserves    For the years ended December 31, 2004, 2003 and 2002

Valuation accounts deducted from assets to which they apply:

|                                           |  | Balance at
Beginning
of Year |        | Charged to
Costs and
Expenses |   | Write Offs/
Allowances
Taken |   | Balance
at End
of Year
|------------------------------------------ |  | ---------------------------- | ------ | ----------------------------- | - | ---------------------------- | - | ----------------------
|
|Allowance for Doubtful Accounts Receivable |  |                              |        |                               |   |                              |   |                       
|2004                                       |  | $                            | 18,987 |                               | $ | (1,500                       | ) | $                     
|2003                                       |  | $                            | 17,855 |                               | $ | 5,279                        |   | $                     
|2002                                       |  | $                            | 18,712 |                               | $ | 3,890                        |   | $                     
|Inventory Reserve                          |  |                              |        |                               |   |                              |   |                       
|2004                                       |  | $                            | 38,766 |                               | $ | 17,376                       |   | $                     
|2003                                       |  | $                            | 37,164 |                               | $ | 6,600                        |   | $                     
|2002                                       |  | $                            | 32,850 |                               | $ | 10,780                       |   | $                     
|Deferred Tax Asset Valuation Allowance     |  |                              |        |                               |   |                              |   |                       
|2004                                       |  | $                            | 3,518  |                               | $ | 2,143                        |   | $                     
|2003                                       |  | $                            | 2,434  |                               | $ | 1,084                        |   | $                     
|2002                                       |  | $                            | 1,659  |                               | $ | 775                          |   | $                     

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AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES  EXHIBIT INDEX

|Exhibit Number |  | Description                                                                                                                                               
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|3.01(a)        |  | Articles of Organization of the registrant, as amended (3.01)                                                                                             
|3.02(b)        |  | By-Laws of the registrant, as amended and restated (3.1)                                                                                                  
|4.01(c)        |  | Shareholder Rights Agreement, dated as of September 2, 1999, between APC and BankBoston, N.A. (4.01)                                                      
|10.01(d)       |  | 1987 Stock Option Plan of the registrant (10.01) (X)                                                                                                      
|10.02(d)       |  | Form of Incentive Stock Option Agreement under the registrant's 1987 Stock Option Plan (10.02) (X)                                                        
|10.03(d)       |  | Form of the Non-Qualified Stock Option Agreement under the registrant's 1987 Stock Option Plan (10.03) (X)                                                
|10.04(d)       |  | Employment Agreement dated June 16, 1986 between APC and Rodger B. Dowdell, Jr. (10.07) (X)                                                               
|10.05(e)       |  | Unsecured, non-committed line of credit agreement dated June 29, 1991 between the registrant and Rhode Island Hospital Trust National Bank (10.19)        
|10.06(e)       |  | Unsecured, non-committed line of credit agreement dated December 30, 1991 between the registrant and Fleet National Bank (10.20)                          
|10.07(f)       |  | Amendment dated December 30, 1992 to line of credit agreement between the registrant and Fleet National Bank (10.13)                                      
|10.08(f)       |  | Grant agreement dated February 16, 1994 between the registrant and Industrial Development Authority of Ireland (10.14)                                    
|10.09(f)       |  | Contract for Sale dated January 31, 1994 between the registrant and Digital Equipment International (10.15)                                               
|10.10(f)       |  | Management Agreement dated January 31, 1994 between the registrant and Digital Equipment International (10.17)                                            
|10.11(f)       |  | License Agreement dated January 31, 1994 between the registrant (Grantor) and Digital Equipment International (Licensee) (10.18)                          
|10.12(f)       |  | Grant of Options Agreement dated January 31, 1994 between the registrant and Digital Equipment International (10.19)                                      
|10.13(f)       |  | Memorandum Agreement dated January 31, 1994 between the registrant and Digital Equipment International (10.20)                                            
|10.14(g)       |  | Letter Agreement dated June 22, 1995 to amend line of credit agreement dated December 30, 1991 by and between registrant and Fleet National Bank (10.1)   
|10.15(h)       |  | Letter Agreement dated October 11, 1995 to amend line of credit agreement dated December 30, 1991 by and between registrant and Fleet National Bank (10.1)
|10.16(i)       |  | American Power Conversion Corporation B.V. Profit Sharing Scheme dated September 25, 1996 (10.20) (X)                                                     
|10.17(j)       |  | 1997 Non-Employee Director Stock Option Plan of the registrant (4.4) (X)                                                                                  
|10.18(k)       |  | Amended and Restated 1997 Stock Option Plan of the registrant (X)                                                                                         
|               |  |                                                                                                                                                           

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|10.19(j) |  | 1997 Employee Stock Purchase Plan of the registrant (4.6) (X)                                                                                                                                                                                            
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.20(l) |  | Form of Change-in-Control Severance Agreement dated as of July 5, 2000 entered into by APC with each of Rodger B. Dowdell, Jr. and Neil E. Rasmussen. (X) (10.24)                                                                                        
|10.21(l) |  | Form of Change-in-Control Severance Agreement dated as of July 5, 2000 entered into by APC with each of Donald M. Muir, Aaron L. Davis, and Edward D. Bednarcik, and dated as of February 7, 2001 entered into by APC with
Edward M. Machala. (X) (10.25)
|10.22(m) |  | 2004 Long-Term Incentive Plan (4.3) (X)                                                                                                                                                                                                                  
|10.23(n) |  | Form of Restricted Stock Unit Agreement (10.2) (X)                                                                                                                                                                                                       
|21       |  | Subsidiaries of registrant                                                                                                                                                                                                                               
|23       |  | Consent of KPMG LLP                                                                                                                                                                                                                                      
|31.1     |  | Certification of Rodger B. Dowdell, Jr., Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith)            
|31.2     |  | Certification of Donald M. Muir, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)                    
|32.1     |  | Certification of Rodger B. Dowdell, Jr., Chief Executive Officer, pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)            
|32.2     |  | Certification of Donald M. Muir, Chief Financial Officer, pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)                    

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