**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

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**x**                               ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

**Forthe fiscal year ended December 31, 2006**

**or**

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

**Forthe transition periodfrom                to                **

**CommissionFile No. 0-29454**

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**POWER-ONE, INC.**

(Exact name of registrantas specified in its charter)

| **DELAWARE**                                                     |   | **77-0420182**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or  organization) |   | (I.R.S. Employer  Identification No.) |
| **740 Calle Plano  Camarillo, California**                       |   | **93012**(Zip code)                   |
| (Address of  principal executive offices)                        |   |                                  |

 

Registrant’s telephonenumber, including area code **(805) 987-8741**

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Securities registeredpursuant to Section 12(b) of the Act: **None**

Securities registeredpursuant to Section 12(g) of the Act:

**Common Stock, $0.001 parvalue**

(Title of class)

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or15(d) of the Act. Yes o No x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, ornon-accelerated filer. See definition of “accelerated file and largeaccelerated filer” in Rule 12b-2 of Exchange Act. (Check one):
| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|---------------------------|--------|--------------------------|--------|-------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes o No x

Aggregate market value ofregistrant’s common stock held by non-affiliates of the registrant, based uponthe closing price of a share of the registrant’s common stock on July 2,2006, as reported by the National Market System of the National Association ofSecurities Dealers Automated Quotation (“NASDAQ”) System on that date wasapproximately $409,157,000

As of March 9, 2007,86,809,911 shares of the registrant’s $0.001 par value common stock wereoutstanding.

**DOCUMENTS INCORPORATED BYREFERENCE**

Portionsof the registrant’s definitive Proxy Statement to be filed with the Securitiesand Exchange Commission pursuant to Regulation 14A and relating to theregistrant’s Annual Meeting of Stockholders For Fiscal Year 2006, to be held onApril 24, 2007, are incorporated by reference into Parts II and III ofthis Annual Report on Form 10-K.

 

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**TABLEOF CONTENTS**
|                               | ** ** | ** **                                                                                                                      | ** ** | **Page** | ** ** |
|-------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I                   |       |                                                                                                                            |       |     |       |   |   |
| Item 1.                       |       | Business                                                                                                                        |       |     | 2          |   |   |
| Item 1A.                      |       | Risk Factors                                                                                                                    |       |     | 14         |   |   |
| Item 1B.                      |       | Unresolved Staff Comments                                                                                                       |       |     | 20         |   |   |
| Item 2.                       |       | Properties                                                                                                                      |       |     | 21         |   |   |
| Item 3.                       |       | Legal Proceedings                                                                                                               |       |     | 21         |   |   |
| Item 4.                       |       | Submission of Matters to a  Vote of Security Holders                                                                            |       |     | 21         |   |   |
| PART II                  |       |                                                                                                                            |       |     |       |   |   |
| Item 5.                       |       | Market for Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities             |       |     | 22         |   |   |
| Item 6.                       |       | Selected Financial Data                                                                                                         |       |     | 24         |   |   |
| Item 7.                       |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations       |       |     | 26         |   |   |
| Item 7A.                      |       | Quantitative and Qualitative  Disclosures about Market Risk                                                                     |       |     | 41         |   |   |
| Item 8.                       |       | Financial Statements and  Supplementary Data                                                                                    |       |     | 42         |   |   |
| Item 9.                       |       | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosures                 |       |     | 42         |   |   |
| Item 9A.                      |       | Controls and Procedures                                                                                                         |       |     | 42         |   |   |
| Item 9B.                      |       | Other Information                                                                                                               |       |     | 44         |   |   |
| PART III                 |       |                                                                                                                            |       |     |       |   |   |
| Item 10.                      |       | Directors and Executive  Officers of the Company                                                                                |       |     | 45         |   |   |
| Item 11.                      |       | Executive Compensation                                                                                                          |       |     | 45         |   |   |
| Item 12.                      |       | Security Ownership of  Certain Beneficial Owners and Management and Related Stockholder Matters                            |       |     | 45         |   |   |
| Item 13.                      |       | Certain Relationships and  Related Transactions                                                                                 |       |     | 45         |   |   |
| Item 14.                      |       | Principal Accountant Fees  and Services                                                                                         |       |     | 45         |   |   |
| PART IV                  |       |                                                                                                                            |       |     |       |   |   |
| Item 15.                      |       | Exhibits and Financial  Statement Schedules                                                                                     |       |     | 46         |   |   |
| Signatures                    |       |                                                                                                                            | 47         |     |       |
| Index to Financial Statements |       |                                                                                                                            | F-1        |     |       |
| Financial Statement Schedule  |       |                                                                                                                            | S-1        |     |       |
| Index to Exhibits             |       |                                                                                                                            | S-2        |     |       |

 

*Unless the contextindicates otherwise, all references herein to “Power-One,” “the Company,” “we,”“us,” and “our” refer collectively to Power-One, Inc. and itssubsidiaries.*

*This Annual Reporton Form 10-K, including “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” contains forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995 that can be identified by the use of forward-looking terminologysuch as “may,” “will,” “can,” “believe,” “expect,” “anticipate,” “estimate,” “plan,”“intend” or “continue” or the negative or other variations of such terms orcomparable terminology. We caution that the matters set forth under “RiskFactors,” constitute cautionary statements identifying important factors withrespect to such forward-looking statements, including certain risks anduncertainties that could cause actual results to differ materially from thosein such forward-looking statements.*

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**PART I**

**ITEM 1—BUSINESS**

**Overview**

We are a leading designer and manufacturer of powerconversion and power management products, most of which are sold into thecommunications infrastructure and high technology markets. Our products areused to convert, process and manage electrical energy, in both alternatingcurrent (“AC”) and direct current (“DC”) form, to the high levels of quality,reliability and precision required by communications infrastructure and otherequipment. With hundreds of different standard products and the ability tocreate custom products, we have one of the most comprehensive product lines inthe power conversion and power management industry and are one of just a fewcompanies that can power virtually every component and system of an infrastructurenetwork.

Our powerconversion and power management products include:

·       AC/DCpower supplies that convert AC from a primary power source, such as a walloutlet, into a precisely controlled DC voltage. Virtually every electronicdevice that plugs into an AC wall outlet requires some type of AC/DC powersupply, and we provide a broad range of AC/DC power supplies that power a widevariety of equipment in the communications, networking, server/storage,computer, instrumentation, industrial, and electronic industries;

·       DCpower systems that are used by communications and Internet service providers topower large communications infrastructure equipment;

·       DC/DCconverters that modify an existing DC voltage level to a different DC voltagelevel to meet the power needs of various subsystems and components withinelectronic equipment. Our DC/DC converters include high-density and low-density“brick” converters that are generally used to control power on communicationsprinted circuit boards and also include Point-of-Load (“POL”) converters thatpower devices within an Intermediate Bus Architecture as well as in otherapplications. Our Z-One® digital power management products fall intothe DC/DC converter category.

·       Arange of other products that include alternative energy (“AE”) products thatconvert solar (photo-voltaic) or wind energy into useable AC/DC power, digitalcontrol products for motors, and a variety of application-specific specialtypower products.

We design our power conversion and power managementproducts primarily to meet the needs of higher-end markets, includingmanufacturers of communications and server/storage infrastructureequipment; industrial applications; and higher-end consumer and industrialappliances; rather than for use in personal computers, and mobile phones. Forhigh-end manufacturers, a fluctuation of power may cause severe damage tosensitive systems, resulting in data loss, file corruption and significantlyreduced productivity. We design our products to take lower-quality power fromthe electrical grid and convert,process, and purify it to meet the higher quality demanded bycommunications networks, providing significantly greater protection againstpower disturbances, fluctuations and outages. In addition, our products’ compactdesigns are critical to our customers who need to minimize the space allocatedto power conversion products within a system in order to maximize the spaceavailable for other components and subsystems. We continually strive to stayahead of the technology curve to develop innovative products that meet andexceed our customers’ needs.

While approximately 35.9% of our sales were to our topten customers in 2006, we sell our products to hundreds of direct customersworldwide. Our largest customer in 2006 was Cisco Systems and its contractmanufacturers, which accounted for 12.2% of our sales in 2006 and 15.1% of oursales in both 2005 and 2004. No other customer accounted for more than 10% ofour sales during 2006, 2005, and 2004.

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In October 2006, we completed the acquisition ofMagnetek, Inc.’s Power Electronics Group for approximately $69.0 millionplus the assumption of approximately $27.8 million in debt. The acquisitionadded a team of experienced engineers to our employee base, enhanced our customAC/DC design capabilities, expanded our product portfolio, broadened ourcustomer list, and provided us with a low-cost manufacturing operation inChina.

We were originallyincorporated in 1973 as a California corporation and re-incorporated in theState of Delaware in January 1, 1996.

**Industry Background**

The power conversion and power management industry ishighly fragmented and diverse. Manufacturers of power conversion and powermanagement products are generally divided into two broad categories: those whosell to third-party customers (merchant) and those who sell for usein-house to other divisions within the manufacturer’s own company (captive). Weare a merchant power supply manufacturer whose products are sold to thirdparties.

The communications industry experienced rapid changein the late 1990s through 2000 as deregulation and privatization fueled theentry of new competitors. In addition, advances in technology allowedcommunications service providers to offer a more varied range of services, and increasesin Internet usage and demand for broadband and wireless services contributed tothe growth of the communications industry. Because these technological advancesrequired significantly greater and more reliable power, the demand for powerconversion and power management products also grew. In 2001, however, thecommunications infrastructure industry entered into a severe, multi-yeardownturn that was characterized by delayed network deployments and upgrades byservice providers due to lower-than-expected demand for their products andservices and a resulting oversupply of capacity and inventory. Due to thedownturn, we experienced decreasing sales, price erosion, cancellation oforders, write-offs of excess inventory, restructuring charges and asset impairmentcharges. In recent years, however, we have experienced revenue growth.

Long term, we believe the following key trends willcontinue to drive demand for power conversion and power management products:

***Increasing Amountsof Power Required by the Communications Infrastructure Industry.******  ***With thedevelopment and proliferation of the Internet, wireless communications,broadband applications and other new technologies, recent years have witnessedunprecedented growth in the volume of information being transmitted around theworld at any given moment. We believe that this increasing volume will drivedemand for larger data processing capabilities among communicationsinfrastructure companies and that increased data processing needs in turn willrequire increases in power and more demand for power conversion and powermanagement products. Industry sources project that the amount of power requiredby communications infrastructure equipment manufacturers will growsignificantly faster than the demand by other traditional users of power.

***Increasing Demandfor High Conversion Efficiencies.  ***Recentdevelopments in the European Union (“EU”), the United States and China to cutenergy consumption will increase the demand for digital power. The use ofdigital control techniques can contribute to improved conversion efficienciesof AC/DC power supplies across a wide range of conditions.

***Increasing Demandfor High Reliability Power.******  ***The nature ofpower demanded by the digital economy is significantly different from the powerprovided by the electric utility grid. The electric utility grid suppliesacceptable power quality, or power that is free from surges, spikes, or sags,99.9% of the time, resulting in the equivalent of nine hours per year ofinterrupted, or unavailable, power. These nine hours of downtime often occur inmany isolated interruptions of very short duration. In traditional industries,a 

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brief interruption ofpower only interrupts operations for the time that the power is actuallyunavailable. For a modern communications network, however, even a minor powerdisturbance or brief interruption could cause equipment to crash andsignificantly shorten the life-span of electrical components. A network crashcould result in several hours of downtime, including the time necessary forcomplex microprocessor-based equipment to reboot and regain power. Thisdowntime could lead to significant lost revenue and customer dissatisfaction.As a result, modern communications network operators are increasingly requiringsignificantly more reliable power than that provided by the electric utilitygrid. We believe this demand will increase as wireless communications,broadband applications and other new technologies became more pervasive insociety and as society becomes more dependent on their reliability.

***Proliferation ofDistributed Power Architecture and Intermediate Bus Architecture, as well asthe Trend Toward Power Management Rather than Simple Power Conversion.***   Traditional power supply architecture uses asingle, centralized power supply, which distributes power through a cable ofwires to the various individual components and subsystems dispersed throughouta system. Newer communications systems demand increasing amounts of power forsemiconductors located throughout their communications equipment. At the sametime, newer-generation communications technologies being developed arerequiring semiconductors that use lower voltages than previous-generationtechnologies. In many sophisticated systems, the traditional architecturedistributes power too inefficiently to accomplish these goals because as powerincreases and voltage decreases, the current level increases and therefore thecable thickness increases, often to an unacceptable size.

Distributed Power Architecture, or DPA, is atechnology that has been developed to address this technical issue. DPA uses afront-end power supply that converts AC voltage into a high-level DC voltage,typically 48 volts, thus allowing a smaller cable to be used within a system todistribute power and then uses DC/DC “brick” converters that are placedthroughout the system close to the devices that actually use power and reducethe voltage to the precise amount needed by the devices. Furthermore, DPA helpsto diversify the risk within a large communications system. While the failureof a traditional centralized power supply could jeopardize the entire system,the failure of a single DC/DC brick converter in a DPA system may only affectthose few individual components that it serves. Finally, because there are manyDC/DC brick converters within a system, DPA allows for greater flexibility bypermitting part of the system to be reconfigured or upgraded without requiringa major change to the overall system.

More recently, a modifiedversion of DPA called Intermediate Bus Architecture, or IBA, has emerged, whichaddresses the number of different and lower voltages required by differentsystems. Instead of using multiple DC/DC brick converters that have a typicalinput of 48 volts and low output voltages of less than 3 volts, the IBA uses asingle brick converter with an input of 48 volts and an intermediate outputvoltage (typically between 12 volts and 3 volts) that is then transmitted tomultiple DC/DC Point-of-Load (POL) converters, each of which converts theintermediate voltage to the voltages required by the local devices (typically 3volts or less). During 2003 we announced our new Silicon Power Systems (SPS)division to focus on the design of highly innovative and efficient silicon-basedsolutions for next generation DC/DC power management products in the IBAmarket. We developed our maXyz® product line specifically for the IBA market.In 2004 we introduced our Z-One® digital power management architecture andrelated products as part of the maXyz product line. We have spent andanticipate spending significant capital on research and development efforts todevelop new power conversion technology.

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**Our CompetitiveAdvantages**

We believe that wehave key advantages that have helped us to establish a leading brand for ourproducts. Some of the factors that we believe have contributed to this leadingposition are as follows:

***Broad Product Line.******  ***We offerhundreds of products, in power ranging from one watt to a half-megawatt. Oursmaller products are no larger than a fingernail, while our larger DC powersystems could fill an entire cabinet. With millions of potential current andvoltage configurations, our broad product line offers our customers a onestop-shop opportunity, allowing them to purchase nearly all of their powerconversion and power management products from a single supplier. As a result,we are one of the few companies that can power virtually every component andsystem of an infrastructure network.

***Leading Design andDevelopment Capabilities.******  ***There are alimited number of highly-skilled power engineers in the world, and webelieve that we have assembled some of the most capable and innovative of suchengineers through our hiring efforts and through strategic acquisitions,including our October 2006 acquisition of Magnetek, Inc.’s PowerElectronics Group. Furthermore, we have been effective at maintaining a highretention rate among our technical staff. This team of engineering talent hasallowed us to consistently upgrade to new generations of power conversion andpower management products, each of which has outperformed prior products withhigher power density and smaller size. It has also allowed us to become aleader in the implementation of DPA technology, and we expect to achieve asimilar leading position in IBA technology. We believe that our Z-One digitalpower management architecture has created a first-to-market competitiveadvantage for us, although certain of our competitors are working to developsimilar or competing products and to promote such products via a competingstrategic alliance and open-standards consortium. We have been diligent inseeking to secure patent and other intellectual property rights for thetechnology that we have developed and implemented in our Z-One digital powermanagement architecture and products, and we have also been diligent inprotecting those rights. We are currently involved in patent infringementlitigation against one company that has announced and introduced products thatwe believe infringe upon certain of our intellectual property rights as securedin certain U.S. patents issued to us.

***Reputation forQuality and Reliability.******  ***We have beenin the power conversion and power management product industry since 1973. Byestablishing rigorous internal quality control programs, we believe that wehave been able to provide our customers with products that are highly reliable.This is particularly important for manufacturers of infrastructure equipment.As a result, we established a strong customer base that includes many of thelargest manufacturers in the communications infrastructure industry. Althoughpower conversion products typically represent only 2% to 5% of the cost of anentire network, their failure can cripple the entire system in which they areinstalled. Consequently, we believe most customers are not willing to riskbuying from an unproven supplier in an effort to cut costs in this area.

***Changing Customer Needs.******  ***Manufacturersand service providers are facing greater competition to accelerate thetime-to-market for their new products and are increasingly expected to producenewer generations of products in a shorter period of time. As a result, theyare more likely to purchase from suppliers who can offer a broad range ofstandardized power conversion products, rather than highly customized productsthat take more time to design and manufacture. Manufacturers of communicationsinfrastructure equipment are also focusing more on their core competencies andtherefore increasingly are outsourcing the manufacture of power conversion andpower management products to more efficient suppliers. Consequently, thesecustomers are moving towards sourcing from the limited number of suppliers whocan meet all of these needs.

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**Our Strategy:Powering the High Technology and Communications Markets**

Our primary objective is to become one of theworldwide leaders in power conversion and power management equipment for theglobal communications and high technology equipment markets. To achieve thisobjective, we plan to do the following:

***Expand ProductLines, Including DPA and IBA Products.******  ***We provide oneof the most comprehensive lines of power conversion and power managementproducts, including DPA and IBA products. Our products are increasingly beingdesigned into infrastructure equipment. We believe that we have goodrelationships with our customers, including leading infrastructure equipmentmanufacturers, and through these relationships we can work with our customersto understand their changing product needs in order to proactively developleading technology products for them. We intend to continue our extensiveresearch and development program to improve our products’ performance andexpand the breadth of our product offerings. Our Z-One digital power managementproducts play a key role in this strategy.

***Continue toCross-Sell Products on a Global Basis.******  ***We expandedthe geographic reach of our business into Europe and Asia through internalefforts and through a series of strategic acquisitions from 1998 through 2006.We believe we have substantial opportunities to market products developed inone region to customers located in other regions and to market products tocustomers who had previously purchased only a single line or family of productsfrom us but who have increasing needs for other products that we develop.

***Continue to Acquire and Invest in Strategic Businessesand Technologies.******  ***We plan to selectively acquireand invest in businesses and technologies that can extend our geographic reach,increase the breadth of our product line, enhance the performance of ourproducts, lower our manufacturing costs or expand our customer base in thecommunications infrastructure equipment market. We believe the fragmentation ofthe power conversion and power management product industry presentsopportunities for further consolidation. In addition, we are investingaggressively in research and development initiatives to create next-generationpower conversion and power management products and continuing to invest inadvanced technologies to enable significantly smaller DC/DC power converterproducts, higher efficiencies in these products, and better performance by themin controlling and managing power on communications-oriented printedcircuit boards. We continue to earmark a significant portion of our overallresearch and development budget to develop this technology.

In 2004, we introduced our Z-One digital powermanagement architecture and released products designed using this architecture.We believe that these products integrate conversion, communications, andcontrol for a digital board-level solution in a significantly enhancedmanner over traditional power supplies. Features of this architecture and therelated Z-7000 product line include the ability to fully manage up to 32POL DC/DC converters with a single-wire digital bus. It also provides asignificant reduction in printed circuit board space, design time and number ofcomponents, which in turn can lead to cost savings.

In 2005, we introduced our Z-1000 product line,which includes power conversion and power management products that containmany, but not all, of the same features as the Z-7000 products, and wemarket the Z-1000 products for customers’ mid-range applications.

In 2006, we redesigned ourproducts in such a way that allowed the circuit board to be one-sixth the sizeof its predecessor, and we further increased the capability of the systemby adding functionality that allows the control of devices manufactured bythird parties. This provides the ability of the Z-One architecture tointegrate with existing analog systems to provide customers with moreflexibility and further enables adoption to a broader range of customers andapplications.

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**Our Products**

We design, develop, manufacture and market powerconversion and power management products. All of our products are designed toconvert, regulate, purify, store, manage or distribute electrical power forelectronic equipment but power conversion products generally convert onevoltage into another voltage, whether AC-to-DC or DC-to-DC, while powermanagement products generally manage multiple voltages and provide otherfunctionality.

Depending on our customer’s needs, including thebalancing of cost and time-to-market of new products, we offer standard,modified-standard and custom-designed products. Standard products refer toproducts that are standard to a particular manufacturer, whilemodified-standard products refer to standard products of a manufacturer thatcan be easily modified to meet a customer’s particular application. Becausethey have already been designed and manufactured, standard and modifiedstandard products allow our customers to reduce their time-to-market andminimize costs for new product introductions. Custom products are usuallydesigned from “scratch” to meet the specifications of a unique customerapplication and may require significant tool and die costs and four-totwelve-month lead-times from conception through production.

We operate in an industry where quantity discounts,price erosion (and corresponding decreases in revenues and margins), andproduct obsolescence due to technological improvements are normal. While we seeprice erosion on most of the products we sell, we also have seen a smallerprice erosion on many of the components we purchase for inclusion in ourproducts, thereby decreasing our costs. Product obsolescence refers to thetendency of small and less expensive products to replace larger and moreexpensive products. For example, the functions of a full-size DC/DC brickconverter were replaced by a half-brick, which was subsequently replaced by aquarter brick and then a 1/8th-brick, and this will eventually be replaced by a 1/16th-brick or even smallerproduct. Each successive product is smaller and somewhat less costly than itspredecessor but has usually retained or expanded the functionality of itspredecessor. Sales of each successor product typically replace sales of thepredecessor product, making the predecessor product obsolete. These phenomenaare normal in our industry, and we have experienced price erosion and productobsolescence in line with industry trends. Price erosion and productobsolescence may continue to negatively impact gross margins and result ininventory write-offs. Price erosion may also mask increases in unit sales (asopposed to revenues) of certain products.

Our products can beclassified into the following main groups: AC/DC power supplies, DC/DCconverters, DC power systems, alternative energy (AE), and a category of otherproducts, including smart motor control. Our Z-One silicon board powermanagement products fall into the DC/DC converter category. These categoriescan be distinguished based on their location within a system, size andfunction.

*AC/DC powersupplies:*

·       aretypically embedded within the equipment that they are powering;

·       rangein size from a small paperback book to a desktop computer;

·       maybe standard, modified-standard or custom designed;

·       convertAC voltage, from a primary power source such as a wall outlet, into DC voltage;and

·       areused primarily in networking systems, large scale data processors andindustrial equipment.

*DC/DC converters (“Bricks”)and POL converters:*

·       areembedded within the equipment that they are powering and are generally mounteddirectly on a printed circuit board within the equipment;

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·       bricksrange in size from an AA battery to a portable CD player, while POL convertersmay be silicon-based and range in size from a fingernail to a smallmatchbox;

·       modifyan existing DC voltage level to a different DC voltage level;

·       arethe cornerstone of DPA and IBA technology; and

·       areused by our customers primarily to power communications infrastructureequipment, although their usage is expanding to other markets including serverand storage.

*DC power systems:*

·       canbe either stand-alone units that are external to the equipment orsub-systems (commonly called “racks”) that are integrated into a system;

·       rangein size from a shelf of integrated modules to large-scale systems thatcan fill entire cabinets;

·       convertAC voltage into DC voltage and, together with a generator or an array ofbatteries, provide several hours of additional power capacity in the event ofan AC input disturbance or power outage; and

·       are used primarily to powercommunications networks and cellular communications systems.

*Smart motor controland other products:*

·       areused primarily in sophisticated appliances, such as high-end clothes washersand dryers, and air conditioners, where energy efficiency is very important;and

·       are generally board-levelproducts or modules that are incorporated by the manufacturer in their system.

*Alternative energy (AE)products:*

·       aregenerally stand-alone units that are sometimes called “inverters.” Theseproducts are DC-to-AC converters that convert DC voltage from either solar,wind, or fuel cells into useable AC power.

·       rangein size from a briefcase to a small file cabinet.

We organize these productsinto two product lines, referred to as “embedded products” and “power systems.”Embedded products include AC/DC powersupplies, DC/DC converters (including “brick” converters and POL converters),alternative energy, and smart motor control products. Power systems productsinclude DC power systems.

**Division Structure**

Prior to 2005, we had fourdivisions: the Compact Advanced Power Systems (“CAPS”) division, the EnergySolutions (“ES”) division, the Silicon Power Systems (“SPS”) division anddi/dt. In 2005, we restructured and integrated most of our operations into asingle integrated business. The most significant components of therestructuring involved the elimination of most of the DC power systemsoperations in Norway through their integration into our other existinglocations and the elimination of certain manufacturing operations in NorthAmerica through their transfer to our other existing locations or to contractmanufacturers. Our SPS group is focused on developing next-generation silicon-baseddigital power management products for our Z-One digital power managementarchitecture. We intend to fully integrate the Power Electronics Group that weacquired from Magnetek, Inc. in October 2006 into our existingbusiness and not operate it as a separate division.

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**Customers**

We sell our powerconversion and power management products to a diversified group of hundreds ofequipment manufacturers, including contract manufacturers. Cisco Systems andits contract manufacturers accounted for 12.2% of our sales in 2006, 15.1% ofour sales in 2005, and 15.1% of our sales in 2004. Cisco Systems and itscontract manufacturers collectively were the only customers to account for morethan 10% of our sales during these periods.

Ourtop 10 customers accounted for approximately 35.9% of net sales in 2006, 36.2%of net sales in 2005 and 38.4% of net sales in 2004. Although our sales arediversified across many markets, our strategy has been to focus our efforts onthe communications infrastructure equipment and other high technology marketsbecause the quality, reliability and precision of our products make themparticularly suitable for these markets and because of the higher long-term growthwe believe these markets will experience. The following table illustrates thepercentage of our net sales in our primary markets:

| ** **                      | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Communications                  |       |                                   | 59         | % |   |   | 61 | % |   |
| Instrumentation  and Industrial |       |                                   | 27         | % |   |   | 30 | % |   |
| Server, Storage  and Computer   |       |                                   | 7          | % |   |   | 3 | % |   |
| Other                           |       |                                   | 7          | % |   |   | 6 | % |   |
| Total                           |       |                                   | 100        | % |   |   | 100 | % |   |

 

Our customers are located throughout the world, andthe following table summarizes our revenues in different geographiclocations for our two product lines (in millions):

| ** **   | ** ** | **Years Ended December 31,** | ** ** |               |
|--------------|------------|---------------------------------------------|------------|--------------------|
| ** **   | ** ** | **2006**                                    | ** ** | **2005**           | ** ** | **2004** | ** ** |   |
| ** **   | ** ** | **Embedded  products**                      | ** ** | **Power  systems** | ** ** | **Total** | ** ** | **Embedded  products** | ** ** | **Power  systems** | ** ** | **Total** | ** ** | **Embedded  products** | ** ** | **Power  systems** | ** ** | **Total** | ** ** |   |
| Revenues:(a) |       |                                        |       |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|              |            |                                             |            |                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| North America         |   |   | $    | 109.0  |   |   |   | $      | 12.7   |   |   | $      | 121.7 |   |   | $      | 91.8  |   |   |   | $      | 14.9   |   |   | $      | 106.7  |   |   | $      | 112.5 |   |   |   | $ | 20.3 |   |   | $ | 132.8 |   |
|-----------------------|--------|--------|------|--------|--------|--------|--------|--------|--------|--------|--------|--------|-------|--------|--------|--------|-------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|-------|--------|--------|--------|---|------|--------|--------|---|-------|--------|
| European countries    |   |   | 74.5 |   |   |   | 54.2   |   |   | 128.7  |   |   | 50.1  |   |   |   | 43.5  |   |   | 93.6   |   |   | 55.3   |   |   |   | 41.8   |   |   | 97.1  |   |
| Malaysia              |   |   | 30.3 |   |   |   | 0.9    |   |   | 31.2   |   |   | 25.5  |   |   |   | 1.0   |   |   | 26.5   |   |   | 19.5   |   |   |   | 1.3    |   |   | 20.8  |   |
| Other Asian countries |   |   | 32.7 |   |   |   | 18.4   |   |   | 51.1   |   |   | 18.9  |   |   |   | 11.0  |   |   | 29.9   |   |   | 12.8   |   |   |   | 11.6   |   |   | 24.4  |   |
| Other                 |   |   | 0.5  |   |   |   | 4.8    |   |   | 5.3    |   |   | 0.2   |   |   |   | 4.7   |   |   | 4.9    |   |   | 0.1    |   |   |   | 5.1    |   |   | 5.2   |   |
| Total                 |   |   | $    | 247.0  |   |   |   | $      | 91.0   |   |   | $      | 338.0 |   |   | $      | 186.5 |   |   |   | $      | 75.1   |   |   | $      | 261.6  |   |   | $      | 200.2 |   |   |   | $ | 80.1 |   |   | $ | 280.3 |   |

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(a)              Revenues are attributable to countries based onlocation of customer.

**Long-lived Assets**

The following is a summaryof our long-lived assets by geographical locations, in millions:

| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Long-Lived  Assets:     |       |                  |       |   |   |
| United States           |       | $                     | 48.1       |   | $ | 51.4 |   |
| Italy                   |       | 47.9                  |       | — |   |
| Switzerland             |       | 14.5                  |       | 14.2 |   |
| Dominican Republic      |       | 14.0                  |       | 15.8 |   |
| China                   |       | 9.4                   |       | 1.0 |   |
| Slovakia                |       | 7.2                   |       | 5.0 |   |
| Other foreign countries |       | 5.8                   |       | 2.8 |   |
| Total                   |       | $                     | 146.9      |   | $ | 90.2 |   |

 

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**Sales and Marketing**

We market our products through a global sales force.We have direct sales offices in Europe, North America, Asia, Middle East,South America, and Australia. These direct sales offices are augmented by anextensive network of manufacturers’ representatives and distributors.

Our direct sales force istypically oriented towards customers that have the potential to purchase largevolumes of our products, generally several million dollars or more annually.Our direct sales force works closely with existing and potential customers todetermine their long-term technology requirements for power conversionproducts. This close collaboration allows us to design products that best fitour customers’ expected applications. We expect that our direct sales tostrategic accounts will increase in the future as we increasingly focus onsales to these customers.

**Research,Development and Engineering**

Worldwide we have 458employees in our research and development departments of which 182 areengineers. We spent approximately $21.7 million on research and development (“R&D”)in 2006, approximately $22.0 million in 2005 and approximately$29.4 million in 2004. During 2006, we shifted our R&D operationstoward lower-cost locations, thereby significantly reducing R&D costs withonly a modest decrease in R&D resources. We have established engineeringand design centers in areas that are strategically located for servicing ourcustomers and where we have strong access to technical talent. Our fourengineering and design centers in the United States are located in Andover,Massachusetts and Camarillo, Carlsbad, and Morgan Hill, California. We alsohave engineering and design centers in Santo Domingo, Dominican Republic;Uster, Switzerland; Dubnica, Slovakia; Tuscany, Italy; Shenzhen, China andLimerick, Ireland. Additionally, we have engineering staff on site in each ofour manufacturing facilities. Finally, we have engineering teams at each of ourpower plant system integration facilities to enable more efficient customizationof our system configurations for our customers. 

**ManufacturingProcess and Quality Control**

Production of many of our products typically entailssubassembly of sophisticated printed circuit boards that are in turn combinedwith hardware components to produce a final product. In response to demand forincreased quality and reliability, design complexity, and sophisticatedtechnology, we continue to invest in state-of-the-art processes. We have alsostandardized many of our manufacturing processes and much of our equipmentworldwide to increase efficiency and optimize flexibility between facilities.

Our manufacturing processes are designed to rapidlyproduce a wide variety of quality products at a low cost. The use of surfacemount technology, or SMT, permits us to reduce board size by eliminating theneed for holes in the printed circuit boards and by allowing us to use smallercomponents. Our investment in SMT has significantly increased our productdevelopment processes and production capacity, and we believe it has alsoimproved our product quality. In addition, we made an equity investment in andhave manufacturing outsourcing arrangements with a contract manufacturer inAsia and we have outsourcing arrangements with other contract manufacturers.

Product quality and responsiveness to our customers’needs are of critical importance in our efforts to compete successfully. Weemphasize quality and reliability in both the design and manufacturing of ourproducts. In addition to testing throughout the design and manufacturingprocess, we test and /or burn-in our products using automated equipment andcustomer-approved processes. We also perform out-of-box test or pre-shipaudit on randomly selected units before delivery. We insist on the same levelsof quality from our contract manufacturers, and as a result have and maycontinue to incur additional costs to ensure quality products.

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As our customers’ operations expand internationally,they increasingly require that their power products meet or exceed establishedinternational safety and quality standards. We therefore design and manufactureour power conversion and power management products in accordance with thecertification requirements of many international agencies, including theUnderwriters Laboratories in the U.S., the CSA International in Canada, and TUVProduct Service for the European market. In addition, various products may betested to Network Equipment-Building System requirements for the U.S.telecommunications market and to European Telecom Standard Instituterequirements for the European Union telecommunications market.

We have manufacturingoperations in the United States, Dominican Republic, Slovakia, Italy, China,and Hungary; and we expect that for 2007 we will manufacture and assemble approximately70% of our products at our facilities in the Dominican Republic, China, Italy,and Slovakia. Production of our silicon-based products is outsourced tocontract manufacturers in North America and in Asia. All of our manufacturingfacilities are ISO certified. In our global operations, we currently have anaggregate of approximately 630,000 square feet of manufacturing space. Inaddition to our own facilities, we utilize low-cost contract manufacturing inseveral locations around the world, although most of our subcontractors arelocated in Asia.

**Suppliers**

We maintain a network of suppliers for components andother materials used in the manufacture of our power conversion and powermanagement products. We typically design products using components readilyavailable from several sources and attempt to minimize our use of componentsthat we can only obtain through a single source. We procure components basedupon our enterprise resource planning system and use a combination offorecasts, customer purchase orders and formal purchase agreements to createour materials requirements plan.

We occasionally usecomponents or other materials for which a single supplier is the only source ofsupply. We may seek to establish long-term relationships with such suppliers.We have volume purchase agreements with certain suppliers of key items. Thispractice enables us to maintain a more constant source for required suppliesand produce cost savings through volume purchase discounts.

**Backlog**

We generally sell our productspursuant to purchase orders rather than long-term contracts. Backlog consistsof purchase orders on-hand having delivery dates scheduled within the next sixmonths. Customers may cancel or reschedule most deliveries without penalty. Wedo not maintain long-term contracts with our customers and they are free tocancel or modify their orders. We also derive a significant portion of ourrevenues from “turns” business (that is, revenues from orders that are bookedand shipped within the same reporting period and that therefore do not appearas backlog at the end of a reporting period). In addition, customers on ourVendor Managed Inventory (“VMI”) programs exercise discretion as to the timingof inventory consumption. When customers adopt our VMI program, they no longerplace orders with us and instead use an automated forecasting model. We thenmanufacture products for the customer based on its forecast, and the customeruses the inventory as needed. As a result, under a VMI program, the booking andbilling occur simultaneously upon use of the product, and therefore there isalways a book-to-bill ratio of 1.0 for these programs. We may bring additionalVMI programs on-line in the future, which would result in higher “turns”business, lower book-to-bill ratio, and higher finished goods inventory. Assuch, we believe that backlog may not necessarily be a reliable indicator offuture results.

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**Competition**

The power conversion andpower management industry is highly fragmented and characterized by intensecompetition. No single company dominates the overall market, and ourcompetitors vary depending upon the specific type of products they produce. Webelieve that the principal bases of competition in our targeted markets arebreadth of product line, stability and reputation of the provider, along withcost. Our main competition includes companies located throughout the world,including Emerson Electric, C&D Technologies, Delta Electronics, Eltek anda division of Tyco International. 

**IntellectualProperty Matters**

We consider ourintellectual property to be very important and valuable, and we have madeintellectual property protection a key element of our overall businessstrategy. We rely on a combination of patent, trade secret and otherintellectual property laws, confidentiality agreements executed by most of ourexempt employees and other measures to protect our proprietary rights. Wecurrently maintain 116 active U.S. patents, many of which are protected bycorresponding foreign patents in selected jurisdictions. Additional U.S. andforeign patent applications are pending. We hold 18 U.S. registered trademarkswith additional trademark applications pending, and we claim common lawtrademark rights to additional marks. We consider our intellectual property inthe area of digital power management and control, including trademarks andpatents that we have secured and are continuing to seek in that area, to be ofparticular importance and strategic significance. These particular patents haveall been issued since 2004 and have patent terms extending for approximately 20years from date of grant.

**Employees**

At December 31,2006, we employed 4,167 employees at our facilities in the following functions:

| **Function**                | ** ** | ** ** | ** ** | **Number of  Employees** | ** ** |
|-----------------------------|------------|------------|------------|-------------------------------|------------|
| Manufacturing               |       |       | 3,037      |                          |       |
| Engineering                 |       |       | 458        |                          |       |
| General and  administrative |       |       | 291        |                          |       |
| Sales and  marketing        |       |       | 187        |                          |       |
| Quality assurance           |       |       | 194        |                          |       |
| Total                       |       |       | 4,167      |                          |       |

 

We believe that ourcontinued success depends, in part, on our ability to attract and retainqualified personnel. We consider our relations with our employees to be good.

**Company Website,Corporate Governance Website and Access to Company Filings**

We post all of ourperiodic reports on Form 10-K and 10-Q, current reports on Form 8-K,and amendments to these reports filed or furnished pursuant to the SecuritiesExchange Act of 1934 on our website at *www.power-one.com*as soon as reasonably practicable after we file or furnish the reports with theSecurities and Exchange Commission. Access to these reports is free of charge.In addition, we maintain a Corporate Governance section on our Website toprovide the investor community with easy access to relevant information aboutour corporate governance. The public may read and copy any materials that wefile with the SEC at the SEC’s Public Reference Room at 450 Fifth Street,NW, Washington, DC 20549, and the public may obtain information on theoperation of the Public Reference Room by calling the SEC at1-800-SEC-0330. In addition, the SEC maintains an Internet site that containsreports, proxy and information statements, and other information regardingissuers that file electronically with the SEC at *http://www.sec.gov.*

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**EXECUTIVE OFFICERSOF THE REGISTRANT**

Setforth below is certain information concerning our executive officers.

| **Name**            | ** ** | ** ** | ** ** | ** **                                                          | **Age(1)** | ** ** | ** ** | **Position** |
|---------------------|------------|------------|------------|---------------------------------------------------------------------|------------|------------|------------|--------------|
| Steven J. Goldman   |       | 49         |       | Chairman of the Board                                               |
| William T. Yeates   |       | 46         |       | Chief Executive Officer                                             |
| Brad W. Godfrey     |       | 47         |       | President and Chief  Operating Officer                              |
| Paul E. Ross        |       | 33         |       | Vice President—Finance,  Treasurer and Chief Financial Officer |
| Randall H. Holliday |       | 57         |       | Secretary and General Counsel                                       |

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(1)          As of March 16,2007

*StevenJ. Goldman.**  *Mr. Goldman,our Chairman of the Board, joined Power-One in 1982 and has held severalpositions with us, including Vice President of Engineering, Senior VicePresident and Chief Financial Officer. In July 1990, Mr. Goldman wasselected by the Board of Directors as our President and CEO and served in thesepositions until February 2006. He was named Chairman of the Board in 1997.Mr. Goldman received his B.S. Degree in Electrical Engineering from theUniversity of Bridgeport in 1979. He is a 1989 graduate of the PepperdineUniversity Presidential and Key Executive MBA Program, and in 1999 he wasrecognized by Pepperdine as a Distinguished Alumnus of the Graziado School. Mr. Goldmanis a contributing member of the San Fernando Valley Chapter of the Young Presidents’Organization.

*WilliamT. Yeates.**  *Mr. Yeatesjoined us in January 2000 and served as our President and Chief OperatingOfficer until February 2006 when he was appointed our Chief ExecutiveOfficer. Before joining us, Mr. Yeates held various positions ofincreasing responsibility at Lucent Technologies, including Vice President andGeneral Manager of the Titania Power Division. He received his B.S. degree inElectrical Engineering and his M.B.A degree in Finance from Louisiana TechUniversity.

*BradW. Godfrey.**  *Mr. Godfrey,who joined us in 1988, was appointed President and Chief Operating Officer in February 2006.During his tenure with us, he has held a variety of positions of increasingresponsibility and scope within the Company, including Senior Vice President—GlobalOperations. He served as the CAPS Division President from July 2003 until February 2006.

*PaulE. Ross.*   Mr. Ross, who joined us in April 2001,was appointed Vice President—Finance in January 2005, and Treasurer andChief Financial Officer in May 2005. Prior to that, he served as AssistantTreasurer from May 2004 until May 2005. Prior to joining the Company,Mr. Ross was employed with British Petroleum, Los Angeles. Mr. Rossis a CPA and holds a B.A. degree from the University of California,Los Angeles, and an M.B.A. degree from the University of SouthernCalifornia. On February 12, 2007, Mr. Ross advised the Company thathe will resign from the Company at a date to be determined by mutual agreementwith the Company. As previously announced, the Company has appointed Mr. JeffreyJ. Kyle to succeed Mr. Ross as the Company’s principal financial officer.Mr. Kyle will officially assume the position and duties as the Company’sprincipal financial officer upon the departure of Mr. Ross.

*RandallH. Holliday.**  *Mr. Hollidayjoined us in 2000 as General Counsel and was appointed Secretary in 2001.Before joining us, Mr. Holliday served as Secretary and General Counsel ofXircom, Inc. He has held a variety of in-house legal positions in diverseindustries since 1981. Mr. Holliday received his J.D. degree in 1974 fromFlorida State University, Tallahassee, FL.

Our officers serve at thediscretion of the Board.

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**ITEM 1A—RISKFACTORS**

**Changes in demand or downturns in the volatile and cyclicalcommunications infrastructure and server/storage industries could affect ourbusiness and profitability.**

A majority of our sales in the past fiveyears have been to companies in the communications infrastructure industry. Weexpect our sales to communications infrastructure companies to continue to besignificant in the future, and we are also pursuing customers in otherindustries, including the server/storage industry. All of these industries arehighly cyclical and experience downturns. We have experienced such downturns inthe past, and we cannot predict when we may experience such downturns in thefuture. These industries also experience volatility, and future volatility aswell as downturns in any of these industries, or any failure of theseindustries to recover from downturns, could materially harm our business andprofitability.

**We face intense industry competition, price erosionand product obsolescence, which, in turn, could reduce our profitability.**

We operate in an industrythat is generally characterized by intense competition. We believe that theprincipal bases of competition in our markets are breadth of product line,stability and reputation of the provider, along with cost. Quantity discounts,price erosion, and rapid product obsolescence due to technological improvementsare therefore common in our industry as competitors strive to retain or expandmarket share. Product obsolescence can lead to increases in unsaleableinventory that may need to be written off and therefore could reduce ourprofitability. Similarly, price erosion can reduce our profitability bydecreasing our revenues and our gross margins. In fact, we have seen priceerosion over the last several years on most of the products we sell, and wehave factored additional price erosion into our forecasts.

**Our inventorylevels may be too high or too low, reducing our profitability.**

During periods of growth and high demand for ourproducts, we may not have adequate supplies of inventory on hand to satisfy ourcustomers’ needs. Furthermore, during these periods of growth, our suppliersmay also experience high demand and therefore may not have adequate levels ofthe components and other materials that we require to build products so that wecan meet our customers’ needs. As a result, it may take us longer to procuresufficient components for building products than our customers are willing toaccept, and we therefore may lose sales. This could negatively affect ourprofitability.

We may choose to mitigate this risk by purchasing andmaintaining higher inventory levels in order to better meet our customers’needs during these periods of growth and high demand. However, increasedinventory levels could lead to increases in excess and obsolete inventory ifthese periods of high demand do not materialize or if there are unexpectedchanges to our product mix or our forecasts are otherwise inaccurate.Historically, we have had write-offs of excess and obsolete inventory whichnegatively impacted our results of operations. In the future, excess orobsolete inventory may need to be written-off, and this in turn could reduceour profitability.

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**Failure to anticipate trends in the mix of powerconversion products that our customers will demand may adversely affect ourbusiness.**

Because we have many customers in the communicationsinfrastructure industry, the factors and economic trends that affect thesecompanies also affect our business. The communications infrastructure industryhas experienced rapid change in recent years. With advances in technology,communications service providers offer a more varied range of services.Increasing usage of the Internet as well as demand for broadband and wirelessservices all contributed to the growth of the communications infrastructureindustry. Because resulting technological advances required significantlygreater and more reliable power, the demand for newer generation powerconversion and power management products has also grown. To respond to theneeds of our customers in the communications infrastructure industry, we mustcontinuously develop new and more advanced products at lower prices. We havemade and will continue to make significant investments in next generationtechnologies, but there can be no assurance that the resulting products will besuccessful or that we will recoup our research and developments costs throughincreased sales.

During 2003, we announcedthe creation of a new division dedicated to developing next-generation DC/DCproducts, and this division launched its first major digital power managementproducts during 2004. Many of these new products are based on silicontechnology, which may expose us to new and unfamiliar competitors. We also havelimited experience in the semiconductor industry. While we believe that ourtechnology is ahead of our competitors, and is protected by adequateintellectual property rights, some of our traditional competitors have formed aconsortium with other power supply and semiconductor technology companies toaddress the same market as we are seeking to address. This consortium hascreated doubt about our technology and products in the marketplace. In addition,although we have licensed our technology to other companies in order to addresscustomers’ second source concerns, there can be no assurance that sufficientquantities of our products will be available. The market may not accept ourtechnology or adoption rates have been and may continue to be slower thanexpected. Our inability to properly assess developments in the communicationsinfrastructure industry or to anticipate the needs of our customers could causeus to lose some or all of these customers, prevent us from obtaining newcustomers, or cause us to record substantial write-offs.

**Vendor managedinventory programs give rise to variability in our revenue and operatingresults.**

Certain significantcustomers are on vendor managed inventory, or VMI, programs. For VMI programs,we build product to the customer’s forecasts and the inventory is physicallylocated at a site controlled by the customer, but the sale of product does notoccur until the customer uses the inventory. We therefore cannot predict whenthe sale may occur, and this in turn may result in variability in our net salesand operating results and higher inventory balances.

**Cancellations,reductions or delays in purchases could cause our quarterly results tofluctuate.**

We do not obtain long-term purchase orders orcommitments from our customers, and therefore customers may generally cancel,reduce or postpone orders without penalty. Cancellations, reductions and delaysin orders could reduce our net sales and profitability. Our expense levels arebased, in part, on expected future revenues and are relatively fixed once set.Our expectations for net sales beyond 90 days are based partially on our ownestimate of future demand and partially on customer orders. However, we arelimited in our ability to reduce expenses quickly if for any reason net salesdo not meet our expectations in a particular period. Therefore, fluctuations innet sales, particularly if customers cancel, postpone or delay orders, mayadversely impact our operating results.

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Fluctuations in customerneeds may also affect our mix of products sold and our volume of productsorders, which in turn would affect our gross margin and operating results. Inaddition, high-volume orders, if cancelled, may increase the risk of inventoryobsolescence and asset write-offs due to excess capacity.

**We rely on a few major customers for a materialportion of our business and the loss of any of those customers, or a change inour product mix, could reduce our net income and operating results.**

Historically, a fewcustomers accounted for a material portion of our net sales each year. CiscoSystems and its contract manufacturers represented approximately 12% and 15% ofour net sales in 2006 and 2005, respectively. For 2006 and 2005, our top five originalequipment manufacturers customers accounted for approximately 27% and 28% ofour net sales, respectively. If we lose any of these key customers, if any ofthem reduces or cancels a significant order, if any of them experiencessignificant financial or other failures, or if our product mix changessignificantly in favor of products that have lower gross margins, our net salesand operating results could decrease significantly.

**Interruptions inmanufacturing of our products may impair our business and profitability.**

We manufacture products at various facilities aroundthe world. Any disruption of operations at those facilities, including throughnatural disaster, terrorist attack, labor strike or work stoppage, or otherevents that may be outside of our control, could hurt our business andprofitability.

In addition, some of ourproducts are manufactured, assembled and tested by third party subcontractorsand contract manufacturers located in Asia. While we have had relationshipswith many of these third parties in the past, we cannot predict how or whetherthese relationships will continue in the future. In addition, changes inmanagement, financial viability, manufacturing demand or capacity, or otherfactors at these third parties could hurt our ability to have our productsmanufactured. Furthermore, due to the amount of time often required to qualifymanufacturers, assemblers and testers, both on our part and by certaincustomers of ours, we could experience delays in the shipment of our productsto customers and distributors if we are forced to find alternative thirdparties to manufacture, assemble or test products. These delays could adverselyaffect our business and profitability.

**Environmental,health and safety laws may restrict our operations.**

We are subject to locallaws and regulations in various regions in which we operate, including forexample the United States, the European Union (“EU”) and China. There arecertain risks we face in complying with, or seeking to conduct our business inconnection with various local laws and regulations, including directives likeRestriction of Certain Hazardous Substances Directive (“RoHS”) and WasteElectrical and Electronic Equipment Directive (“WEEE”) that were issued by theEU, and Management Measures on Electronic Information Product Pollution Controlissued by China. We believe we are in compliance with the existing directives,however the authorities have the ability to review and challenge our compliancewhich could result in additional costs. We face risks that our products may notbe compliant with any new directives, which may result in reduced sales andalso in additional excess and obsolete inventory risk related to non-compliantinventory that we may continue to hold for which there is reduced demand andthat we may need to write down. Costs of compliance with environmental, healthand safety laws may also have a material adverse impact on our net sales andoperating results.

**We are subject tocredit risks.**

Some of our customers haveexperienced and may continue to experience financial difficulties and/or havefailed to meet their financial obligations to us. As a result, we have incurredcharges for bad debt provisions related to certain trade receivables. Incertain cases where our end-customers utilize contract manufacturers ordistributors, our accounts receivable risk may lie with the contractmanufacturer or 

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distributorand may not be guaranteed by the end-customer. If there are additional failuresof our customers to meet their receivables obligations to us, or if theassumptions underlying our recorded bad debt provisions with respect toreceivables obligations do not materially reflect our customers’ financialconditions and payment levels, we could incur additional write-offs ofreceivables in excess of our provisions, which could have a material adverseeffect on our cash flow and operating results.

**We face, and might in the future face, intellectualproperty infringement claims that might be costly to resolve.**

We have from time to time received, and may in thefuture receive, communications from third parties asserting patent or otherintellectual property rights that are alleged to cover our products, some ofwhich in the past have resulted in litigation. If we do not prevail in any suchlitigation, our business may be adversely affected.

In addition, our industryis characterized by uncertain and conflicting intellectual property claims andvigorous protection and pursuit of intellectual property rights or positions,which have on occasion resulted in significant and often protracted andexpensive litigation. We cannot assure that intellectual property claims willnot be made against us in the future or that we will not be prohibited fromusing our technologies subject to any such claims or that we will not berequired to obtain licenses and make corresponding royalty payments. Inaddition, the necessary management attention diverted to litigation, along withthe associated legal costs, could have a significant adverse effect onoperating results.

**Actions by our competitors and by foreign governmentscould undermine our intellectual property rights, which in turn could adverselyaffect our results.**

We rely upon a combination of patents, trademarks,contractual provisions and trade secret laws to protect our proprietary rightsin certain of our products. Our competitors may, however, misappropriate ourtechnology or independently develop technologies that are as good as, or betterthan, ours. Additionally, the laws of some foreign countries do not protect ourproprietary rights as much as U.S. laws do. We currently own patents andcontinue to apply for additional patents, but the U.S. Patent and TrademarkOffice may reject some or all of our patent applications. The patents that theU.S. government issues to us may not provide us with a competitive advantage orcreate a sufficiently broad claim to protect the technology that we develop.

Our competitors may challenge or circumvent ourpatents, and some of our patents may be invalidated. Litigation may benecessary to enforce our patents and other intellectual property rights, toprotect our trade secrets, to determine the validity of and scope of theproprietary rights of others or to defend against claims of infringement orinvalidity. Litigation could result in substantial costs and diversion ofresources and could have a significant adverse effect on operating results.

During 2005 we initiated legal proceedings against twocompanies whom we believe have infringed on some of our patents in the area ofdigital power management. One of these cases settled in July 2006. Whilewe believe our ongoing case is strong, there can be no assurance that thejudicial system will uphold our patents, or will find that our patent(s) havebeen infringed. We may incur significant costs in the current proceedingprotecting our technology though the judicial system, which costs may not berecouped through damages awards, settlements, royalties or other payments.

Additionally, we may bringsuit against additional companies in the future whom we believe violate ourintellectual property, further increasing our costs. In addition, competitors(either individually, or via alliance-type arrangements) may release infringingproduct(s) prior to any court ruling or other judicial action whichupholds or supports our intellectual property rights, with the goal of securingmarket share with competing product. Significant costs associated withlitigation, slower-than-expected adoption rates of 

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our newproduct, and competitor introductions of competing product could individuallyor in combination have a material adverse impact on our operating results.

**We are subject to risks associated with company andtechnology acquisitions, divestitures, joint ventures and strategicinvestments.**

We have recentlycompleted our acquisition of the Power Electronics Group of Magnetek, Inc.,and we may in the future continue to pursue acquisitions and disposals ofbusinesses, products and technologies, or enter into joint ventures and equityinvestment arrangements, that could complement or otherwise enhance ourbusiness. The negotiation of potential acquisitions, divestitures, jointventures or investments could require us to incur significant costs and causediversion of management’s time and resources for which economic and opportunitycosts cannot be recouped if the transactions do not occur. Future transactionsby us could result in the following consequences:

·       dilutiveissuances of equity securities to finance the acquisition or other transaction,and, furthermore, these equity securities may have rights, preferences, andprivileges that are senior to our outstanding common stock;

·       incurrenceof debt to finance the acquisition or other transactions and contingentliabilities as a result of the transaction;

·       impairmentof tangible and intangible assets;

·       researchand development write-offs; and

·       otheracquisition-related expenses.

We may also encounter difficulties in integratingacquired businesses and assets with our operations. For example, someacquisitions, including our recently completed acquisition of the PowerElectronics Group of Magnetek, Inc., include business operations locatedin various countries around the world, and integrating such geographicallydispersed businesses presents additional communications, management, logistics,and cultural challenges. In addition, newly acquired assets or operations mayinclude new businesses or legacy product lines with which we have minimal or noprior experience. For example, through our recently completed acquisition ofthe Power Electronics Group of Magnetek, Inc., we acquired product linesrelating to alternative energy (e.g. solar power) and intelligent motor drivesand controls, although we had no such lines of products before the acquisition.Our management may need to spend resources gaining the experience to integratethese businesses and product lines with our existing ones.

Furthermore, we may notrealize the benefits we anticipated when entering into these transactions,including our recently completed acquisition of the Power Electronics Group ofMagnetek, Inc. In addition, after we complete an acquisition, ourmanagement must be able to assume significantly greater responsibilities, andthis in turn may cause them to divert their attention from our existingoperations. Any of the foregoing could hurt our financial position and resultsof operations.

**Our success depends on our ability to retain oursenior management and to attract and retain key technical personnel.**

If we lose certain membersof our senior management, our operations may be disrupted and our operatingresults could be adversely affected. In addition, our capacity to develop andimplement new technologies depends on our ability to employ personnel withhighly technical skills. Competition for such qualified technical personnel isintense due to the relatively limited number of power supply engineersworldwide, and we believe that this supply will remain constrained because ofthe limited number of 

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engineeringstudents concentrating on power conversion. If we cannot attract and retain keytechnical personnel, our technical expertise may suffer, and our operatingresults could be adversely affected.

**Much of ourbusiness is subject to risks associated with operations in foreign countries.**

We generate asignificant percentage of our revenue internationally through sales officeslocated throughout Europe and Asia, and many of our operations, including thoseof the recently acquired Power Electronics Group of Magnetek, Inc., arelocated outside of the United States. For example, manufacturing is performedin our own facilities in the Dominican Republic, China, and Slovakia, and atcontract manufacturers in Asia. With the acquisition of the Power ElectronicsGroup, we have recently added manufacturing facilities in Italy, China, andHungary. We expect to continue to build, acquire or move operations overseas,and there are inherent risks from operating overseas that may impact ourbusiness. For example, we face risks that the countries in which we conductbusiness or in which we have customers, suppliers, or contract manufacturerscould:

·       Experiencefinancial, economic or political instability;

·       Havean undeveloped rule of law or judicial system making the enforcement ofour contractual or other legal rights and remedies difficult or uncertain;

·       Provideinadequate intellectual property protection for our technology;

·       Imposerestrictions on the export or import of technology that would affect ourability to obtain supplies from, or sell products into, such countries;

·       Imposetariffs, quotas, taxes, other market barriers; or

·       Imposeother laws, regulations or policies adversely affecting trade, investment ortaxes, including those relating to the repatriation of funds.

In addition, becauseof our international operations, we face additional risks such as:

·       Currencyrisk, since we increasingly receive payments and purchase components in foreigncurrencies, and we have historically not engaged in foreign currency hedgingactivities;

·       Compliancewith laws and regulations in various regions in which we operate, including theElectrical and Electronic Equipment Directive (“WEEE”) and Restriction ofCertain Hazardous Substances Directive (“RoHS”) set forth by the European Unionduring 2005 and 2006, respectively;

·       Greaterdifficulty and longer delays in collecting accounts receivable frominternational customers; and

·       Increased challenges onmanagement associated with overseeing operations that are geographicallydispersed across Europe and Asia, particularly in countries where we have nothistorically done business and where we therefore may not be familiar withlaws, regulations and business practices.

**We may fail tocapture customers in the new markets that we are pursuing.**

We are pursuing customersin new markets, most notably for our digital power management products and inthe server/storage industry. While we have secured design wins from significantplayers in this industry in the past, there can be no assurance that thesedesign wins will turn into revenue in the quantity or timeframe projected. Wehave made investments in our infrastructure, increased our operating costs andhave forgone other business opportunities in order to service these newpotentially significant customers. Failure of these design wins to translateinto revenue in the quantities or timeline projected could have a materiallyadverse impact on our revenue and operating results.

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**Our chartercontains provisions that may hinder or prevent a change in control of our company.**

Certain provisions of ourCertificate of Incorporation could make it difficult for a third party toobtain control of us, even if such a change in control would benefit ourstockholders. Stockholders must inform our corporate secretary before a stockholders’meeting of any business they wish to discuss and any directors they wish tonominate. Our Certificate of Incorporation also requires approval of 75% of ourvoting stock to amend certain provisions. Subject to the rules of theNASDAQ Global Market, our Board of Directors may also be able to issuepreferred stock without stockholder approval. Stockholder rights could beadversely affected by the rights of holders of preferred stock that we issue inthe future. Finally, we have a stockholder rights plan that allows ourstockholders to purchase preferred stock at a reduced price if certain partiesattempt to acquire a substantial interest in us without the approval of ourBoard of Directors. Any one of the provisions discussed above could discouragethird parties from obtaining control of us. Such provisions may also impede atransaction in which our stockholders could receive a premium over then-currentmarket prices and our stockholders’ ability to approve transactions that theyconsider in their best interests.

**Market fluctuations or volatility could cause thetrading price of our common stock to decline and limit our ability to raisecapital.**

The stock market ingeneral and the market for stocks of power conversion and power managementcompanies in particular have experienced price and volume fluctuations, oftenunrelated to the operating performance of the affected companies. We believethat, in the past, similar levels of volatility have contributed to the declinein the trading price of our common stock, and such volatility may do so againin the future. Trading volumes of our common stock can increase dramatically,resulting in a volatile trading price for our common stock. In addition, thetrading price of our common stock could decline significantly as a result ofsales of substantial number of shares of our common stock, or the perceptionthat significant sales could occur. In the past, securities class actionlitigation has been brought against companies that experienced volatility inthe trading price of their securities.

**We are subject to internal control evaluations andattestation requirements of Section 404 of the Sarbanes-Oxley Act.**

Pursuant to Section 404of the Sarbanes-Oxley Act of 2002, we must include in our Annual Report on Form 10-Ka report of management effectiveness of our internal control over financialreporting and an attestation by our independent registered public accountingfirm on the adequacy of management’s assessment of our internal control overfinancial reporting. Ongoing compliance with these requirements is complex,costly and time-consuming. We may be subject to regulatory sanctions and ourreputation may decline if we fail to maintain effective internal control overfinancial reporting, if our management does not timely assess the adequacy ofsuch internal control, or if our independent registered public accounting firmdoes not timely attest to the evaluation.

**ITEM 1B—UNRESOLVEDSTAFF COMMENTS**

None.

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**ITEM2—PROPERTIES**

Thetable below lists our principal facilities currently in operation.

| **Location**                       | ** ** | ** ** | ** ** | **Approximate Size  (square feet)** | ** ** | **Employees** | ** ** | **Primary Activity** | ** ** |
|------------------------------------|------------|------------|------------|-----------------------------------------------|------------|---------------|------------|---------------------------|------------|
| Camarillo, California              |       |       | 100,000    |                                          |       |          | 120        |                      |       | Administration, R&D, Warehousing,  Marketing and Sales |   |
| Santo Domingo, Dominican  Republic |       |       | 192,000    |                                          |       |          | 1,470      |                      |       | Administration, Manufacturing and  Assembly, Warehousing, R&D |   |
| Dubnica Nad Vahom,  Slovakia       |       |       | 245,000    |                                          |       |          | 780        |                      |       | Administration, Manufacturing and  Systems Integration, Warehousing,  R&D |   |
| Valdarno, Italy                    |       |       | 170,000    |                                          |       |          | 550        |                      |       | Administration, Manufacturing and  Assembly, Warehousing,  R&D, Marketing and Sales |   |
| Baoan, China                       |       |       | 245,000    |                                          |       |          | 610        |                      |       | Administration, Manufacturing and  Assembly, Warehousing, Marketing  and Sales |   |
| Shenzhen, China                    |       |       | 145,000    |                                          |       |          | 150        |                      |       | Administration, Manufacturing and  Assembly, Warehousing, Marketing  and Sales |   |
| Hungary                            |       |       | 30,000     |                                          |       |          | 80         |                      |       | Manufacturing and Assembly, and  Warehousing |   |

 

We believe that thefacilities we now use are adequate for our current and anticipated operatingneeds. We own facilities in Italy, Slovakia and Switzerland. We lease the remainderof our facilities pursuant to lease agreements with expiration dates through2014 in North America and in Asia, and 2011 in Europe. We believe that we willbe able to renew these leases with similar terms upon expiration. If we cannotrenew, we believe that we could find other suitable premises without anymaterial adverse impact on our operations.

**ITEM3—LEGAL PROCEEDINGS**

The Company is involved incertain claims and legal proceedings which have arisen in the normal course ofbusiness. Management does not believe that the outcome of any currently pendingclaims or legal proceedings in which the Company is currently involved willhave a material adverse effect on the Company’s consolidated financialposition, results of operations or cash flow.

*Power-One, Inc. v.Artesyn Technologies, Inc.  *United StatesDistrict Court, Eastern District of Texas, Civil Action No. 2-05-CV-463(LED). We initiated this action against Artesyn Technologies on September 30,2005. The complaint alleges that certain products of Artesyn Technologiesinfringe certain of our patents that focus on technologies relating to digitalpower management and control. The complaint seeks injunctive relief against andcompensatory damages from Artesyn Technologies. Trial proceedings are in thestages of discovery and related procedural matters. A trial by jury isscheduled for August 2007.

We initiated a similarlawsuit against Silicon Laboratories, Inc. in December, 2005 forinfringement of certain of our patents. We settled this litigation with SiliconLaboratories as of July 20, 2006, and the lawsuit was dismissed withoutprejudice on July 21, 2006 in connection with the settlement.

**ITEM4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

No matters were submitted to a vote of securityholders, through the solicitation of proxies or otherwise, during the fourthquarter of the fiscal year ended December 31, 2006.

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**PART II**

**ITEM 5—MARKET FORREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES**

OurCommon Stock is listed on the NASDAQ Global Market and is traded under thesymbol “PWER.” The following table sets forth, for the quarterly periodsindicated, the range of high and low closing sale prices for our common stock.

|                | ** ** | **Year Ended December 31,** | ** ** |
|----------------|------------|--------------------------------------------|------------|
| ** **     | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| ** **     | ** ** | **High**                                   | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | 7.20                                       |       | 5.24 |   | 8.65 |   | 4.86 |   |
| Second Quarter |       | 7.98                                       |       | 5.63 |   | 6.43 |   | 4.18 |   |
| Third Quarter  |       | 7.34                                       |       | 5.35 |   | 6.35 |   | 4.31 |   |
| Fourth Quarter |       | 8.00                                       |       | 6.74 |   | 7.04 |   | 5.30 |   |

 

As of March 5, 2007, there were 16,618 holders ofrecord of our common stock.

We have not paid any cash dividends on our commonstock and do not anticipate paying cash dividends in the foreseeable future.

In May 2005, theCompany announced that it had received authorization from its Board ofDirectors to purchase up to $20 million of its outstanding common stock inopen-market transactions through December 31, 2006. The Company purchased$5.3 million of its outstanding common stock in open-market transactionsthrough December 31, 2006.

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

The information requiredby this item will be contained under the caption “Equity Compensation PlanInformation as of December 31, 2006” in our definitive Proxy Statementrelated to our Annual Meeting of Stockholders for Fiscal Year 2006, to be heldon April 24, 2007, and such information is incorporated herein byreference.

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**Performance Graph**

The following performance graph compares the yearlypercentage change in the Company’s cumulative total shareholder return to thecumulative total return of the NASDAQ Composite, the Russell 2000 Index, theRussell 3000 Index, and the Research Data Group Inc. (“RDG”) TechnologyComposite Index for each period from December 31, 2001 through December 31,2006. The comparison is based on the investment of $100 in each stock or indexon December 31, 2001 and includes the reinvestment of dividends. The totalreturn on the common stock is measured by dividing the difference between thecommon stock or index price at the end and the beginning of the measurementperiod by the common stock or index price at the beginning of the measurementperiod.

The Company believes thatthe peer-group of indices selected for inclusion in the graph arerepresentative for comparison purposes. The Russell 3000 Index is a major indexthat is used by third party corporate governance rates for evaluating theCompany’s corporate governance performance. The RDG Index contains companiesthat are closely aligned with the product markets and industries mostcomparable to the Company’s products and target markets.

**COMPARISON OF 5YEAR CUMULATIVE TOTAL RETURN***$100invested on 12/31/01 in stock or index-including reinvestment of dividends.Fiscal year ended December 31,

****

| **Year Ended December 31,** | ** ** | ** ** | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|--------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Power-One, Inc.                       |       | $          | 100.00     |     | $          | 54.47    |       | $        | 104.03     |     | $          | 85.69    |       | $        | 57.83      |   | $ | 69.93 |   |
| NASDAQ Composite                           |       | $          | 100.00     |     | $          | 69.66    |       | $        | 99.71      |     | $          | 113.79   |       | $        | 114.47     |   | $ | 124.20 |   |
| Russell 2000                               |       | $          | 100.00     |     | $          | 79.52    |       | $        | 117.09     |     | $          | 138.55   |       | $        | 144.86     |   | $ | 171.47 |   |
| Russell 3000                               |       | $          | 100.00     |     | $          | 78.46    |       | $        | 102.83     |     | $          | 115.11   |       | $        | 122.16     |   | $ | 141.35 |   |
| RDG Technology Composite                   |       | $          | 100.00     |     | $          | 62.44    |       | $        | 92.49      |     | $          | 95.27    |       | $        | 97.49      |   | $ | 106.14 |   |

 

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**ITEM 6—SELECTEDFINANCIAL DATA**

In the table below, weprovide selected consolidated historical financial and operating data. Weprepared this information using audited financial statements for the fiscalyears ended December 31, 2006, 2005, 2004, 2003 and 2002. When readingthis selected historical consolidated financial and operating data, it isimportant to read it along with “Item 7—Management’s Discussion and Analysis ofFinancial Condition and Operating Results” included in this Form 10-K.Historical results are not necessarily indicative of future results.

| ** **                                             | ** ** | **Fiscal Year Ended December 31,(1)**                                      | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2006(7)**                                                                                    | ** ** | **2005(6)** | ** ** | **2004(5)** | ** ** | **2003(3)(4)** | ** ** | **2002(2)** | ** ** |
| ** **                                             | ** ** | **(In millions, except per share amounts and percentages)** | ** ** |
| **STATEMENT OF OPERATIONS DATA:**                      |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                                              |       | $                                                                                              | 338.0      |   | $ | 261.6 |   | $ | 280.3 |   |   | $ | 256.3 |   |   | $ | 230.7 |   |
| Cost of goods sold                                     |       | 245.4                                                                                          |       | 184.9 |   | 182.4 |   |   | 161.7 |   |   | 234.7 |   |
| Gross profit (loss)                                    |       | 92.6                                                                                           |       | 76.7 |   | 97.9 |   |   | 94.6 |   |   | (4.0 | ) |
| Selling, general and  administrative expense           |       | 63.9                                                                                           |       | 58.6 |   | 67.8 |   |   | 62.4 |   |   | 59.3 |   |
| Engineering and quality  assurance expense             |       | 38.6                                                                                           |       | 36.9 |   | 42.2 |   |   | 40.8 |   |   | 34.7 |   |
| Amortization of  intangible assets                     |       | 4.0                                                                                            |       | 3.9 |   | 3.9 |   |   | 3.6 |   |   | 5.1 |   |
| Restructuring charge                                   |       | 0.4                                                                                            |       | 11.1 |   | 1.1 |   |   | 3.1 |   |   | 10.7 |   |
| Impairment of goodwill                                 |       | —                                                                                         |       | — |   | — |   |   | — |   |   | 67.6 |   |
| Asset impairment                                       |       | —                                                                                         |       | 5.1 |   | 2.0 |   |   | — |   |   | 42.6 |   |
| Total expenses                                         |       | 106.9                                                                                          |       | 115.6 |   | 117.0 |   |   | 109.9 |   |   | 220.0 |   |
| Income (loss) from  operations                         |       | (14.3                                                                                          | )          | (38.9 | ) | (19.1 | ) |   | (15.3 | ) |   | (224.0 | ) |
| Interest income                                        |       | 2.1                                                                                            |       | 2.3 |   | 1.8 |   |   | 1.6 |   |   | 1.7 |   |
| Interest expense                                       |       | (1.4                                                                                           | )          | (0.2 | ) | (0.6 | ) |   | (1.0 | ) |   | (1.1 | ) |
| Other income (expense),  net                           |       | (1.7                                                                                           | )          | 0.3 |   | (0.2 | ) |   | (4.5 | ) |   | 0.2 |   |
| Loss before provision  (benefit) for income  taxes.    |       | (15.3                                                                                          | )          | (36.5 | ) | (18.1 | ) |   | (19.2 | ) |   | (223.2 | ) |
| Provision (benefit) for  income taxes                  |       | (0.7                                                                                           | )          | 1.8 |   | 3.1 |   |   | (1.0 | ) |   | (12.2 | ) |
| Net loss                                               |       | $                                                                                              | (14.6      | ) | $ | (38.3 | ) | $ | (21.2 | ) |   | $ | (18.2 | ) |   | $ | (211.0 | ) |
| Basic and diluted loss  per common share               |       | $                                                                                              | (0.17      | ) | $ | (0.45 | ) | $ | (0.25 | ) |   | $ | (0.22 | ) |   | $ | (2.62 | ) |
| Basic and diluted  weighted average shares outstanding |       | 86.1                                                                                           |       | 85.0 |   | 83.8 |   |   | 82.5 |   |   | 80.4 |   |
| **SELECTED OPERATING DATA:**                           |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Gross profit (loss)  margin                            |       | 27.4                                                                                           | %          | 29.3 | % | 34.9 | % |   | 36.9 | % |   | (1.7 | )% |
| Depreciation and  amortization                         |       | $                                                                                              | 15.0       |   | $ | 14.9 |   | $ | 16.4 |   |   | $ | 16.0 |   |   | $ | 20.9 |   |
| Capital expenditures                                   |       | 5.6                                                                                            |       | 6.2 |   | 7.3 |   |   | 7.3 |   |   | 7.0 |   |
| Backlog(8)                                             |       | 98.9                                                                                           |       | 34.7 |   | 38.0 |   |   | 39.6 |   |   | 32.8 |   |
| Cash flows provided by (used in):                      |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Operating activities                                   |       | $                                                                                              | (25.9      | ) | $ | (5.3 | ) | $ | (0.8 | ) |   | $ | (8.6 | ) |   | $ | 31.4 |   |
| Investing activities                                   |       | (33.6                                                                                          | )          | 6.9 |   | (57.5 | ) |   | (3.7 | ) |   | (8.6 | ) |
| Financing activities                                   |       | 53.8                                                                                           |       | 2.5 |   | (8.0 | ) |   | 2.4 |   |   | 1.6 |   |
| **BALANCE SHEET DATA:**                                |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Working capital                                        |       | $                                                                                              | 144.2      |   | $ | 102.9 |   | $ | 116.7 |   |   | $ | 151.5 |   |   | $ | 150.3 |   |
| Total assets                                           |       | 449.3                                                                                          |       | 285.7 |   | 327.1 |   |   | 349.9 |   |   | 360.9 |   |
| Total long-term  debt(9)                               |       | 54.3                                                                                           |       | — |   | — |   |   | 9.2 |   |   | 9.5 |   |
| Total debt(10)                                         |       | 80.6                                                                                           |       | — |   | — |   |   | 11.2 |   |   | 10.2 |   |
| Total stockholders’ equity                        |       | 223.2                                                                                          |       | 224.5 |   | 270.0 |   |   | 275.3 |   |   | 279.1 |   |

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(1)          Our fiscal year is the 52- or 53-week periodending on the Sunday nearest to December 31. For clarity of presentationwe described year-ends presented as if the year ended on December 31. Assuch, the year ended December 31, 2004 represents a 53-week year andthe years ended December 31, 2006, 2005, 2003 and 2002 each represent a 52-weekyear.

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(2)          The year ended December 31, 2002includes pre-tax charges that consist of the following: restructuring charge of$10.7 million, goodwill and other asset impairment charge of$110.2 million, inventory charge of $73.0 million, a$39.9 million deferred tax valuation allowance and $6.5 million instock compensation charges and related payroll taxes primarily related to theemployer match of our 2001 Deferred Compensation Plan.

(3)          The year ended December 31, 2003includes a write-down of approximately $5.7 million, included in otherexpense, to reduce the book value of an investment held in a privately-ownedenterprise and a restructuring charge of $3.1 million for a reduction inforce and accruals related to an excess facility.

(4)          On February 14, 2003, we acquireddi/dt Inc. The purchase price for di/dt was approximately$17.5 million, which consisted of the following: a $2.0 million notereceivable from, as well as a $3.1 million cost basis investment in, di/dtprior to the acquisition; 1.4 million shares of the Company’s common stockvalued at $6.3 million at acquisition; $1.0 million in cash andacquisition costs; and 0.5 million shares of the Company’s common stockpaid as earn-out to the former shareholders of di/dt during 2003 and 2004valued at $5.1 million. Earn-out payments have been recorded as additionalgoodwill, and no earn-out provisions extended beyond December 31, 2004. Inaddition to the purchase price, the Company granted a cash bonus ofapproximately $1.0 million to the original founders of di/dt uponacquisition, which was recorded as compensation expense in 2003.

(5)          During 2004, we performed an impairmenttest in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 144. The results of these tests indicated that the manufacturingequipment at one of our European facilities was impaired and we recordednon-cash impairment charges of $0.7 million. In addition, we wrote downour Mexico building to fair value based on current market activity resulting innon-cash impairment charges of $1.3 million. We also recorded a$1.1 million write-off of an investment we own in a privately-heldtechnology company, which was recorded in other expense. The year ended December 31,2004 also includes pre-tax restructuring charges of $0.7 million relatedto severance and benefit payments, consolidation of excess facilities, contracttermination costs, and other shutdown costs, in accordance with SFAS 146and $0.4 million of restructuring charges for settlement payments andlegal fees related to additional personnel and legal costs resulting from theclosure of the Boston, Massachusetts facility during 2001.

(6)          During 2005, we announced a restructuringplan which was accounted for in accordance with SFAS 146. We recorded pre-taxcharges of $11.1 million for restructuring costs which included a workforcereduction in Europe and North America, and the charges were comprised ofseverance and related benefits, consolidation of excess facilities andcontinuing lease obligations thereon, contract termination costs, and othershutdown costs. During 2005, we alsoperformed impairment reviews in accordance with SFAS 144. As a result, weidentified certain long-lived assets associated with the 2005 restructuringwhose carrying value would not be recoverable from future cash flows, andrecorded an impairment charge of $5.1 million for these assets for the yearended December 31, 2005. These assets consisted of an owned building inNorway that was held for use and which was written down to fair market valueand then sold in 2005; leasehold improvements for leased facilities whoseoperations were closed during the year; and miscellaneous other long-livedassets that will no longer be used. We also determined that an investment in aforeign enterprise, recorded in other assets on the balance sheet, wasimpaired. The impairment charge of $2.0 million was recorded in other expenseand primarily resulted from a forecast reduction for the enterprise and therelated cash flow.

(7)          On October 23, 2006, we acquired thePower Electronics Group of Magnetek Inc. The purchase price was approximately$69.0 million, of which $50.0 million was borrowed, and $19.0 million was paidin cash including $2.9 million of direct acquisition costs, plus the assumptionof approximately $27.8 million in debt.

(8)          Consists of purchase orders havingdelivery dates scheduled within the following six months, and does not include “turns”business that is ordered, produced, and shipped all within the same period.

(9)          Includes current and long-term portions oflong-term debt and capital leases.

(10) Includesitems in footnote (9) above and short-term debt.

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**ITEM 7—MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Forward-LookingStatements**

Certain statementscontained in this Management’s Discussion and Analysis (MD&A), including,without limitation, statements containing the words “may,” “will,” “can,”“anticipate,” “believe,” “plan,” “estimate,” “continue,” and similarexpressions constitute “forward-looking statements.” Theseforward-looking statements reflect our current views with respect to futureevents and are based on assumptions and subject to risks and uncertainties. Youshould not place undue reliance on these forward-looking statements. Ouractual results could differ materially from those anticipated in these forward-lookingstatements for many reasons, including risks described in the Risk Factorssections and elsewhere in this filing. Except for our ongoing obligation todisclose material information as required by federal securities laws, we do notintend to update you concerning any future revisions to any forward-lookingstatements to reflect events or circumstances occurring after the date of thisreport. The following discussion should be read in conjunction with the RiskFactors as well as our financial statements and the related notes.

**Introduction**

We are a worldwide organization and leading designerand manufacturer of hundreds of high-quality brand name AC/DC and DC/DC powersupplies and converters and power management products. We sell our products tooriginal equipment manufacturers, distributors and service providers who valuequality, reliability, technology and service. We have hundreds of customers inthe communications, networking equipment, server/storage, computer,instrumentation, industrial, and other electronic equipment industries.

Our AC/DC power supplies are typically embedded in ourcustomers’ products and convert alternating current to direct current. Ourboard-mounted DC/DC products provide precise levels of DC power tosensitive electronic components embedded in our customers’ equipment. Our powermanagement products also provide precise levels of DC power to sensitiveelectronic components, but include elements of communications and control. Inaddition, our power management products are programmable via a graphical userinterface and offer our customers significant cost and time savings overtraditional DC/DC converters. Our DC power systems, which provide back-uppower, are sold primarily to telecommunications and Internet service providersworldwide.

In February 2005, we implemented a restructuringplan wherein we consolidated our division structure. The most significantcomponents of this activity involved the elimination of most DC power systemsoperations in Norway and their integration into our other existing lower-costlocations, as well as the elimination of certain manufacturing operations inNorth America and subsequent transfer of the manufacturing to our otherexisting lower-cost locations or to contract manufacturers. We incurred $16.2 millionof restructuring and asset impairment charges during 2005, of whichapproximately $5.1 million were non-cash in nature and primarily relatedto asset impairment charges for long-lived assets. The balance of the chargesrelated to severance and continuing lease obligations for closed facilities,the longest of which continues into 2011.

In October 2006 we completed the acquisition ofthe Power Electronics Group subsidiary of Magnetek, Inc. for approximately$69.0 million plus the assumption of approximately $27.8 million in debt. Wefinanced this acquisition with a $50.0 million term loan and $19.0 million ofcash and investments. The term loan matures 18 months from the date it was madeand carries an interest rate of 10% through October 2007 at an interestrate of 12% from October 2007 until maturity. The Power Electronics Groupis primarily engaged in the design, manufacture and sale of custom AC/DCproducts to original equipment manufacturers (OEMs) and provides us withenhanced capability in the custom AC/DC power supply market, a talentedworkforce of design engineers located in Europe, and an established low-cost 

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manufacturing facility inChina, all of which we expect will enable us to reduce our overall componentand manufacturing costs and broaden our product line and product capabilities.Due to the mix of custom products produced by the Power Electronics Group for highervolume applications, they tend to generate lower gross margins than we havetraditionally seen experienced.

We have two main product lines, referred to as “embeddedproducts” and “power systems.” Embedded products include AC/DC power supplies,DC/DC converters (including “brick” converters and POL converters), alternativeenergy, and smart motor control products. Power systems products include DCpower systems.

Our Silicon Power Systems (“SPS”) group isstrategically significant to the Company and is engaged in the design andproduction of highly innovative and efficient silicon-based digital powermanagement solutions for next generation DC/DC power conversion products in theIntermediate Bus Architecture (IBA) market. SPS’ maXyz® product line wasintroduced in 2003 and was developed specifically for the IBA market. In 2004,we introduced our new Z-OneTM digital power management architecture and our newZ-series product line which included a digital controller. We began fullproduction of these products near the end of the third quarter of 2004. C&DTechnologies is a second-source licensing partner for these products. We havecontinued to strengthen our Z-One Alliance by announcing the addition of Atmeland Micrel to the partnership during 2006 and by establishing a Z-AllianceTMwebsite at *www.Z-Alliance.org.* Duringthe first quarter of 2005, we introduced the Z-1000 No-BusTM family ofdigital point-of-load converters, which provides customers with digital powerconversion without requiring a change in architecture. In 2006, we introducedthe second generation of Digital Power Managers, which can controlnon-Power-One products on the customers’ printed circuit boards. In response toour new technology, certain of our competitors formed a consortium in anattempt to develop competing technologies. We filed a lawsuit onSeptember 30, 2005 against Artesyn Technologies, Inc. and onDecember 14, 2005 against Silicon Laboratories, Inc. for infringementof patents held by the Company related to this technology. The lawsuit againstSilicon Laboratories, Inc. was settled in 2006 and the settlement includedSilicon Laboratories, Inc. joining the Z-One Alliance and allowed forcertain technological collaborations. The remaining lawsuit against ArtesynTechnologies, Inc. seeks compensatory damages and a permanent injunctionto prohibit them from making, using, selling or offering to sell infringingproducts. We expect to reach the jury trial portion of this lawsuit during thesummer of 2007.

We have spent and anticipate spending significantcapital on R&D related to this developing area of power managementtechnology, but there can be no assurance that the market will accept theresulting technology or that we will recover our investment in this technologythrough sales of new products. The costs related to defending our patents andintellectual property may be material to our results of operations.

In May 2005, the Board of Directors authorizedthe purchase of up to $20 million in shares of our common stock with the intentto retire the shares. This authorization expired on December 31, 2006. Asof December 31, 2006, we had repurchased and retired 1.0 million shares ofour common stock for an aggregate purchase price of approximately $5.3million.

We generate asignificant percentage of our revenue internationally through sales officeslocated throughout Europe and Asia. In addition, manufacturing is performed inour own facilities in the Dominican Republic, China, Italy and Slovakia, and atcontract manufacturers in Asia. Approximately 30% of our products aremanufactured by our contract manufacturers. We are significantly increasing ourpresence in Asia to take advantage of a lower cost structure and closerproximity to certain major customers. However, we recognize that there areinherent risks to our international operations that may impact our business,which include but are not limited to the following:

·       Currencyrisk, since we will increasingly receive payments and purchase components inforeign currencies and we have historically not engaged in foreign currencyhedging activities;

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·       Riskassociated with expanding sales or manufacturing operations into economies andmarkets that may experience financial or political instability;

·       Differingdegrees of intellectual property protection outside of the United States;

·       Frequentchanges in laws and policies affecting trade, investment and taxes, includinglaws and policies relating to repatriation of funds and to withholding taxes,that are administered under very different judicial systems;

·       Relianceon overseas contract manufacturers that may not be able to manufacture anddeliver products in the quantity, quality and timeline required; and

·       Additionaltime constraints on management associated with overseeing an increased numberof operations that are geographically dispersed across Asia.

We are subject to local laws and regulations invarious regions in which we operate, including the European Union (“EU”). Onesuch law is the Restriction of Certain Hazardous Substances Directive (“RoHS”),which restricts the distribution of certain substances, including lead, withinthe EU and became effective on July 1, 2006. In addition to eliminatingand/or reducing the level of specified hazardous materials from our products,we are also required to maintain and publish a detailed list of all chemicalsubstances in our products. We believe that we have substantially complied withthis directive and do not believe this directive poses a material risk to ourbusiness.

We operate in an industrywhere quantity discounts, price erosion (and corresponding decreases inrevenues and margins), and product obsolescence due to technologicalimprovements are normal. While we see price erosion on most of the products wesell, we also see price erosion on many of the components we purchase forinclusion in our products, thereby decreasing our costs. Product obsolescencerefers to the tendency of small and less expensive products to replace largerand more expensive products. For example, the functions of a full-size DC/DCbrick converter were replaced by a half-brick, which was subsequently replacedby a quarter brick and then a 1/8th-brick, and this will eventually bereplaced by a 1/16th-brickor even smaller product. Each successive product is smaller but has retained orexpanded the functionality of its predecessor. In addition to the reduction insize, the dollar cost per watt is also reduced, which results in lower pricesfor the customer as well as lower cost for the manufacturer. Sales of eachsuccessor product typically replace sales of the predecessor product, makingthe predecessor product obsolete. These phenomena are normal in our industry,and we have experienced price erosion and product obsolescence in line withindustry trends. Price erosion and product obsolescence may negatively impactgross margins, and price erosion may also mask increases in unit sales (asopposed to revenues) of certain products.

**Critical AccountingPolicies**

Application of our accounting policies requiresmanagement to make judgments and estimates about the amounts reflected in thefinancial statements. Management uses historical experience and all availableinformation to make these estimates and judgments, although differing amountsmay be reported if there are changes in the assumptions and estimates.Estimates are used for, but not limited to, the accounting for the allowancefor doubtful accounts, inventory allowances, restructuring costs, impairmentcharges, depreciation and amortization, business combinations, and salesreturns. Management has identified the following accounting policies ascritical to an understanding of our financial statements and as areas mostdependent on management’s judgment and estimates.

***Revenue Recognition******—******We***recognizerevenue when persuasive evidence of an arrangement exists, title transfer hasoccurred, the price is fixed or readily determinable, and collectibility isprobable. We recognize revenue in accordance with Staff Accounting BulletinNo. 104, “Revenue Recognition.” Sales are recorded net of sales returnsand discounts, which are estimated at the time of shipment based uponhistorical data.

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We generally recognize revenue at the time of shipment(or at the time of inventory consumption for customers on Vendor ManagedInventory (“VMI”) programs) because this is the point at which revenue isearned and realizable and the earnings process is complete. For most shipments,title to shipped goods transfers at the shipping point, so the risks andrewards of ownership transfer once the product leaves our warehouse. Forshipments in which title transfers at a later date, revenue recognition isdelayed. Revenue is only recognized when collectibility is reasonably assured.Shipping and handling costs are included in cost of goods sold. We may chargeshipping and handling costs to customers, which are included in revenue.

We offer our distributors a standard agreement whichincludes payment terms, description of rights to return or exchange product,and price discounts. Under our standard agreement, payment is due within30 days of shipment of the product to the distributors. The distributorhas a right to return only if we discontinue a product that the distributor hason hand. The distributor has a right to exchange up to 5% of the dollar valueof products purchased within the prior six-month period, so long as thedistributor is currently purchasing at least the equivalent dollar value in newproduct. Estimated product exchanges or returns are accrued for at the time ofthe sale based on historical information in accordance with SFAS No. 48,“Revenue Recognition When Right of Return Exists.” Finally, we may give pricediscounts to a distributor at the time a purchase order is received from thedistributor for product that they will sell to a specific customer. The pricediscount is available for one year following issuance of the purchase order foritems listed on the purchase order. We accrue for the estimated price discountat the time revenue is recognized.

We have a joint venture in Asia which, along withcertain of our contract manufacturers, may purchase raw components and othergoods from Power-One, and sell finished goods back to Power-One as well as toother third parties. We record revenue on sales to the joint venture andcontract manufacturer only when the components and goods are for sales to thirdparties. When the joint venture or contract manufacturer purchases componentsthat will be assembled and sold back to us, no revenue is recorded because theearnings process has not been completed.

***Impairment ofLong-Lived Assets and Goodwill******—******We***reviewthe recoverability of the carrying value of long-lived assets using themethodology prescribed in SFAS No. 144, “Accounting for the Impairment andDisposal of Long-Lived Assets.” We review long-lived assets for impairmentwhenever events or changes in circumstances indicate that the carrying value ofsuch assets may not be recoverable. Upon such an occurrence, recoverability ofthese assets is determined by comparing the forecasted undiscounted net cashflows to which the assets relate, to the carrying amount. If the asset isdetermined to be unable to recover its carrying value, it is written down tofair value. Fair value is determined based on discounted cash flows, appraisedvalues or other information available in the market, depending on the nature ofthe assets. Methodologies for determining fair value are inherently based onestimates that may change, such as the useful lives of assets and our cash flowforecasts associated with certain assets. A change in these estimates mayresult in impairment charges, which would impact our operating results.

We review the carryingvalue of goodwill and non-amortizable intangible assets using the methodologyprescribed in SFAS No. 142, “Goodwill and Other Intangible Assets.” SFASNo. 142 requires that we not amortize goodwill, but instead subject it toimpairment tests on at least an annual basis and whenever circumstances suggestthat goodwill may be impaired. These impairment tests are also dependent onmanagement’s forecasts, which frequently change. A change in our forecasts mayresult in impairment charges.

***Restructuring Costs******—******We***recordrestructuring charges in accordance with SFAS No. 146, “Accounting forCosts Associated with Disposal Activities,” which requires that a liability fora cost associated with an exit or disposal activity be recognized when theliability is incurred, in contrast to the date of an entity’s commitment to anexit plan. Restructuring costs were related to the downsizing of operations and

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primarily consisted ofspecific charges that had been incurred or were to be incurred with no futureeconomic benefit. These charges included costs related to personnel severance,continuing lease obligations for vacant facilities, and certain contracttermination penalties and other shutdown costs. Calculation of therestructuring reserves includes management’s judgment regarding closedfacilities, which include assumptions about the length of time it will take forfacilities to be subleased as well as the likely sublease income amount.Changes in these estimates may impact our operating results.

***Deferred Income TaxAsset Valuation Allowance******—******We***record adeferred income tax asset in jurisdictions where the Company generates a loss.We also record a valuation allowance against these deferred income tax assetsin accordance with SFAS 109, “Accounting for Income Taxes,” when, inmanagement’s judgment, it is more likely than not that the deferred income taxassets will not be realized in the foreseeable future.

***Inventories******—******Inventories***arestated at the lower of cost (first-in, first-out method) or market. Slow movingand obsolete inventory are written down quarterly based on a comparison ofon-hand quantities to historical and projected usages. Additionally, reservesfor non-cancelable open purchase orders for components we are obligated topurchase in excess of projected usage, or for open purchase orders where themarket price is lower than the purchase order price, are recorded as otheraccrued expenses on the balance sheet. Calculation of inventory write-downsis based on management’s assumptions regarding projected usage of eachcomponent, which are subject to changes in market demand.

***Accounts Receivableand Allowance for Doubtful Accounts******—******We***establishthe allowance for doubtful accounts using the specific identification methodand also provide a reserve in the aggregate. Our estimates for calculating theaggregate reserve are based on historical information. Any changes to ourassumptions or estimates may impact our operating results.

***Business Combinations******—******We***accountfor our acquisitions utilizing the purchase method of accounting. Under thepurchase method of accounting, the total consideration paid is allocated to theunderlying assets and liabilities, based on their respective estimated fairvalues. The excess of the purchase price over the estimated fair values of thenet assets acquired is recorded as goodwill. Determining the fair value ofcertain acquired assets and liabilities, identifiable intangible assets inparticular, is subjective in nature and often involves the use of significantestimates and assumptions including, but not limited to: estimates of revenuegrowth rates; estimates of rates of return; royalty rates; and determination ofappropriate discount rates. These assumptions are generally made based onavailable historical information. Identifiable intangible assets with finitelives are amortized on a straight-line basis over their useful lives.

***Recent Pronouncementsand Accounting Changes******—***In February 2007, the FASB issuedSFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities,” which permits entities to choose to measure many financialinstruments and certain other items at fair value. SFAS No 159 also includes anamendment to SFAS No. 115, “Accounting for Certain Investments in Debt andEquity Securities” which applies to all entities with available-for-sale andtrading securities. This Statement is effective as of the beginning of anentity’s first fiscal year that begins after November 15, 2007. We areassessing the impact of SFAS No. 159 and have not determined whether itwill have a material impact on our results of operations or financial position.

***In***September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements.”  The Statement defines fair value, establishesa framework for measuring fair value in generally accepted accountingprinciples and expands disclosures about fair value measurements, and does notrequire any new fair value measurements. This Statement applies under otheraccounting pronouncements that require or permit fair value measurements. TheStatement is effective for the fiscal years beginning after November 15,2007. We are assessing the impact of SFAS No. 157 and have not determinedwhether it will have a material impact on our results of operations orfinancial position.

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In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109” (FIN 48). Theinterpretation clarifies the accounting for uncertainty in income taxesrecognized in a company’s financial statements in accordance with SFASNo. 109, “Accounting for Income Taxes.” Specifically, the pronouncementprescribes a recognition threshold and a measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. The interpretation also provides guidanceon the related derecognition, classification, interest and penalties,accounting for interim periods, disclosure and transition of uncertain taxpositions. The interpretation is effective for fiscal years beginning afterDecember 15, 2006. We are assessing FIN 48 and have not determined theimpact that the adoption of FIN 48 will have on our consolidated financialstatements.

**Results ofOperations**

Theyears ended December 31, 2006 and 2005 represent 52-week years andthe year ended December 31, 2004 represents a 53-week year. The followingtable represents our consolidated statements of operations as a percentage ofnet sales for the periods presented:

| ** **                                        | ** ** | **Fiscal Year Ended  December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                         |       | 100.0                                              | %          | 100.0 | % | 100.0 | % |
| Cost of goods  sold                               |       | 72.6                                               |       | 70.7 |   | 65.1 |   |
| Gross profit                                      |       | 27.4                                               |       | 29.3 |   | 34.9 |   |
| Selling, general  and administrative expense      |       | 18.9                                               |       | 22.4 |   | 24.2 |   |
| Engineering and  quality assurance expense        |       | 11.4                                               |       | 14.1 |   | 15.0 |   |
| Amortization of  intangibles                      |       | 1.2                                                |       | 1.5 |   | 1.4 |   |
| Restructuring  costs                              |       | 0.1                                                |       | 4.3 |   | 0.4 |   |
| Asset impairment                                  |       | —                                             |       | 1.9 |   | 0.7 |   |
| Loss from  operations                             |       | (4.2                                               | )          | (14.9 | ) | (6.8 | ) |
| Interest income                                   |       | 0.6                                                |       | 0.9 |   | 0.6 |   |
| Interest expense                                  |       | (0.4                                               | )          | (0.1 | ) | (0.2 | ) |
| Other income  (expense), net                      |       | (0.5                                               | )          | 0.2 |   | (0.1 | ) |
| Loss before  provision (benefit) for income taxes |       | (4.5                                               | )          | (13.9 | ) | (6.5 | ) |
| Provision  (benefit) for income taxes             |       | (0.2                                               | )          | 0.7 |   | 1.1 |   |
| Net loss                                          |       | (4.3                                               | )%         | (14.6 | )% | (7.6 | )% |

 

***Comparison ofFiscal Year Ended December 31, 2006 with Fiscal Year EndedDecember 31, 2005***

***Net Sales.******  ***Net salesincreased $76.5 million, or 29%, to $338.0 million for the year endedDecember 31, 2006 from $261.6 million for the year endedDecember 31, 2005. The increase in sales was attributable to ouracquisition of the Power Electronics Group during the fourth quarter of 2006 aswell as organic volume growth in sales across all product lines. Included inthe results for the year ended December 31, 2006 is 10 weeks of activityrelated to the Power Electronics Group, or $43.3 million of net sales. Weannounced several significant new customers during 2006 in the server/storageindustry and saw particular strength in existing customers in thecommunications, computer/retail, and transportation industries.

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Netsales for our two product lines were as follows, in millions:

| ** **        | ** ** | **Year Ended  December 31,  2006** | ** ** | **Year Ended  December 31,  2005** | ** ** |
|-------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Embedded products |       | $                                            | 247.0      |                                         | 73         | % | $ | 186.5 |   | 71 | % |
| Power systems     |       | 91.0                                         |       | 27                                           | %          | 75.1 |   | 29 | % |
| Total             |       | $                                            | 338.0      |                                         | 100        | % | $ | 261.6 |   | 100 | % |

 

Net sales by customercategory were as follows, in millions:

| ** **        | ** ** | **Year Ended  December 31,  2006** | ** ** | **Year Ended  December 31,  2005** | ** ** |
|-------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| OEMs              |       | $                                            | 236.4      |                                         | 70         | % | $ | 170.8 |   | 65 | % |
| Distributors      |       | 78.3                                         |       | 23                                           | %          | 70.1 |   | 27 | % |
| Service providers |       | 23.3                                         |       | 7                                            | %          | 20.7 |   | 8 | % |
| Total             |       | $                                            | 338.0      |                                         | 100        | % | $ | 261.6 |   | 100 | % |

 

Cisco Systems and its contract manufacturerscollectively were the only customer to exceed 10% of net sales in either of theyears ended December 31, 2006 or 2005 with $41.2 million, or 12% ofnet sales, and $39.6 million, or 15% of net sales, in each respective year.

Because of the acquisition of the Power ElectronicsGroup during the fourth quarter of 2006, we have redefined our end-markets andreclassified certain customers. Net sales for the years ended December 31,2006 and 2005 by end-markets under this new classification were as follows:

| ** **                      | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Communications                  |       |                                   | 59         | % |   |   | 61 | % |   |
| Instrumentation  and Industrial |       |                                   | 27         | % |   |   | 30 | % |   |
| Server, Storage  and Computer   |       |                                   | 7          | % |   |   | 3 | % |   |
| Other                           |       |                                   | 7          | % |   |   | 6 | % |   |
| Total                           |       |                                   | 100        | % |   |   | 100 | % |   |

 

Ourcombined year-end 180-day and 90-day backlog were as follows, inmillions :

| ** **                | ** ** | **Year Ended  December 31, 2006** | ** ** | **Year Ended  December 31, 2005** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| Combined 180-day  backlog |       |                                             | $          | 98.9                                             |       |   |   | $ | 34.7 |   |   |
| Combined 90-day  backlog  |       |                                             | $          | 89.1                                             |       |   |   | $ | 31.7 |   |   |

 

We generally sell our products pursuant to purchaseorders rather than long-term contracts. Backlog consists of purchase orderson-hand having delivery dates scheduled within the next six months. Customersmay cancel or reschedule most deliveries without penalty. Our backlog may notnecessarily be a reliable indicator of future revenue both because we do notmaintain long-term contracts with our customers so they are free to cancel ormodify their orders and also because a significant portion of our revenuesderives from “turns” business (that is, revenues from orders that are bookedand shipped within the same reporting period and that therefore do not appearas backlog at the end of a reporting period). The 180-day and 90-daybacklog of the newly acquired entity on December 31, 2006 was $61.2million and $56.0 million, respectively. The increase in backlog isprimarily a result of our acquisition of the Power Electronics Group during thefourth quarter of 2006. Since the Power Electronics Group is primarily engagedin the design, manufacture and sale of AC/DC products that are customized tothe particular 

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customer, lead times arelonger and orders are booked earlier than they would be for standard products.As such, the backlog for the products of the Power Electronics Group was, andwe expect it to continue to be, higher than for our other products. Our bookingswere not significantly impacted by any new Vendor Managed Inventory (“VMI”)programs during 2006. When customers adopt our VMI program, they no longerplace orders with us and instead use an automated forecasting model. We thenmanufacture products for the customer based on their forecast, and the customeruses the inventory as needed. As a result, under a VMI program, the booking andbilling occur simultaneously upon use of the product, and therefore there isalways a book-to-bill ratio of 1.0 for these programs. We may bring additionalVMI programs on-line in the future, which would result in higher “turns”business, lower backlog, and higher finished goods inventory. As such, webelieve that backlog may not necessarily be a reliable indicator of futureresults.

***Gross Profit.******  ***Gross profitfor the year ended December 31, 2006 was $92.6 million compared witha gross profit of $76.7 million for the year ended December 31, 2005.Our gross margin decreased to 27.4% for the year ended December 31, 2006from a gross margin of 29.3% for the same period in 2005. The decrease in grossmargin during the year ended December 31, 2006 was primarily because ofthe write-up of finished goods and work-in-process inventory of the newlyacquired business, in accordance with purchase accounting rules, that weresubsequently sold at an increased basis, as well as an overall shift in productmix toward higher volume and lower margin products. In addition to the shifttoward lower margin products in the embedded product line in 2006, the productsof the Power Electronics Group generally carry gross margins lower thanPower-One’s historical consolidated gross margin. During the year endedDecember 31, 2006, we incurred additional costs related to quality issuesat one of our contract manufacturers. We also recorded $2.7 million in cost ofgoods sold related to the write off of excess inventory and other inventoryadjustments during the year ended December 31, 2006 compared to $6.0 millionduring the year ended December 31, 2005. The gross margin of the PowerElectronics Group was 11.6% for the 10 weeks of activity in the year endedDecember 31, 2006, which included a $1.9 million fair market valuewrite-up of finished goods and work-in-process inventory.

***Selling, Generaland Administrative Expense.******  ***Selling,general and administrative expense increased $5.3 million, or 9%, to$63.9 million for the year ended December 31, 2006 from$58.6 million for the year ended December 31, 2005. As a percentageof net sales, selling, general and administrative expense decreased to 19% forthe year ended December 31, 2006 from 22% for the same period in 2005.

Selling expense increased $3.5 million, or 14%,to $27.8 million for the year ended December 31, 2006 from$24.3 million for the year ended December 31,  2005. The Power Electronics Group’s sellingexpense recorded for the 10 weeks of activity in the year endedDecember 31, 2006 was $1.9 million. The increase in selling expensesduring the year ended December 31, 2006 was primarily due to theadditional expense incurred by the Power Electronics Group for the 10 weeksthey were included as part of the Company, as well as increased commissions andbonus expense due to the increase in product revenue during 2006.

Administrative expense increased $1.8 million, or5%, to $36.1 million for the year ended December 31, 2006 from$34.3 million for year ended December 31, 2005. The increase of $1.8 millionwas primarily related to the 10 weeks of activity of  the Power Electronics Group in the year endedDecember 31, 2006 which was $1.7 million.

***Engineering andQuality Assurance Expense.******  ***Engineeringand quality assurance expense increased $1.6 million, or 4% to$38.6 million for the year ended December 31, 2006 from$36.9 million for year ended December 31, 2005. As a percentage ofnet sales, engineering and quality assurance expense decreased to 11% for theyear ended December 31, 2006 from 14% for the same period in 2005. ThePower Electronics Group incurred $2.0 million of engineering and qualityassurance expenses related to the 10 weeks of activity in the year endedDecember 31, 2006.

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Engineering expense increased $0.8 million, or 3%, to$31.7 million for the year ended December 31, 2006 from $30.9 million forthe same period in 2005. Quality assurance expense increased $0.8 million, or14%, to $6.9 million for the year ended December 31, 2006 from $6.0million for the same period in 2005. The increases in engineering and qualityassurance expense were primarily due to expense incurred by the PowerElectronics Group during the fourth quarter of 2006.

***Amortization ofIntangible Assets.******  ***Amortization of intangible assetsincreased by $0.1 million to $4.0 million for the year endedDecember 31, 2006 compared to $3.9 million for the year endedDecember 31, 2005. The increase of $0.1 million was due to $1.0 millionof amortization of intangibles resulting from the acquisition of the PowerElectronics Group during the fourth quarter of 2006 which was mostly offset bya $0.9 million decrease in amortization expense due to certain intangibleassets reaching the end of their amortizable lives.

***RestructuringCharge during Fiscal Year Ended December 31, 2006.******  ***AtDecember 31, 2006, we evaluated our remaining restructuring reserves andincreased our reserves by $0.4 million due to increases in certain continuinglease obligations.

***Loss fromOperations.***   As a result of the items above,loss from operations decreased $24.6 million to a loss of$14.3 million for the year ended December 31, 2006 from an operatingloss of $38.9 million for the same period in 2005.

***Interest Income(Expense), Net.***   Net interest income was $0.7million for the year ended December 31, 2006 compared to net interestincome of $2.2 million for the same period in 2005. The decrease in netinterest income primarily resulted from the use of $19.0 million of our cash tofinance a portion of the acquisition of the Power Electronics Group in the fourthquarter of 2006. Additionally, we borrowed $50.0 million in term debt with aninitial interest rate of 10% to finance the acquisition. The Power ElectronicsGroup incurred $0.4 million of interest expense during the 10 week period inthe year ended December 31, 2006 related to credit facility and long-termdebt obligations.

***Other Income(Expense), Net.***   Net other expense was$1.8 million for the year ended December 31, 2006, compared with netother income of $0.3 million for the year ended December 31, 2005.Net other expense during 2006 included $1.3 million in net losses related toforeign currency fluctuations, $0.4 million of realized loss on the saleof held-to-maturity securities that were sold prior to their maturity dates and$0.8 million in impairment losses related to an available-for-sale investmentthat experienced a decline in value that we deemed to be other-than-temporaryin accordance with FASB Staff Position FAS115-1/124-1, “The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments.” The impairmentloss was equal to the difference between the investment’s cost and its fair valueas of December 31, 2006.

***Provision forIncome Taxes.***   The benefit for income taxeswas $0.7 million for the year ended December 31, 2006 compared to aprovision for income taxes of $1.8 million for the year endedDecember 31, 2005. The benefit for income taxes for the year endedDecember 31, 2006 included approximately $1.6 million related to a foreigntax refund and $1.1 million related to a favorable European tax ruling duringthe second quarter ended June 30, 2006. We recorded a tax provision incertain European jurisdictions where we generated income during both yearsended December 31, 2006 and 2005. The Power Electronics Group recorded a tax provision of $0.2 million forthe 10 weeks of activity in the year ended December 31, 2006. In 2006, werecorded a deferred income tax asset valuation allowance of approximately$11.2 million compared to $14.3 million recorded during the sameperiod in 2005.

We record a deferredincome tax asset in jurisdictions where we generate a loss. We also record avaluation allowance against these deferred tax assets in accordance withSFAS 109, “Accounting for Income Taxes,” when, in management’s judgment,it is more likely than not that the deferred income tax assets will not berealized in the foreseeable future.

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***Comparison of Fiscal Year Ended December 31, 2005with Fiscal Year Ended December 31, 2004***

***Net Sales.******  ***Net salesdecreased $18.7 million, or 7%, to $261.6 million for the year ended December 31,2005 from $280.3 million for the year ended December 31, 2004. Salesdecreases for the year ended December 31, 2005 were attributable to volumedecreases in sales to certain communications and semiconductor automatic testequipment industry customers. The industry experienced a softening across allmarket segments during 2005 as compared to the moderate growth seen in theindustry during 2004.

Netsales for our two product lines are as follows, in millions:

| ** **        | ** ** | **Year Ended  December 31,  2005** | ** ** | **Year Ended  December 31,  2004** | ** ** |
|-------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Embedded products |       | $                                            | 186.5      |                                         | 71         | % | $ | 200.2 |   | 71 | % |
| Power systems     |       | 75.1                                         |       | 29                                           | %          | 80.1 |   | 29 | % |
| Total             |       | $                                            | 261.6      |                                         | 100        | % | $ | 280.3 |   | 100 | % |

 

Netsales by customer category are as follows, in millions:

| ** **        | ** ** | **Year Ended  December 31,  2005** | ** ** | **Year Ended  December 31,  2004** | ** ** |
|-------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| OEMs              |       | $                                            | 170.8      |                                         | 65         | % | $ | 196.1 |   | 70 | % |
| Distributors      |       | 70.1                                         |       | 27                                           | %          | 61.1 |   | 22 | % |
| Service providers |       | 20.7                                         |       | 8                                            | %          | 23.1 |   | 8 | % |
| Total             |       | $                                            | 261.6      |                                         | 100        | % | $ | 280.3 |   | 100 | % |

 

Cisco Systems and its contract manufacturerscollectively were the only customer to exceed 10% of net sales in either of theyears ended December 31, 2005 or 2004 with $39.6 million, or 15% ofnet sales, and $42.3 million, or 15% of net sales, in each respectiveyear.

Netsales by end-markets, as defined and classified prior to the reclassificationthat we implemented after our acquisition of the Power Electronics Group ofMagnetek, Inc. in October 2006, were as follows:

| ** **                        | ** ** | **Year Ended  December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Communications                    |       |                                   | 61         | % |   |   | 59 | % |   |
| Industrial                        |       |                                   | 17         | % |   |   | 16 | % |   |
| Transportation                    |       |                                   | 7          | % |   |   | 7 | % |   |
| ATE/Semiconductor  test equipment |       |                                   | 4          | % |   |   | 7 | % |   |
| Computer and  Retail              |       |                                   | 3          | % |   |   | 4 | % |   |
| Medical                           |       |                                   | 2          | % |   |   | 2 | % |   |
| Other                             |       |                                   | 6          | % |   |   | 5 | % |   |
| Total                             |       |                                   | 100        | % |   |   | 100 | % |   |

 

Ourcombined 180-day and 90-day backlog are summarized were as follows,in millions :

| ** **                | ** ** | **Year Ended  December 31, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| Combined 180-day  backlog |       |                                             | $          | 34.7                                             |       |   |   | $ | 38.0 |   |   |
| Combined 90-day  backlog  |       |                                             | $          | 31.7                                             |       |   |   | $ | 33.9 |   |   |

 

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Our combined 180-day backlog on December 31,2005 was $34.7 million, a decrease of 9% compared to backlog of$38.0 million on December 31, 2004. The decrease in backlog primarilyreflects the shorter lead times and a temporary build-up of inventory at ourcustomers during the fourth quarter of 2005. Our bookings were notsignificantly impacted by any new Vendor Managed Inventory (“VMI”) programsduring 2005. When VMI programs are initiated by customers, bookings arecanceled (or never placed) and replaced by a forecast. We then supply productto the customer per an agreed-upon electronic “signal” or an order placed toship the goods, and the customer uses the inventory as needed. Under a VMIprogram, the booking and billing occur simultaneously upon use of the product,and therefore there is always a book-to-bill ratio of 1.0 for these programs.We may bring additional VMI programs on-line in the future, which could resultin higher turns business and a lower backlog. As such, we believe that backlogmay not necessarily be a reliable indicator of future results over time.

***Gross Profit.******  ***Gross profitfor the year ended December 31, 2005 was $76.7 million compared witha gross profit of $97.9 million for 2004. As a percentage of net sales,gross profit percentage decreased to 29.3% for the year ended December 31,2005 from a gross profit percentage of 34.9% for the same period in 2004. Thedecrease in gross margin during the year ended December 31, 2005 wasprimarily due to two factors. First, the decrease of $18.7 million in salesrelated to the volume sold during 2005 compared to 2004 negatively impacted ourmargin by approximately 4%. Second, the gross margin was negatively impacted byapproximately 1 point by a write-off of excess inventory resulting from a shiftin our forecasted product mix as well as from product rationalization in ourtelecommunications power systems division in Europe. We recorded $6.0 millionin cost of goods sold related to the write off of the excess inventory andother inventory adjustments during the year ended December 31, 2005compared to $3.1 million related to write-offs of excess and obsolete inventoryrecorded during the year ended December 31, 2004.

***Selling, Generaland Administrative Expense.******  ***Selling,general and administrative expense decreased $9.2 million, or 14%, to$58.6 million for the year ended December 31, 2005 from$67.8 million for 2004. As a percentage of net sales, selling, general andadministrative expense decreased to 22% for the year ended December 31,2005 from 24% for the same period in 2004.

Selling expense decreased $5.2 million, or 18%,to $24.3 million for the year ended December 31, 2005 from$29.5 million for 2004. The decrease in selling expenses during the yearended December 31, 2005 was primarily due to the decrease in productrevenue during 2005, lower commission expense, reduced bonus expense, and dueto personnel reductions as a result of the restructuring plan implementedduring 2005.

Administrative expense decreased $4.0 million, or11%, to $34.3 million for the year ended December 31, 2005 from$38.3 million for 2004. The decrease was primarily due to cost savingsresulting from the restructuring of our North American and European operationsduring 2005.

***Engineering andQuality Assurance Expense.******  ***Engineeringand quality assurance expense decreased $5.3 million, or 12% to$36.9 million for the year ended December 31, 2005 from$42.2 million for 2004. As a percentage of net sales, engineering andquality assurance expense decreased to 14% for the year ended December 31,2005 from 15% for the same period in 2004.

Engineering expense decreased $5.5 million, or 15%, to$30.9 million for the year ended December 31, 2005 from $36.4 million forthe same period in 2004. The decreases in engineering expense were primarilydue to cost savings resulting from the restructuring of our North American andEuropean operations during 2005.

Quality assurance expenseincreased $0.2 million, or 4%, to $6.0 million for the year ended December 31,2005 from $5.8 million for the same period in 2004. Quality assurance expensefor the year ended December 31, 2005 included support costs related to thetransfer of production, both internally and 

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externallyto contract manufacturers, which resulted from the restructuring of our operationsin Norway and North America, as well as expense related to the RoHS initiative.

***Amortization of Intangible Assets.******  ***Amortizationof intangible assets remained constant at $3.9 million for both yearsended December 31, 2005 and 2004.

***Restructuring Charge during Fiscal Year Ended December 31,2005.******  ***Effective January 1, 2003, weadopted SFAS 146. During 2005, we recorded pre-tax cash restructuringcharges of $11.1 million in accordance with SFAS 146, of which $4.7 millionrelated to severance payments for a reduction in headcount and$6.2 million related to consolidation of excess facilities. The chargeswere a result of our plan to restructure our organization and to realign andconsolidate our telecommunications power systems business, as well asconsolidate our domestic facilities. We estimate that overall we will saveapproximately $30 million annually as a result of the restructuring initiativesimplemented and have seen an increasing portion of these savings during thelatter half of 2005. A summary of the restructuring activity recorded underSFAS 146 during the year ended December 31, 2005 is as follows, inmillions:

| ** **                     | ** ** | **Restructuring  Liabilities at  January 1, 2005** | ** ** | **Restructuring  Charges** | ** ** | **Applications of  Reserve** | ** ** | **Restructuring  Liabilities at  December 31, 2005** | ** ** |
|--------------------------------|------------|-------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------------|------------|---------------------------------------------------------------------|------------|
| Worldwide  workforce reduction |       |                                                              | $          | —                     |       |                              |       | $                                                                   | 4.7        |   |   |   | $ | 4.6 |   |   |   | $ | 0.1 |   |   |
| Facilities  closure            |       |                                                              | 1.9        |                       |       |                              | 6.2        |                                                                |       |   | 3.1 |   |   |   | 5.0 |   |   |
| Other                          |       |                                                              | 0.4        |                       |       |                              | 0.2        |                                                                |       |   | 0.6 |   |   |   | — |   |   |
|                           |       |                                                              | $          | 2.3                        |       |                              |       | $                                                                   | 11.1       |   |   |   | $ | 8.3 |   |   |   | $ | 5.1 |   |   |

 

***Asset Impairment.***   Asa result of the restructuring, during 2005 we recorded $5.1 million in assetimpairment non-cash charges, in accordance with SFAS 144, for our building inNorway that was sold during the fourth quarter of 2005, for leaseholdimprovements for leased facilities whose operations are being closed, and forother long-lived assets that will no longer be used.

***Loss from Operations.***   Asa result of the items above, loss from operations increased $19.8 millionto a loss of $38.9 million for the year ended December 31, 2005 froman operating loss of $19.1 million for the same period in 2004.

***Interest Income (Expense), Net.***   Netinterest income was $2.2 million for the year ended December 31, 2005compared to net interest income of $1.2 million for the same period in2004. The increase in net interest income between periods is largelyattributable to changes in our cash management plan as well as to the decreasein interest expense resulting from the repayment of our long-term debt duringthe quarter ended March 31, 2004.

***Other Income (Expense), Net.***   Netother income was $0.3 million for the year ended December 31, 2005,compared with net other expense of $0.2 million for 2004. Net other incomeduring 2005 included $1.7 million net gains related to foreign currencyfluctuations, and $0.6 million of proceeds from the settlement of a lawsuit,offset by $2.0 million related to the impairment of certain foreign investmentsresulting from a forecast reduction for those enterprises and the related cashflow. Components of other expense during 2004 include the write-down of$1.1 million related to an investment we hold in a privately-heldtechnology company and foreign currency losses, offset by income related to ourjoint venture and a VAT tax refund in Europe.

***Provision for Income Taxes.***   Theprovision for income taxes was $1.8 million for the year ended December 31,2005 at our profitable international locations, compared to the provision forincome taxes of $3.1 million for 2004. For the year ended December 31,2005, we recorded a deferred income tax asset valuation allowance ofapproximately $14.3 million compared to $10.1 million recorded duringthe same period in 2004.

We also record a valuationallowance against these deferred tax assets in accordance with SFAS 109, “Accountingfor Income Taxes,” when, in management’s judgment, it is more likely than notthat the deferred income tax assets will not be realized in the foreseeablefuture.

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**Liquidity and Capital Resources**

Ourcash and cash equivalents balance decreased $2.7 million, or 7%, to$34.4 million at December 31, 2006 from $37.1 million at December 31,2005. Our primary uses of cash in 2006 consisted of $63.3 million related to thepurchase of the Power Electronics Group in October 2006 which was funded withcash on hand as well as proceeds of a $50 million Promissory note issued by theCompany, $25.9 million for operating activities, $5.6 million for theacquisition of property and equipment and $1.0 million for the repurchase andretirement of 0.2 million shares of our own common stock. Our primary sourcesof cash in 2006 consisted of $29.1 million and $5.8 million related to the netproceeds from held to maturity and available for sale investments,respectively, $3.2 million from the issuance of common stock primarilyrelated to stock option exercises and $1.5 million related to the proceeds fromborrowings on our credit facilities net of the repayments of borrowing on our creditfacilities and long-term debt.

Our total net cash outflow related to the investment in thePower Electronics Group, for the year ended December 31 2006, was $63.3 millionwhich was comprised of the purchase price of $69.0 million, less $7.5 millionof cash acquired plus $1.8 million of cash expected to be received from Magnetek,Inc. for adjustments made to the preliminary purchase price based on theclosing balance sheet of the Power Electronics Group.

Netproceeds of $29.1 million from held to maturity investments included $37.5million of proceeds from the sale of debt securities of which $23.7 millionwas received in the third quarter from the sale of these debt securities beforetheir maturity dates in order to complete the acquisition of the PowerElectronics Group, less $8.4 million of such securities that had been purchasedearlier in the year. In connection with the sale of the securities, we realizeda loss of $0.4 million which has been recorded as other expense in theconsolidated statements of operations.

Cashused in operating activities of $25.9 million included an increase ininventories, accounts receivable, net, and accounts payable of $22.6 million, $19.2million and $18.3 million, respectively, and a decrease in accrued expenses of$2.5 million. The increase in inventories was primarily attributable torealized and expected revenue growth related to high volume programs,additional VMI programs, and buildups of production related to anticipatedproduction transfers between facilities. In addition, cash used in operatingactivities was net of a $1.6 million tax refund related to a North Americanfacility and included $1.4 million of cash payments related to ourrestructuring programs.

Wemaintain credit facilities with various banks in Europe and Asia. These creditfacilities were acquired primarily as a result of acquisitions in 1998, 2000and 2006. The aggregate limit on all credit facilities is approximately$38.6 million. The credit facilities bear interest on amounts outstandingat various intervals based on published market rates. At December 31,2006, the total outstanding balance on all credit facilities was $25.7 millionat a weighted average interest rate of 4.9%, and $2.0 million was committed toback letters of credit. After consideration of these commitments, $10.9 millionof additional borrowing capacity was available to us as of December 31,2006. Some credit agreements require our subsidiaries to maintain certainfinancial covenants and to provide certain financial reports to the lenders.From time to time a newly acquired subsidiary has not been in compliance withits debt covenants and was not in compliance with a financial covenantrequiring a maximum percentage of debt to equity at December 31, 2006. The$6.8 million outstanding balance under this credit agreement, as well as a $0.6million long-term note payable through 2008 at a 5.6% interest rate issued bythe same bank with similar financial covenants, have been classified as currentliabilities as we did not seek to obtain a waiver and consider this debtpotentially callable by the bank. We do not expect there to be a materialadverse impact on our liquidity position related to the potentially callabledebt.

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AtDecember 31, 2006, we were in compliance with all other debt covenants. AtDecember 31, 2005, we had no outstanding balance on any credit facilityand were in compliance with all debt covenants.

We also owe $50 million under a promissory note thatwe issued in connection with our acquisition of the Power Electronics Group. Thenote matures 18 months from the date it was made and may be prepaid withoutpenalty or premium at any time. Interest on the outstanding principal balanceof the Note will accrue at a rate of 10% per annum until the first anniversarydate of the Note, and then will accrue at a rate of 12% thereafter.

Additionally, through our acquisition of the PowerElectronics Group we have certain long-term notes payable through fiscal year2011. Amounts outstanding at December 31, 2006, were $4.3 million and boreinterest at various rates ranging from 2% to 8% at a weighted-average interestrate of 3.6%. The long-term notes payable agreements require our subsidiary toprovide certain financial reports to the lender but do not require compliancewith any financial covenants.

At December 31, 2005, the Company had nooutstanding balance on any long-term borrowing arrangement.

We currently anticipate that our total capitalexpenditures for 2007 will be in the range of $13 to $15 million, primarily formanufacturing equipment and process improvements, equipment related to researchand development and product development, additions and upgrades to ourfacilities and information technology infrastructure, and other administrativerequirements. However, the amount of these anticipated capital expenditureslikely will change during the year based on changes in expected revenues, ourfinancial condition and the general economic climate.

Based on current plans and business conditions, webelieve our existing working capital and borrowing capacity, coupled with thefunds generated from our operations, will be sufficient to meet our liquidityrequirements for the next twelve months. However, if we make another significantacquisition for cash, it may be necessary to raise additional debt or equity tofund all or a portion of the purchase price.

Below we identify and disclose all of our significantoff balance sheet arrangements and related party transactions. We do notutilize special purpose entities or have any known financial relationships withother companies’ special purpose entities.

*OperatingLeases.**  *Weenter into operating leases where the economic climate is favorable. Theliquidity impact of operating leases generally is not material.

*PurchaseCommitments.**  *Wehave purchase commitments for materials, supplies, services, and property,plant and equipment as part of the normal course of business. Commitments topurchase inventory at above-market prices have been reserved. Certainsupply contracts may contain penalty provisions for early termination. Based oncurrent expectations, we do not believe that we are reasonably likely to incurany material amount of penalties under these contracts.

*OtherContractual Obligations.**  *We do not have material financial guarantees that arereasonably likely to affect liquidity.

*RelatedParties.**  *SFHolding Corp., an affiliate of both PWER Bridge, LLC and Stephens Inc., is ourlargest stockholder. From time to time Stephens, Inc. has providedfinancial advisory services to us, although they provided no financial advisoryservices to us during the years ended December 31, 2006, 2005 and 2004. Wehad no payables to Stephens, Inc., at December 31, 2006 and 2005. Aformer officer of Stephens, Inc. who is a current officer of The StephensGroup, an affiliate of Stephens, Inc., is on our Board of Directors. Duringthe year ended December 31, 2006, we borrowed $50.0 million from PWERBridge, LLC to finance our acquisition of the Power Electronics Group ofMagnetek, Inc. PWER Bridge, LLC is an affiliate of Stephens Inc. StephensInc. served as financial advisor to Magnetek, Inc. in connection with ourpurchase of the Power Electronics Group.

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We maintain minority ownership in a joint venturelocated in China. The joint venture is accounted for and recorded on ourbalance sheet under the equity-method.

The joint venture may purchase raw components andother goods from us and may sell finished goods to us as well as to other thirdparties. We record revenue on sales to the joint venture only when thecomponents and goods are for sales to third parties. When the joint venture purchasescomponents that will be assembled and sold back to us, we record no revenue. Wealso have significant and similar relationships with contract manufacturers.These contract manufacturers may purchase raw components from and sell finishedgoods back to us. No revenue is recognized for these transactions. Revenue isrecognized only when the products are for sale to third parties.

During the year ended December 31, 2005, werecorded $0.6 million in revenue related to the joint venture. No revenue wasrecognized related to the joint venture or during the years ended December 31,2006 and 2004. The Company paid $8.7 million, $6.4 million, and $4.9 millionfor inventory purchased from the joint venture during the years ended December31, 2006, 2005, and 2004, respectively. At December 31, 2006 and 2005, weowed the joint venture approximately $1.2 million and $0.3 million,respectively. 

One of our Board of Directors is the Chief Executive Officerof Benchmark Electronics, a contract manufacturer to whom we sell products. Duringthe years ended December 31, 2006, 2005 and 2004, we recognized revenue onsales to Benchmark Electronics in the amounts of $1.2 million, $1.0 million, and$0.7 million, respectively. At December 31, 2006 and 2005, we were owed$0.2 million by Benchmark Electronics.

We spent approximately $0.2 million, $0.1 million,  and less than $0.1 million during the yearsended December 31, 2006, 2005 and 2004, respectively, for lodging Companypersonnel in a Dominican Republic hotel in which our President and ChiefOperating Officer, Brad Godfrey, owns a minority interest.

*Summaryof Contractual Obligations and Commitments.**  *A summary of our future contractualpayments related to lease obligations, non-cancelable open purchase orders andlong-term debt is as follows (in millions):

| **Year Ending December 31,** | ** ** | ** ** | ** ** | **Operating  Leases(1)** | ** ** | **Non-Cancelable  Purchase  Orders** | ** ** | **Long-Term  Debt  Obligations** | ** ** | **Estimated  Interest  Obligations(2)** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|------------|------------|--------------------------|------------|--------------------------------------|------------|----------------------------------|------------|-----------------------------------------|------------|-----------|------------|
| 2007                                        |       |       | $          | 5.0                      |       |                                 |       | $                                | 4.4        |                                    |       |      | $          | 1.9 |   |   |   | $ | 8.9 |   |   | $ | 20.2 |   |
| 2008                                        |       |       | 3.9        |                     |       |                                 | —     |                             |       |                                    | 51.8       |      |       |   | 3.8 |   |   | 59.5 |   |
| 2009                                        |       |       | 3.0        |                     |       |                                 | —     |                             |       |                                    | 0.2        |      |       |   | — |   |   | 3.2 |   |
| 2010                                        |       |       | 2.6        |                     |       |                                 | —     |                             |       |                                    | 0.2        |      |       |   | — |   |   | 2.8 |   |
| 2011                                        |       |       | 1.6        |                     |       |                                 | —     |                             |       |                                    | 0.2        |      |       |   | — |   |   | 1.8 |   |
| 2012 and  thereafter                        |       |       | 2.9        |                     |       |                                 | —     |                             |       |                                    | —     |      |       |   | — |   |   | 2.9 |   |
| Total                                       |       |       | $          | 19.0                     |       |                                 |       | $                                | 4.4        |                                    |       |      | $          | 54.3 |   |   |   | $ | 12.7 |   |   | $ | 90.4 |   |

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(1)          Approximately$5.2 million of the operating lease commitments above were reserved for inthe restructuring charge accrual as of December 31, 2006.

(2)          We calculated estimatedinterest payments for long-term debt as follows: for fixed-rate term debt, wecalculated interest based on the applicable rates and payment dates; forvariable-rate term debt, we calculated interest based on the most recentapplicable interest rates in effect.

For the year ended December 31, 2007, ourcalculation of estimated interest payments includes $1.4M of interest paymentsrelated to a $6.8 million credit agreement, payable through 2013, and $0.6million term loan, payable through 2008, that were reclassified from long termdebt to current liabilities at December 31, 2006 as we did not seek toobtain a waiver for our noncompliance with a financial 

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covenant requiring a maxiumum percentage of debt toequity and consider the debt potentially callable by the bank.

Estimated interestpayments for the year ended December 31, 2007 include $1.0 million ofinterest related to our $50 million Promissory Note that was accrued for theyear ended December 31, 2006 but not paid until January 2007.

**ITEM 7A—QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Market risks relating to our operations resultprimarily from changes in interest rates on outstanding financial debtinstruments and changes in foreign currency exchange rates.

***Debt.******  ***Our exposureto interest rate risk results from financial debt instruments that we enter. Wemay also enter into derivative financial instrument transactions, such asswaps, in order to manage or reduce our exposure to interest rate changesrelated to our indebtedness. However, under no circumstances do we enter intoderivative or other financial instrument transactions for speculative purposes.We are exposed to cash flow risk due tochanges in market interest rates related to our outstanding debt. For example,in Europe our variable long term debt bears interest on borrowings outstandingat various time intervals and is based on the Euro Interbank Offered Rate(EURIBOR). Our principal risk with respect to our variable long-term debt is tochanges in this market rate.

Thetable below presents principal cash flows and related weighted-averageinterest rates for our credit facilities and long-term debt obligations at December 31,2006 by expected maturity dates. The information is presented in U.S. dollarequivalents, our reporting currency, and parenthetically in Eurodollar or SwissFrancs, where applicable. Additionally, the U.S. dollar equivalent carryingvalue of Eurodollars or Swiss Francs denominated debt is sensitive to foreigncurrency exchange rates. However, a 10% change in the U.S. dollar exchange rateagainst these currencies would not be expected have a significant effect on ourfuture earnings.

| ** **                | ** ** | **Expected Maturity Date**                                       | ** ** | ** ** | ** ** | **Fair** | ** ** |
|---------------------------|------------|----------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| ** **                | ** ** | **2007**                                                                   | ** ** | **2008**   | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Value** | ** ** |
| ** **                | ** ** | **(Amounts in millions, except for percentages)** | ** ** |
| **Credit  Facilities:**   |       |                                                                       |       |       |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Variable Rate  (EUR 18.4) |       | $                                                                          | 24.3       |       | $          | —   |       | $ | — |   | $ | — |   | $ | — |   |   | $ | — |   |   | $ | 24.3 |   | $ | 24.3 |   |
| Average Interest Rate     |       | 5.0                                                                        | %          |       |       |     |       |   |   |   |   |   |   |   |   | 5.0 | % |   |   |
| Variable Rate (CHF  1.7)  |       | $                                                                          | 1.4        |       | $          | —   |       | $ | — |   | $ | — |   | $ | — |   |   | $ | — |   |   | $ | 1.4 |   | $ | 1.4 |   |
| Average Interest Rate     |       | 3.1                                                                        | %          |       |       |     |       |   |   |   |   |   |   |   |   | 3.1 | % |   |   |
| **Notes  Payable:**       |       |                                                                       |       |       |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Variable Rate  (EUR 0.5)  |       | $                                                                          | 0.6        |       | $          | —   |       | $ | — |   | $ | — |   | $ | — |   |   | $ | — |   |   | $ | 0.6 |   | $ | 0.6 |   |
| Average Interest Rate     |       | 5.6                                                                        | %          |       |       |     |       |   |   |   |   |   |   |   |   | 5.6 | % |   |   |
| **Long-term  Debt:**      |       |                                                                       |       |       |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed Rate (USD)          |       | $                                                                          | —     |       | $          | 50.0     |       | $ | — |   | $ | — |   | $ | — |   |   | $ | — |   |   | $ | 50.0 |   | $ | 50.0 |   |
| Average Interest Rate     |       |                                                                       |       | 10.7       | %          |     |       |   |   |   |   |   |   |   |   | 10.7 | % |   |   |
| Fixed Rate (EUR  1.7)     |       | $                                                                          | 0.9        |       | $          | 0.7      |       | $ | 0.2 |   | $ | 0.2 |   | $ | 0.2 |   |   | $ | — |   |   | $ | 2.2 |   | $ | 2.2 |   |
| Average Interest Rate     |       | 3.5                                                                        | %          | 2.0        | %          | 2.0      | %          | 2.0 | % | 2.0 | % |   |   |   |   | 2.6 | % |   |   |
| Variable Rate  (EUR 1.6)  |       | $                                                                          | 1.0        |       | $          | 1.1      |       | $ | — |   | $ | — |   | $ | — |   |   | $ | — |   |   | $ | 2.1 |   | $ | 2.1 |   |
| Average Interest  Rate    |       | 4.7                                                                        | %          | 4.7        | %          |     |       |   |   |   |   |   |   |   |   | 4.7 | % |   |   |

*** ***

***Foreign Currency.***   Asignificant portion of our business operations are conducted in variouscountries in Europe and Asia. As a result, we have a certain degree of marketrisk with respect to our cash flows due to changes in foreign currency exchangerates when transactions are denominated in currencies other than our functionalcurrency, including inter-company transactions. Historically, we have notactively engaged in 

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substantialexchange rate hedging activities, and at December 31, 2006, we had notentered into any significant foreign exchange contracts.

**ITEM 8—FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

The financial statementsand supplementary data listed in Item 15(a)(1) hereof are incorporatedherein by reference and are filed as part of this Annual Report on Form 10-Kbeginning on page F-1.

**ITEM 9—CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES**

None

**ITEM 9A—CONTROLSAND PROCEDURES**

**Evaluation ofDisclosure Controls and Procedures**

Disclosure controls and procedures are designed toensure that information required to be disclosed in our periodic reports filedor submitted under the Securities Exchange Act of 1934 (“Exchange Act”) isrecorded, processed, summarized and reported within the required time periods.

As of December 31,2006, we had carried out an evaluation of our disclosure controls andprocedures under the supervision and with the participation of our ChiefExecutive Officer and our Chief Financial Officer of the effectiveness of our disclosure controls and procedures.Based on this evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that such disclosure controls and procedures, as defined inExchange Act Rules 13a—15(e) and 15d—15(e), are effective to ensurethat information required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in Securities and Exchange Commission rules andforms. We review our disclosure controls and procedures on an ongoing basis andmay from time to time make changes aimed at enhancing their effectiveness andto ensure that they evolve with our business.

**Management’s Reporton Internal Control Over Financial Reporting**

Our management is responsible for establishing andmaintaining adequate internal control over our financial reporting, as definedin Exchange Act Rules 13a—15(f). Internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with accounting principles generally accepted in theUnited States of America.

Our internal control over financial reporting includesthose policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of our assets; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States of America, and that receipts and expendituresare being made only in accordance with authorizations of our management anddirectors; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of our assetsthat could have a material effect on the financial statements.

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

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Under the supervision andwith the participation of our management, including our Chief Executive Officerand our Chief Financial Officer, we conducted an evaluation of theeffectiveness of internal control over financial reporting based on thecriteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission. Based on our evaluation, our management concluded that ourinternal control over financial reporting was effective as of December 31,2006. Our evaluation of and conclusion on the effectiveness of internal controlover financial reporting excludes the Power Electronics Group of Magnetek, Inc.,acquired by us on October 23, 2006. The Power Electronics Group ofMagnetek, Inc. contributed approximately 13% of our total net sales forthe year ended December 31, 2006 and constituted less 1% of our net assetsand 33% of our total assets at December 31, 2006. Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2006 has been audited by Deloitte &Touche LLP, an independent registered public accounting firm, as stated intheir report which is included herein. Deloitte and Touche, LLP has also issuedan audit report on the consolidated financial statements and supplementalschedule included herein. 

**Report ofIndependent Registered Public Accounting Firm**

To the Board ofDirectors and Stockholders of

Power One, Inc.:

Camarillo, California

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting, that Power One, Inc. and subsidiaries (the “Company”)maintained effective internal control over financial reporting as of December 31,2006, based on the criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission. As described in Management’s Report on Internal ControlOver Financial Reporting, management excluded from its assessment the internalcontrol over financial reporting of the Power Electronics Group, which wasacquired on October 23, 2006, and whose financial statements constitute lessthan 1% of net assets and 33% of total assets, respectively, and 13 percent of totalnet sales of the consolidated financial statement amounts as of and for theyear ended December 31, 2006. Accordingly, our audit did not include theinternal control over financial reporting at the Power Electronics Group. TheCompany’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded 

43

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as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of December 31,2006, is fairly stated, in all material respects, based on the criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31,2006, based on the criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), the consolidatedfinancial statements and financial statement schedule as of and for the yearended December 31, 2006, of the Company and our report dated March 16,2007 expressed an unqualified opinion on those financial statements and thefinancial statement schedule.

Deloitte & ToucheLLPLos Angeles, CaliforniaMarch 16, 2007

**Changes In InternalControl Over Financial Reporting**

There have been nosignificant changes in our internal control over financial reporting, asdefined in Exchange Act Rules 13a-15, during the fourth fiscalquarter of 2006 that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

**ITEM 9B—OTHERINFORMATION**

Not applicable.

44

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**PART III**

**ITEM 10—DIRECTORSAND EXECUTIVE OFFICERS OF THE COMPANY**

The information relating to our directors and nomineesrequired by this item will be contained under the caption “Proposal 1: Electionof Directors” in our definitive Proxy Statements related to our Annual Meetingof Stockholders for Fiscal Year 2006, to be held on April 24, 2007, andsuch information is incorporated herein by reference.

The information relating to our executive officersrequired by this item is included herein in Part I, Item 1 under thecaption “Executive Officers of the Registrants,” and such information isincorporated by reference into this section.

The information required pursuant to Item 405 ofRegulation S-K will be contained under the caption “Section 16(a) BeneficialOwnership Reporting Compliance” in our Proxy Statement related to our AnnualMeeting of Stockholders for Fiscal Year 2006, to be held on April 24,2007, and such information is incorporated herein by reference.

The information required pursuant to Item 406 ofRegulation S-K is presented below.

We adopted a senior officer code of ethics thatspecifically applies to our principal executive officer, principal financialofficer, and all associated principal corporate and divisional/business unitfinancial managers. This code of ethics is posted in the “Governance” sectionwithin the “Investor Relations” pages of our Website. The Internet addressfor our Website is *www.power-one.com*.

We intend to satisfy thedisclosure requirement under Item 10 of Form 8-K regarding anyamendment to, or waiver of, a provision of this code of ethics by posting suchinformation on our website, within the “Governance” section of our website perthe address specified above.

**ITEM 11—EXECUTIVECOMPENSATION**

The information requiredby this item will be contained under the caption “Executive OfficerCompensation” in our Proxy Statement related to our Annual Meeting ofStockholders for Fiscal Year 2006, to be held on April 24, 2007, and suchinformation is incorporated herein by reference.

**ITEM 12—SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

The information requiredby this item will be contained under the caption “Security Ownership of CertainBeneficial Owners and Management” in our Proxy Statement related to our AnnualMeeting of Stockholders for Fiscal Year 2006, to be held on April 24,2007, and such information is incorporated herein by reference.

**ITEM 13—CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

The information called forby this item will be contained under the caption “Other Information—CertainRelationships and Related Transactions” in our Proxy Statement related to ourAnnual Meeting of Stockholders for Fiscal Year 2006, to be held on April 24,2007, and is incorporated herein by reference.

**ITEM 14—PRINCIPALACCOUNTANT FEES AND SERVICES**

The information called for by this item will becontained under the captions “Ratification of Independent Auditors—PrincipalAccountant Fees and Services” in our Proxy Statement related to our AnnualMeeting of Stockholders for Fiscal Year 2006, to be held on April 24,2007, and is incorporated herein by reference.

45

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**PART IV**

**ITEM 15—EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

**(a)(1)****              FINANCIALSTATEMENTS**

Thefollowing financial statements are filed as a part of this Annual Report onForm 10-K:
| POWER-ONE, INC.                                                      | ** ** | ** ** | ** ** | **Page** |
|----------------------------------------------------------------------|------------|------------|------------|----------|
| Report of Independent  Registered Public Accounting Firm             |       | F-2        |
| Consolidated Statements of Operations                                |       | F-3        |
| Consolidated Balance Sheets                                          |       | F-4        |
| Consolidated Statements of Comprehensive  Loss                       |       | F-5        |
| Consolidated Statements of Stockholders’  Equity                |       | F-6        |
| Consolidated Statements of Cash Flows                                |       | F-7        |
| Notes  to Consolidated Financial Statements                          |       | F-9        |
| Quarterly Financial  Data for the 2006 and 2005 Quarters (Unaudited) |       | F-38       |

 

**(a)(2)**              SCHEDULES

Thefollowing financial statement schedule is filed as a part of this Annual Reporton Form 10-K and is incorporated herein by reference.
| POWER-ONE, INC.                                 | ** ** | ** ** | ** ** | **Page** |
|-------------------------------------------------|------------|------------|------------|----------|
| Schedule II: Valuation  and Qualifying Accounts |       | S-1        |

 

**(c)**                               EXHIBITS

The exhibit index on page S-2 is herebyincorporated by reference.

46

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Act of1934, as amended, the registrant has duly caused this Annual Report onForm 10-K to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                           | POWER-ONE, INC. |
|---------------------------|----------------------|
|                      | By:                  | /s/  WILLIAM T. YEATES |
|                      |                 | William T. Yeates |
|                      |                 | *Chief  Executive Officer* |
| Date: March 16, 2007 |                 |

 

**POWER OF ATTORNEY**

We the undersigned directors and officers ofPower-One, Inc. hereby constitute and appoint William T. Yeates andPaul E. Ross, or any of them, our true and lawful attorneys and agents, to doany and all acts and things in our name and behalf in our capacities asdirectors and officers and to execute any and all instruments for us and in ournames in the capacities indicated below, that said attorneys and agents, oreither of them, may deem necessary or advisable to enable said corporation tocomply with the Securities and Exchange Act of 1934, as amended, any rules,regulations, and requirements of the SEC, in connection with this Annual Reporton Form 10-K, including specifically, but not limited to, power andauthority to sign for us or any of us in our names and in the capacitiesindicated below, any and all amendments and supplements to this Annual Reporton Form 10-K, and we hereby ratify and confirm all that the saidattorneys and agents, or any of them, shall do or cause to be done by virtuehereof.

Pursuantto the requirements of the Securities Act of 1934, as amended, this Annual Reporton Form 10-K has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicatedbelow.
|                         | **Signature** | ** **                                                                                        | ** ** | ** **          | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-------------------------|---------------|---------------------------------------------------------------------------------------------------|------------|---------------------|-----------|------------|------------|------------|----------|------------|
| /s/ WILLIAM T. YEATES   |          | Chief Executive Officer (Principal Executive Officer),  Director                                  |       | March 16, 2007 |
| (William  T. Yeates)    |          |                                                                                              |
| /s/ PAUL E.  ROSS       |          | Vice President—Finance, Treasurer and Chief Financial  Officer (Principal Financial Officer) |       | March 16, 2007 |
| (Paul  E. Ross)         |          |                                                                                              |
| /s/ STEVEN J.  GOLDMAN  |          | Chairman of the Board of Directors                                                                |       | March 16, 2007 |
| (Steven  J. Goldman)    |          |                                                                                              |
| /s/ KENDALL R.  BISHOP  |          | Director                                                                                          |       | March 16, 2007 |
| (Kendall  R. Bishop)    |          |                                                                                              |
| /s/ JON E. M.  JACOBY   |          | Director                                                                                          |       | March 16, 2007 |
| (Jon  E. M. Jacoby)     |          |                                                                                              |
| /s/ JAY  WALTERS        |          | Director                                                                                          |       | March 16, 2007 |
| (Jay  Walters)          |          |                                                                                              |
| /s/ MARK  MELLIAR-SMITH |          | Director                                                                                          |       | March 16, 2007 |
| (Mark  Melliar-Smith)   |          |                                                                                              |
| /s/ GAYLA J.  DELLY     |          | Director                                                                                          |       | March 16, 2007 |
| (Gayla J. Delly)        |          |                                                                                              |

** **

47

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**FINANCIALSTATEMENTS**

The following financialstatements are filed as a part of this Report:

**POWER-ONE, INC.**

|                                                                      | ** ** | **Page** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|
| Report of Independent  Registered Public Accounting Firm             |       | F-2      |       |
| Consolidated Statements of Operations                                |       | F-3      |       |
| Consolidated Balance Sheets                                          |       | F-4      |       |
| Consolidated Statements of Comprehensive  Loss                       |       | F-5      |       |
| Consolidated Statements of Stockholders’  Equity                |       | F-6      |       |
| Consolidated Statements of Cash Flows                                |       | F-7      |       |
| Notes to Consolidated Financial Statements                           |       | F-9      |       |
| Quarterly Financial Data for the 2006 and 2005  Quarters (Unaudited) |       | F-38     |       |
| Supplemental Schedule II: Valuation and Qualifying  Accounts         |       | S-1      |       |

 

F-1

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofPower One, Inc.:Camarillo, California

We have audited the accompanying consolidated balancesheets of Power One, Inc. and its subsidiaries (the “Company”) as of December 31,2006 and 2005, and the related consolidated statements of operations,comprehensive loss, stockholders’ equity, and cash flows for each of the threeyears in the period ended December 31, 2006. Our audits also included thefinancial statement schedule listed in the Index at Item 15. These financialstatements and the financial statement schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thefinancial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of the Companyand its subsidiaries as of December 31, 2006 and 2005, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2006, in conformity with accounting principlesgenerally accepted in the United States of America. Also, in our opinion, suchfinancial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, present fairly, in all materialrespects, the information set forth therein.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2006, based on the criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated March 16, 2007 expressed an unqualified opinion onmanagement’s assessment of the effectiveness of the Company’s internal controlover financial reporting and an unqualified opinion on the effectiveness of theCompany’s internal control over financial reporting.

Deloitte & Touche LLPLos Angeles, CaliforniaMarch 16, 2007

F-2

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**POWER-ONE, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)**

| ** **                                             | ** ** | **Year Ended  December 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                             | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| NET SALES                                              |       | $                                      | 338,048    |   | $ | 261,557 |   | $ | 280,279 |   |
| COST OF GOODS  SOLD                                    |       | 245,434                                |       | 184,870 |   | 182,375 |   |
| GROSS PROFIT                                           |       | 92,614                                 |       | 76,687 |   | 97,904 |   |
| EXPENSES:                                              |       |                                   |       |   |   |   |   |
| Selling, general and administrative                    |       | 63,903                                 |       | 58,561 |   | 67,827 |   |
| Engineering and quality assurance                      |       | 38,582                                 |       | 36,936 |   | 42,195 |   |
| Amortization of intangibles                            |       | 3,999                                  |       | 3,877 |   | 3,913 |   |
| Restructuring costs                                    |       | 385                                    |       | 11,135 |   | 1,080 |   |
| Asset impairment                                       |       | —                                 |       | 5,098 |   | 1,991 |   |
| Total expenses                                         |       | 106,869                                |       | 115,607 |   | 117,006 |   |
| LOSS FROM  OPERATIONS                                  |       | (14,255                                | )          | (38,920 | ) | (19,102 | ) |
| INTEREST AND OTHER  INCOME (EXPENSE):                  |       |                                   |       |   |   |   |   |
| Interest income                                        |       | 2,085                                  |       | 2,371 |   | 1,792 |   |
| Interest expense                                       |       | (1,406                                 | )          | (220 | ) | (615 | ) |
| Other income (expense), net                            |       | (1,779                                 | )          | 307 |   | (165 | ) |
| Total interest and other income (expense)              |       | (1,100                                 | )          | 2,458 |   | 1,012 |   |
| LOSS BEFORE  PROVISION (BENEFIT) FOR INCOME TAXES      |       | (15,355                                | )          | (36,462 | ) | (18,090 | ) |
| PROVISION  (BENEFIT) FOR INCOME TAXES                  |       | (730                                   | )          | 1,820 |   | 3,100 |   |
| NET LOSS                                               |       | $                                      | (14,625    | ) | $ | (38,282 | ) | $ | (21,190 | ) |
| BASIC AND DILUTED  LOSS PER SHARE                      |       | $                                      | (0.17      | ) | $ | (0.45 | ) | $ | (0.25 | ) |
| BASIC AND DILUTED  WEIGHTED AVERAGE SHARES OUTSTANDING |       | 86,144                                 |       | 84,991 |   | 83,757 |   |

 

See notes to consolidated financial statements.

F-3

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**POWER-ONE, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except per share data)**

| ** **                                                                                                                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| CURRENT ASSETS:                                                                                                                                 |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                      |       | $                     | 34,422     |   | $ | 37,101 |   |
| Available for sale  securities                                                                                                                  |       | 11,365                |       | 5,767 |   |
| Investments held to  maturity                                                                                                                   |       | —                |       | 9,790 |   |
| Accounts receivable:                                                                                                                            |       |                  |       |   |   |
| Trade, less allowance  for doubtful accounts of $6,891 in 2006 and $3,733 in 2005                                                          |       | 122,533               |       | 58,877 |   |
| Other                                                                                                                                           |       | 7,208                 |       | 5,252 |   |
| Inventories                                                                                                                                     |       | 111,893               |       | 41,956 |   |
| Refundable income taxes                                                                                                                         |       | 482                   |       | 101 |   |
| Deferred income taxes                                                                                                                           |       | 5,657                 |       | — |   |
| Prepaid expenses and  other current assets                                                                                                      |       | 6,832                 |       | 4,025 |   |
| Total current assets                                                                                                                            |       | 300,392               |       | 162,869 |   |
| INVESTMENTS HELD TO  MATURITY                                                                                                                   |       | —                |       | 31,048 |   |
| PROPERTY AND EQUIPMENT,  net                                                                                                                    |       | 66,831                |       | 37,715 |   |
| GOODWILL, net                                                                                                                                   |       | 53,177                |       | 31,850 |   |
| OTHER INTANGIBLE ASSETS,  net                                                                                                                   |       | 26,850                |       | 20,658 |   |
| OTHER ASSETS                                                                                                                                    |       | 2,021                 |       | 1,533 |   |
| TOTAL                                                                                                                                           |       | $                     | 449,271    |   | $ | 285,673 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                  | ** ** | ** **            | ** ** | ** ** | ** ** |
| CURRENT LIABILITIES:                                                                                                                            |       |                  |       |   |   |
| Bank credit facilities  and notes payable                                                                                                       |       | $                     | 26,349     |   | $ | — |   |
| Accounts payable                                                                                                                                |       | 91,572                |       | 32,268 |   |
| Income taxes payable                                                                                                                            |       | 2,452                 |       | 5,150 |   |
| Restructuring reserve                                                                                                                           |       | 10,272                |       | 5,098 |   |
| Deferred income taxes                                                                                                                           |       | —                |       | 1,270 |   |
| Long-term debt, current  portion                                                                                                                |       | 1,925                 |       | — |   |
| Other accrued expenses                                                                                                                          |       | 23,667                |       | 16,154 |   |
| Total current  liabilities                                                                                                                      |       | 156,237               |       | 59,940 |   |
| DEFERRED INCOME TAXES                                                                                                                           |       | 7,977                 |       | 937 |   |
| INDEBTEDNESS TO RELATED  PARTIES                                                                                                                |       | 50,000                |       | — |   |
| LONG-TERM DEBT, less  current portion                                                                                                           |       | 2,363                 |       | — |   |
| OTHER LONG-TERM  LIABILITIES                                                                                                                    |       | 9,466                 |       | 301 |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                   |       |                  |       |   |   |
| STOCKHOLDERS’ EQUITY                                                                                                                       |       |                  |       |   |   |
| Common stock, par value  $0.001; 300,000 shares authorized; 86,594 and 85,588 shares issued and  outstanding at December 31, 2006 and 2005 |       | 87                    |       | 86 |   |
| Additional paid-in  capital                                                                                                                     |       | 611,300               |       | 606,315 |   |
| Accumulated other  comprehensive income                                                                                                         |       | 29,536                |       | 21,164 |   |
| Accumulated deficit                                                                                                                             |       | (417,695              | )          | (403,070 | ) |
| Total stockholders’  equity                                                                                                                |       | 223,228               |       | 224,495 |   |
| TOTAL                                                                                                                                           |       | $                     | 449,271    |   | $ | 285,673 |   |

 

See notes to consolidated financial statements.

F-4

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**POWER-ONE, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(In thousands)**

| ** **                                                     | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| NET LOSS                                                       |       | $                                          | (14,625    | ) | $ | (38,282 | ) | $ | (21,190 | ) |
| OTHER COMPREHENSIVE  INCOME (LOSS)                             |       |                                       |       |   |   |   |   |
| Unrealized gain (loss) on investments(a)                       |       | 192                                        |       | (675 | ) | (317 | ) |
| Reclassification adjustment for losses included in  net income |       | 830                                        |       |   |   |   |   |
| Foreign currency translation adjustments(a)                    |       | 7,350                                      |       | (10,209 | ) | 8,318 |   |
| COMPREHENSIVE LOSS                                             |       | $                                          | (6,253     | ) | $ | (49,166 | ) | $ | (13,189 | ) |

----

(a)           Accumulated othercomprehensive income consists of unrealized loss on available-for-saleinvestments of $0.1 million and $1.0 million at December 31, 2006 and 2005,respectively, and foreign currency translation gains of $29.5 million and $22.2million at December 31, 2006 and 2005, respectively.

See notes to consolidated financial statements.

F-5

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**POWER-ONE, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In thousands, except share data)**

| ** **                                                      | ** ** | **Common Stock—$.001 Par Value** | ** ** | **Additional  Paid-in** | ** ** | **Deferred** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated**        | ** ** | ** **  | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------|------------|--------------|------------|---------------------------------------|------------|------------------------|------------|-------------|------------|
| ** **                                                      | ** ** | **Shares**                                           | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Compensation**                      | ** ** | **Income (Loss)** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| BALANCE, DECEMBER 31, 2003                                      |       | 83,308,554                                           |       |                    | $          | 83           |       |                                  |       | $                      | 595,449    |        |       |   | $ | (662 | ) |   |   | $ | 24,047 |   |   |   | $ | (343,598 | ) |   | $ | 275,319 |   |
| Net loss                                                        |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   |   |   |   |   | (21,190 | ) |   | (21,190 | ) |
| Other comprehensive loss:                                       |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative translation adjustment                               |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   | 8,318 |   |   |   |   |   |   | 8,318 |   |
| Unrealized gain (loss) on investments                           |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   | (317 | ) |   |   |   |   |   | (317 | ) |
| Total comprehensive loss                                        |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   |   |   |   |   |   |   |   | (13,189 | ) |
| Issuance of common stock under stock option and  purchase plans |       | 613,065                                              |       |                    | 1          |         |       |                                  | 3,072      |                   |       |        |       |   |   |   |   |   |   |   |   |   |   | 3,073 |   |
| Stock compensation                                              |       | 32,125                                               |       |                    | —     |         |       |                                  | 999        |                   |       |        | 618        |   |   |   |   |   |   |   |   |   |   | 1,617 |   |
| Issuance of common stock in connection with  acquisition        |       | 298,383                                              |       |                    | —     |         |       |                                  | 3,217      |                   |       |        |       |   |   |   |   |   |   |   |   |   |   | 3,217 |   |
| BALANCE, DECEMBER 31, 2004                                      |       | 84,252,127                                           |       |                    | 84         |         |       |                                  | 602,737    |                   |       |        | (44        | ) |   |   | 32,048 |   |   |   | (364,788 | ) |   | 270,037 |   |
| Net loss                                                        |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   |   |   |   |   | (38,282 | ) |   | (38,282 | ) |
| Other comprehensive loss                                        |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative translation adjustment                               |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   | (10,209 | ) |   |   |   |   |   | (10,209 | ) |
| Unrealized gain (loss) on investments                           |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   | (675 | ) |   |   |   |   |   | (675 | ) |
| Total comprehensive loss                                        |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   |   |   |   |   |   |   |   | (49,166 | ) |
| Issuance of common stock under stock option and  purchase plans |       | 2,089,592                                            |       |                    | 2          |         |       |                                  | 6,782      |                   |       |        |       |   |   |   |   |   |   |   |   |   |   | 6,784 |   |
| Stock compensation                                              |       | 32,125                                               |       |                    | —     |         |       |                                  | 1,063      |                   |       |        | 44         |   |   |   |   |   |   |   |   |   |   | 1,107 |   |
| Purchase and retirement of common stock                         |       | (786,010                                             | )          |                    | —     |         |       |                                  | (4,267     | )                      |       |        |       |   |   |   |   |   |   |   |   |   |   | (4,267 | ) |
| BALANCE, DECEMBER 31, 2005                                      |       | 85,587,834                                           |       |                    | 86         |         |       |                                  | 606,315    |                   |       |        | —     |   |   |   | 21,164 |   |   |   | (403,070 | ) |   | 224,495 |   |
| Net loss                                                        |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   |   |   |   |   | (14,625 | ) |   | (14,625 | ) |
| Other comprehensive loss                                        |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative translation adjustment                               |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   | 7,350 |   |   |   |   |   |   | 7,350 |   |
| Unrealized gain (loss) on investments                           |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   | 192 |   |   |   |   |   |   | 192 |   |
| Reclassification adjustments for losses included in  net income |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   | 830 |   |   |   |   |   |   | 830 |   |
| Total comprehensive loss                                        |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   |   |   |   |   |   |   |   | (6,253 | ) |
| Issuance of common stock under stock option and  purchase plans |       | 960,721                                              |       |                    | 1          |         |       |                                  | 3,225      |                   |       |        |       |   |   |   |   |   |   |   |   |   |   | 3,226 |   |
| Stock compensation                                              |       | 220,330                                              |       |                    | —     |         |       |                                  | 2,764      |                   |       |        |       |   |   |   |   |   |   |   |   |   |   | 2,764 |   |
| Purchase and retirement of common stock                         |       | (175,000                                             | )          |                    | —     |         |       |                                  | (1,004     | )                      |       |        |       |   |   |   |   |   |   |   |   |   |   | (1,004 | ) |
| BALANCE, DECEMBER  31, 2006                                     |       | 86,593,885                                           |       |                    | $          | 87           |       |                                  |       | $                      | 611,300    |        |       |   | $ | — |   |   |   | $ | 29,536 |   |   |   | $ | (417,695 | ) |   | $ | 223,228 |   |

 

See notes to consolidated financial statements.

F-6

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**POWER-ONE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)**

| ** **                                                                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                            |       |                                       |       |   |   |   |   |
| Net loss                                                                         |       | $                                          | (14,625    | ) | $ | (38,282 | ) | $ | (21,190 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities:     |       |                                       |       |   |   |   |   |
| Depreciation and  amortization                                                   |       | 15,041                                     |       | 14,949 |   | 16,396 |   |
| Asset impairment (a)                                                             |       | —                                     |       | 5,098 |   | 1,991 |   |
| Investment write-off  (b)                                                        |       | 830                                        |       | 2,049 |   | 1,118 |   |
| Stock compensation                                                               |       | 2,764                                      |       | 1,107 |   | 1,617 |   |
| Exchange (gain) or  loss                                                         |       | (1,858                                     | )          | (1,075 | ) | 148 |   |
| Net loss on sale  of held to maturity investments                                |       | 392                                        |       | — |   | — |   |
| Net (gain) loss on  disposal of property and equipment                           |       | 391                                        |       | (61 | ) | (190 | ) |
| Deferred income  taxes                                                           |       | (2,027                                     | )          | 409 |   | (1,019 | ) |
| Changes in operating  assets and liabilities:                                    |       |                                       |       |   |   |   |   |
| Accounts  receivable, net                                                        |       | (19,238                                    | )          | (6,466 | ) | 8,050 |   |
| Notes receivable                                                                 |       | —                                     |       | — |   | 804 |   |
| Inventories                                                                      |       | (22,638                                    | )          | 10,205 |   | (1,210 | ) |
| Refundable income  taxes                                                         |       | 10                                         |       | (27 | ) | 1,088 |   |
| Prepaid expenses  and other current assets                                       |       | (9                                         | )          | (141 | ) | (279 | ) |
| Accounts payable                                                                 |       | 18,329                                     |       | 4,270 |   | (7,290 | ) |
| Restructuring reserve                                                            |       | (1,045                                     | )          | 2,843 |   | (3,404 | ) |
| Accrued expenses                                                                 |       | (2,501                                     | )          | 466 |   | 2,552 |   |
| Other liabilities                                                                |       | 243                                        |       | (638 | ) | 32 |   |
| Net cash used in  operating activities                                           |       | (25,941                                    | )          | (5,294 | ) | (786 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                            |       |                                       |       |   |   |   |   |
| Purchases of  available-for-sale investments                                     |       | (129                                       | )          | (252 | ) | (7,516 | ) |
| Purchases of held  to maturity investments                                       |       | (8,334                                     | )          | (7,810 | ) | (44,193 | ) |
| Proceeds from  available-for-sale investments                                    |       | 5,896                                      |       | 2,001 |   | — |   |
| Proceeds from held  to maturity investments                                      |       | 37,450                                     |       | 11,201 |   | — |   |
| Acquisition of  property and equipment                                           |       | (5,642                                     | )          | (6,236 | ) | (7,330 | ) |
| Proceeds from sale  of property and equipment                                    |       | 11                                         |       | 7,915 |   | 1,933 |   |
| Other assets                                                                     |       | 434                                        |       | 123 |   | (399 | ) |
| Investment in  Power Electronics Group, net of cash acquired                     |       | (63,323                                    | )          | — |   | — |   |
| Net cash provided  by (used in) investing activities                             |       | (33,637                                    | )          | 6,942 |   | (57,505 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                            |       |                                       |       |   |   |   |   |
| Proceeds from  borrowings on bank credit facilities                              |       | 3,839                                      |       | — |   | — |   |
| Repayments of  borrowings on bank credit facilities                              |       | (1,746                                     | )          | — |   | (2,008 | ) |
| Bank overdraft                                                                   |       | 330                                        |       | — |   | — |   |
| Proceeds from  borrowings on related party indebtedness, net of debt issue costs |       | 49,750                                     |       | — |   | — |   |
| Repayments of  borrowings on long-term debt                                      |       | (585                                       | )          | — |   | (9,054 | ) |
| Issuance of common  stock                                                        |       | 3,226                                      |       | 6,784 |   | 3,073 |   |
| Repurchases of  common stock                                                     |       | (1,004                                     | )          | (4,267 | ) | — |   |
| Net cash provided  by (used in) financing activities                             |       | 53,810                                     |       | 2,517 |   | (7,989 | ) |
| EFFECT OF EXCHANGE  RATE CHANGES ON CASH AND CASH EQUIVALENTS                    |       | 3,089                                      |       | (2,568 | ) | 2,277 |   |
| INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS                                |       | (2,679                                     | )          | 1,597 |   | (64,003 | ) |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                  |       | 37,101                                     |       | 35,504 |   | 99,507 |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                        |       | $                                          | 34,422     |   | $ | 37,101 |   | $ | 35,504 |   |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                              |       |                                       |       |   |   |   |   |
| Cash paid (received) for:                                                        |       |                                       |       |   |   |   |   |
| Interest                                                                         |       | $                                          | 269        |   | $ | 4 |   | $ | 192 |   |
| Income taxes                                                                     |       | $                                          | 3,387      |   | $ | 172 |   | $ | (1,285 | ) |

----

(a)           The asset impairment charges of $5.1 million and $2.0million for the years ended December 31, 2005 and 2004, respectively,related to the impairment of property and equipment calculated in accordancewith SFAS No. 144.

See notes to consolidated financial statements.

F-7

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**POWER-ONE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands)**

(b)           The investment write-off of $0.8 millionfor the year ended December 31, 2006 related to the impairment of theCompany’s investment in one of its contract manufacturers in Asia. Theimpairment was calculated in accordance with FAS115-1/124-1 and wasrecorded as other expense.

The $2.0 millioninvestment write-off for the year ended December 31, 2005 related to thewrite-off of a foreign investment and was recorded as other expense.

The$1.1 million investment write-off for the year ended December 31,2004 related to a $1.3 million investment in a private technology company thatwas written down to a fair value of $0.2 million and was recorded as otherexpense.

**SUPPLEMENTAL DISCLOSUREOF NONCASH INVESTING AND FINANCING ACTIVITIES**

On October 23, 2006, the Company completed itsacquisition of certain assets and liabilities of Magnetek, Inc. and all ofthe outstanding common stock of Magnetek, SpA, a subsidiary of Magnetek, Inc.(collectively the “Power Electronics Group”).  The aggregate purchase price for the equitywas approximately $69.0 million, consisting of $66.1 million in cash and $2.9million in direct acquisition costs. The purchase price was funded with cash onhand and the proceeds of a $50 million promissory note issued by the Company. TheCompany’s total net cash outflow related to the investment in the PowerElectronics Group was $63.3 million which was comprised of the purchase priceof $69.0 million, less $7.5 million of cash acquired plus $1.8 million of cashexpected to be received from Magnetek, Inc. for adjustments made to thepreliminary purchase price based on the closing balance sheet of the PowerElectronics Group.  The $1.8 million isrecorded as other receivables on the Company’s consolidated balance sheet atDecember 31, 2006.

Inconjunction with the acquisition, liabilities were assumed as follows (inmillions):

| Fair value of  tangible assets acquired |   | $     | 131.3  |   |
|-----------------------------------------|--------|-------|--------|--------|
| Fair value of  goodwill                 |   | 20.5  |   |
| Fair value of  identifiable intangibles |   | 10.6  |   |
| Cash paid for  Power Electronics Group  |   | (69.0 | )      |
| Liabilities assumed                     |   | $     | 93.4   |   |

 

During the year ended December 31, 2006, an additional$0.9 million of property and equipment had been purchased but not yet paid.

See notes to consolidated financial statements.

F-8

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

**NOTE 1. GENERALINFORMATION**

The accompanying consolidated financial statements ofPower-One, Inc. (the “Company” or “Power-One”) reflect theconsolidated results of its operations for the years ended December 31,2006, 2005 and 2004 and include the accounts of the Company and itssubsidiaries, all of which are wholly owned. The statements were prepared inaccordance with accounting principles generally accepted in the United Statesof America and pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”). The Company’s reporting period coincides with the52- or 53-week period ending on the Sunday closest to December 31and its fiscal quarters are the 13- or 14-week periods ending onthe Sunday nearest to March 31, June 30, September 30 and December 31.Both years ending December 31, 2006 and January 1, 2006 were 52-weekyears. The year ended January 1, 2006 is described for simplicity as December 31,2005. The year ended January 2, 2005, described as December 31,2004, was a 53 week year. 

The Company manufactures and assembles its productsprimarily at facilities in the United States, Dominican Republic, China,Slovakia, Italy and Hungary and at several contract manufacturers locatedthroughout the world, predominantly in Asia.

The Company operates inone industry segment which consists of the design, development, manufacture andmarketing of power conversion and power management products primarily for thecommunications infrastructure and other high technology markets. The Companysells its products and grants credit to customers in this industry, primarilyin the United States, Europe, and Asia. Net sales to Cisco Systems and itscontract manufacturers, collectively the Company’s largest customer, wereapproximately 12% of sales during the year ended December 31, 2006 and 15%in each of the years ended December 31, 2005 and 2004. Solectron and itssubsidiaries, which are contract manufacturers for Cisco Systems, representedapproximately 5% and 12% of the Company’s trade accounts receivable balances asof December 31, 2006 and 2005, respectively.

**NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND NEWACCOUNTING PRONOUNCEMENTS**

***Principles ofConsolidation******—******The***accompanyingconsolidated financial statements include the consolidated accounts of theCompany and its wholly owned subsidiaries. All significant intercompanybalances and transactions have been eliminated. The Company includes in itsstatement of operations its pro rata share of the financial results ofinvestments accounted for under the equity method.

***Use of Estimates in the Preparation of the FinancialStatements******—***Thepreparation of the financial statements and related disclosures in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect amountsreported in the consolidated financial statements and accompanying notes.Estimates are used for, but not limited to, the accounting for the allowancefor doubtful accounts, inventory valuation, restructuring costs, impairmentcosts, depreciation and amortization, sales returns, warranty costs, taxes,stock compensation, and contingencies. Due to the inherent uncertainty involvedin making estimates, actual results reported in future periods may differ fromthose estimates.

***Revenue Recognition******—***The Companyrecognizes revenue when persuasive evidence of an arrangement exists, titletransfer has occurred, the price is fixed or readily determinable, andcollectibility is probable. The Company recognizes revenue in accordance withStaff Accounting Bulletin No. 104, “Revenue Recognition.” Sales arerecorded net of sales returns and discounts, which are estimated at the time ofshipment based upon historical data.

F-9

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

The Company generallyrecognizes revenue at the time of shipment (or at the time of inventoryconsumption for customers on Vendor Managed Inventory (“VMI”) programs) becausethis is the point at which revenue is earned and realizable and the earningsprocess is complete. For most shipments, title to shipped goods transfers atthe shipping point, so the risks and rewards of ownership transfer once theproduct leaves the Company’s warehouse. Revenue is only recognized whencollectibility is reasonably assured. Shipping and handling costs are includedin cost of goods sold. Shipping and handling costs may be charged to customers,and are included in net sales.

The Company offers itsdistributors a standard agreement which includes payment terms, description ofrights to return or exchange product, and price discounts. In general, paymentis due within 30 days of shipment of the product to the distributors. Thedistributor has a right to return only if the Company discontinues a productthat the distributor has on hand. The distributor has a right to exchange up to5% of the dollar value of products purchased within the prior six-month period,so long as the distributor is currently purchasing at least the equivalent dollarvalue in new product. Estimated product exchanges or returns are accrued for atthe time of the sale based on historical information in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 48, “RevenueRecognition When Right of Return Exists.” Finally, the Company may give pricediscounts to a distributor at the time a purchase order is received from thedistributor for product that they will sell to a specific customer. The pricediscount is available for one year following issuance of the purchase order foritems listed on the purchase order. The Company accrues for the estimated pricediscount at the time revenue is recognized.

The Company has a jointventure in Asia that, along with certain of our contract manufacturers, maypurchase raw components and other goods from Power-One, and sell finished goodsback to Power-One as well as to other third parties. The Company recordsrevenue on sales to the joint venture and contract manufacturer only when thecomponents and goods are for sales to third parties. When the joint venture orcontract manufacturer purchases components that will be assembled and sold backto the Company, no revenue is recorded because the earnings process has notbeen completed.

***Cash and Cash Equivalents******—***The Companyconsiders all highly liquid instruments with a maturity of three months or lessat purchase date to be cash equivalents.

***Accounts Receivable and Allowance for DoubtfulAccounts******—***The Companyestablishes the allowance for doubtful accounts using the specificidentification method and also provides a reserve in the aggregate. Theestimates for calculating the aggregate reserve are based on historicalinformation.

***Inventories******—***Inventoriesare stated at the lower of cost (first-in, first-out method) or market. Slowmoving and obsolete inventories are written down quarterly based on acomparison of on-hand quantities to historical and projected usages.Additionally, reserves for non-cancelable open purchase orders for componentsthe Company is obligated to purchase in excess of projected usage, or for openpurchase orders where the market price is lower than the purchase order price,are recorded as other accrued expenses on the balance sheet.

***Investments******—***Investmentsin certain debt securities have been classified on the balance sheet asavailable-for-sale securities or investments held-to-maturity in accordancewith SFAS No. 115, “Accounting for Certain Investments and Debt and EquitySecurities” (SFAS 115). SFAS 115 establishes accounting and reportingrequirements for investments in equity securities that have readilydeterminable fair values and for all investments in debt securities.Investments held-to-maturity are recorded on the balance sheet at cost.Available-for-sale securities are recorded at fair value, with unrealized gainsand 

F-10

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

losses (net of applicableincome taxes) included in accumulated other comprehensive income. Realizedgains and losses are determined using the specific identification method. TheCompany also holds certain equity available-for-sale securities which have beenrecorded in other assets on the balance sheet.

The Company also hasinvestments in privately-held companies. These investments are included inother assets on the Company’s balance sheet and are accounted for under thecost or equity method depending on the nature and circumstances surrounding theinvestment. The Company monitors these investments for impairment and makesappropriate reductions in carrying value when necessary.

***Property and Equipment******—***Propertyand equipment are recorded at cost. Provision for depreciation has been madebased upon the estimated useful lives of the assets, which range from three to30 years, using principally the straight-line and double-declining balancemethods. Provision for amortization of leasehold improvements is made basedupon the estimated lives of the assets or terms of the leases, whichever areshorter. Property and equipment held for sale has been classified in accordancewith the provisions of Statement of Financial Accounting Standards No. (SFAS)144, “Accounting for the Impairment and Disposal of Long-Lived Assets.”

***Intangible Assets******—***Intangibleassets include cost in excess of net assets acquired in connection with theacquisition of the Company in 1995, of Melcher AG in 1998, of InternationalPower Devices, Inc. in 1999, of di/dt, Inc. in 2003, and of the PowerElectronics Group of Magnetek, Inc. in 2006, which were allocated amongcertain intangible items determined by management to have value, such as theCompany’s name, distribution network and product technology. Provision foramortization has been made based upon the estimated useful lives of theintangible asset categories, which range from three months to 20 years,using the straight-line method.

***Impairment of Long-Lived Assets and Goodwill******—***The Companyreviews the recoverability of the carrying value of long-lived assets using themethodology prescribed in SFAS 144. The Company reviews long-lived assetsfor impairment whenever events or changes in circumstances indicate that thecarrying value of such assets may not be recoverable. Upon such an occurrence,recoverability of these assets is determined by comparing the forecastedundiscounted net cash flows to which the assets relate, to the carrying amount.If the asset is determined to be unable to recover its carrying value, it iswritten down to fair value. Fair value is determined based on discounted cashflows, appraised values or other information available in the market, dependingon the nature of the assets.

The Company reviews the carrying value of goodwill andnon-amortizable intangible assets using the methodology prescribed inSFAS 142, “Goodwill and Other Intangible Assets.” SFAS 142 requiresthat the Company not amortize goodwill and intangible assets with indefinitelives, but instead subject them to impairment tests on at least an annual basisand whenever circumstances suggest that goodwill may be impaired.

***Restructuring Costs******—***The Companyrecords restructuring charges in accordance with SFAS 146, “Accounting forCosts Associated with Disposal Activities,” which requires that a liability fora cost associated with an exit or disposal activity be recognized when theliability is incurred, in contrast to the date of an entity’s commitment to anexit plan. Restructuring costs related to the downsizing of the Company’soperations and primarily consisted of specific charges that had been incurredor were to be incurred with no future economic benefit. These charges includedcosts related to personnel severance, continuing lease obligations for vacantfacilities, and certain contract termination penalties and other shutdowncosts.

F-11

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

***Income Taxes******—***Incometaxes are provided for taxes currently payable or refundable, and for deferredincome taxes arising from future tax consequences of events that wererecognized in the Company’s financial statements or tax returns. The effects ofincome taxes are measured based on enacted tax laws and rates applicable toperiods in which the differences are expected to reverse. If necessary, avaluation allowance is established to reduce deferred income tax assets to anamount that will more likely than not be realized in accordance with SFAS No.109 “Accounting for Income Taxes.”

Additionally, the Company’ssubsidiary Power-One Limited operates in the Dominican Republic in a tax-freeenterprise zone and, accordingly, pays no income taxes in connection with itsoperations in that country. The Company has not provided for U.S. federal andstate income taxes on the undistributed earnings of its foreign operations asit is the Company’s intention to permanently re-invest the undistributedearnings.

***Stock Compensation******—******Effective***January 1,2006, the Company adopted SFAS No. 123(R), “Share-Based Payment: An Amendmentof FASB Statements No. 123 and 95” using the modified prospective method.Under this method, compensation cost is recognized on or after the effectivedate for the portion of outstanding awards for which the requisite service hasnot yet been rendered, based on the grant date fair value of those awards.Prior to January 1, 2006, the Company accounted for employee stock optionsusing the intrinsic value method in accordance with Accounting Principles Board(“APB”) Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” and adopted thedisclosure only alternative of SFAS No. 123. For stock-based awards issuedon or after January 1, 2006, the Company recognizes the compensation coston a straight-line basis over the requisite service period for the entireaward. Measurement and attribution of compensation cost for awards that areunvested as of the effective date of SFAS No. 123(R) are basedon the same estimate of the grant-date or modification-date fair value and thesame attribution method used under SFAS No. 123.

On November 10, 2005,the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS123(R)-3 “Transition Election Related to Accounting for Tax Effects ofShare-Based Payment Awards.” The Company has elected to adopt the alternativetransition method provided in the FASB Staff Position for calculating the taxeffects of stock-based compensation pursuant to SFAS 123(R). The alternativetransition method includes simplified methods to establish the beginningbalance of the additional paid-in capital pool (“APIC pool”) related to the taxeffects of employee stock-based compensation, and to determine the subsequentimpact on the APIC pool and Consolidated Statements of Cash Flows of the taxeffects of employee stock-based compensation awards that are outstanding uponadoption of SFAS 123(R). As the Company is currently in a net operating lossposition and has placed valuation allowances on its net deferred tax assets,there is no net impact on the Company’s APIC pool related to stock-basedcompensation for the year ended December 31, 2006.

F-12

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

Inaccordance with SFAS No. 148, and as required by SFAS 123(R), the requiredpro forma disclosure, for periods prior to adoption of SFAS 123(R), is shownbelow (in millions, except per share data).

| ** **                                                                                         | ** ** | **Year Ended December 31,**                                       | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** |
| Net loss, as  reported                                                                             |       |                                                                             | $          | (38.3 | ) |   |   | $ | (21.2 | ) |   |
| Add: Stock-based  employee compensation expense included in reported  net loss                     |       |                                                                             | 1.1        |   |   |   | 1.6 |   |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value  based method |       |                                                                             | (20.0      | ) |   |   | (15.3 | ) |   |
| Pro forma net  loss                                                                                |       |                                                                             | $          | (57.2 | ) |   |   | $ | (34.9 | ) |   |
| Loss per share:                                                                                    |       |                                                                             |       |   |   |   |   |   |   |
| Basic and Diluted—as reported                                                                 |       |                                                                             | $          | (0.45 | ) |   |   | $ | (0.25 | ) |   |
| Basic and  Diluted—pro forma                                                                  |       |                                                                             | $          | (0.67 | ) |   |   | $ | (0.42 | ) |   |

 

Included in the $20.0 million of pro forma stock-basedemployee compensation expense for the year ended December 31, 2005 isexpense associated with the acceleration of most of the Company’s stock optionsduring the quarter ended March 31, 2005. During the quarter ended March 31,2005, the Board of Directors of the Company authorized the acceleration of thevesting of all of the Company’s outstanding unvested stock options granted todirectors, officers and employees of the Company under applicable equityincentive plans of the Company with an exercise price greater than $5.00 inresponse to the issuance of SFAS 123(R), “Share Based Payment,” which requiredthe Company to treat unvested stock options as an expense and was effective atthe beginning of the Company’s first fiscal quarter in 2006. By acceleratingthe vesting of the affected stock options, the Company elected to recognizecompensation expense of $0.1 million during the first fiscal quarter of 2005for such accelerated stock options that had exercise prices between $5.00 and$5.93. The Company believes that no further compensation expense will berequired in future periods associated with the affected options.

Thepro forma amounts for the years ended December 31, 2005 and 2004 do notinclude a tax benefit on the stock compensation due to the deferred income taxvaluation allowance recorded by the Company in the period. In determining thefair value of the options, the Company used an estimated forfeiture rate determinedat the time of grant, which is revised if necessary if actual experience isdifferent than estimated. The fair value of each option grant is estimated onthe date of grant using the Black-Scholes model, with the assumptions shownbelow. There were no stock option grants during the year ended December 31,2006.

| ** **                                                       | ** ** | **Year Ended  December 31,** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Risk-free  interest rate                                         |       | 4.2                                    | %          | 3.9 | % |
| Volatility                                                       |       | 46.7                                   | %          | 49.3 | % |
| Option life,  years                                              |       | 4.8                                    |       | 5.9 |   |
| Dividends                                                        |       | —                                 |       | — |   |
| Stock options  granted, in millions                              |       | 0.1                                    |       | 2.4 |   |
| Weighted-average grant  date fair value of stock options granted |       | $                                      | 2.25       |   | $ | 4.99 |   |
|                                                                  |            |                                        |            |  |  |  |  |

 

F-13

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

***Earnings Per Share******—***The Companypresents both basic and diluted earnings (loss) per share (“EPS”) amounts.Basic EPS is calculated by dividing net income (loss) by the weighted averagenumber of common shares outstanding during the period. Diluted EPS amounts arebased upon the weighted average number of common and common equivalent sharesoutstanding during the period. The Company uses the treasury stock method tocalculate the impact of stock compensation. Common equivalent shares areexcluded from the computation in periods in which they have an anti-dilutiveeffect. Stock options for which the exercise price exceeds the average marketprice over the period have an anti-dilutive effect on EPS and, accordingly, areexcluded from the calculation. Dilutive stock options have an anti-dilutiveeffect on EPS in a period with a net loss, and therefore are excluded from theEPS computation.

***Engineering******—***Engineeringcosts include existing product engineering, custom product development andresearch and development costs. Research and development costs are expensed inthe period incurred in accordance with SFAS 2, “Accounting for Research andDevelopment Costs”.

***Warranties******—***The Companygenerally offers its customers a two-year warranty on products sold, althoughwarranty periods may vary by product type and application. Based on warrantyrepair costs and the estimated rate of return, the Company periodically reviewsand adjusts its warranty accrual. Actual repair costs are charged against thereserve balance as incurred.

***Derivative Instruments******—The***Companyaccounts for derivative instruments in accordance with SFAS 133, “Accountingfor Derivative Instruments and Hedging Activities” and subsequent amendments,which establish accounting and reporting standards for derivative instruments,including certain derivative instruments embedded in other contracts, and forhedging activities. The Company did not hold any significant derivativefinancial instruments during the years presented.

***Fair Value of Financial Instruments******—The***recordedvalues of accounts receivable, notes receivable, accounts payable and accruedexpenses approximate their fair values based on their short-term nature. Thecarrying amounts of fixed long-term debt approximate its fair values as themajority of the debt has been recently incurred. The carrying amounts of allother debt have variable rates of interest and reflect current market rates of interestand its fair value approximates the carrying amount.

***Concentration of Risk******—Financial***instrumentsthat potentially subject the Company to concentrations of credit risk consistprimarily of cash and cash equivalents placed with high credit quality institutionsand trade receivables. The Company sells products and extends credit tocustomers, primarily in the United States, Europe and Asia; periodicallymonitors its exposure to credit losses; and maintains allowances foranticipated losses.

***Translation of Foreign Currencies******—***Thereporting currency for the consolidated financial statements of the Company isthe U.S. dollar. The assets and liabilities of companies whose functionalcurrency is other than the U.S. dollar are included in the consolidation bytranslating the assets and liabilities at the exchange rates applicable at theend of the reporting period. The statements of operations and cash flows ofsuch companies are translated at the average exchange rates during theapplicable period. Translation gains or losses are accumulated as a separatecomponent of stockholders’ equity. The Company has not tax-effected thecumulative translation adjustment it is the Company’s intention to permanentlyre-invest the undistributed earnings.

***Reclassifications***—Certain prior year amounts have been reclassified to conform to thecurrent year presentation.

F-14

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

***Segment Reporting******—***The Companyoperates as one segment in accordance with SFAS 131, “Disclosures AboutSegments of an Enterprise and Related Information.” The Company’s chiefoperating decision maker and management personnel view the Company’sperformance and make resource allocation decisions by looking at the Company asa whole. Although there are different product lines within the Company, theyare economically similar and are also similar in terms of the five criteria setforth in SFAS 131 that must be met to combine segments. The Company’sproducts are all power conversion and power management products primarily soldinto the communication infrastructure and other high technology markets, andthe sales force sells all products lines. The nature of the production processis similar for all product lines, and manufacturing for the different productlines occurs in common facilities. Generally, the same engineers with the samequalifications design and manufacture products for all product lines. The typesand class of customers are similar across all product lines, and products aredistributed through common channels and distributor networks.

***Recent Pronouncements and Accounting Changes******—In February 2007, the FASB issuedSFAS No. 159, which permits entities to choose to measure many financialinstruments and certain other items at fair value. SFAS No. 159 also includesan amendment to SFAS No. 115, “Accounting for Certain Investments in Debt andEquity Securities” which applies to all entities with available-for-sale andtrading securities. This Statement is effective as of the beginning of anentity’s first fiscal year that begins after November 15, 2007. The Company isassessing the impact of SFAS No. 159 and has not determined whether it willhave a material impact on the Company’s results of operations or financialposition.***

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements.” The Statementdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements, and does not require any new fair value measurements. ThisStatement applies under other accounting pronouncements that require or permitfair value measurements. The Statement is effective for the fiscal yearsbeginning after November 15, 2007. The Company is assessing SFASNo. 157 and has not determined the impact the adoption of SFASNo. 157 will have its results of operations or financial position.

In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109” (FIN 48). Theinterpretation clarifies the accounting for uncertainty in income taxesrecognized in a company’s financial statements in accordance with SFASNo. 109, “Accounting for Income Taxes.” Specifically, the pronouncementprescribes a recognition threshold and a measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. The interpretation also provides guidanceon the related derecognition, classification, interest and penalties,accounting for interim periods, disclosure and transition of uncertain taxpositions. The interpretation is effective for fiscal years beginning afterDecember 15, 2006. The Company is assessing FIN 48 and has not determinedthe impact that the adoption of FIN 48 will have on its consolidated financialstatements.

**NOTE 3. ACQUISITIONS**

On October 23,2006, the Company completed its acquisition of certain assets and liabilitiesof Magnetek, Inc. and all of the outstanding common stock of Magnetek,SpA, a subsidiary of Magnetek, Inc. (collectively the “Power ElectronicsGroup”). The preliminary aggregate purchase price for the equity was approximately$69.0 million, consisting of $66.1 million in cash and $2.9 million in directacquisition costs. The Company also assumed $27.8 million in debt of the PowerElectronics Group. The preliminary purchase price was funded with cash on handand the proceeds of a $50 million promissory note issued by 

F-15

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

the Company. The transaction was accounted for usingthe purchase method of accounting for business combinations and, accordingly,the results of operations of the Power Electronics Group have been included inthe Company’s consolidated financial statements since the date of theacquisition. The consolidated statements of operations, consolidated statementsof comprehensive loss, and the consolidated statements of cash flows includeapproximately 10 weeks of activity for the Power Electronics Group. Thefollowing table summarizes the estimated fair value of assets acquired andliabilities assumed at the date of the acquisition:

| Cash                                        |   | $     | 7.5        | ** ** |
|---------------------------------------------|--------|-------|------------|------------|
| Accounts  receivable                        |   | 39.2  | ** ** |
| Inventories                                 |   | 44.0  | ** ** |
| Deferred income  tax asset, current         |   | 6.3   | ** ** |
| Property, plant  and equipment              |   | 30.9  | ** ** |
| Goodwill                                    |   | 20.5  | ** ** |
| Identifiable  intangible assets             |   | 10.6  | ** ** |
| Other assets                                |   | 3.4   | ** ** |
| Accounts payable  and accrued liabilities   |   | (49.2 | )          |
| Credit facilities                           |   | (23.1 | )          |
| Long-term debt                              |   | (4.7  | )          |
| Deferred income  tax liability, non-current |   | (7.9  | )          |
| Other long term  liabilities                |   | (8.5  | )          |
| Total                                       |   | $     | 69.0       | ** ** |

 

The above preliminarypurchase price has been allocated based on preliminary estimates of the fairvalues of the assets acquired and the liabilities assumed. The net preliminarypurchase price, plus acquisition costs, was allocated to tangible assets andintangible assets. The Company recognized $20.5 million of goodwill, none ofwhich is expected to be deductible for tax purposes. The Company also recognized$10.6 million of other identifiable amortizable intangible assets that arebeing amortized over a weighted-average useful life of approximately 6 years. Theintangible assets that make up that amount include customer relationships of$5.3 million (7 year useful life), product technology of $2.5 million (10 yearuseful life) and other assets of $2.8 million (2 year weighted-average usefullife). The purchase price allocation is preliminary and may be impacted by thefinalization of the Company’s restructuring plan, the valuation of theintangible assets acquired, and other items related to the acquisition.

Factorsthat contributed to a purchase price that resulted in recognition of goodwillinclude:

·       creationof a larger sales and service organization worldwide which is expected topresent greater opportunities for revenue growth and profitability;

·       theability of the assembled workforce, including top-tier engineering talent, tocontinue to develop new products to better service our customers and theircustom product requirements;

·       avoidanceof incurring certain costs that the companies would expect to incur on astand-alone basis, and the ability to achieve cost synergies;

·       additionallow-cost manufacturing operations to accommodate anticipated volume and timelydelivery to customers;

F-16

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

·       creationof a larger consumer of electronic components which is expected to result ingreater purchasing power and opportunities for component cost reduction.

Thefollowing pro forma consolidated financial information presents the combinedresults of operations of the Company and the Power Electronics Group as if themerger occurred at the beginning of the periods presented, after giving effectto certain adjustments, including amortization, depreciation expense, assumedinterest expense, assumed decrease in interest income earned, and inventorystep-up. Due to the non-recurring nature of the $1.9 million of inventorystep-up charges, the amount has not been included in the unaudited consolidatedpro forma financial information. The unaudited pro forma consolidated financialinformation does not necessarily reflect the results of operations that wouldhave occurred had the merger been completed as of the dates indicated or of theresults that may be obtained in the future.

| ** **                            | ** ** | **December 31, 2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| Net Sales, in  millions               |       |                       | $          | 478.1                       |       |   |   | $ | 415.2 |   |   |
| Net Loss, in  millions                |       |                       | (49.0      | )                           |       |   | (45.3 | ) |   |
| Basic and diluted  earnings per share |       |                       | $          | (0.57                       | )          |   |   | $ | (0.53 | ) |   |

 

**NOTE 4. INVESTMENTS**

Investments in certaindebt securities have been classified on the balance sheet as investmentsheld-to-maturity and certain other securities have been classified asavailable-for-sale securities in accordance with SFAS No. 115, “*Accounting for Certain Investments in Debt and Equity Securities*”.The Company also has certain equity securities that have been classified asavailable-for-sale securities that are recorded in other assets on the balancesheet. Investments held-to-maturity are recorded on the balance sheet at cost,and available-for-sale securities are recorded at fair value based upon quotedmarket prices, with unrealized gains and losses (net of applicable deferredincome taxes) included in accumulated other comprehensive income. Realizedgains and losses on sales of investments are determined using the specificidentification method.

Thefollowing tables summarize the Company’s investments (in millions):

| ** **                                    | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **Amortized Cost**         | ** ** | **Unrealized  Pretax Net  Gains (Losses)** | ** ** | **Fair Value** | ** ** |
| U.S. government  and agencies notes and bonds |       |                            | $          | 6.0 |   |   |   | $ | (0.1 | ) |   |   | $ | 5.9 |   |   |
| Other fixed  income investments               |       |                            | 5.5        |   |   |   | — |   |   |   | 5.5 |   |   |
|                                          |       |                            | $          | 11.5 |   |   |   | $ | (0.1 | ) |   |   | $ | 11.4 |   |   |

 

| ** **                                    | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **Amortized Cost**         | ** ** | **Unrealized  Pretax Net Gains  (Losses)** | ** ** | **Fair Value** | ** ** |
| U.S. government  and agencies notes and bonds |       |                            | $          | 34.7 |   |   |   | $ | (0.6 | ) |   |   | $ | 34.1 |   |   |
| Other fixed  income investments               |       |                            | 11.9       |   |   |   | — |   |   |   | 11.9 |   |   |
|                                          |       |                            | $          | 46.6 |   |   |   | $ | (0.6 | ) |   |   | $ | 46.0 |   |   |

 

F-17

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

 

| ** **                                | ** ** | **December 31, 2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| *Reported as:*                       | ** ** |                       | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| Available-for-sale  securities            |       |                       | $          | 11.4                        | ** ** |   |   | $ | 5.8 | ** ** |   |
| Investments held  to maturity, short-term |       |                       | —     | ** **                  |       |   | 9.8 | ** ** |   |
| Investments held  to maturity             |       |                       | —     | ** **                  |       |   | 31.0 | ** ** |   |
| Total                                     |       |                       | $          | 11.4                        | ** ** |   |   | $ | 46.6 | ** ** |   |

 

Thefair value of the Company’s available-for-sale investments at December 31,2006, by contractual maturity, is shown below. Expected maturities may differfrom contractual maturities because borrowers may have the right to prepay andcreditors may have the right to call certain obligations.

| ** **                 | ** ** | **Amortized Cost** | ** ** | **Fair Value** | ** ** |
|----------------------------|------------|-------------------------|------------|---------------------|------------|
| Due in less than  one year |       |                    | $          | 2.0                 |       |   |   | $ | 2.0 |   |   |
| Due in 1—2 years      |       |                    | 4.0        |                |       |   | 3.9 |   |   |
| Due in 2—5 years      |       |                    | 5.5        |                |       |   | 5.5 |   |   |
|                       |       |                    | $          | 11.5                |       |   |   | $ | 11.4 |   |   |

 

During the year ended December 31,2006, the Company sold debt securities previously classified asheld-to-maturity prior to their maturity dates. The net carrying amount ofsecurities sold was $26.1 million. In connection with the sale of thesecurities, the Company realized a loss of $0.4 million which has been includedas a component of “Other expense” in the consolidated statements of operations.The Company sold $24.1 million of these securities during the third quarterended September 30, 2006 in order to complete its acquisition of the PowerElectronics Group of Magnetek, Inc. in October 2006.

Unsold securities in theamount of $11.4 million, previously classified as held-to maturity, weretransferred to available-for-sale securities, and were classified asavailable-for-sale securities for the period ended December 31, 2006. Dueto this transfer, $0.1 million was recorded as an unrealized pre-tax net lossin other comprehensive income.

The Company also hasavailable-for-sale investments in both public and privately-held companies thatare included in other assets on the Company’s balance sheet and are accountedfor using the cost or equity methods, depending on the nature and circumstancessurrounding the investment. These investments include an investment in one ofthe Company’s contract manufacturers in Asia. 

During 2006, the Company determinedthat its investment in a publicly-traded Asian contract manufacturer hadexperienced a decline in value that was deemed to be other-than-temporary inaccordance with FASB Staff Position 115-1/124-1, “The Meaning of Other ThanTemporary Impairment and Its Application to Certain Investments”. Therefore,the Company realized a $0.8 million impairment loss equal to the differencebetween the investment’s cost and fair value at December 31, 2006. This losswas recorded in other expense on the income statement and the remaining $0.8million investment balance is included in other assets on the balance sheet.

During 2005, the Companydetermined that an investment in a foreign enterprise in China was impaired,primarily as a result of a forecast reduction and related cash flow. Therefore,the Company recorded a $2.0 million loss in other expense on the incomestatement, which represents a write off of the entire carrying value. 

F-18

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

During 2004, the Companydetermined that an investment in a privately-held technology company wasimpaired, based on new information supporting a fair value lower than therecorded cost. Therefore, the Company recorded an impairment loss of $1.1million which was recorded as other expense in the income statement. Theremaining investment balance of $0.2 million at December 31, 2006 isincluded in other assets on the balance sheet.

**NOTE 5. INVENTORIES**

Inventories,inclusive of the inventory charges recorded, consist of the following (inmillions):

| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Raw materials            |       | $                     | 67.3       |   | $ | 26.5 |   |
| Subassemblies-in-process |       | 14.2                  |       | 4.8 |   |
| Finished goods           |       | 30.4                  |       | 10.7 |   |
|                     |       | $                     | 111.9      |   | $ | 42.0 |   |

 

The Company looks athistorical and projected usage for inventory in determining what is excess andobsolete. The methodology for forecasting demand may be modified depending onspecific product lifecycles and local circumstances. Any inventory in excess ofthis demand is written off. During each of the years ended December 31,2006, 2005 and 2004, the Company wrote off $2.7 million, $6.0 million and $3.1 million,respectively, related to excess inventory and other inventory adjustments, andrecorded the charges as costs of goods sold.

**NOTE 6. PROPERTY AND EQUIPMENT**

Propertyand equipment consist of the following (in millions):

| ** **                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Land                                                          |       | $                     | 1.9        |   | $ | — |   |
| Buildings (useful  lives of 20 to 30 years)                   |       | 12.8                  |       | 4.3 |   |
| Factory and  office equipment (useful lives of 3 to 10 years) |       | 98.4                  |       | 70.8 |   |
| Vehicles (useful  lives of 3 to 7 years)                      |       | 0.7                   |       | 0.3 |   |
| Leasehold  improvements (useful lives of 5 to 10 years)       |       | 12.8                  |       | 10.4 |   |
| Construction in  progress                                     |       | 2.1                   |       | 3.2 |   |
|                                                          |       | 128.7                 |       | 89.0 |   |
| Less accumulated  depreciation and amortization               |       | 61.9                  |       | 51.3 |   |
|                                                          |       | $                     | 66.8       |   | $ | 37.7 |   |

 

During the year ended December 31,2005, the Company sold its excess facility in Norway for net cash proceeds ofapproximately $5.8 million. The Company recorded net impairment charges of $0.2million during the year ended December 31, 2005 related to that facility. Additionally,the Company sold its Mexico facility, which was previously impaired for $1.3million during the year ended December 31, 2004, for net cash proceeds of $1.7million and recorded a loss on sale of approximately $0.1 million. During theyear ended December 31, 2004, the Company also recorded asset impairmentcharges of $0.7 million related to manufacturing equipment. No impairment lossesrelated to property and equipment were recorded during the year ended December31, 2006.

F-19

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

**NOTE 7. INTANGIBLE ASSETS**

Intangibleassets consist of the following (in millions):

| ** **                     | ** ** | **December 31, 2006**   | ** ** | ** **                    | ** ** |
|--------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **Gross Intangible  Assets** | ** ** | **Accumulated  Amortization** | ** ** | **Net Intangible  Assets** | ** ** | **Weighted Average  Life (In Years)** | ** ** |
| *Non-amortizable  intangibles* |       |                              |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill                       |       |                              | $          | 53.2                          |       |   |   | $ | — |   |   |   | $ | 53.2 |   |   |   |   |   |   |
| Trade name                     |       |                              | 11.4       |                          |       |   | — |   |   |   | 11.4 |   |   |   |   |   |   |
| Subtotal                       |       |                              | 64.6       |                          |       |   | — |   |   |   | 64.6 |   |   |   |   |   |   |
| *Amortizable  intangibles*     |       |                              |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Product technology             |       |                              | 18.6       |                          |       |   | 13.3 |   |   |   | 5.3 |   |   |   | 9 |   |   |
| Customer relationships         |       |                              | 10.0       |                          |       |   | 3.8 |   |   |   | 6.2 |   |   |   | 8 |   |   |
| Other                          |       |                              | 8.1        |                          |       |   | 4.2 |   |   |   | 3.9 |   |   |   | 14 |   |   |
| Subtotal                       |       |                              | 36.7       |                          |       |   | 21.3 |   |   |   | 15.4 |   |   |   | 10 |   |   |
| Total                          |       |                              | $          | 101.3                         |       |   |   | $ | 21.3 |   |   |   | $ | 80.0 |   |   |   |   |   |   |

 

| ** **                     | ** ** | **December 31, 2005**   | ** ** | ** **                    | ** ** |
|--------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **Gross Intangible  Assets** | ** ** | **Accumulated  Amortization** | ** ** | **Net Intangible  Assets** | ** ** | **Weighted Average  Life (In Years)** | ** ** |
| *Non-amortizable  intangibles* |       |                              |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill                       |       |                              | $          | 31.8                          |       |   |   | $ | — |   |   |   | $ | 31.8 |   |   |   |   |   |   |
| Trade name                     |       |                              | 11.4       |                          |       |   | — |   |   |   | 11.4 |   |   |   |   |   |   |
| Subtotal                       |       |                              | 43.2       |                          |       |   | — |   |   |   | 43.2 |   |   |   |   |   |   |
| *Amortizable  intangibles*     |       |                              |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Product technology             |       |                              | 19.2       |                          |       |   | 14.2 |   |   |   | 5.0 |   |   |   | 9 |   |   |
| Customer relationships         |       |                              | 4.7        |                          |       |   | 3.2 |   |   |   | 1.5 |   |   |   | 10 |   |   |
| Other                          |       |                              | 5.9        |                          |       |   | 3.1 |   |   |   | 2.8 |   |   |   | 18 |   |   |
| Subtotal                       |       |                              | 29.8       |                          |       |   | 20.5 |   |   |   | 9.3 |   |   |   | 11 |   |   |
| Total                          |       |                              | $          | 73.0                          |       |   |   | $ | 20.5 |   |   |   | $ | 52.5 |   |   |   |   |   |   |

 

The Company reviews thecarrying value of goodwill and non-amortizable intangible assets using themethodology prescribed in SFAS No. 142, “Goodwill and Other IntangibleAssets.” SFAS No. 142 requires that the Company not amortize goodwill, butinstead subject it to impairment tests on at least an annual basis and whenevercircumstances suggest that goodwill may be impaired.

The Company performed animpairment test of goodwill and of the Company’s trade name in accordance withSFAS No. 142 during the third quarter of 2006, 2005, and 2004. Based onthe impairment tests performed using a discounted cash flow approach, there wasno impairment of the goodwill or the Company’s trade name.

F-20

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

In October 2006, the Company completed itsacquisition of the Power Electronics Group, which was accounted for using thepurchase method of accounting. The preliminary purchase price, plus acquisitioncosts, was allocated to tangible assets and intangible assets. The excess ofthe preliminary purchase price over the estimated fair market values of the netassets acquired was recognized as goodwill in the amount of $20.5 million, noneof which is expected to be deductible for tax purposes. Other identifiableamortizable intangible assets in the amount of $10.6 million are beingamortized over a weighted-average useful life of approximately 6 years. Theintangible assets that make up that amount include customer relationships of$5.3 million (7 year useful life), product technology of $2.5 million (10 yearuseful life) and other assets of $2.8 million (2 year weighted-average usefullife). The purchase price allocation is preliminary and may be impacted bythe finalization of the Company’s restructuring plan, the****valuationof the intangible assets acquired, and other items that may arise during 2007related to the acquisition.

Total amortization expense for the years ended December 31,2006, 2005 and 2004 was $4.4 million, $3.9 million, and $3.9 million,respectively. Of the $4.4 million of expense recorded during the year ended December 31,2006, $4.0 million was recorded as amortization of intangibles and $0.4 millionrecorded as cost of goods sold.

Estimatedfuture amortization expense is as follows, in millions:

| **Year Ending December 31,** | ** ** | ** ** | ** ** | **Amortization  Expense** | ** ** |
|---------------------------------------------|------------|------------|------------|---------------------------|------------|
| 2007                                        |       |       | $          | 4.6                       |       |   |
| 2008                                        |       |       | 2.5        |                      |       |
| 2009                                        |       |       | 1.7        |                      |       |
| 2010                                        |       |       | 1.6        |                      |       |
| 2011                                        |       |       | 1.5        |                      |       |
| Total                                       |       |       | $          | 11.9                      |       |   |

 

Thechanges in the carrying amount of goodwill for the years ended December 31,2006 and 2005 are as follows (in millions):

| ** **                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Beginning balance                             |       | $                     | 31.8       |   | $ | 33.4 |   |
| Increase in  goodwill related to acquisition  |       | 20.5                  |       | — |   |
| Changes due to  foreign currency fluctuations |       | 0.9                   |       | (1.6 | ) |
| Ending balance                                |       | $                     | 53.2       |   | $ | 31.8 |   |

 

**NOTE 8. CREDITFACILITIES AND NOTES PAYABLE**

The Company maintains credit facilities with variousbanks in Europe and Asia. These credit facilities were acquired primarily as aresult of acquisitions in 1998, 2000 and 2006. The aggregate limit on allcredit facilities is approximately $38.6 million. The credit facilities bearinterest on amounts outstanding at various intervals based on published marketrates. At December 31, 2006, the total outstanding balance on all creditfacilities was $25.7 million at a weighted average interest rate of 4.9%, and$2.0 million was committed to back letters of credit. After consideration ofthese commitments, $10.9 million of additional borrowing capacity was availableto the Company as of December 31, 2006. Some credit agreements 

F-21

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

require the Company’ssubsidiaries to provide certain financial reports to the lenders and meetcertain financial ratios.

At December 31, 2006, $24.3 million of the total$25.7 million credit facilities outstanding were held at a subsidiary that theCompany acquired in connection with the acquisition of the Power ElectronicsGroup of Magnetek, Inc. in October 2006 of which $17.5 million relatesto revolving credit arrangements with various banks. These revolving creditarrangements bear interest at various rates based on the European InterbankOffering Rate (EURIBOR) and bore a weighted average interest rate of 4.9% at December 31,2006.

In addition, this acquired subsidiary has an agreementwith a European bank to provide borrowings secured by the subsidiary’s land andbuilding over a ten-year period. The initial commitment to lend under thisagreement was $9.2 million (Euro 7 million), with the commitment amount reducedratably on a quarterly basis beginning March 31, 2004 and ending December 30,2013. Borrowings outstanding under this agreement were $6.8 million at December 31,2006 and bore interest at the European Interbank Offering Rate (EURIBOR) plusone and one-half percent (5.3% at December 31, 2006). The agreementcontains financial covenants that require a minimum EBITDA as a percentage ofnet revenue and a maximum percentage of debt to equity. At December 31,2006, this subsidiary was not in compliance with the debt to equity ratio. The$6.8 million outstanding balance under this credit agreement, as well as a $0.6million long- term note payable through 2008 at a 5.6% interest rate issued bythe same bank with similar financial covenants, have been classified as currentliabilities as the Company has not sought to obtain a waiver and considers thisdebt potentially callable by the bank.

The remaining $1.4 million balance outstanding undercredit facilities is held by another European subsidiary of the Company andbears interest of 3.1% at December 31, 2006. The credit agreement requiresthe Company’s subsidiary to provide certain financial reports to the lender butdoes not require compliance with any financial covenants.

At December 31, 2005,the Company had no outstanding balance on any credit facility and was incompliance with all debt covenants.

**NOTE 9. OTHERACCRUED EXPENSES**

Otheraccrued expenses consist of the following (in millions):

| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Accrued payroll  and related expenses |       | $                     | 7.9        |   | $ | 4.0 |   |
| Accrued bonuses                       |       | 2.4                   |       | 4.0 |   |
| Accrued  warranties                   |       | 2.0                   |       | 2.0 |   |
| Other accrued  expenses               |       | 11.4                  |       | 6.2 |   |
|                                  |       | $                     | 23.7       |   | $ | 16.2 |   |

 

**NOTE 10. WARRANTIES**

TheCompany offers its customers warranties on products sold based on product typeand application. Management reviews and adjusts the warranty accrual based onwarranty repair costs and the rate of return. Actual repair costs are chargedagainst the reserve. A tabular presentation of the activity within the 

F-22

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

warranty accrual account for the years ended December 2006,2005 and 2004 is presented below, in millions:

| ** **                                                                       | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                       | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Beginning balance                                                                |       | $                     | 2.0        |   | $ | 3.4 |   | $ | 3.3 |   |
| Balance acquired  upon acquisition                                               |       | 0.2                   |       | — |   | — |   |
| Charges and costs  accrued                                                       |       | 2.6                   |       | 0.9 |   | 1.0 |   |
| Adjustments  related to pre-existing warranties (including changes in estimates) |       | (0.4                  | )          | (0.1 | ) | — |   |
| Less repair costs  incurred                                                      |       | (2.5                  | )          | (2.1 | ) | (1.0 | ) |
| Change due to  foreign currency                                                  |       | 0.1                   |       | (0.1 | ) | 0.1 |   |
| Ending balance                                                                   |       | $                     | 2.0        |   | $ | 2.0 |   | $ | 3.4 |   |

 

**NOTE 11.RESTRUCTURING COSTS AND ASSET IMPAIRMENT CHARGES**

**Restructuring Costs**

Asummary of the restructuring activity during the years ended December 31,2006 and 2005 is as follows (in millions):

| ** **                                  | ** ** | **Worldwide  Workforce  Reduction** | ** ** | **Facilities  Closure** | ** ** | **Other Costs** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|-------------------------|------------|----------------------|------------|-----------|------------|
| Balance at  December 31, 2004          |       |                                | $          | —                  |       |                 |       | $         | 1.9        |   |   |   | $ | 0.4 |   |   | $ | 2.3 |   |
| Restructuring charges                       |       |                                | 4.7        |                    |       |                 | 6.2        |      |       |   | 0.2 |   |   | 11.1 |   |
| Applications of reserve                     |       |                                | (4.6       | )                       |       |                 | (3.1       | )         |       |   | (0.6 | ) |   | (8.3 | ) |
| Balance at  December 31, 2005          |       |                                | $          | 0.1                     |       |                 |       | $         | 5.0        |   |   |   | $ | — |   |   | $ | 5.1 |   |
| Restructuring charges                       |       |                                | —     |                    |       |                 | 0.4        |      |       |   | — |   |   | 0.4 |   |
| Acquisition related restructuring liability |       |                                | 5.2        |                    |       |                 | 0.9        |      |       |   | 0.1 |   |   | 6.2 |   |
| Applications of reserve                     |       |                                | (0.3       | )                       |       |                 | (1.1       | )         |       |   | — |   |   | (1.4 | ) |
| Balance at  December 31, 2006          |       |                                | $          | 5.0                     |       |                 |       | $         | 5.2        |   |   |   | $ | 0.1 |   |   | $ | 10.3 |   |

 

As of December 31, 2006, the remainingrestructuring obligations excluding the acquisition related restructuringliability relate to facilities closures and severance. The liabilities relatedto facilities closures contain continuing lease obligations, the longest of whichextends into 2011. The restructuring costs are classified as operating expensesand all restructuring obligations have been or will be settled with cash. TheCompany evaluated its remaining restructuring reserves and increased itsreserves by $0.4 million due to changes in certain continuing leaseobligations.

F-23

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

Therestructuring charges during the years ended December 31, 2006 and 2005are comprised of the following (in millions), excluding the acquisition relatedrestructuring liability:

| ** **                     | ** ** | **Restructuring Costs  Year Ended  December 31,** | ** ** |
|--------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| Worldwide  workforce reduction |       | $                                                                | —     |   | $ | 4.7 |   | $ | 0.7 |   |
| Facilities  closure            |       | 0.4                                                              |       | 6.2 |   | — |   |
| Other costs                    |       | —                                                           |       | 0.2 |   | 0.4 |   |
| Total                          |       | $                                                                | 0.4        |   | $ | 11.1 |   | $ | 1.1 |   |

 

**2006 AcquisitionRelated Restructuring Liability**

In connection with theacquisition of the Power Electronics Group of Magnetek, Inc. in October 2006,the Company began to assess and formulate a restructuring plan to exit certainactivities of the acquired business, which was accounted for in accordance withEITF 95-3, “Recognition of Liabilities in Connection with a PurchaseBusiness Combination.” As a result of the purchase business combination, theCompany recognized restructuring liabilities of approximately $6.2 million, asof the consummation date of the acquisition on October 23, 2006, relatedto the Company’s plan to exit certain activities of the acquired business. TheCompany has developed a plan to integrate and restructure the operations of theacquired business to more closely align them with those of the Company. Theplan is expected to be finalized by the end of 2007. Additional liabilitiesthat arise will result in an adjustment to the restructuring liability andgoodwill. The plan includes costs related to severance, facility lease costsand termination, and contract termination costs that will be incurred as adirect result of these integration and restructuring efforts. As part of thisrestructuring, during the first fiscal quarter of the year ending December 31,2007, the Company announced its plan to close the U.S. facility of the acquiredbusiness and to transfer production out of this facility and into its facilityin the Dominican Republic, thereby reducing the workforce in the U.S. byapproximately 75 employees.

**2005 RestructuringCosts**

During 2005, the Company implemented a restructuringplan which was accounted for in accordance with SFAS 146. The Company recordedpre-tax charges of $11.1 million for restructuring costs and pre-tax non-cashcharges of $5.1 million in asset impairment costs during the year ended December 31,2005 related to the restructuring of its worldwide operations. Therestructuring costs and asset impairment charges are classified as operatingexpenses. All restructuring obligations have been or will be settled with cash.

The restructuring chargeof $11.1 million for the year ended December 31, 2005 included a workforcereduction in Europe and North America, and the charges were comprised ofseverance and related benefits for approximately 250 terminated employees, consolidationof excess facilities and continuing lease obligations thereon, contracttermination costs, and other shutdown costs. The facilities closure chargeincludes $4.3 million of continuing lease obligations related to a NorthAmerican facility. In accordance with SFAS 146, “Accounting for CostsAssociated with Disposal Activities,” the Company measured and recognized theadditional liability for the fair value of the future payments remaining on thelease, offset by estimated sublease rents. The charge includes amounts expectedto be paid over the life of the lease which extends into 2011. The facilitiesclosure charge also includes a lease termination fee of 

F-24

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

$1.0 millionwhich the Company paid out during 2005. All restructuring charges are expectedto be settled with cash. The Company paid the remaining severance obligationsas of December 31, 2005 during the first quarter of 2006.

**2004 RestructuringCosts**

During 2004, the Company announced a restructuringplan in accordance with SFAS 146 related to the restructuring of theCompany’s manufacturing and engineering operations primarily in Europe. TheCompany recorded pre-tax restructuring charges of $1.1 million and pre-taxnon-cash asset impairment charges of $2.0 million. The restructuring costs andasset impairment charges are classified as operating expenses. Allrestructuring obligations have been or will be settled with cash.

The $0.7 million ofrestructuring charge for workforce reduction during 2004 was related toapproximately 45 positions eliminated, primarily in Switzerland and in Norway.The reductions in Norway related to the Company’s 2003 restructuring plan toconsolidate manufacturing facilities internally and shift production to outsidecontract manufacturers. The $0.4 million of other restructuring chargeswere for settlement payments and legal costs resulting from a settlementagreement related to the closure of the Boston, Massachusetts facility during2001. A settlement agreement was reached during the fourth quarter of 2004between the Company and the employees impacted by the 2001 restructuring of theBoston facility. All severance and related benefits were paid out during 2004.

**Impairment of FixedAssets**

During 2006, the Company performed impairment reviewsin accordance with SFAS 144, “Accounting for the Impairment and Disposal ofLong-Lived Assets,” to determine whether any of its long-lived assets wereimpaired. No long-lived asset impairments were recorded during the year ended December 31,2006.

During 2005, the Company performed impairment reviewsin accordance with SFAS 144 to determine whether any of its long-lived assetswere impaired. The Company identified certain long-lived assets associated withthe 2005 restructuring whose carrying value would not be recoverable fromfuture cash flows, and recorded an impairment charge of $5.1 million for theseassets for the year ended December 31, 2005. These assets consisted of anowned building in Norway that was initially held for use and written down tofair value, and then sold during 2005; leasehold improvements for leasedfacilities whose operations were closed during the year; and miscellaneousother long-lived assets that will no longer be used. None of the impairmentcharges included cash components.

During 2004, the Company performed an impairmentreview in accordance with SFAS 144 to determine whether any of itslong-lived assets were impaired due to the restructuring of one of its Europeanfacilities. The Company recorded non-cash impairment charges of$0.7 million related to manufacturing equipment at that facility. Thefixed assets were written down to fair value based on a discounted cash flowand on market quotes obtained from third party sources, as the Companydetermined that the carrying values of the fixed assets would not be recoveredfrom future cash flows. In addition, the Company recorded non-cash assetimpairment charges of $1.3 million when it wrote down the book value of anidle facility in Mexico to fair value which the Company determined based oncurrent market activity.

F-25

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

**NOTE 12. LONG-TERMDEBT**

At December 31,2006, long-term debt consists of the following (in millions):

| ** **                                                 | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **2006**              | ** ** |
| Promissory Note  (related party indebtedness)              |       |                  | $          | 50.0 |   |   |
| Installment notes  ranging from 2% to 8%, due through 2011 |       |                  | 4.3        |   |   |
| Total long-term debt                                       |       |                  | 54.3       |   |   |
| Less current  portion                                      |       |                  | 1.9        |   |   |
| Total long-term  debt, less current portion                |       |                  | $          | 52.4 |   |   |

 

In connection with the acquisition of the PowerElectronics Group in October, 2006, the Company entered into a Term LoanAgreement (the “Loan Agreement”) with PWER Bridge LLC, and issued a PromissoryNote (the “Note”) to PWER Bridge LLC as of October 23, 2006 in theprincipal amount of $50 million. The Note is due and payable 18 months from thedate of issuance and may be prepaid without penalty or premium at any time. Intereston the outstanding principal balance of the Note will accrue at a rate of 10%per annum until the first anniversary date of the Note, and then will accrue ata rate of 12% thereafter. The Loan Agreement contains customary terms andconditions, including customary representations and warranties, events ofdefault, and affirmative and negative covenants (although none of suchcovenants require any financial tests to be met). PWER Bridge LLC is anaffiliate of SF Holding Corp., which is the largest stockholder of the Company,and an affiliate of Stephens Inc. From time to time, Stephens, Inc. hasprovided financial advisory services to the Company, however, no financialadvisory services were provided to the Company during the years ended December 31,2006, 2005 and 2004.

In addition, the Power Electronics Group has certainlong-term notes payable through fiscal year 2011. Amounts outstanding at December 31,2006, were $4.3 million and bore interest at various rates ranging from 2% to8% at a weighted-average interest rate of 3.6%. The long-term notes payableagreements require the Company’s subsidiary to provide certain financialreports to the lender but do not require compliance with any financialcovenants.

At December 31, 2006, the Company was in compliancewith the debt covenants related to these long-term borrowing arrangements.

At December 31, 2005, the Company had nooutstanding balance on any long-term borrowing arrangement.

F-26

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

Aggregateprincipal maturities on long-term debt outstanding at December 31, 2006are as follows:

| **Year Ending December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                        |       | $          | 1.9        |       |
| 2008                                        |       | 51.8       |       |
| 2009                                        |       | 0.2        |       |
| 2010                                        |       | 0.2        |       |
| 2011                                        |       | 0.2        |       |
| Thereafter                                  |       | —     |       |
| Total                                       |       | $          | 54.3       |       |

 

**NOTE 13.COMMITMENTS AND CONTINGENCIES**

***Leases******—******The*** Companyleases facilities in various locations around the world under lease agreementsexpiring at various dates through 2014 in North America and Asia, and 2011 inEurope.

Additionally, the Companyalso leases several vehicles with leases expiring in 2008.

Future minimum leasepayments for operating leases as of December 31, 2006 are as follows (in millions):

| **Years Ending December 31,** | ** ** | ** ** | ** ** | **Operating  Leases** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------------|------------|
| 2007                                         |       |       | $          | 5.0                   |       |   |
| 2008                                         |       |       | 3.9        |                  |       |
| 2009                                         |       |       | 3.0        |                  |       |
| 2010                                         |       |       | 2.6        |                  |       |
| 2011                                         |       |       | 1.6        |                  |       |
| 2012 and  thereafter                         |       |       | 2.9        |                  |       |
| Total minimum lease  payments                |       |       | $          | 19.0                  |       |   |

 

Total rent expense wasapproximately $5.2 million, $4.7 million, and $7.2 million forthe years ended December 31, 2006, 2005 and 2004, respectively.Approximately $5.2 million of operating lease commitments above werereserved for in the restructuring charge accruals as of December 31, 2006.The Company intends to seek subleases for unused facilities.

***Legal Proceedings******—******The*** Companyis involved in certain claims and legal proceedings which have arisen in thenormal course of business. Management does not believe that the outcome of anycurrently pending claims or legal proceedings in which the Company is currentlyinvolved will have a material adverse effect on the Company’s consolidatedfinancial position, results of operations or cash flow.

*Power-One, Inc.v. Artesyn Technologies, Inc.* United StatesDistrict Court, Eastern District of Texas, Civil Action No. 2-05-CV-463(LED). This action was initiated by the Company against Artesyn Technologies onSeptember 30, 2005. The complaint alleges that certain products of ArtesynTechnologies infringe certain patents held by the Company that focus ontechnologies relating to digital power management and control. The Complaintseeks certain injunctive relief against and compensatory damages from ArtesynTechnologies. Trial proceedings are in the stages of discovery and relatedprocedural matters. A trial by jury is scheduled for August 2007.

F-27

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

The Company initiated a similar lawsuit against SiliconLaboratories, Inc. in December, 2005 for infringement of certain of theCompany’s patents. The Company settled this litigation with SiliconLaboratories as of July 20, 2006 and the lawsuit was dismissed withoutprejudice on July 21, 2006 in connection with the settlement.

**NOTE 14. COMMONSTOCK**

***Stock Plans******—******In*** February 1996,the Board of Directors approved a stock option plan (the “1996 Plan”). In January 1999,the 1996 Plan was amended to increase the shares issuable under the plan. In May 2004,the 1996 Plan was amended by the Board of Directors to prevent furtherincreases in share issuable under this plan, to prevent grants tonon-employees, and to reprice the exercise price of options issued under theplan. Under the terms of the 1996 Plan, power and authority to issue grants andawards under the plan terminated effective February 22, 2006. Any grant oraward issued prior to that date remains outstanding per the terms of theoriginal grant or award. The maximum contractual life of each option is 10years from the date of grant. Any shares available for issuance under the 1996Plan which had not been issued as of February 22, 2006 were cancelled asof that date and are no longer available for issuance. The Company issuedeither qualified or non-qualified stock options, restricted stock andrestricted stock units under the 1996 Plan. The option exercise price wasdetermined by the Board of Directors based on the fair market value of theCompany’s common stock on the date of grant. The existing options generallyvest over four- and seven-year terms. Those options with seven-year vestingterms include accelerated vesting provisions that allowed for vesting over fiveyears if certain performance measures were met. As of December 31, 2006,approximately 15.2 million shares of common stock were issued andoutstanding under the 1996 Plan.

In September 2001,the Board of Directors approved a stock option plan for the issuance of2.5 million shares of common stock (the “2001 Plan”). The Company onlyissued non-qualified stock options under the 2001 Plan, and did not issueoptions under the 2001 Plan to any member of the Board of Directors or anyexecutive officer (i.e. an officer as defined under and subject to Section 16of the Securities Exchange Act of 1934). The Board of Directors determined theoption exercise price based on the fair market value of the Company’s commonstock on the date of grant. All options under the 2001 Plan were granted atfair market value. Options granted under the 2001 Plan generally vest over fouryears and have a maximum contractual life of 10 years. In May 2004, theBoard of Directors approved an amendment to this plan whereby the Company maynot grant additional awards under the 2001 Plan and the Company may not repriceoptions previously granted under this plan. As of December 31, 2006,approximately 1.8 million shares of common stock were issued andoutstanding under the 2001 Plan.

In May 2004, theBoard of Directors and shareholders approved the adoption of the Power-One 2004stock incentive plan (the “2004 Plan”) for the issuance of 4.8 millionshares of common stock. Under this plan, the Company can issue stock options,stock appreciation rights, restricted stock, stock bonuses and other forms ofawards denominated in common stock or units as well as cash bonus awards. Theoption exercise price is determined by the Board of Directors based on the fairmarket value of the Company’s common stock on the date of grant. The existingoptions generally vest over four-year terms and have a maximum contractual lifeof 10 years. At December 31, 2006, approximately 0.5 million shares ofcommon stock were issued an outstanding under the 2004 plan and 4.3 millionshares of common stock were available for future grants.

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

***Stock Awards******—***TheCompany has granted restricted share awards under its 1996 and 2004 stockincentive plans. A summary of the activity for nonvested share awards ispresented below:

| ** **                                              | ** ** | **Shares**             | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|---------------------------------------------------------|------------|
| ** **                                              | ** ** | **(in millions)** | ** ** | ** **                                              | ** ** |
| Nonvested awards  outstanding at December 31, 2003 |       |                   | 0.2        |                                                    |       |   | $ | 7.73 |   |   |
| Awards granted                                          |       |                   | —     |                                                    |       |   | — |   |   |
| Awards vested and issued                                |       |                   | (0.1       | )                                                       |       |   | 7.37 |   |   |
| Awards canceled                                         |       |                   | —     |                                                    |       |   | — |   |   |
| Awards forfeited                                        |       |                   | —     |                                                    |       |   | — |   |   |
| Nonvested awards  outstanding at December 31, 2004 |       |                   | 0.1        |                                                    |       |   | $ | 8.48 |   |   |
| Awards granted                                          |       |                   | 1.3        |                                                    |       |   | 4.44 |   |   |
| Awards vested and issued                                |       |                   | (0.1       | )                                                       |       |   | 8.48 |   |   |
| Awards canceled                                         |       |                   | (0.1       | )                                                       |       |   | 4.42 |   |   |
| Awards forfeited                                        |       |                   | —     |                                                    |       |   | — |   |   |
| Nonvested awards  outstanding at December 31, 2005 |       |                   | 1.2        |                                                    |       |   | $ | 4.44 |   |   |
| Awards granted                                          |       |                   | 0.8        |                                                    |       |   | 6.53 |   |   |
| Awards vested and issued                                |       |                   | (0.3       | )                                                       |       |   | 4.46 |   |   |
| Awards canceled                                         |       |                   | —     |                                                    |       |   | — |   |   |
| Awards forfeited                                        |       |                   | —     |                                                    |       |   | — |   |   |
| Nonvested awards  outstanding at December 31, 2006 |       |                   | 1.7        |                                                    |       |   | $ | 5.43 |   |   |

 

TheCompany recorded compensation cost in the income statement related to stockawards of $2.1 million, $1.0 million and $1.5 million for the yearsended December 31, 2006, 2005 and 2004, respectively. As of December 31,2006, there was $7.6 million of total unrecognized compensation cost related tononvested stock awards granted under the Company’s stock option plans. Thatcost is expected to be recognized over a weighted average period of 2.5 years. AtDecember 31, 2006, there were 1.6 million stock awards that wereexpected to vest with an aggregate intrinsic value of $8.5 million and aweighted average grant date fair value of $5.43 per share.

| ** **                                            | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | ** 2006 **                       | ** ** | ** 2005 ** | ** ** | **2004** | ** ** |
| Total fair value  of stock awards vested, in millions |       |                                       | $          | 1.4 |   |   |   | $ | 0.2 |   |   | $ | 1.5 |   |
|                                                       |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |

 

***Stock Options******—******On***February 23,2005, the Board of Directors of the Company authorized the acceleration of thevesting of all of the Company’s outstanding unvested stock options granted todirectors, officers and employees of the Company under the 1996 Plan, the 2001Plan and the 2004 Plan with an exercise price greater than $5.00. The closingprice of the Company’s common stock on the NASDAQ Global Market to be usedfor measurement of compensation as of the date of acceleration was $5.93. As aresult of the acceleration, options to acquire approximately 3.8 million sharesof the Company’s common stock, which otherwise would have vested from timeto time over the next four years, became immediately exercisable. All otherterms and conditions applicable to outstanding stock option grants remainin effect. The Board of Directors’ decision to accelerate the vesting of theaffected stock options was in response to the issuance by the SFAS 123(R), “Share-Based Payment,” which required the 

F-29

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

Company to treat unvestedstock options as an expense effective at the beginning of the Company’s firstfiscal quarter of 2006. By accelerating the vesting of the affected stockoptions, the Company elected to recognize compensation expense of $0.1 millionduring the first fiscal quarter of 2005 for such accelerated stock options withexercise prices between $5.00 and $5.93. No further compensation expense willbe required in future periods associated with the affected options.

The Company recordedcompensation cost in the income statement related to stock options of $0.7 million,$0.1 million, and $0.1 million for the years ended December 31, 2006, 2005and 2004, respectively. As of December 31, 2006, there was $0.1 million oftotal unrecognized compensation cost related to nonvested stock options grantedunder the Company’s stock option plans

For the years ended December 31,2006, 2005 and 2004, the total options available for exercise, the weightedaverage exercise price, and the fair value of stock options was as follows:

| ** **                                                     | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Total options  exercisable, in millions                        |       | $                                          | 8.7        |   | $ | 9.9 |   | $ | 8.7 |   |
| Weighted average  exercisable stock option exercise price      |       | $                                          | 9.94       |   | $ | 9.73 |   | $ | 10.47 |   |
| Total intrinsic value of stock options exercised, in  millions |       | $                                          | 2.7        |   | $ | 6.1 |   | $ | 2.6 |   |
| Total fair value of  stock awards vested, in millions          |       | $                                          | 1.4        |   | $ | 0.2 |   | $ | 1.5 |   |

 

F-30

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

Duringthe years ended December 31, 2006, 2005 and 2004, the following activityoccurred under our plans:

| ** **                                                       | ** ** | **Options**            | ** ** | **Exercise Price  per Option** | ** ** | **Weighted  Average  Exercise  Price** | ** **    | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|------------------------------------------|------------|----------------------------------------|---------------|-----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                       | ** ** | **(in millions)** | ** ** | ** **                               | ** ** | ** **                             | ** **    | ** **                                          | ** ** | **(in millions)**          | ** ** |
| Options  outstanding—December 31, 2003                 |       |                   | 12.7       |                                     |       | $                                      | 0.34 - $83.75 |                                                |       | $                               | 9.39       |   |   |   |   |   |   |   |   |   |   |
| Options granted                                                  |       |                   | 2.4        |                                     |       | $                                      | 6.20 - $14.26 |                                                |       | $                               | 9.52       |   |   |   |   |   |   |   |   |   |   |
| Options exercised                                                |       |                   | (0.5       | )                                        |       | $                                      | 0.34 - $9.55  |                                                |       | $                               | 4.77       |   |   |   |   |   |   |   |   |   |   |
| Options cancelled                                                |       |                   | (0.6       | )                                        |       | $                                      | 2.32 - $83.75 |                                                |       | $                               | 12.12      |   |   |   |   |   |   |   |   |   |   |
| Options  outstanding—December 31, 2004                 |       |                   | 14.0       |                                     |       | $                                      | 0.34 - $83.75 |                                                |       | $                               | 9.44       |   |   |   |   |   |   |   |   |   |   |
| Options granted                                                  |       |                   | 0.1        |                                     |       | $                                      | 4.46 - $7.07  |                                                |       | $                               | 4.70       |   |   |   |   |   |   |   |   |   |   |
| Options exercised                                                |       |                   | (2.0       | )                                        |       | $                                      | 0.34 - $7.19  |                                                |       | $                               | 3.22       |   |   |   |   |   |   |   |   |   |   |
| Options cancelled                                                |       |                   | (1.7       | )                                        |       | $                                      | 2.05 - $83.75 |                                                |       | $                               | 16.52      |   |   |   |   |   |   |   |   |   |   |
| Options  outstanding—December 31, 2005                 |       |                   | 10.4       |                                     |       | $                                      | 0.34 - $82.22 |                                                |       | $                               | 9.48       |   |   |   |   |   |   |   |   |   |   |
| Options granted                                                  |       |                   | —     |                                     |       | —                                 |          |                                                | —     |                            |       |   |   |   |   |   |   |   |   |
| Options exercised                                                |       |                   | (0.9       | )                                        |       | $                                      | 0.34 - $6.48  |                                                |       | $                               | 3.92       |   |   |   |   |   |   |   |   |   |   |
| Options cancelled                                                |       |                   | (0.6       | )                                        |       | $                                      | 2.32 - $23.75 |                                                |       | $                               | 12.33      |   |   |   |   |   |   |   |   |   |   |
| Options  outstanding—December 31, 2006                 |       |                   | 8.9        |                                     |       | $                                      | 0.50 - $82.22 |                                                |       | $                               | 9.82       |   |   |   | 4.89 yrs |   |   |   | $ | 9.8 |   |   |
| Options  exercisable—December 31, 2006                 |       |                   | 8.7        |                                     |       |                                   |          |                                                | $          | 9.94                            |       |   |   | 4.86 yrs |   |   |   | $ | 9.3 |   |   |
| Options vested and expected to  vest—December 31, 2006 |       |                   | 8.9        |                                     |       |                                   |          |                                                | $          | 9.82                            |       |   |   | 4.89  yrs |   |   |   | $ | 9.8 |   |   |

 

Thefollowing table summarizes information regarding options outstanding at December 31,2006:

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of Exercise Prices** | ** ** | ** **                   | ** ** | **Millions  Outstanding**    | ** ** | **Remaining  Contractual Life** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Millions  Exercisable** | ** ** | **Weighted Average  Exercise Price** | ** ** |
| $  0.50  - $  4.60      |       |                         | 0.7        |                         |       |   | 2.29 yrs |   |   |   | $ | 2.44 |   |   |   | 0.7 |   |   |   | $ | 2.43 |   |   |
| $  4.64  - $  4.86      |       |                         | 0.9        |                         |       |   | 4.52 yrs |   |   |   | $ | 4.67 |   |   |   | 0.7 |   |   |   | $ | 4.67 |   |   |
| $  4.96  - $  5.77      |       |                         | 1.8        |                         |       |   | 4.76 yrs |   |   |   | $ | 5.75 |   |   |   | 1.8 |   |   |   | $ | 5.75 |   |   |
| $  5.86  - $  9.11      |       |                         | 1.6        |                         |       |   | 6.00 yrs |   |   |   | $ | 6.84 |   |   |   | 1.6 |   |   |   | $ | 6.84 |   |   |
| $  9.12  - $  9.12      |       |                         | 1.5        |                         |       |   | 7.48 yrs |   |   |   | $ | 9.12 |   |   |   | 1.5 |   |   |   | $ | 9.12 |   |   |
| $  9.13  - $20.00                 |       |                         | 1.1        |                         |       |   | 3.76 yrs |   |   |   | $ | 12.34 |   |   |   | 1.1 |   |   |   | $ | 12.34 |   |   |
| $20.25 -  $82.22                            |       |                         | 1.3        |                         |       |   | 3.31 yrs |   |   |   | $ | 25.77 |   |   |   | 1.3 |   |   |   | $ | 25.77 |   |   |
| $  0.50 -  $82.22                 |       |                         | 8.9        |                         |       |   | 4.89 yrs |   |   |   | $ | 9.82 |   |   |   | 8.7 |   |   |   | $ | 9.94 |   |   |
|                                             |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During the years ended December 31, 2006, 2005,and 2004, the Company received cash of $3.6 million, $6.4 million, and $2.3million, respectively, from the exercise of stock options granted under itsstock options plans.

F-31

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

***Employee******Stock Purchase Plan******—******The***Companyadopted, effective January 1, 1998, an Employee Stock Purchase Plan, underwhich 9.0 million shares are reserved for purchase by employees. The planqualifies for non-compensatory status because it meets the following criteria:all full-time employees are able to participate in the plan, the stock isoffered equally to all eligible employees, the purchase right is limited to areasonable time period, and the discount from the market price of the stock isreasonable and in compliance with Section 423 of the Internal RevenueCode. No compensation cost is recognized for shares issued under this plan.Substantially all of the Company’s domestic employees may contribute from twoto eight percent of their qualified earnings toward the purchase of theCompany’s common stock. Through the year ended December 31, 2006, the planprovided the participants the opportunity to purchase shares at 85% of the fairmarket value on either the first day or the last day of each six-month offeringperiod, whichever was lower. Effective January 1, 2006, the plan providedthe participants the opportunity to purchase shares at 95% of the fair marketvalue on the last day of the respective offering period. The offering periodsgenerally run from January 1 through June 30 and July 1 throughDecember 31. At December 31, 2006, 2005 and 2004 there wereapproximately 0.5 million, 0.5 million and 0.4 million sharesissued cumulatively under this plan, respectively. During the years endedDecember 31, 2006, 2005, and 2004, the Company received cash of $0.2million, $0.5 million, and $0.9 million, respectively, for shares issued underthe plan.

***Share Repurchase Program******—******In***May 2005,the Company received authorization from its Board of Directors to purchase andretire up to $20 million of its outstanding common stock in open-markettransactions until December 31, 2006. As of December 31, 2006, theCompany had repurchased and retired 1.0 million shares of its common stock atan average price of $5.49 per share for an aggregate purchase priceof $5.3 million.

F-32

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

**NOTE 15. BUSINESSGEOGRAPHICAL LOCATIONS AND PRODUCT LINE REVENUE**

The Company hasmanufacturing and/or research and development operations in the United States,Dominican Republic, Slovakia, Italy, China, Hungary, Switzerland and Ireland.The following table summarizes the Company’s revenues and long-lived assets indifferent geographic locations by product line (in millions):

| ** **   | ** ** | **Years Ended December 31,** | ** ** |
|--------------|------------|---------------------------------------------|------------|
| ** **   | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **   | ** ** | **Embedded  products**                      | ** ** | **Power  systems** | ** ** | **Total** | ** ** | **Embedded  products** | ** ** | **Power  systems** | ** ** | **Total** | ** ** | **Embedded  products** | ** ** | **Power  systems** | ** ** | **Total** | ** ** |
| Revenues:(a) |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|              |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| North America         |   |   | $    | 109.0  |   |   |   | $      | 12.7   |   |   | $      | 121.7 |   |   | $      | 91.8  |   |   |   | $      | 14.9   |   |   | $      | 106.7  |   |   | $      | 112.5 |   |   |   | $ | 20.3 |   |   | $ | 132.8 |   |
|-----------------------|--------|--------|------|--------|--------|--------|--------|--------|--------|--------|--------|--------|-------|--------|--------|--------|-------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|-------|--------|--------|--------|---|------|--------|--------|---|-------|--------|
| European countries    |   |   | 74.5 |   |   |   | 54.2   |   |   | 128.7  |   |   | 50.1  |   |   |   | 43.5  |   |   | 93.6   |   |   | 55.3   |   |   |   | 41.8   |   |   | 97.1  |   |
| Malaysia              |   |   | 30.3 |   |   |   | 0.9    |   |   | 31.2   |   |   | 25.5  |   |   |   | 1.0   |   |   | 26.5   |   |   | 19.5   |   |   |   | 1.3    |   |   | 20.8  |   |
| Other Asian countries |   |   | 32.7 |   |   |   | 18.4   |   |   | 51.1   |   |   | 18.9  |   |   |   | 11.0  |   |   | 29.9   |   |   | 12.8   |   |   |   | 11.6   |   |   | 24.4  |   |
| Other                 |   |   | 0.5  |   |   |   | 4.8    |   |   | 5.3    |   |   | 0.2   |   |   |   | 4.7   |   |   | 4.9    |   |   | 0.1    |   |   |   | 5.1    |   |   | 5.2   |   |
| Total                 |   |   | $    | 247.0  |   |   |   | $      | 91.0   |   |   | $      | 338.0 |   |   | $      | 186.5 |   |   |   | $      | 75.1   |   |   | $      | 261.6  |   |   | $      | 200.2 |   |   |   | $ | 80.1 |   |   | $ | 280.3 |   |

----

(a)           Revenues areattributable to countries based on location of customer.

|                    | ** ** | **December 31,** | ** ** |
|--------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Long-Lived Assets: |       |                  |       |   |   |
| United States      |       | $                     | 48.1       |   | $51.4 |   |
| Italy              |       | 47.9                  |       | — |   |
| Switzerland        |       | 14.5                  |       | 14.2 |   |
| Dominican Republic |       | 14.0                  |       | 15.8 |   |
| China              |       | 9.4                   |       | 1.0 |   |
| Slovakia           |       | 7.2                   |       | 5.0 |   |
| Other              |       | 5.8                   |       | 2.8 |   |
| Total              |       | $                     | 146.9      |   | $ | 90.2 |   |
|                    |            |                       |            |  |  |  |  |

 

**NOTE 16. RETIREMENTPLANS**

The Company sponsors or participates in variousretirement and pension plans, including defined benefit and definedcontribution plans. Most international employees are covered bygovernment-sponsored programs where the costs to the Company are notsignificant. The costs and liabilities associated with the various plans arenot material to the Company as of December 31, 2006 and 2005. 

In accordance with Italian law, the Company has anunfunded severance plan under which all employees are entitled to receiveseverance indemnities (Trattamento di Fine Rapporto or “TFR”) upon terminationof their employment. The amounts payable are based on salary paid and increasesin cost of living, and are included in other long-term liabilities in theconsolidated balance sheets. The liability is recorded in accordance with EITF88-I, “Determination of Vested Benefit Obligation for a Defined Benefit PensionPlan (“approach 1”).” The severance indemnities accrue approximately at therate of 1/12 

F-33

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

of the gross salaries paidduring the year, and are revalued applying a cost of living factor establishedby the Italian Government. Theamounts accrued become payable upon termination of the individual employee, forany reason, e.g., retirement, dismissal or reduction in work force. Employeesare fully vested in TFRbenefits after two months of service.

The Company has a 401(k) profitsharing plan covering all U.S. employees, subject to certain participation, ageand vesting requirements. The plan provides for a partial Company match ateither a discretionary amount or up to specified percentages. Total Companycontributions were $0.7 million, $0.3 million, and $0.5 millionfor the years ended December 31, 2006, 2005 and 2004, respectively.

**NOTE 17. RESEARCHAND DEVELOPMENT**

Research and developmentexpenses were $21.7 million, $22.0 million, and $29.4 million for theyears ended December 31, 2006, 2005 and 2004, respectively.

**NOTE 18. INCOMETAXES**

Income(loss) before provision (benefit) for income taxes consisted of the following(in millions):

|                    | ** ** | **Year Ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States      |       | $                                          | (24.8      | ) | $ | (32.0 | ) | $ | (17.4 | ) |
| Non-United  States |       | 9.4                                        |       | (4.5 | ) | (0.7 | ) |
| Total              |       | $                                          | (15.4      | ) | $ | (36.5 | ) | $ | (18.1 | ) |

 

Thecomponents of the provision (benefit) for income taxes are as follows (inmillions):

| ** **                            | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:                              |       |                                       |       |   |   |   |   |   |   |
| Federal                               |       | $                                          | —     |   |   | $ | — |   |   | $ | — |   |
| State                                 |       | —                                     |       |   | — |   |   | — |   |
| Foreign                               |       | 0.8                                        |       |   | 1.2 |   |   | 4.3 |   |
| Total current                         |       | 0.8                                        |       |   | 1.2 |   |   | 4.3 |   |
| Deferred:                             |       |                                       |       |   |   |   |   |   |   |
| Federal                               |       | —                                     |       |   | — |   |   | — |   |
| State                                 |       | —                                     |       |   | — |   |   | — |   |
| Foreign                               |       | (1.5                                       | )          |   | 0.6 |   |   | (1.2 | ) |
| Total deferred                        |       | (1.5                                       | )          |   | 0.6 |   |   | (1.2 | ) |
| Provision (benefit) for  income taxes |       | $                                          | (0.7       | ) |   | $ | 1.8 |   |   | $ | 3.1 |   |

 

F-34

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

For the years endedDecember 31, 2006, 2005 and 2004, the components of deferred income taxassets (liabilities) were as follows (in millions):

| ** **                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **Federal**                                | ** ** | **State** | ** ** | **Foreign** | ** ** | **Federal** | ** ** | **State** | ** ** | **Foreign** | ** ** |
| Current:                             |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Uniform capitalization               |       | $                                          | 0.4        |   | $ | 0.1 |   |   | $ | — |   |   | $ | 0.3 |   | $ | 0.1 |   |   | $ | — |   |   |
| Sales discount reserve               |       | 0.6                                        |       | 0.1 |   |   | — |   |   | 0.5 |   | 0.1 |   |   | — |   |   |
| Bad debt reserve                     |       | 0.3                                        |       | 0.1 |   |   | 1.5 |   |   | 0.4 |   | 0.1 |   |   | 1.1 |   |   |
| Inventory reserve                    |       | 3.2                                        |       | 0.5 |   |   | 2.8 |   |   | 3.5 |   | 0.6 |   |   | (1.1 | ) |   |
| Warranty reserve                     |       | 0.4                                        |       | 0.1 |   |   | — |   |   | 0.5 |   | 0.1 |   |   | — |   |   |
| Restructuring allowance              |       | 2.8                                        |       | 0.5 |   |   | 1.6 |   |   | 1.3 |   | 0.4 |   |   | 0.1 |   |   |
| Other                                |       | 0.9                                        |       | 0.1 |   |   | 0.3 |   |   | 1.2 |   | 0.2 |   |   | 0.2 |   |   |
| Subtotal                             |       | 8.6                                        |       | 1.5 |   |   | 6.2 |   |   | 7.7 |   | 1.6 |   |   | 0.3 |   |   |
| Valuation allowance                  |       | (8.6                                       | )          | (1.5 | ) |   | (0.5 | ) |   | (7.7 | ) | (1.6 | ) |   | (1.6 | ) |   |
| Total current                        |       | —                                     |       | — |   |   | 5.7 |   |   | — |   | — |   |   | (1.3 | ) |   |
| Non-current:                         |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOL                                  |       | 94.2                                       |       | 5.9 |   |   | 17.5 |   |   | 85.9 |   | 5.7 |   |   | 14.4 |   |   |
| Intangible assets                    |       | 2.1                                        |       | 3.8 |   |   | (2.8 | ) |   | 2.9 |   | 3.1 |   |   | — |   |   |
| Fixed assets                         |       | —                                     |       | 0.1 |   |   | (3.9 | ) |   | 0.2 |   | 0.1 |   |   | (0.2 | ) |   |
| Other                                |       | 0.2                                        |       | 0.5 |   |   | (1.7 | ) |   | (0.2 | ) | 0.6 |   |   | (0.6 | ) |   |
| Subtotal                             |       | 96.5                                       |       | 10.3 |   |   | 9.1 |   |   | 88.8 |   | 9.5 |   |   | 13.6 |   |   |
| Valuation allowance                  |       | (96.5                                      | )          | (10.3 | ) |   | (17.1 | ) |   | (88.8 | ) | (9.5 | ) |   | (14.5 | ) |   |
| Total non-current                    |       | —                                     |       | — |   |   | (8.0 | ) |   | — |   | — |   |   | (0.9 | ) |   |
| Net deferred  income tax liabilities |       | $                                          | —     |   | $ | — |   |   | $ | (2.3 | ) |   | $ | — |   | $ | — |   |   | $ | (2.2 | ) |   |

 

The Company records a valuation allowance against its deferredincome tax assets in accordance with SFAS 109 when, in management’sjudgment, the deferred income tax assets will likely not be realized in theforeseeable future. For the years ended December 31, 2006, 2005 and 2004,the Company recorded valuation allowances against deferred income tax assets of$11.2 million, $14.3 million and $10.1 million, respectively.

Areconciliation of the Company’s provision (benefit) for income taxes to theU.S. federal statutory rate is as follows (in millions):

| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | **Amount**                                 | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Provision for income  taxes at statutory rate |       |                                       | $          | (5.4 | ) |   | (35 | ) |   | $ | (12.8 | ) |   | (35 | ) |   | $ | (6.3 | ) |   | (35 | ) |
| Foreign income taxed at  different rates      |       |                                       | (2.6       | ) |   | (17 | ) |   | 3.4 |   |   | 9 |   |   | 3.3 |   |   | 18 |   |
| Tollgate tax refund                           |       |                                       | (1.6       | ) |   | (11 | ) |   | — |   |   | — |   |   | — |   |   | — |   |
| Non-deductible  goodwill                      |       |                                       | 0.5        |   |   | 3 |   |   | 0.7 |   |   | 2 |   |   | 0.5 |   |   | 3 |   |
| Other                                         |       |                                       | —     |   |   | — |   |   | 0.7 |   |   | 2 |   |   | — |   |   | — |   |
| Valuation allowance net  of state taxes       |       |                                       | 8.4        |   |   | 55 |   |   | 9.8 |   |   | 27 |   |   | 5.6 |   |   | 31 |   |
|                                          |       |                                       | $          | (0.7 | ) |   | (5 | )% |   | $ | 1.8 |   |   | 5 | % |   | $ | 3.1 |   |   | 17 | % |

 

F-35

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

As of December 31, 2006, the Company had netoperating loss (NOL) carry-forwards for U.S. federal and state income taxpurposes of approximately $269 million and $82 million, respectively.These operating loss carry-forwards expire in various years beginning in2021 and 2012, respectively. The Company also has foreign NOLs in variouscountries totaling approximately $52 million.

**NOTE 19. EARNINGS(LOSS) PER SHARE (EPS)**

Thefollowing is a reconciliation of the EPS data (in millions, except per sharedata):

| ** **                            | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                            | ** ** | **(Loss)**                                 | ** ** | **Average  Shares** | ** ** | **Per  Share** | ** ** | **(Loss)** | ** ** | **Average  Shares** | ** ** | **Per  Share** | ** ** | **(Loss)** | ** ** | **Average  Shares** | ** ** | **Per  Share** | ** ** |
| Net loss                              |       |                                       | $          | (14.6 | ) |   |   |   |   |   |   |   |   | $ | (38.3 | ) |   |   |   |   |   |   |   |   | $ | (21.2 | ) |   |   |   |   |   |   |   |
| Basic and Diluted  shares outstanding |       |                                       |       |   |   |   | 86.1 |   |   |   |   |   |   |   |   |   | 85.0 |   |   |   |   |   |   |   |   |   | 83.8 |   |   |   |   |
| Basic and Diluted loss  per share     |       |                                       | $          | (14.6 | ) |   |   | 86.1 |   |   | $ | (0.17 | ) |   | $ | (38.3 | ) |   |   | 85.0 |   |   | $ | (0.45 | ) |   | $ | (21.2 | ) |   |   | 83.8 |   |   | $ | (0.25 | ) |
|                                       |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Basic earnings per share are computed based upon theweighted average number of common shares outstanding and diluted earnings pershare are computed based upon the weighted average number of common sharesoutstanding and dilutive common share equivalents (consisting of incentivestock options, non-qualified stock options and restricted stock awards) outstandingduring the periods using the treasury stock method. Due to the Company’s netloss in each of the years ended December 31, 2006, 2005 and 2004, theinclusion of dilutive common share equivalents in the calculation of dilutedearnings per share would be anti-dilutive, therefore such common shareequivalents have been excluded from the computation of diluted earnings pershare. 

Had the Company been in a net income position for therespective periods, the weighted average common share equivalents of 2.0million, 1.0 million and 2.8 million which were outstanding during the yearsending December 31, 2006, 2005 and 2004 would have been dilutive. 

The weighted average common share equivalentsoutstanding during each period that were excluded from the computation ofdiluted earnings per share because the exercise price for these options wasgreater than the average market price of the Company’s shares of common stockduring the years ending December 31, 2006, 2005, and 2004 were 4.7 million, 9.3million, and 3.4 million, respectively.

**NOTE 20. RELATEDPARTY TRANSACTIONS**

SF Holding Corp., an affiliate of both PWER Bridge,LLC and Stephens Inc, is the largest stockholder of the Company. From time totime Stephens, Inc. has provided financial advisory services to theCompany, although they provided no financial advisory services to the Companyduring the years ended December 31, 2006, 2005 and 2004. The Company hadno payables to Stephens, Inc., at December 31, 2006 and 2005. Aformer officer of Stephens, Inc., who is a current officer of The StephensGroup, an affiliate of Stephens, Inc., is on the Company’s Board ofDirectors. During the year ended December 31, 2006, the Company borrowed$50.0 million from PWER Bridge, LLC to finance its acquisition of the PowerElectronics Group of Magnetek, Inc. PWER Bridge, LLC is an affiliate ofStephens Inc. Stephens Inc. served as financial advisor to Magnetek, Inc.in connection with the sale of the Power Electronics Group to the Company.

The Company maintains minority ownership in a jointventure located in China. The joint venture is accounted for and recorded onthe Company’s balance sheet under the equity-method.

F-36

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

The joint venture may purchase raw components andother goods from the Company and may sell finished goods to the Company as wellas to other third parties. The Company records revenue on sales to the jointventure only when the components and goods are for sales to third parties. Whenthe joint venture purchases components that will be assembled and sold back tothe Company, no revenue is recorded. The Company also has significant andsimilar relationships with contract manufacturers. These contract manufacturersmay purchase raw components from and sell finished goods back to us. No revenueis recognized for these transactions. Revenue is recognized only when theproducts are for sale to third parties.

During the year ended December 31, 2005, theCompany recorded $0.6 million in revenue related to the joint venture. Norevenue was recognized related to the joint venture or during the years ended December 31,2006 and 2004. The Company paid $8.7 million, $6.4 million, and$4.9 million for inventory purchased from the joint venture during theyears ended December 31, 2006, 2005, and 2004, respectively. At December 31,2006 and 2005, the Company owed the joint venture approximately $1.2 millionand $0.3 million, respectively. 

One of the Board of Directors of the Company is theChief Executive Officer of Benchmark Electronics, a contract manufacturer towhom products are sold. During the years ended December 31, 2006, 2005 and2004, the Company recognized revenue on sales to Benchmark Electronics in theamounts of $1.2 million, $1.0 million and $0.7 million, respectively. At December 31,2006 and 2005, the Company was owed $0.2 million by Benchmark Electronics.

The Company spent approximately $0.2 million, $0.1million and less than $0.1 million during the years ended December 31,2006, 2005 and 2004, respectively, for lodging Company personnel in a DominicanRepublic hotel in which its President and Chief Operating Officer, BradGodfrey, owns a minority interest.

F-37

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**POWER-ONE, INC.QUARTERLY FINANCIAL DATA FOR THE2006 AND 2005 QUARTERS (Unaudited)(In millions, except per share data)**

| ** **                         | ** ** | **2006 Quarters Ended** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|
| ** **                         | ** ** | **Mar. 31**                  | ** ** | **Jun. 30** | ** ** | **Sept. 30** | ** ** | **Dec. 31(1)** | ** ** |
| Net sales                          |       |                              | $          | 64.6 |   |   |   | $ | 78.6 |   |   |   | $ | 78.6 |   |   |   | $ | 116.2 |   |   |
| Gross profit                       |       |                              | 20.2       |   |   |   | 26.3 |   |   |   | 25.8 |   |   |   | 20.3 |   |   |
| Income (loss)  from operations     |       |                              | (4.4       | ) |   |   | 0.9 |   |   |   | 1.9 |   |   |   | (12.7 | ) |   |
| Net Income (loss)                  |       |                              | (4.8       | ) |   |   | 3.1 |   |   |   | 1.3 |   |   |   | (14.2 | ) |   |
| Diluted earnings (loss)  per share |       |                              | (0.06      | ) |   |   | 0.04 |   |   |   | 0.01 |   |   |   | (0.16 | ) |   |

 

| ** **             | ** ** | **2005 Quarters Ended** | ** ** |
|------------------------|------------|-----------------------------------|------------|
| ** **             | ** ** | **Mar. 31**                  | ** ** | **Jun. 30** | ** ** | **Sept. 30** | ** ** | **Dec. 31(2)** | ** ** |
| Net sales              |       |                              | $          | 66.7 |   |   | $ | 63.4 |   |   | $ | 67.2 |   |   |   | $ | 64.3 |   |   |
| Gross profit           |       |                              | 16.2       |   |   | 15.9 |   |   | 22.8 |   |   |   | 21.8 |   |   |
| Loss from  operations  |       |                              | (25.7      | ) |   | (15.1 | ) |   | — |   |   |   | 1.9 |   |   |
| Net loss               |       |                              | (28.4      | ) |   | (14.8 | ) |   | 1.5 |   |   |   | 3.4 |   |   |
| Diluted loss per share |       |                              | (0.34      | ) |   | (0.17 | ) |   | 0.02 |   |   |   | 0.04 |   |   |
|                        |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          During the fourthquarter of 2006, the Company recorded a $0.8 million impairment loss related toan other-than-temporary impairment of an available-for-sale investment in oneof its contract manufacturers. Additionally, in the fourth quarter of 2006,cost of goods sold includes $1.4 million of non-recurring inventory chargesthat related to previous quarters.

(2)          During the fourthquarter of 2005, the Company recorded a gain of $2.7 million against assetimpairment charges related to its excess facility in Norway which was soldduring the quarter for net cash proceeds of $5.8 million. The facility wasdetermined to be excess and was impaired by $2.9 million during the firstquarter of 2005 resulting in a net asset impairment charge of $0.2 millionrelated to the building for the fiscal year ended December 31, 2005.Additionally, the Company recorded net $0.2 million of restructuring charges inthe fourth quarter of 2005 primarily for severance and related benefits relatedto its workforce reduction in Europe.

F-38

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**SUPPLEMENTAL SCHEDULE II:VALUATION AND QUALIFYING ACCOUNTSFOR EACH OF THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004(In millions)**

| **Descriptions**                         | ** ** | ** ** | ** ** | **Balance at  Beginning of  Period** | ** ** | **Acquired  Balances (1)** | ** ** | **Charged to  Costs and  Expenses (2)** | ** ** | **Deductions (3)** | ** ** | **Foreign  Currency  Impact** | ** ** | **Balance at  End of Period** | ** ** |
|------------------------------------------|------------|------------|------------|------------------------------------------------|------------|---------------------------------|------------|--------------------------------------------------------|------------|-------------------------|------------|-------------------------------|------------|----------------------------------------------|------------|
| Allowance for doubtful  accounts:        |       |       |       |                                           |       |                            |       |                                                   |       |                    |       |                          |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| *Year  ended December 31,*          | * *   |       |       |                                           |       |                            |       |                                                   |       |                    |       |                          |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| 2006                                     |       |       | $          | 3.7                                            |       |                            |       | $                                                      | 3.7        |                    |       |                          | $          | —                                       |       |   |   | $ | (0.9 | ) |   |   | $ | 0.4 |   |   |   | $ | 6.9 |   |   |
| 2005                                     |       |       | 4.8        |                                           |       |                            | —     |                                                   |       |                    | 0.9        |                          |       |                                         | (1.8       | ) |   |   | (0.2 | ) |   |   | 3.7 |   |   |
| 2004                                     |       |       | 4.4        |                                           |       |                            | —     |                                                   |       |                    | 1.1        |                          |       |                                         | (0.9       | ) |   |   | 0.2 |   |   |   | 4.8 |   |   |
| Accrued sales  discounts and returns:    |       |       |       |                                           |       |                            |       |                                                   |       |                    |       |                          |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| *Year  ended December 31,*          | * *   |       |       |                                           |       |                            |       |                                                   |       |                    |       |                          |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| 2006                                     |       |       | $          | 1.6                                            |       |                            |       | $                                                      | —     |                    |       |                          | $          | 13.0                                         |       |   |   | $ | (12.7 | ) |   |   | $ | — |   |   |   | $ | 1.9 |   |   |
| 2005                                     |       |       | 1.9        |                                           |       |                            | —     |                                                   |       |                    | 10.4       |                          |       |                                         | (10.7      | ) |   |   | — |   |   |   | 1.6 |   |   |
| 2004                                     |       |       | 1.1        |                                           |       |                            | —     |                                                   |       |                    | 13.3       |                          |       |                                         | (12.5      | ) |   |   | — |   |   |   | 1.9 |   |   |
| Deferred tax  asset valuation allowance: |       |       |       |                                           |       |                            |       |                                                   |       |                    |       |                          |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| *Year  ended December 31,*          | * *   |       |       |                                           |       |                            |       |                                                   |       |                    |       |                          |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| 2006                                     |       |       | $          | 123.7                                          |       |                            |       | $                                                      | —     |                    |       |                          | $          | 11.2                                         |       |   |   | $ | (1.7 | ) |   |   | $ | 1.3 |   |   |   | $ | 134.5 |   |   |
| 2005                                     |       |       | 111.1      |                                           |       |                            | —     |                                                   |       |                    | 14.3       |                          |       |                                         | —     |   |   |   | (1.7 | ) |   |   | 123.7 |   |   |
| 2004                                     |       |       | 99.7       |                                           |       |                            | —     |                                                   |       |                    | 10.1       |                          |       |                                         | (0.6       | ) |   |   | 1.9 |   |   |   | 111.1 |   |   |

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(1)          Beginning balance uponacquisition of the Power Electronics Group of Magnetek, Inc effective October 23,2006.

(2)          For the allowance fordoubtful accounts, represents charges to bad debt expense for the year. For theaccrued sales discounts and returns, represents the provisions for estimateddiscounts and returns. For the deferred tax asset valuation allowance,represents additional reserves for deferred tax assets generated during thecurrent period.

(3)          For the allowance fordoubtful accounts, represents write off of bad debt. For the accrued salesdiscounts and returns, represents products returned from and discounts grantedto customers. For the deferred tax asset valuation allowance, represents theutilization of previously reserved deferred tax assets.

S-1

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**INDEX TO EXHIBITS**

Theexhibits listed below are filed as part of, or incorporated by reference, intothis Annual Report on Form 10-K.

|          | **Description**                                                                                                                                                                                                                                                                 |
|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(a)   | Restated  Certificate of Incorporation of the Company                                                                                                                                                                                                                           |
| 3.2(b)   | Certificate of Amendment of Restated Certificate of  Incorporation, filed with the Secretary of State of the State of Delaware on  August 31, 2000                                                                                                                         |
| 3.3(c)   | Certificate of Amendment to the Restated Certificate  of Incorporation of Power-One, Inc., filed with the Secretary of State  of the State of Delaware on May 16, 2005                                                                                                |
| 3.4(d)   | Amended and Restated Bylaws of the Company dated  February 6, 2006                                                                                                                                                                                                         |
| 4.1(a)   | Specimen Common Stock Certificate                                                                                                                                                                                                                                               |
| 4.2(f)   | Rights Agreement, dated as of July 27, 2000,  between Power-One, Inc. and American Stock Transfer &  Trust Company, as Rights Agent, including as exhibits thereto the terms of  the Junior Participating Preferred Stock and Form of Right Certificate |
| 4.3(g)   | Certificate of Designations of Junior Participating  Preferred Stock of the Company                                                                                                                                                                                             |
| 10.1(e)  | Form of Indemnification Agreement between the  Company and its directors, executive officers and certain other officers                                                                                                                                                    |
| 10.2(h)  | Amended and Restated 1996 Stock Incentive Plan,  dated January 25, 2002                                                                                                                                                                                                    |
| 10.3(i)  | Employee Stock Purchase Plan                                                                                                                                                                                                                                                    |
| 10.4(j)  | Power-One 2001 Stock Option Plan, dated  September 28, 2001                                                                                                                                                                                                                |
| 10.5(k)  | Summary of Named Executive Officer Compensation                                                                                                                                                                                                                                 |
| 10.6     | Summary of Director Compensation                                                                                                                                                                                                                                                |
| 10.7(l)  | Power-One 2004 Stock Incentive Plan, dated  May 4, 2004                                                                                                                                                                                                                    |
| 10.11(e) | Form of Stock Unit award agreement under 2004  Stock Incentive Plan for new non-employee director                                                                                                                                                                          |
| 10.12(e) | Form of Stock Unit award agreement under 2004  Stock Incentive Plan for continued service as a non-employee director                                                                                                                                                       |
| 10.13(e) | Form of Stock Unit award agreement under 2004  Stock Incentive Plan for employee award                                                                                                                                                                                     |
| 10.14(m) | Purchase and Sale Agreement dated as of  September 28, 2006 by and between Magnetek, Inc. and  Power-One, Inc.                                                                                                                                                   |
| 10.15(m) | Term Loan Agreement dated as of September 28,  2006 by and between Power-One, Inc. and PWER Bridge, LLC                                                                                                                                                               |
| 10.16(m) | Form of Promissory Note in the amount of  $50,000,000 to be issued by Power-One, Inc. to PWER Bridge, LLC                                                                                                                                                             |
| 10.17    | Form of Change in Control Agreement                                                                                                                                                                                                                                        |
| 21       | List of Subsidiaries                                                                                                                                                                                                                                                            |
| 23       | Consent of Independent Registered Public Accounting  Firm                                                                                                                                                                                                                       |
| 24       | Power of Attorney (Contained on Signature Page)                                                                                                                                                                                                                                 |
| 31.1     | Section 302 Certification of Principal  Executive Officer                                                                                                                                                                                                                  |
| 31.2     | Section 302 Certification of Principal  Financial Officer                                                                                                                                                                                                                  |
| 32       | Section 906 Certifications of Principal  Executive Officer and Principal Financial Officer                                                                                                                                                                                 |

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(a)           Previously filed as anexhibit to the Registration Statement on Form S-1 of Power-One, Inc.,as amended, filed on September 12, 1997.

S-2

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(b)          Previously filed as anexhibit to the Quarterly Report on Form 10-Q for the QuarterlyPeriod ended October 1, 2000.

(c)           Previously filed as anexhibit to the Annual Report on Form 10-K for the Fiscal Year ended December 21,2005.

(d)          Previously filed as anexhibit to the Current Report on Form 8-K filed on February 6,2006.

(e)           Previously filed as anexhibit to the Quarterly Report on Form 10-Q for the QuarterlyPeriod Ended March 31, 2006.

(f)             Previously filed asan exhibit to the Registration Statement on Form 8-A of Power-One, Inc.filed on August 9, 2000.

(g)           Previously filed as anexhibit to the Current Report on Form 8-K filed on August 9,2000.

(h)          Previously filed as anexhibit to the Annual Report on Form 10-K for the Fiscal Year ended December 31,2001.

(i)             Previously filed asan exhibit to the Registration Statement on Form S-8 filed on December 12,1997.

(j)              Previously filed asan exhibit to the Registration Statement on Form S-8 filed on September 28,2001.

(k)          Incorporated byreference from the Current Report on Form 8-K filed on August 4,2006.

(l)             Previously filed asan appendix to the Proxy Statement filed March 26, 2004.

(m)      Previously filed as anexhibit to the Current Report on Form 8-K filed on September 28,2006.

S-3

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