**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

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**x**                               ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF1934

**Forthe fiscal year ended December 31, 2005**

**or**

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

**For the transition periodfrom                to                **

**Commission File No. 0-29454**

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**POWER-ONE, INC.**

(Exact name of registrant asspecified in its charter)

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

 

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

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Securitiesregistered pursuant to Section 12(b) of the Act: **None**

Securitiesregistered pursuant to Section 12(g) of the Act:

**CommonStock, $0.001 par value**

(Titleof class)

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Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o No x

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or 15(d) of the Act. Yes o No x

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x  No o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or non-accelerated filer. See definition of “acceleratedfile and large accelerated filer” in Rule 12b-2 of Exchange Act. (Checkone):

| Large  accelerated filer o | Accelerated filer x | Non-accelerated  filer o |
|----------------------------|--------------------------|--------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). Yes o No x

Aggregatemarket value of registrant’s common stock held by non-affiliates of theregistrant, based upon the closing price of a share of the registrant’s commonstock on July 3, 2005, as reported by the National Market System of theNational Association of Securities Dealers Automated Quotation (“NASDAQ”)System on that date was approximately $407,038,000

Asof March 6, 2006, 85,470,339 shares of the registrant’s $0.001 par valuecommon stock were outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the registrant’s definitive ProxyStatement to be filed with the Securities and Exchange Commission pursuant toRegulation 14A and relating to the registrant’s Annual Meeting ofStockholders For Fiscal Year 2005, to be held on April 25, 2006, are incorporated by referenceinto Parts II and III of this Annual Report on Form 10-K.

 

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**TABLE OF CONTENTS**

|                                | ** **                                                                                                          | **Page** |   |
|--------------------------------|---------------------------------------------------------------------------------------------------------------------|----------|--------|
| PART I                    |                                                                                                                |     |   |
| Item 1.                        | Business                                                                                                            | 2        |   |
| Item 1A.                       | Risk Factors                                                                                                        | 13       |   |
| Item  1B.                      | Unresolved  Staff Comments                                                                                          | 19       |   |
| Item 2.                        | Properties                                                                                                          | 19       |   |
| Item 3.                        | Legal  Proceedings                                                                                                  | 20       |   |
| Item  4.                       | Submission  of Matters to a Vote of Security Holders                                                                | 20       |   |
| PART II                   |                                                                                                                |     |   |
| Item  5.                       | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities | 21       |   |
| Item 6.                        | Selected  Financial Data                                                                                            | 21       |   |
| Item  7.                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 24       |   |
| Item  7A.                      | Quantitative  and Qualitative Disclosures about Market Risk                                                         | 38       |   |
| Item  8.                       | Financial  Statements and Supplementary Data                                                                        | 39       |   |
| Item  9.                       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosures                              | 39       |   |
| Item  9A.                      | Controls  and Procedures                                                                                            | 39       |   |
| Item 9B.                       | Other Information                                                                                                   | 41       |   |
| PART III                  |                                                                                                                |     |   |
| Item  10.                      | Directors  and Executive Officers of the Company                                                                    | 42       |   |
| Item  11.                      | Executive  Compensation                                                                                             | 42       |   |
| Item  12.                      | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 42       |   |
| Item  13.                      | Certain  Relationships and Related Transactions                                                                     | 42       |   |
| Item  14.                      | Principal  Accountant Fees and Services                                                                             | 42       |   |
| PART IV                   |                                                                                                                |     |   |
| Item 15.                       | Exhibits and Financial Statement Schedules                                                                          | 43       |   |
| Signatures                     | 44                                                                                                                  |     |
| 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 of FinancialCondition and Results of Operations,” contains forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of 1995 thatcan be identified by the use of forward-looking terminology such as “may,”“will,” “can,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “intend”or “continue” or the negative or other variations of such terms or comparableterminology. We caution that the matters set forth under “Risk Factors,”constitute cautionary statements identifying important factors with respect tosuch 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 the hightechnology and communications infrastructure markets. Our products are used toconvert, process and manage electrical energy to the high levels of quality,reliability and precise levels of direct current (“DC”) voltage required bycommunications infrastructure and other equipment. With hundreds of differentproducts, we have one of the most comprehensive product lines in the powerconversion and power management industry and are one of just a few companiesthat can power virtually every segment of an infrastructure network.

Our productsinclude:

·       AC/DCpower supplies that power communications and networking equipment, as well asindustrial, automatic/semiconductor test, transportation, medical and otherelectronic equipment;

·       DCpower systems that are used by communications and Internet service providers;

·       DC/DC“Brick” converters, including high-density and low-density products, that aregenerally used to control power on communications printed circuit boards;

·       DC/DCPoint-of-Load (“POL”) converters for powering Intermediate Bus Architecture(IBA) POL and other board-level applications; and

·       Adigital power management architecture (Z-One TM system) and related digitalproducts that integrate conversion, communications, and control for a digitalboard-level power solution.

We design our products primarily for the high-endmarkets, rather than for use in personal computers, mobile phones or otherconsumer products.

AC/DC power supplies convert alternating current (“AC”)from a primary power source, such as a wall outlet, into a precisely controlledDC voltage. Virtually every electronic device that plugs into an AC wall outletrequires some type of AC/DC power supply. DC/DC converters modify an existingDC voltage level to other DC voltage levels to meet the power needs of varioussubsystems and components within electronic equipment. DC power systems areintegrated or external racks, or cabinet power systems used to power andback-up large communications infrastructure equipment. During 2004, weintroduced our Z-One digital power management architecture and relatedproducts, which manage DC power in a significantly enhanced manner overtraditional power supplies and also can save customers significant board space,design time and cost.

We design our power conversion and power managementproducts primarily to meet the needs of manufacturers of infrastructureequipment. For these manufacturers, a fluctuation of power may cause severedamage to sensitive systems, resulting in data loss, file corruption andsignificantly reduced productivity. We design our products to take low-qualitypower from the electrical grid and purify it to meet the higher qualitydemanded by digital communications networks, providing significantly greaterprotection against power disturbances, such as fluctuations and outages. Inaddition, our products’ compact designs are critical to our customers who needto minimize the space allocated to power conversion products in order tomaximize the space available for other components. We continually strive tostay ahead of the technology curve to develop innovative products that meet andexceed our customers’ needs.

While approximately 36.2% of our sales were to our topten customers in 2005, we sell our products to hundreds of customers worldwide.Our largest customer in 2005 was Cisco Systems and its contract manufacturers,which accounted for 15.1% of our sales both in 2005 and in 2004, and 15.4% ofour sales in 

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2003. Other keycommunications infrastructure customers include Nokia, Lucent, Alcatel, Norteland Motorola. Key customers in other industries include Siemens, Hitachi,Teradyne, and Xyratex.

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. Sales of power conversion and power managementproducts are generally divided into two broad categories: those sold to third-partycustomers (merchant) and those for use in-house or sold to other divisionswithin a manufacturer’s own company (captive). Power-One is a merchant powersupply manufacturer whose products are sold to third parties.

The communications industry experienced rapid changein the late 1990s through 2000 as deregulation and privatization fueledcompetition and fostered the entry of new competitors. In addition, advances intechnology allowed communications service providers to offer a more variedrange of services. Increases in Internet usage and demand for broadband andwireless services contributed to the growth of the communications industry.Because these technological advances required significantly greater and morereliable power, the demand for power conversion and power management productsalso grew. In 2001, however, the communications infrastructure industry enteredinto a severe downturn, which was characterized by delayed network deploymentsby service providers due to excess capacity and by a significant inventorycorrection. This downturn continued into 2002, and resulted in significantindustry contraction. Since this downturn we experienced decreasing sales,price erosion, cancellation of orders, write-offs of excess inventory,restructuring charges and asset impairment charges. We experienced modest salesgrowth in 2003 and 2004 and a decrease in 2005. We believe our customers arenow ordering at levels that reflect current estimated demand.

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

***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 will grow significantly faster thanthe demand by other traditional users of power.

***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 brief interruption of power only interrupts operations for the time that thepower is actually unavailable. For a modern communications network, however,even a minor power disturbance or brief interruption could cause equipment tocrash and significantly shorten the life-span of electrical components. Anetwork crash could result in several hours of downtime, including the timenecessary for complex microprocessor-based equipment to reboot and regainpower. This downtime could lead to significant lost revenue and customerdissatisfaction. To reduce these risks, power conversion products convert thislow-quality power to power that is much more reliable than that providedby the electric utility grid.

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***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 the power through a cableof wires to the various individual components dispersed throughout a 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 cable thickness increases to anunacceptable size, due to the corresponding increase in current.

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. DC/DC Brick converters are located throughout the system andplaced close to the devices that actually use power. These Brick convertersreduce the voltage to the precise amount needed at the point it is to be used.Furthermore, DPA helps to diversify the risk within a large communicationssystem. While the failure of a traditional centralized power supply couldjeopardize the entire system, the failure of a single DC/DC Brick converter ina DPA system may only affect those few individual components that it serves.Finally, because there are many converters within the system, DPA allows forgreater flexibility by permitting a part of the system to be reconfigured orupgraded without requiring a 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 3V, the IBA uses asingle Brick converter with an intermediate voltage (typically between 12 voltsand 3 volts). The intermediate voltage from the one converter is thentransmitted to multiple Point of Load (POL) DC/DC converters, each of whichconverts the intermediate voltage to the required lower voltages, which aretypically 3 volts or less. During 2003 we announced a new division within theCompany, Silicon Power Systems (SPS), which designs highly innovative andefficient silicon-based solutions for next generation DC/DC powermanagement products in the IBA market. We developed our maXyz product linespecifically for the IBA market. In 2004 we introduced our Z-One digital powermanagement architecture and related products as part of the maXyz product line.We have spent and anticipate spending significant capital on R&D related tothis developing area of power conversion technology.

**Our Competitive Advantages**

We believe that we have key advantages that helped usto establish a leading brand for our products. The factors that we believecontribute to this leading position 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 aone-stop-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 segment of aninfrastructure 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 teams inthe industry. In addition to maintaining a high retention rate among ourtechnical staff, we also added top scientists to our ranks through each of ourpast strategic acquisitions. This pool of engineering talent has allowed us toconsistently upgrade to new generations of power conversion products, each of 

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which has outperformedprior products with higher power density and smaller size. It has also allowedus to become a leader in the implementation of DPA technology, and we expect toachieve a similar leading position in IBA technology. We believe that our Z-Onedigital power management architecture has created a first-to-market competitiveadvantage for us, although certain competitors have announced a strategicalliance to develop similar or competing products. We have been diligent inseeking to establish intellectual property rights (i.e. via securing patents)for the intellectual property we have developed and implemented in our Z-Onedigital power management architecture and products. We have also been diligentin protecting those rights. To date, we have initiated patent infringementlitigation against two companies that have announced and introduced productswhich we believe infringe upon certain of our intellectual property rights assecured in certain U.S. patents issued to us.

***Reputation forQuality and Reliability.******  ***We have beenin the power conversion industry since 1973. By establishing rigorous internalquality control programs, we believe that we have been able to provide ourcustomers with products that are highly reliable. This is particularlyimportant for manufacturers of infrastructure equipment. As a result, weestablished a strong customer base that includes many of the largestmanufacturers in the communications infrastructure industry. Although powerconversion products typically represent only 2% to 5% of the cost of an entirenetwork, 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 outsourcing the manufacture of power conversion productsto more efficient suppliers. Consequently, these customers are moving towardssourcing from the limited number of suppliers who can meet all of these needs.

**OurStrategy: Powering the High Technology and Communications Markets**

Our primary objective is to become one of theworldwide leaders in power conversion equipment for the global communicationsand high technology equipment markets. To achieve this objective, we plan to dothe 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, which are increasingly being designedinto infrastructure equipment. Our Z-One digital power management products playa key role in our strategy. Once a power supply has been designed into acustomer’s product, it is generally difficult for the customer to changesuppliers during that product’s life cycle. We also work with our customers tounderstand their changing product needs in order to proactively develop leadingtechnology products. We intend to continue our extensive research anddevelopment program to improve our products’ performance and expand the breadthof our product offerings.

***Continue toCross-Sell Products on a Global Basis.******  ***We expandedthe geographic reach of our business through a series of strategic acquisitionsin 1998 through 2003, which provided market penetration for our AC/DC and DC/DCproducts throughout Europe and opened access for our telecom DC power systemsproducts to Europe and Asia. We believe we have substantial opportunities tomarket products developed in one region to customers located in other regions.We intend to capitalize on our increased access to global markets by attemptingto sell our complete product line to customers who had previously purchasedonly those products offered by the companies we acquired.

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***Continue to Acquireand Invest in Strategic Businesses and Technologies.******  ***We plan toselectively acquire and invest in businesses and technologies that can extendour geographic reach, increase the breadth of our product line, enhance theperformance of our products, lower our manufacturing costs or expand ourcustomer base in the communications infrastructure equipment market. We believethe fragmentation of the power conversion industry presents opportunities forfurther consolidation. In addition, we are investing aggressively in internal researchand development initiatives to create next-generation power conversion productsand continuing to invest in advanced technologies for our DC/DC power converterproducts to enable significantly smaller power converters, higher efficiencies,and better performance in controlling and managing power on communications-orientedprinted circuit boards. We continue to earmark a significant portion of ouroverall research and development budget to develop this technology.

In 2004 we introduced our Z-One digital powermanagement architecture and related products, which integrate conversion,communications, and control for a digital board-level solution. Featuresof this architecture and the related Z-7000 product line include theability to fully manage up to 32 POL DC/DC converters with a single-wiredigital bus. It also provides a significant reduction in Printed Circuit Board(PCB) space, cost savings, and a decrease in components, number of PCB traces,and power-system development time. In 2005, we introduced our Z-1000product line, which are power conversion and management products that containmany, but not all, of the same features as the Z-7000 products, which weplan to market for customers’ mid-range applications.

***Utilize Contract Manufacturers to Minimize Risk andRemain Cost Competitive.******  ***We haveshifted our manufacturing model toward increased use of low-cost contractmanufacturers around the world, especially in Asia. We have made strategicinvestments in or formed joint ventures with certain contract manufacturers inorder to ensure adequate access to their capacity. Although we currentlymanufacture many of our products in low-cost locations such as the DominicanRepublic and Slovakia, the increased use of contract manufacturers has enabledus to lower our overall costs and allowed us to more efficiently scaleproduction without significant capital investments in production capacity.

**Our Products**

The majority of our products are standard and modifiedstandard products that are designed to accelerate customers’ time to market, aswell as reduce the cost of customers’ new product introductions. Power suppliesare generally classified as standard, modified standard and custom. Standardproducts refer to products that are standard to a particular manufacturer, asopposed to an industry standard. Modified standard products are a specificcompany’s standard products modified to fit a particular customer application.Because they have already been designed and manufactured, standard and modifiedstandard products allow end 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. Standard and modified standard products tend to have highermargins than custom products, which require significant tool and die costs andfour-to six-month lead-times from conception through production. In addition,users with high-volume production requirements typically operate in more price-sensitiveindustries. We also have developed modular product architectures, which aremeant to achieve the flexibility of a custom power supply without the longlead-times and significant tool and die costs.

We operate in an industry where quantity discounts,price erosion, and product obsolescence due to technological improvements, allof which result in decreased revenues in a static environment, are normal. Whilewe see price erosion on most of the products we sell, we also see price erosion(i.e. cost reduction) on many of the components we purchase for inclusion inour products. Product obsolescence refers to the tendency of small and lessexpensive products to replace larger and more expensive products. In DC/DCbricks, for example, the functions of a full-brick were replaced by half-brick,which was replaced by a quarter brick, which was replaced by a 1/8th-brick, which will eventuallybe replaced by a 1/16th-brickor smaller product. Each successive product is smaller and somewhat less costlythan its predecessor, but has 

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usually retained orexpanded the functionality of its predecessor. Sales of each successor producttypically replace sales of the predecessor product. These phenomena are normalin our industry, and we have experienced price erosion in line with industrytrends. Price erosion on our products may negatively impact gross margins. Priceerosion may also mask increases in unit sales of certain products.

All of our products aredesigned to convert, regulate, purify, store, manage or distribute electricalpower for electronic equipment. Our products can be classified into three maingroups: AC/DC power supplies, DC/DC converters and DC power systems. Our Z-Onesilicon board power management products fall into the DC/DC converter category.These categories can be distinguished based on their location, size andfunctions within the system.

*AC/DC powersupplies:*

·       aretypically embedded within the equipment;

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

·       convertAC voltage, from a primary power source such as a wall outlet, into DCvoltage(s); and

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

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

·       areembedded within the equipment, and are generally mounted directly on theprinted circuit boards;

·       bricksrange in equivalent size from an AA battery to a portable CD player;

·       POLsmay be silicon-based, and range in equivalent size from a fingernail to asmall matchbox;

·       modifyDC voltage into other levels of DC voltage(s) and are the cornerstone ofDPA and IBA technology; and

·       areused by our customers primarily to power communications infrastructure equipment,although their usage is expanding to other markets, including server andstorage.

*DC power systems:*

·       canbe either stand-alone units that are external to the equipment orsub-systems (racks) that are integrated into an OEM’s 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; and

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

**Division Structure**

Prior to 2005, the Companyconsisted of four divisions: the Compact Advanced Power Systems (“CAPS”)division, the Energy Solutions (“ES”) division, the Silicon Power Systems (“SPS”)division and di/dt. In 2005, we restructured and integrated most of ouroperations into one division. The most significant components of therestructuring involved the elimination of most DC power systems operations inNorway and their integration into our other existing locations, as well as theelimination of certain manufacturing operations in North America and subsequenttransfer of the manufacturing to our other existing locations or to contractmanufacturers. SPS is focused on developing next-generation silicon-based

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digitalpower management products for the recently introduced Z-One digital powermanagement architecture.

**Customers**

We sell our powerconversion products to a diversified group of hundreds of equipmentmanufacturers, including contract manufacturers. Cisco Systems and its contractmanufacturers accounted for 15.1% of our sales in both 2005 and 2004, and 15.4%of our sales in 2003. Cisco Systems and its contract manufacturers collectivelywere the only customers to account for more than 10% of our sales during theseperiods.

Ourtop 10 customers accounted for approximately 36.2% of net sales in 2005, 38.4%of net sales in 2004 and 36.3% of net sales in 2003. Although our sales are diversifiedacross many end markets, our strategy has been to focus our sales efforts onthe communications infrastructure equipment market due to the suitability ofour products for this market and because of the higher level of long-termgrowth we believe this market will experience. The following table illustratesthe percentage of our net sales in our primary markets:

| ** **                        | ** ** | **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 | % |   |

 

We have manufacturingand/or research and development operations in the United States, DominicanRepublic, Switzerland, Slovakia, Ireland and China. We have two product lines,referred to as “embedded products” and “power systems.” Embedded productsinclude AC/DC power supplies, DC/DCconverters (“Bricks”) and POLs, and power management products, while the powersystems product line is comprised of DC power systems. The followingtable summarizes our revenues and long lived assets in different geographiclocations (in millions):

| ** **                     | ** ** | **Years Ended December 31,** | ** **   |
|--------------------------------|------------|---------------------------------------------|--------------|
| ** **                     | ** ** | **2005**                                    | ** **   | **2004** | ** ** | **2003** | ** ** |
| ** **                     | ** ** | **Embedded**                                | ** **   | **Power** | ** ** | ** ** | ** ** | **Embedded** | ** ** | **Power** | ** ** | ** ** | ** ** | **Embedded** | ** ** | **Power** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **products**                                | ** **   | **systems** | ** ** | **Total** | ** ** | **products** | ** ** | **systems** | ** ** | **Total** | ** ** | **products** | ** ** | **systems** | ** ** | **Total** | ** ** |
|                           |       |                                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues:(a)                   |       |                                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| North America                  |       |                                        | $ 91.8  |   |   |   | $ 14.9 |   |   | $ 106.7 |   |   | $ 112.5 |   |   |   | $ 20.3 |   |   | $ 132.8 |   |   | $ 91.1 |   |   |   | $ 18.7 |   |   | $ 109.8 |   |
| United Kingdom                 |       |                                        | 7.3          |   |   |   | 3.8 |   |   | 11.1 |   |   | 9.2 |   |   |   | 4.1 |   |   | 13.3 |   |   | 9.1 |   |   |   | 7.0 |   |   | 16.1 |   |
| Other Europeancountries        |       |                                        | 42.8         |   |   |   | 39.7 |   |   | 82.5 |   |   | 46.1 |   |   |   | 37.7 |   |   | 83.8 |   |   | 40.3 |   |   |   | 39.9 |   |   | 80.2 |   |
| Malaysia                       |       |                                        | 25.5         |   |   |   | 1.0 |   |   | 26.5 |   |   | 19.5 |   |   |   | 1.3 |   |   | 20.8 |   |   | 25.7 |   |   |   | — |   |   | 25.7 |   |
| Other Asian countries          |       |                                        | 18.9         |   |   |   | 15.6 |   |   | 34.5 |   |   | 12.8 |   |   |   | 11.6 |   |   | 24.4 |   |   | 6.9 |   |   |   | 12.9 |   |   | 19.8 |   |
| Other foreign  countries  |       |                                        | 0.2          |   |   |   | 0.1 |   |   | 0.3 |   |   | 0.1 |   |   |   | 5.1 |   |   | 5.2 |   |   | 0.1 |   |   |   | 4.6 |   |   | 4.7 |   |
| Total                          |       |                                        | $ 186.5 |   |   |   | $ 75.1 |   |   | $ 261.6 |   |   | $ 200.2 |   |   |   | $ 80.1 |   |   | $ 280.3 |   |   | $ 173.2 |   |   |   | $ 83.1 |   |   | $ 256.3 |   |

 

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| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Long-Lived Assets:      |       |                  |       |   |   |
| United States           |       | $ 54.6           |       | $ 66.2 |   |
| Switzerland             |       | 12.2                  |       | 15.5 |   |
| Dominican Republic      |       | 12.6                  |       | 9.1 |   |
| Slovakia                |       | 7.0                   |       | 7.9 |   |
| Norway                  |       | 1.9                   |       | 13.3 |   |
| Other foreign countries |       | 1.9                   |       | 3.8 |   |
| Total                   |       | $ 90.2           |       | $ 115.8 |   |

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(a)           Revenuesare attributable to countries based on location of customer.

**Sales and Marketing**

We market our products through a global sales force.We have direct sales offices in Europe, North America, Asia and Australia.These direct sales offices are augmented by an extensive network ofmanufacturers’ 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 on an annualbasis. Our direct sales force works closely with our existing and potentialcustomers to determine their long-term technology requirements for powerconversion products. This close collaboration allows us to design products thatbest fit our customers’ expected applications. We expect that our direct salesto strategic accounts will increase in the future as we increasingly focus onsales to these customers.

**Research,Development and Engineering**

Worldwide we have 294employees in our research and development departments of which 158 areengineers. We spent approximately $22.0 million on research anddevelopment in 2005, $29.4 million in 2004 and $28.5 million in 2003.During 2005, we shifted our research and development operations towardlower-cost locations, thereby significantly reducing research and developmentcosts with only a modest decrease in research and development resources. Wehave four engineering and design centers in the United States: Andover,Massachusetts; and Camarillo, Carlsbad, and Morgan Hill, California. We alsohave engineering and design centers in Santo Domingo, Dominican Republic;Uster, Switzerland; Dubnica, Slovakia; Shenzhen, China; and Limerick, Ireland.Additionally, we have engineering staff on site in each of our manufacturingfacilities. Finally, we have engineering teams at each of our power plantsystem integration facilities to enable more efficient customization of oursystem configurations for our customers. Our goal has been to establishresearch centers in areas that are strategically located for servicing ourcustomers and in which we have strong access to technical talent.

**ManufacturingProcess and Quality Control**

Production of most of our products typically entailssubassembly of sophisticated printed circuit boards that are in turn combinedwith structural hardware to produce a final product. In response to marketdemands for increased quality and reliability, design complexity, andsophisticated technology, we continue to invest in state-of-the-art processesand have automated many electronic assembly and testing processes that wepreviously performed manually. We have also standardized many of ourmanufacturing processes and much of our equipment worldwide to increaseefficiency 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 

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in SMT has significantlyincreased our product development processes and production capacity, and webelieve it has also improved our product quality. In addition, we made anequity investment in and have manufacturing outsourcing arrangements with acontract manufacturer in Asia and we have outsourcing arrangements with othercontract 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 require the same levels ofquality from our contract manufacturers.

As their operations expand internationally, ourcustomers increasingly require that their power products meet or exceedestablished international safety and quality standards. In response to thisneed, we design and manufacture our power conversion products in accordancewith the certification requirements of many international agencies. Theseagencies include Underwriters Laboratories in the U.S., the CSA Internationalin Canada, and TUV Product Service for the European market; additionally,various equipment may be tested to Network Equipment-Building Systemrequirements for the U.S. telecom market, and to European Telecom StandardInstitute requirements for the European Union telecom market.

We manufacture and assemble approximately 50% of ourproducts at our facilities in the Dominican Republic, Asia, and Slovakia. Wehave smaller system integration facilities throughout Europe, Asia, and NorthAmerica for our DC power system products. Production of our silicon-basedPOLs is outsourced to contract manufacturers in North America and in Asia. Allof our manufacturing facilities are ISO certified or, in the case of the newestfacilities, are in the process of receiving their certification. In our globalmanufacturing operations, we currently have an aggregate of approximately350,000 square feet of manufacturing space. Most of our subcontractors arelocated in Asia.

In addition to our ownfacilities, we utilize low-cost contract manufacturing in several locationsaround the world. Although we currently manufacture many of our own products,we have shifted toward increased use of contract manufacturers to minimizecosts and capital requirements, while providing greater flexibility.Approximately 50% of our products are produced by contract manufacturers. Wetend to shift high-volume, low-mix products to the contract manufacturers whileretaining low-volume, high-mix products at our own manufacturing facilities. Althoughdecisions to use and/or expand contract manufacturing will depend on a numberof factors, including customer needs, we expect that the overall trend towardincreased use of contract manufacturers will continue in the future.

**Suppliers**

We maintain a network of suppliers for components andother materials used in the manufacture of our power conversion products. Wetypically design products using components readily available from severalsources and attempt to minimize our use of components that we can only obtainthrough a single source. We procure components based upon our enterpriseresource planning system and use a combination of forecasts, customer purchaseorders and formal purchase agreements to create our materials requirementsplan.

We occasionally use componentsor other materials for which a single supplier is the only source of supply. Wemay seek to establish long-term relationships with such suppliers. We have anumber of 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.

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**Backlog**

We generally sell ourproducts pursuant to purchase orders rather than long-term contracts. Backlogconsists of purchase orders on-hand having delivery dates scheduled within thenext six months. Customers may cancel or reschedule most deliveries withoutpenalty. Our backlog is not necessarily a reliable indicator of future revenuebecause a significant portion of customer orders is turns business (ordersbooked and shipped within the same reporting period that never appear asperiod-end backlog). We believe that our lead-times are substantially lowerthan our competition, which allows us to turn around product to customers morequickly than our competitors. Therefore, a higher proportion of our business isturns business. In addition, customers on Vendor Managed Inventory (“VMI”)programs exercise discretion as to the timing of inventory consumption. WhenVMI programs are initiated by customers, bookings and backlog are canceled andreplaced by a product-use forecast. We then manufacture product for thecustomer per the forecast, and the customer uses the inventory as needed. Undera VMI program, the booking and billing occur simultaneously upon use of theproduct, and therefore there is always a book-to-bill ratio of 1.0 for theseprograms. We may bring additional VMI programs on-line in the future, whichwould result in higher turns business, lower backlog, and higher finished goodsinventory.

**Competition**

The power conversionindustry is highly fragmented and characterized by intense competition. Nosingle company dominates the overall market, and our competitors vary dependingupon the specific type of products they produce. We believe that the principalbases of competition in our targeted markets are breadth of product line,competitive prices, quality, reliability, technical knowledge, flexibility,readily available products and financial strength. Our competition includes companieslocated throughout the world, including Artesyn Technologies which recentlyannounced that it was to be acquired by Emerson Electric, C&D Technologies,Delta Electronics, Eltek, Lite-On, Phihong, Vicor, and divisions of EmersonElectric and Tyco International.

**Intellectual Property Matters**

We regard certainequipment, processes, information and knowledge that we developed and use todesign and manufacture our products as proprietary. We rely on a combination ofpatent, trade secret and other intellectual property laws, confidentialityagreements executed by most of our employees and other measures to protect ourproprietary rights. We consider our intellectual property to be very importantand valuable, particularly the patents we have secured and are continuing toseek in the area of digital power management and control. Those particularpatents have all been very recently issued, (i.e. during 2004 or later), andhave patent terms extending for approximately 20 years from date of grant. Wehave made intellectual property protection a key element of our overallresearch and development in the area of digital power management and control. Weconsider these digital power management and control patents to be keyintellectual property assets that we will rely upon to protect our Z-One familyof products and technologies well into the future. We currently maintain 80active U.S. patents, many of which are protected by corresponding foreignpatents in selected jurisdictions. Additional U.S. and foreign patentapplications are pending. Trademarks are also an element of our overallintellectual property holdings. The trademarks associated with our digitalpower management and control technologies are considered the more importantmarks, along with those marks associated with our corporate name. We hold 10U.S. registered trademarks with additional applications pending, and claimcommon law trademark rights to certain additional marks.

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**Employees**

At December 31,2005, we employed 2,513 employees at our facilities in the following functions:

| **Function**                | ** ** | ** ** | ** ** | **Number of  Employees** | ** ** |
|-----------------------------|------------|------------|------------|-------------------------------|------------|
| Manufacturing               |       |       | 1,786      |                          |       |
| Engineering                 |       |       | 294        |                          |       |
| General and  administrative |       |       | 191        |                          |       |
| Sales and  marketing        |       |       | 127        |                          |       |
| Quality assurance           |       |       | 115        |                          |       |
| Total                       |       |       | 2,513      |                          |       |

 

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.None of our employees are represented by a union.

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

The Company posts all periodic reports on Form 10-Kand 10-Q, current reports on Form 8-K, and amendments to thesereports filed or furnished pursuant to the Securities Exchange Act of 1934 onits website at *www.power-one.com*,as soon as reasonably practicable after the reports are filed with or furnishedto the Securities and Exchange Commission. Access to these reports is free ofcharge. In addition, the Company maintains a Corporate Governance section onits Website to provide easy access for the investor community to relevantinformation about our corporate governance. The public may read and copy any materialsthe Company files with the SEC at the SEC's Public Reference Room at 450 FifthStreet, 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 thatcontains reports, proxy and information statements, and other informationregarding issuers that file electronically with the SEC at *http://www.sec.gov.*

**EXECUTIVE OFFICERSOF THE REGISTRANT**

Set forth below is certaininformation concerning our executive officers.

| **Name**            | ** ** | ** ** | ** ** | **Age(1)**                                                          | ** ** | **Position** |
|---------------------|------------|------------|------------|---------------------------------------------------------------------|------------|--------------|
| Steven J. Goldman   |       | 48         |       | Chairman of the  Board                                              |
| William T. Yeates   |       | 45         |       | Chief Executive  Officer                                            |
| Brad W. Godfrey     |       | 46         |       | President and  Chief Operating Officer                              |
| Paul E. Ross        |       | 32         |       | Vice  President—Finance, Treasurer and Chief Financial Officer |
| Veronica O. Tarrant |       | 44         |       | Vice  President—Finance and Chief Accounting Officer           |
| Randall H. Holliday |       | 56         |       | Secretary and  General Counsel                                      |

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(1)          Asof March 9, 2006

*Steven J. Goldman.**  *Mr. Goldman, our Chairman ofthe Board, joined Power-One in 1982 and has held several positions in theCompany, including Vice President of Engineering, Senior Vice President andChief Financial Officer. In July, 1990, Mr. Goldman was selected by theBoard of Directors to lead Power-One as President and CEO. He was namedChairman of the Board in 1997. Mr. Goldman received his B.S. Degree inElectrical Engineering from the University of Bridgeport in 1979. He is a 1989graduate of the Pepperdine University Presidential and Key Executive MBAProgram, and in 1999 he was recognized by Pepperdine as a Distinguished Alumnusof the Graziado School. Mr. Goldman is a contributing member of the SanFernando Valley Chapter of the Young Presidents’ Organization.

*William T. Yeates.**  *Mr. Yeates joined us inJanuary, 2000 as President and Chief Operating Officer and served asPresident and Chief Operating Officer until February, 2006 when he wasappointed our 

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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.

*Brad W. Godfrey.**  *Mr. Godfrey, who joined us in1988, 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 untilFebruary, 2006.

*Paul E. Ross.*   Mr. Ross,who joined us in April, 2001, was appointed Treasurer and Chief FinancialOfficer in May, 2005. He has served the Company as Assistant Secretary sinceMay, 2004 and served as Assistant Treasurer from May, 2004 until May, 2005. Hehas served as Vice President, Finance since January, 2005.  Prior to joining the Company, Mr. Rosswas employed with British Petroleum, Los Angeles. Mr. Ross is a CPA andholds a B.A. degree from the University of California, Los Angeles,and an M.B.A. degree from the University of Southern California.

*Veronica O. Tarrant.**  *Ms. Tarrant,who joined us in June, 2000, was appointed Chief Accounting Officer in May 2005.She has served the Company as Vice President, Finance since January, 2003. Shewas previously employed by the Company as Controller, CAPS Division, from June,2000 until January, 2003. Prior to joining the Company, Ms. Tarrant wasemployed by Schlumberger, Los Angeles. Ms. Tarrant holds a B.A., Economics, from Pomona College, and anM.B.A. from Pepperdine University.

*Randall H. Holliday.**  *Mr. Holliday joined us in 2000as General Counsel, and was appointed Secretary in 2001. Before joining us,Mr. Holliday served as Secretary and General Counsel of Xircom, Inc.He has held a variety of in-house legal positions in diverse industries since1981. Mr. Holliday received his J.D. degree in 1974 from Florida StateUniversity, Tallahassee, FL.

Our officers serve at thediscretion of the Board.

**ITEM 1A—RISK FACTORS**

**Asignificant percentage of our revenue is generated from customers in thevolatile communications infrastructure industry. If our customers in thisindustry do not maintain their level of purchases from us, our operatingresults may be materially adversely affected.**

Our sales to thecommunications infrastructure industry has been in the range of 59% to 73% ofour total sales during the five years ended December 31, 2005, and weexpect this concentration of customers in the communications infrastructureindustry to continue. The communications industry steadily grew in the late1990s through 2000, driven primarily by the expansion of the Internet,broadband and wireless networks. The subsequent downturn in the industry in2001and 2002 caused a sharp decrease in demand for our products as a result ofa decrease in capital spending by our customers. The industry downturn causedsome of our customers, including our largest customers, to restructure into smalleroperations and hampered their ability to forecast accurately. Our futurerevenue growth depends in large part on the resumed growth of these services aswidely used media for commerce and communication. However, if thecommunications infrastructure industry experiences further volatility, it couldhave a material adverse effect on our operating results.

**Priceerosion may have a material adverse effect on our margins and profitability.**

The power supplymanufacturing industry is generally characterized by intense competition. Webelieve that the principal bases of competition in our targeted markets arebreadth of product line, cost, quality, reliability, technical knowledge,flexibility, readily available products, and stability and reputation of the provider.We saw pricing pressure from some of our key customers during 2005, 2004 and2003 and have factored additional price erosion into our forecast for 2006.Downward pricing pressure could have a material adverse effect on our operatingresults.

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**Failureto anticipate trends in the type of power conversion products our customerswill demand may adversely affect our business.**

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, demand for broadband services 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 products has also grown. To respond to the needs of our customers inthe communications infrastructure industry, we must continuously develop newand more advanced products at lower prices. We have made and will continue tomake significant investments in next generation technologies, but there can beno assurance that the resulting products will be successful or that we willrecoup our research and developments costs through increased sales.

During 2003, we announcedthe creation of a new division within the Company dedicated to developingnext-generation DC/DC products, and this division launched its first majordigital power management products during 2004. Many of these new products arebased on silicon technology, which may expose us to new and unfamiliarcompetitors. We also have limited experience in the semiconductor industry.While we believe that our technology is ahead of our competitors, and isprotected by adequate intellectual property rights, some of our traditional competitorshave formed a consortium with other 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. Inaddition, although we have licensed our technology to another company in orderto address customers’ second source concerns, there can be no assurance thatsufficient quantities of our products will be available. The market may notaccept our technology or adoption rates may be slower than expected. Ourinability to properly assess developments in the communications infrastructureindustry or to anticipate the needs of our customers could cause us to losesome or all of these customers, prevent us from obtaining new customers, or causeus to record substantial write-offs.

**Wemay not be able to procure necessary key components for our products.**

The electronicsmanufacturing industry is cyclical. During periods of growth, key components werequire to build our products may become unavailable in the timeframe requiredfor us to meet our customers’ demands. Our inability to secure sufficientcomponents to build products for our customers could negatively impact oursales and operating results. We may choose to mitigate this risk by increasingthe levels of our inventory. With increased inventory comes increased excessand obsolescence risk should our forecasts fail to materialize or if there arenegative factors impacting our customers’ end markets. If we purchase too muchinventory or the wrong inventory, we may have to write-off the inventory,thereby negatively impacting our gross margins and operating results.

**Vendormanaged inventory programs give rise to variability in our revenue andoperating results.**

Certain significantcustomers are on vendor managed inventory, or VMI, programs. For VMI programs,we build product to the customers’ forecast and the inventory is physicallylocated at a site controlled by the customer. The customer uses the inventoryas needed, and the sale occurs at that time. We experienced and expect tocontinue to experience variability as to the timing of customers’ use of VMI,which results in variability in our net sales and operating results.

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**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 customers may generally cancel, reduce orpostpone orders without penalty. Cancellations, reductions and delays in orderscould reduce our backlog and adversely affect our net sales, gross profit andoperating results. Our expense levels are based, in part, on expected futurerevenues and are relatively fixed once set. Our expectations for net salesbeyond 90 days are based partially on our own estimate of future demandand partially on firm customer orders. Because a substantial portion of ourquarterly net sales is made during the last month of a quarter, we are limitedin our ability to reduce expenses quickly if for any reason net sales do not meetour expectations in a particular period. Therefore, fluctuations in net sales,particularly if customers cancel, postpone or delay orders, may adverselyimpact our operating results.

Fluctuations in customerneeds may also affect our mix of products and volume of orders, which in turnaffect our gross margin and operating results. High-volume orders, ifcancelled, may substantially increase the risk of inventory obsolescence andasset write-offs due to excess capacity.

**Werely on a few major customers for a material portion of our business and theloss of any of those customers could reduce our net income and operatingresults.**

A few customers accountfor a material portion of our net sales each year. Cisco Systems and itscontract manufacturers represented approximately 15% of our net sales in 2005and 2004. For 2005 and 2004, our top five original equipment manufacturers (“OEM”)customers accounted for approximately 28% and 31% of our net sales,respectively. In addition, some of our products sell for significantly highergross margins than others. If we lose any of these key customers, if any ofthem reduces or cancels a significant order, or if our product mix changessignificantly, our net sales and operating results could decreasesignificantly.

**E**nvironmental,health and safety laws may restrict our operations.

We are subject to local laws and regulations invarious regions in which we operate, including the European Union (“EU”). Inparticular, two current EU directives may have a material impact on ourbusiness. The first is the Restriction of Certain Hazardous SubstancesDirective (“RoHS”), which restricts the distribution of certain substances,including lead, within the EU and is effective July 1, 2006. In additionto eliminating and/or reducing the level of specified hazardous materials fromour products, we will also be required to maintain and publish a detailed listof all chemical substances in our products. We are starting to see requestsfrom our customers, including some of our major customers, for RoHS-compliantproducts. We are in the process of compiling RoHS-compliant information on ourproducts as well as procuring RoHS-compliant material and information fromour suppliers.

The second directive is the Waste Electrical andElectronic Equipment Directive (“WEEE”), which was effective August 13,2005 in certain jurisdictions and requires covered manufacturers or importersto recycle or dispose of all products manufactured or imported into the EU by aparty which is subject to the directive at its own expense at the end of theproducts’ useful lives. It is our current position and interpretation of theWEEE directive that our products are not directly covered by or such as torequire to our direct compliance with the directive. We believe our endcustomers bear the responsibility for WEEE directive compliance for theproducts and/or systems in which our products are components.

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There are certainrisks we face in complying with, or seeking to conduct our business inconnection with, the RoHS and WEEE directives, which include but are notlimited to the following:

·       For RoHS

·        Wemay be unable to procure appropriate RoHS-compliant material in sufficientquantity and quality and/or may be unable to incorporate it into ourmanufacturing processes without compromising quality and/or impacting our coststructure;

·        Wemay not be able to sell non-compliant product into the EU or to any customerwhose end product will be sold into the EU, which may result in reduced sales;

·        Wemay face 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.

·       ForWEEE

·        Wemay be determined by applicable national regulatory agencies which implement theWEEE directive that certain of our products are directly covered under the WEEEdirective, making us directly responsible for WEEE compliance for suchproducts.

·        Ourcustomers may refuse to agree to contractual language which allocates andassigns WEEE responsibility, or demand that we undertake WEEE responsibilitiesindependent of regulatory interpretation.

We are unable to estimateat this time the cost of compliance, if any, with either EU directive. Complianceand non-compliance with these laws may have a material adverse impact on ournet sales and operating results.

**We are subject to credit 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 contract manufactureror distributor and may not be guaranteed by the end-customer. If there areadditional failures of our customers to meet their receivables obligations tous, or if the assumptions underlying our recorded bad debt provisions withrespect to receivables obligations do not materially reflect our customers’financial conditions and payment levels, we could incur additional write-offsof receivables in excess of our provisions, which could have a material adverseeffect on our cash flow and operating results.

**Weface, and might in the future face, intellectual property infringement claimsthat 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. At leastone such claim has resulted in litigation in the past that was resolvedfavorably for us. If we do not prevail in any such litigation, our business maybe 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 

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correspondingroyalty payments. In addition, the necessary management attention diverted tolitigation, along with the associated legal costs, could have a significantadverse effect on operating results.

**Anyfailure to protect our intellectual property could have a material adverseeffect on our business; costs associated with enforcing our rights couldadversely affect 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. While we believe our cases are strong, there can beno assurance that the judicial system will uphold our patents, or will findthat our patent(s) have been infringed.   We may incur significant costs in thesecurrent proceedings protecting our technology though the judicial system, whichcosts may not be recouped through damages awards, settlements, royalties orother 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 viaalliance-type arrangements) may release infringing product(s) prior to anycourt ruling or other judicial action which upholds or supports ourintellectual property rights,  with thegoal of securing market share with competing product. Significant costsassociated with litigation, slower-than-expected adoption rates of our newproduct, and competitor introductions of competing product could individuallyor in combination have a material adverse impact on our operating results.

**Weare subject to risks associated with future company and technologyacquisitions, divestitures, joint ventures and strategic investments.**

We may continue topursue acquisitions and disposals of businesses, products and technologies, orenter into joint ventures and equity investment arrangements, that couldcomplement or otherwise enhance our business. The negotiation of potentialacquisitions, divestitures, joint ventures or investments as well as theintegration of an acquired business, product or technology could require us toincur significant costs and cause diversion of management’s time and resourcesfor which economic and opportunity costs cannot be recouped if the transactionsdo not occur. Future transactions by us could result in the followingconsequences:

·       dilutiveissuances of equity securities;

·       incurrenceof debt and contingent liabilities;

·       impairmentof tangible and intangible assets;

·       researchand development write-offs; and

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·       otheracquisition-related expenses.

We may also encounterdifficulties in integrating acquired assets with our operations. Furthermore,we may not realize the benefits we anticipated when entering into thesetransactions. In addition, after we complete an acquisition, our managementmust be able to assume significantly greater responsibilities, and this in turnmay cause them to divert their attention from our existing operations. Any ofthe foregoing could have a material adverse effect on our financial positionand results of operations.

**Oursuccess depends on our ability to retain our senior management and to attractand retain key technical personnel.**

If we lose one or moremembers of our senior management, or if we cannot attract and retain qualifiedmanagement or highly technical personnel, our operating results could beadversely affected. Our capacity to develop and implement new technologiesdepends on our ability to employ personnel with highly technical skills.Competition for such qualified technical personnel is intense due to therelatively limited number of power supply engineers worldwide. We believe thatthis supply will remain constrained because of the limited number ofengineering students concentrating on power conversion.

**Muchof our business is subject to risks associated with operations in foreigncountries.**

Many of ouroperations are located outside of the United States and we expect to build ormove additional operations overseas. Depending on location, our operations maybe affected by:

·       impositionof tariffs, quotas, taxes and other market barriers;

·       restrictionson the export or import of technology;

·       greaterdifficulty in accounts receivable collection and longer collection periods;

·       inconsistentregulations and unexpected changes in legislation or regulatory requirements;

·       politicaland economic instability;

·       workstoppages and difficulties in staffing and managing internationaloperations; and

·       fluctuationsin the value of the U.S. dollar relative to foreign currencies.

Historically, we have nothedged against any currency exchange rate risks. The occurrence of any of thesefactors may adversely affect our operating results.

**Wemay fail to capture 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. The server/storage industry has been historicallyvolatile. Any downturn or disruption in this industry could impact our salesand operating results. 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 translate intorevenue in the quantities or timeline projected could have a materially adverseimpact on our revenue and operating results.

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**Ourcharter contains provisions that may hinder or prevent a change in control ofour 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. As currently adopted, our Certificate of Incorporation providesfor election of all directors annually. Stockholders must inform our corporatesecretary before a stockholders’ meeting of any business they wish to discussand any directors they wish to nominate. Our Certificate of Incorporation alsorequires approval of 75% of our voting stock to amend certain provisions. OurBoard of Directors can issue preferred stock without stockholder approval.Stockholder rights could be adversely affected by the rights of holders ofpreferred stock that we issue in the future. Finally, we have a stockholderrights plan that allows our stockholders to purchase preferred stock at areduced price if certain parties attempt to acquire a substantial interest inus without the approval of our Board of Directors. Any one of the provisionsdiscussed above could discourage third parties from obtaining control of us.Such provisions may also impede a transaction in which our stockholders couldreceive a premium over then-current market prices and our stockholders’ abilityto approve transactions that they consider in their best interests.

**ITEM1B—UNRESOLVED STAFF COMMENTS**

None.

**ITEM 2—PROPERTIES**

Thetable below lists our principal facilities currently in operation.

| **Location**                       | ** ** | ** ** | ** ** | **Approximate Size  (square feet)** | ** ** | **Employees** | ** ** | **Primary Activity** | ** ** |
|------------------------------------|------------|------------|------------|-----------------------------------------------|------------|---------------|------------|---------------------------|------------|
| Camarillo,  California             |       |       | 100,000    |                                          |       |          | 140        |                      |       | Administration, R&D, Warehousing,  Marketing and Sales |   |
| Andover,  Massachusetts            |       |       | 61,000     |                                          |       |          | 27         |                      |       | Administration, R&D, Warehousing,  Marketing and Sales |   |
| Lewisville, Texas                  |       |       | 20,000     |                                          |       |          | 25         |                      |       | Administration, R&D, Systems  Integration, Warehousing,  Marketing and Sales |   |
| Santo Domingo,  Dominican Republic |       |       | 190,000    |                                          |       |          | 1,292      |                      |       | Administration, Manufacturing and  Assembly, Warehousing, R&D |   |
| Dubnica Nad  Vahom, Slovakia       |       |       | 136,000    |                                          |       |          | 640        |                      |       | Administration, Manufacturing and  Systems Integration, Warehousing,  R&D |   |
| Shenzhen, China                    |       |       | 52,000     |                                          |       |          | 150        |                      |       | Administration, Manufacturing and  Assembly, Warehousing, Marketing  and Sales |   |

 

We believe that thefacilities we now use are adequate for our current and anticipated operatingneeds. We own our facilities in Slovakia and Switzerland. We lease theremainder of our facilities pursuant to lease agreements with expiration datesthrough 2014 in North America and 2011 in Europe and 2010 in Asia. We believethat we will be able to renew these leases with similar terms upon expiration.If we cannot renew, we believe that we could find other suitable premiseswithout any material adverse impact on our operations.

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**ITEM 3—LEGAL PROCEEDINGS**

The Company isinvolved 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. and Silicon Laboratories, Inc.*   UnitedStates District Court, Eastern District of Texas, Civil Action No. 2-05-CV-463(LED). This combined action initiated by the Company against ArtesynTechnologies on September 30, 2005, and against Silicon Laboratories on December 14,2005, alleges that certain products of the named defendants infringe certainpatents held by the Company which focus on technologies relating to digitalpower management and control. The Complaint seeks certain injunctive reliefagainst and compensatory damages from each defendant.  Trial proceedings are in the very initialstages of discovery and related procedural matters.

**ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

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, 2005.

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**PART II**

**ITEM5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

OurCommon Stock is listed on the NASDAQ and is traded under the symbol “PWER.” Thefollowing table sets forth, for the quarterly periods indicated, the range ofhigh and low closing sale prices for our common stock.

| ** **     | ** ** | **Year Ended December 31,** | ** ** |
|----------------|------------|--------------------------------------------|------------|
| ** **     | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **     | ** ** | **High**                                   | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | 8.65                                       |       | 4.86 |   | 14.26 |   | 10.30 |   |
| Second Quarter |       | 6.43                                       |       | 4.18 |   | 11.37 |   | 8.62 |   |
| Third Quarter  |       | 6.35                                       |       | 4.31 |   | 11.00 |   | 6.45 |   |
| Fourth Quarter |       | 7.04                                       |       | 5.30 |   | 10.12 |   | 6.08 |   |

 

As of March 9, 2006, there were 489 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, the Company announced that it hadreceived authorization from its Board of Directors to purchase up to$20 million of its outstanding common stock in open-market transactions.At December 31, 2005, $15.7 million remains available for purchase inaccordance with this authorization. This authorization expires on December 31,2006.

Thefollowing is a table summarizing the issuer’s purchases of its own equitysecurities during the three months ended December 31, 2005:

|                           | ** ** | ** **         | ** ** | ** **          | ** ** | **Total Number**           | ** ** |
|--------------------------------|------------|--------------------|------------|---------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | ** **         | ** ** | ** **          | ** ** | **of Shares**              | ** ** |
| ** **                     | ** ** | **Total**          | ** ** | ** **          | ** ** | **Purchased as Part** | ** ** |
| ** **                     | ** ** | **Number of** | ** ** | **Average**         | ** ** | **of Publicly**            | ** ** |
| ** **                     | ** ** | **Shares**         | ** ** | **Price Paid** | ** ** | **Announced Plans**        | ** ** |
| **Period**                     | ** ** | ** **         | ** ** | **Purchased**       | ** ** | **Per Share**              | ** ** | **or Programs** | ** ** |
| November 1 –  November 30 |       | 313,501            |       |                | $          | 5.58                            |       |   |   | 313,501 |   |   |
| Total                          |       | 313,501            |       |                | $          | 5.58                            |       |   |   | 313,501 |   |   |
|                                |            |                    |            |                     |            |                                 |            |  |  |  |  |  |  |  |

 

**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, 2005” in our definitive Proxy Statementrelated to our Annual Meeting of Stockholders for Fiscal Year 2005, to be heldon April 25, 2006, and such information is incorporated herein byreference.

**ITEM6—SELECTED FINANCIAL DATA**

In the table below, we provide selected consolidatedhistorical financial and operating data. We prepared this information usingaudited financial statements for the fiscal years ended December 31, 2005,2004, 2003, 2002 and 2001. When reading this selected historical consolidatedfinancial and operating data, it is important to read it along with “Item 7—Management’sDiscussion and Analysis of Financial

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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)**                                      | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2005(7)**                                                                                    | ** ** | **2004(6)** | ** ** | **2003(4)(5)** | ** ** | **2002(3)** | ** ** | **2001(2)** | ** ** |
| ** **                                             | ** ** | **(In millions, except per share amounts and percentages)** | ** ** |
| **STATEMENT OF OPERATIONS DATA:**                      |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                                              |       | $                                                                                              | 261.6      |   | $ | 280.3 |   |   | $ | 256.3 |   |   | $ | 230.7 |   | $ | 363.7 |   |
| Cost of goods sold                                     |       | 184.9                                                                                          |       | 182.4 |   |   | 161.7 |   |   | 234.7 |   | 357.9 |   |
| Gross profit (loss)                                    |       | 76.7                                                                                           |       | 97.9 |   |   | 94.6 |   |   | (4.0 | ) | 5.8 |   |
| Selling, general and  administrative expense           |       | 58.6                                                                                           |       | 67.8 |   |   | 62.4 |   |   | 59.3 |   | 72.6 |   |
| Engineering and quality  assurance expense             |       | 36.9                                                                                           |       | 42.2 |   |   | 40.8 |   |   | 34.7 |   | 39.1 |   |
| Amortization of  intangible assets                     |       | 3.9                                                                                            |       | 3.9 |   |   | 3.6 |   |   | 5.1 |   | 19.1 |   |
| Restructuring charge                                   |       | 11.1                                                                                           |       | 1.1 |   |   | 3.1 |   |   | 10.7 |   | 25.1 |   |
| Impairment of goodwill                                 |       | —                                                                                         |       | — |   |   | — |   |   | 67.6 |   | 11.0 |   |
| Asset impairment                                       |       | 5.1                                                                                            |       | 2.0 |   |   | — |   |   | 42.6 |   | 22.7 |   |
| Total expenses                                         |       | 115.6                                                                                          |       | 117.0 |   |   | 109.9 |   |   | 220.0 |   | 189.6 |   |
| Income (loss) from  operations                         |       | (38.9                                                                                          | )          | (19.1 | ) |   | (15.3 | ) |   | (224.0 | ) | (183.8 | ) |
| Interest income                                        |       | 2.3                                                                                            |       | 1.8 |   |   | 1.6 |   |   | 1.7 |   | 3.8 |   |
| Interest expense                                       |       | (0.2                                                                                           | )          | (0.6 | ) |   | (1.0 | ) |   | (1.1 | ) | (2.5 | ) |
| Other income (expense),  net                           |       | 0.3                                                                                            |       | (0.2 | ) |   | (4.5 | ) |   | 0.2 |   | (4.4 | ) |
| Loss before provision  (benefit) for income taxes.     |       | (36.5                                                                                          | )          | (18.1 | ) |   | (19.2 | ) |   | (223.2 | ) | (186.9 | ) |
| Provision (benefit) for  income taxes                  |       | 1.8                                                                                            |       | 3.1 |   |   | (1.0 | ) |   | (12.2 | ) | (1.0 | ) |
| Net loss                                               |       | $                                                                                              | (38.3      | ) | $ | (21.2 | ) |   | $ | (18.2 | ) |   | $ | (211.0 | ) | $ | (185.9 | ) |
| Basic and diluted loss  per common share               |       | $                                                                                              | (0.45      | ) | $ | (0.25 | ) |   | $ | (0.22 | ) |   | $ | (2.62 | ) | $ | (2.36 | ) |
| Basic and diluted  weighted average shares outstanding |       | 85.0                                                                                           |       | 83.8 |   |   | 82.5 |   |   | 80.4 |   | 78.8 |   |
| **SELECTED  OPERATING DATA:**                          |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Gross profit (loss)  margin                            |       | 29.3                                                                                           | %          | 34.9 | % |   | 36.9 | % |   | (1.7 | )% | 1.6 | % |
| Depreciation and  amortization                         |       | $                                                                                              | 14.9       |   | $ | 16.4 |   |   | $ | 16.0 |   |   | $ | 20.9 |   | $ | 36.5 |   |
| Capital expenditures                                   |       | 6.2                                                                                            |       | 7.3 |   |   | 7.3 |   |   | 7.0 |   | 30.5 |   |
| Backlog(8)                                             |       | 34.7                                                                                           |       | 38.0 |   |   | 39.6 |   |   | 32.8 |   | 40.3 |   |
| Cash flows provided by  (used in):                     |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Operating activities                                   |       | $                                                                                              | (5.4       | ) | $ | (1.0 | ) |   | $ | (8.6 | ) |   | $ | 31.4 |   | $ | (0.5 | ) |
| Investing activities                                   |       | 6.9                                                                                            |       | (57.5 | ) |   | (3.7 | ) |   | (8.6 | ) | (37.0 | ) |
| Financing activities                                   |       | 2.7                                                                                            |       | (7.8 | ) |   | 2.4 |   |   | 1.6 |   | (19.4 | ) |
| **BALANCE  SHEET DATA:**                               |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Working capital                                        |       | $                                                                                              | 102.9      |   | $ | 116.7 |   |   | $ | 151.5 |   |   | $ | 150.3 |   | $ | 218.3 |   |
| Total assets                                           |       | 285.7                                                                                          |       | 327.1 |   |   | 349.9 |   |   | 360.9 |   | 541.9 |   |
| Total long-term  debt(9)                               |       | —                                                                                         |       | — |   |   | 9.2 |   |   | 9.5 |   | 9.2 |   |
| Total debt(10)                                         |       | —                                                                                         |       | — |   |   | 11.2 |   |   | 10.2 |   | 10.6 |   |
| Total stockholders’ equity                        |       | 224.5                                                                                          |       | 270.0 |   |   | 275.3 |   |   | 279.1 |   | 450.2 |   |

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(1)          Our fiscal year is the 52-or 53-week ending on the Sunday nearest to December 31. For clarityof presentation we described year-ends presented as if the year ended on December 31.As such, the year ended December 31, 2004 represents a 53-week yearand the years ended December 31, 2005, 2003, 2002 and 2001 each representa 52-week year.

(2)          The year ended December 31,2001 includes pre-tax charges that consist of the following: restructuringcharge of $25.1 million, goodwill and asset impairment charge of$33.8 million, inventory charge of $110.3 million, technologywrite-off of $7.5 million, write-off of capitalized bank fees of$1.1 million, a $58.8 million deferred tax valuation allowance and$1.3 million in stock compensation charges primarily related to theemployer match of our 2001 Deferred Compensation Plan.

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(3)          The year ended December 31,2002 includes pre-tax charges that consist of the following: restructuringcharge 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.

(4)          The year ended December 31,2003 includes a write-down of approximately $5.7 million, included inother expense, 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.

(5)          On February 14, 2003,we acquired di/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.

(6)          During 2004, weperformed an impairment test in accordance with SFAS 144. The results ofthese tests indicated that the manufacturing equipment at one of our European facilitieswas impaired and we recorded non-cash impairment charges of $0.7 million.In addition, we wrote down our Mexico building to fair value based on currentmarket activity resulting in non-cash impairment charges of $1.3 million.We also recorded a $1.1 million write-off of an investment we own ina privately-held technology company, which was recorded in other expense.The year ended December 31, 2004 also includes pre-tax restructuringcharges of $0.7 million related to severance and benefit payments,consolidation of excess facilities, contract termination costs, and othershutdown costs, in accordance with SFAS 146 and $0.4 million ofrestructuring charges for settlement payments and legal fees related toadditional personnel and legal costs resulting from the closure of the Boston,Massachusetts facility during 2001.

(7)          During 2005, weannounced a restructuring plan which was accounted for in accordance with SFAS146. We recorded pre-tax charges of $11.1 million for restructuring costs whichincluded a workforce reduction in Europe and North America, and the chargeswere comprised of severance and related benefits, consolidation of excessfacilities and continuing lease obligations thereon, contract terminationcosts, and other shutdown costs. During2005, we also performed impairment reviews in accordance with SFAS 144. As aresult, we identified certain long-lived assets associated with the 2005restructuring whose carrying value would not be recoverable from future cashflows, and recorded an impairment charge of $5.1 million for these assets forthe year ended December 31, 2005. These assets consisted of an ownedbuilding in Norway that was held for use and which was written down to fairmarket value and then sold in 2005; leasehold improvements for leasedfacilities whose operations were closed during the year; and miscellaneousother long-lived assets that will no longer be used. We also determined that aninvestment in a foreign enterprise, recorded in other assets on the balancesheet, was impaired. The impairment charge of $2.0 million was recorded inother expense and primarily resulted from a forecast reduction for theenterprise and the related cash flow.

(8)          Consists of purchaseorders having delivery dates scheduled within the following six months, anddoes not include turns business that is ordered, produced, and shipped in thesame period.

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

(10)   Includes items in footnote (9) aboveand short-term debt.

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**ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Forward-Looking Statements**

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 similar expressions constitute “forward-lookingstatements.” These forward-looking statements reflect our current views with respectto future events and are based on assumptions and subject to risks anduncertainties. You should not place undue reliance on these forward-lookingstatements. Our actual results could differ materially from those anticipatedin these forward-looking statements for many reasons, including risksdescribed in the Risk Factors sections and elsewhere in this filing. Except forour ongoing obligation to disclose material information as required by federalsecurities laws, we do not intend to update you concerning any future revisionsto any forward-looking statements to reflect events or circumstances occurringafter the date of this report. The following discussion should be read inconjunction with the Risk Factors as well as our financial statements and therelated 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, industrial, transportation, automatic/semiconductor testequipment, medical equipment 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 to telecommunications and Internet service providers worldwide.

In February 2005, we announced a restructuringplan in which we consolidated our division structure. The most significantcomponents of this plan involved the elimination of most DC power systemsoperations in Norway and their integration into our other existing locations,as well as the elimination of certain manufacturing operations in North Americaand subsequent transfer of the manufacturing to our other existing locations orto contract manufacturers. In addition, we implemented cost reductions in otherareas of the Company. We have seen an increasing portion of the $30 million intargeted annual cost savings each quarter during 2005. We incurred $16.2million of 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.

All products are sold under the Power-One brand nameby our sales force. We have two product lines, referred to as “embeddedproducts” and “power systems.” Embedded products include AC/DC power supplies,DC/DC converters (“Bricks”) and POLs, and power management products, while thepower systems product line is comprised of the DC power 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 

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solutions for nextgeneration DC/DC power conversion products in the Intermediate Bus Architecture(IBA) market. SPS’ maXyzTM product line was introduced in 2003 and was developedspecifically for the IBA market. In 2004, we introduced our new Z-OneTM digitalpower management architecture and our new Z-series product line which includeda digital controller. We began full production of these products near the endof the third quarter of 2004, and signed on C&D Technologies as asecond-source licensing partner for these products. We have continued tostrengthen our Z-One Alliance by announcing the addition of Atmel to thepartnership during the third quarter of 2005, 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 response to our newtechnology, certain of our competitors have formed a consortium in an attemptto develop competing technologies. We filed a lawsuit on September 30,2005 against Artesyn Technologies, Inc. and against Silicon Laboratories, Inc.on December 14, 2005 for infringement of patents held by the Companyrelated to this technology. The lawsuits seek compensatory damages and a permanent injunction toprohibit these companies from making, using, selling or offering to sellinfringing products, and are in the earliest stages.

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 expires on December 31, 2006.During 2005, we repurchased and retired 0.8 million shares of our common stockfor approximately $4.3 million.

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, and Slovakia, and atcontract manufacturers in Asia. Approximately 50% of our products aremanufactured by our contract manufacturers. We believe that the increased useof contract manufacturers will provide us with greater flexibility and a betterability to respond to changes in the market and will be less capital intensive.We are significantly increasing our presence in Asia to take advantage of itslower cost structure and closer proximity to certain major customers. However,we recognize that there are inherent risks to our international operations thatmay impact our business, which include but are not limited to the following:

·  Currency risk, since we willincreasingly receive payments and purchase components in foreign currencies andwe have historically not engaged in foreign currency hedging activities;

·  Risk associated with expandingsales or manufacturing operations into economies and markets that mayexperience financial or political instability;

·  Differing degrees ofintellectual property protection outside of the United States;

·  Frequent changes in laws andpolicies affecting trade, investment and taxes, including laws and policiesrelating to repatriation of funds and to withholding taxes, that areadministered under very different judicial systems;

·  Increased reliance on overseascontract manufacturers that may not be able to manufacture and deliver productsin the quantity, quality and timeline required; and

·  Additional time constraints onmanagement associated with overseeing an increased number of small operationsthat are geographically dispersed across Asia.

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We are subject to local laws and regulations invarious regions in which we operate, including the European Union (“EU”). Inparticular, two current EU directives may have a material impact on ourbusiness. The first is the Restriction of Certain Hazardous SubstancesDirective (“RoHS”), which restricts the distribution of certain substances,including lead, within the EU and is effective July 1, 2006. In additionto eliminating and/or reducing the level of specified hazardous materials fromour products, we will also be required to maintain and publish a detailed listof all chemical substances in our products. We are starting to see requestsfrom our customers, including some of our major customers, for RoHS-compliantproducts. We are in the process of compiling RoHS-compliant information on ourproducts as well as procuring RoHS-compliant material and information fromour suppliers.

The second directive is the Waste Electrical andElectronic Equipment Directive (“WEEE”), which was effective August 13,2005 in certain jurisdictions and requires covered manufacturers or importersto recycle or dispose of all products manufactured or imported into the EU by aparty which is subject to the directive at its own expense at the end of theproducts’ useful lives. It is our current position and interpretation of theWEEE directive that our products are not directly covered by or such as torequire to our direct compliance with the directive. We believe our endcustomers bear the responsibility for WEEE directive compliance for theproducts and/or systems in which our products are components.

There are certainrisks we face in complying with, or seeking to conduct our business inconnection with, the RoHS and WEEE directives, which include but are notlimited to the following:

·  For RoHS

·   We may be unable to procureappropriate RoHS-compliant material in sufficient quantity and quality and/ormay be unable to incorporate it into our manufacturing processes withoutcompromising quality and/or impacting our cost structure;

·   We may not be able to sellnon-compliant product into the EU or to any customer whose end product will besold into the EU, which may result in reduced sales;

·   We may face additional excessand obsolete inventory risk related to non-compliant inventory that we maycontinue to hold for which there is reduced demand and that we may need towrite down.

·  For WEEE

·   We may be determined byapplicable national regulatory agencies which implement the WEEE directive thatcertain of our products are directly covered under the WEEE directive, makingus directly responsible for WEEE compliance for such products.

·   Our customers may refuse toagree to contractual language which allocates and assigns WEEE responsibility,or demand that we undertake WEEE responsibilities independent of regulatoryinterpretation.

We are unable to estimate at this time the cost ofcompliance, if any, with either EU directive. Compliance and non-compliancewith these laws may have a material adverse impact on our net sales andoperating results.

We operate in an industrywhere quantity discounts, price erosion, and product obsolescence due totechnological improvements, all of which result in decreased revenues in astatic environment, are normal. While we see price erosion on most of the productswe sell, we also see price erosion (i.e. cost reduction) on many of thecomponents we purchase for inclusion in our products. Product obsolescencerefers to the tendency of small and less expensive products to replace largerand more expensive products. In DC/DC bricks, for example, the functions of afull-brick were replaced by half-brick, which was replaced by a quarter brick,which was replaced by a 1/8th-brick, which will eventually be replaced by a 1/16th-brick or 

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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. These phenomena are normal in our industry, and we haveexperienced price erosion in line with industry trends. Price erosion on ourproducts may negatively impact gross margins. Price erosion may also maskincreases in unit sales of certain products.

**Critical Accounting Policies**

Application of ouraccounting policies requires management to make judgments and estimates aboutthe amounts reflected in the financial statements. Management uses historicalexperience and all available information to make these estimates and judgments,although differing amounts may be reported if there are changes in theassumptions and estimates. Estimates are used for, but not limited to, theaccounting for the allowance for doubtful accounts, inventory allowances,restructuring costs, impairment charges, depreciation and amortization, salesreturns, warranty costs, taxes and contingencies. Management has identified thefollowing accounting policies as critical to an understanding of our financialstatements and as areas most dependent on management’s judgment and estimates.

***Revenue Recognition***—Werecognize revenue when persuasive evidence of an arrangement exists, titletransfer has occurred, the price is fixed or readily determinable, andcollectibility is probable. We recognize revenue in accordance with StaffAccounting Bulletin No. 104, “Revenue Recognition.” Sales are recorded netof sales returns and discounts, which are estimated at the time of shipmentbased upon historical data.

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.We may charge shipping and handling costs to customers, which are included inrevenue and cost of goods sold.

We offer our distributors a standard agreement whichincludes payment terms, description of rights to return or exchange product,and price discounts. In general, payment is due within 30 days of shipmentof the product to the distributors. The distributor has a right to return onlyif we discontinue a product that the distributor has on hand. The distributorhas a right to exchange up to 5% of the dollar value of products purchasedwithin the prior six-month period, so long as the distributor is currentlypurchasing at least the equivalent dollar value in new product. Estimated productexchanges or returns are accrued for at the time of the sale based onhistorical information in accordance with Statement of Financial AccountingStandards (SFAS) 48, “Revenue Recognition When Right of Return Exists.”Finally, we may give price discounts to a distributor at the time a purchaseorder is received from the distributor for product that they will sell to aspecific customer. The price discount is available for one year followingissuance of the purchase order for items listed on the purchase order. Weaccrue for the estimated price discount at 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 review therecoverability of the carrying value of long-lived assets using the methodologyprescribed in SFAS 144, “Accounting for the Impairment and 

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Disposal of Long-LivedAssets.” We review long-lived assets for impairment whenever events or changesin circumstances indicate that the carrying value of such assets may not berecoverable. Upon such an occurrence, recoverability of these assets isdetermined by comparing the forecasted undiscounted net cash flows to which theassets relate, to the carrying amount. If the asset is determined to be unableto recover its carrying value, it is written down to fair value. Fair value isdetermined based on discounted cash flows, appraised values or otherinformation available in the market, depending on the nature of the assets.Methodologies for determining fair value are inherently based on estimates thatmay change, such as the useful lives of assets and our cash flow forecastsassociated with certain assets. A change in these estimates may result inimpairment charges, which would impact our operating results.

We review the carrying value of goodwill andnon-amortizable intangible assets using the methodology prescribed inSFAS 142, “Goodwill and Other Intangible Assets.” SFAS 142 requiresthat we not amortize goodwill, but instead subject it to impairment tests on atleast an annual basis and whenever circumstances suggest that goodwill may beimpaired. These impairment tests are also dependent on management’s forecasts,which frequently change. A change in our forecasts may result in impairmentcharges.

***Restructuring Costs***—EffectiveJanuary 1, 2003, we adopted and recorded restructuring charges inaccordance with SFAS 146, “Accounting for Costs Associated with DisposalActivities,” which requires that a liability for a cost associated with an exitor disposal activity be recognized when the liability is incurred, in contrastto the date of an entity’s commitment to an exit plan. Restructuring costs wererelated to the downsizing of our operations and primarily consisted of specificcharges that had been incurred or were to be incurred with no future economicbenefit. These charges included costs related to personnel severance,continuing lease obligations for vacant facilities and write-off of leaseholdimprovements and equipment therein, and certain contract termination penaltiesand other shutdown costs. Calculation of the restructuring reserves includesmanagement’s judgment regarding closed facilities, which include assumptionsabout the length of time it will take for facilities to be subleased as well asthe likely sublease income amount. Changes in these estimates may impact ouroperating results.

***Deferred Income TaxAsset Valuation Allowance***—We record a deferred income taxasset in jurisdictions where the Company generates a loss. We also record avaluation allowance against these deferred income 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.

***Inventories***—Inventoriesare stated at the lower of cost (first-in, first-out method) or market. Slowmoving and obsolete inventory are written down quarterly based on a comparisonof on-hand quantities to historical and projected usages. Additionally,reserves for non-cancelable open purchase orders for components we areobligated to purchase in excess of projected usage, or for open purchase orderswhere the market price is lower than the purchase order price, are recorded asother accrued 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 establish theallowance for doubtful accounts using the specific identification method andalso 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.

***Recent Pronouncementsand Accounting Changes***—In November 2004, the FASBissued SFAS No. 151, “Inventory Costs an amendment of ARB No. 43,Chapter 4” (SFAS No. 151). SFAS 151 amends the guidance in ARB No. 43,Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amountsof idle facility expense, handling costs and wasted material (spoilage). Amongother provisions, the new rule requires that such items be recognized ascurrent-period charges, regardless of whether they meet the criterion of “soabnormal” as stated in ARB No. 43. SFAS No. 151 is effective forfiscal years beginning 

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after June 15, 2005.We do not expect that adoption of SFAS 151 will have a material effect on theCompany’s financial position, results of operations, or liquidity.

In December 2004, the FASB issued SFAS 123(R), “Share-BasedPayment,” which revises SFAS 123, “Accounting for Stock-Based Compensation,”and supersedes APB Opinion No. 25, “Accounting for Stock Issued toEmployees.” We adopted SFAS 123(R) in the first quarter of fiscal 2006using the modified prospective method and will continue to evaluate the impactof SFAS 123(R) on our operating results and financial condition. Valuing astock option is a complex calculation that can be performed by a number ofvaluation methods, such as the Black-Scholes or lattice binomial methods. Eachvaluation method, however, may utilize a number of management judgments ascalculation inputs, including but not limited to the expected life of theoption, expected forfeitures, and future volatility. We will recognize thecompensation cost for stock-based awards issued after December 31, 2005 ona straight-line basis over the requisite service period for the entire award.Changes in the our estimates of the valuation assumptions may materially impactthe valuation of any options granted and therefore impact operating results ifa substantial number of options are granted in the future.

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections—areplacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS154). This Statement replaces APB Opinion No. 20, “Accounting Changes,”and FASB Statement No. 3, “Reporting Accounting Changes in InterimFinancial Statements,” and changes the requirements for the accounting for andreporting of a change in accounting principle by requiring retrospectiveapplication to prior periods’ financial statements of changes in accountingprinciple, unless it is impractical to determine either the period-specificeffects or the cumulative effect of the change. It also applies to changesrequired by an accounting pronouncement in the unusual instance that thepronouncement does not include specific transition provisions. In addition, theStatement requires that a change in depreciation or amortization for long-livedassets be accounted for as a change in accounting estimate effected by a changein accounting principle. When a pronouncement includes specific transitionprovisions, those provisions should be followed. SFAS 154 is effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. Consequently, we will adopt provisions of SFAS154 for the fiscal year beginning January 1, 2006. Management currentlybelieves the adoption of the provisions of SFAS 154 will not have a materialimpact on the Company’s financial position or results of operations.

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**Results of Operations**

Theyears ended December 31, 2005 and 2003 represent 52-week years andthe year ended December 31, 2004 represents a 53-week year. Thefollowing table represents our consolidated statements of operations as apercentage of net sales for the periods presented:

| ** **                                        | ** ** | **Fiscal Year Ended  December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales                                         |       | 100.0                                              | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                                |       | 70.7                                               |       | 65.1 |   | 63.1 |   |
| Gross profit  (loss)                              |       | 29.3                                               |       | 34.9 |   | 36.9 |   |
| Selling, general  and administrative expense      |       | 22.4                                               |       | 24.2 |   | 24.4 |   |
| Engineering and  quality assurance expense        |       | 14.1                                               |       | 15.0 |   | 15.9 |   |
| Amortization of  intangibles                      |       | 1.5                                                |       | 1.4 |   | 1.4 |   |
| Restructuring  costs                              |       | 4.3                                                |       | 0.4 |   | 1.2 |   |
| Asset impairment                                  |       | 1.9                                                |       | 0.7 |   | — |   |
| Loss from  operations                             |       | (14.9                                              | )          | (6.8 | ) | (6.0 | ) |
| Interest income                                   |       | 0.9                                                |       | 0.6 |   | 0.6 |   |
| Interest expense                                  |       | (0.1                                               | )          | (0.2 | ) | (0.4 | ) |
| Other income  (expense), net                      |       | 0.2                                                |       | (0.1 | ) | (1.7 | ) |
| Loss before  provision (benefit) for income taxes |       | (13.9                                              | )          | (6.5 | ) | (7.5 | ) |
| Provision  (benefit) for income taxes             |       | 0.7                                                |       | 1.1 |   | (0.4 | ) |
| Net loss                                          |       | (14.6                                              | )%         | (7.6 | )% | (7.1 | )% |

 

***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.

Net sales for our two productlines 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 | % |

 

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

Netsales by end-markets 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 as follows:

| **Backlog and bookings (in millions)** | ** ** | ** ** | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------------------------|------------|------------|------------|---------------------------------|------------|---------------------------------|------------|
| Combined 180-day  backlog                                  |       |       | $          | 34.7                            |       |                            |       | $ | 38.0 |   |   |
| Combined 90-day  backlog                                   |       |       | $          | 31.7                            |       |                            |       | $ | 33.9 |   |   |

 

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 (Loss).******  ***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 ourtelecom power systems division in Europe. We recorded $6.0 million in cost ofgoods sold related to the write off of the excess inventory and other inventoryadjustments during the year ended December 31, 2005 compared to $3.1million related to write-offs of excess and obsolete inventory recorded duringthe 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.

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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 expense increased $0.2 million, or4%, to $6.0 million for the year ended December 31, 2005 from $5.8 millionfor the same period in 2004. Quality assurance expense for the year ended December 31,2005 included support costs related to the transfer of production, bothinternally and externally to contract manufacturers, which resulted from therestructuring of our operations in Norway and North America, as well as expenserelated to the RoHS initiative.

***Amortization ofIntangible Assets.******  ***Amortization of intangible assetsremained constant at $3.9 million for both years ended December 31,2005 and 2004.

Otherchanges in intangible asset balances from period to period relate primarily tothe translation of the intangible asset balances from our subsidiaries’functional currencies into U.S. dollars.

***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 telecom power systems business, as well as consolidate ourdomestic facilities. We estimate that overall we will save approximately $30million annually as a result of the restructuring initiatives implemented andhave seen an increasing portion of these savings during the latter half of 2005.A summary of the restructuring activity recorded under SFAS 146 during theyear ended December 31, 2005 is as follows, in millions:

| ** **                     | ** ** | **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.

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***Loss fromOperations.***   As a result of the items above,loss from operations increased $19.8 million to a loss of $38.9 millionfor the year ended December 31, 2005 from an operating loss of$19.1 million for the same period in 2004.

***Interest Income(Expense), Net.***   Net interest income was$2.2 million for the year ended December 31, 2005 compared to netinterest income of $1.2 million for the same period in 2004. The increasein net interest income between periods is largely attributable to changes inour cash management plan as well as to the decrease in interest expenseresulting from the repayment of our long-term debt during the quarter endedMarch 31, 2004.

***Other Income(Expense), Net.***   Net other income was$0.3 million for the year ended December 31, 2005, compared with netother expense of $0.2 million for 2004. Net other income during 2005included $1.7 million net gains related to foreign currency fluctuations, and$0.6 million of proceeds from the settlement of a lawsuit, offset by $2.0million related to the impairment of certain foreign investments resulting froma forecast reduction for those enterprises and the related cash flow.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 forIncome Taxes.***   The provision for income taxeswas $1.8 million for the year ended December 31, 2005 at ourprofitable international locations, compared to the provision for income taxesof $3.1 million for 2004. For the year ended December 31, 2005, werecorded a deferred income tax asset valuation allowance of approximately $14.3 millioncompared to $10.1 million recorded during the same period in 2004.

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.

***Comparison of Fiscal Year Ended December 31, 2004with Fiscal Year Ended December 31, 2003***

***Net Sales.***   Netsales increased $24.0 million, or 9%, to $280.3 million for the yearended December 31, 2004 from $256.3 million for the year endedDecember 31, 2003. We continued to see moderate growth within our industryduring 2004 as customers ordered product at levels that reflected their currentneeds. Sales increases were attributable to volume growth in sales to certaincommunications and semiconductor automatic test equipment industry customers,and distributors. In addition, we estimate that approximately $8 to$10 million of the increase in net sales related to sales in foreigncurrencies as the US dollar experienced significant weakening during 2004.

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

| ** **        | ** ** | **Year Ended  December 31,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** |
|-------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Embedded products |       | $                                            | 200.2      |                                         | 71         | % | $ | 173.2 |   | 68 | % |
| Power systems     |       | 80.1                                         |       | 29                                           | %          | 83.1 |   | 32 | % |
| Total             |       | $                                            | 280.3      |                                         | 100        | % | $ | 256.3 |   | 100 | % |

 

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Netsales by customer category were as follows, in millions:

| ** **        | ** ** | **Year Ended  December 31,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** |
|-------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| OEMs              |       | $                                            | 196.1      |                                         | 70         | % | $ | 174.0 |   | 68 | % |
| Distributors      |       | 61.1                                         |       | 22                                           | %          | 58.7 |   | 23 | % |
| Service providers |       | 23.1                                         |       | 8                                            | %          | 23.6 |   | 9 | % |
| Total             |       | $                                            | 280.3      |                                         | 100        | % | $ | 256.3 |   | 100 | % |

 

Cisco Systems and its contract manufacturerscollectively were the only customer to exceed 10% of net sales in both yearsended December 31, 2004 and 2003 at $42.3 million, or 15% of netsales, and $39.4 million, or 15% of net sales, in each respective year.

Netsales by end-markets were as follows:

| ** **                        | ** ** | **Year Ended  December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| Communications                    |       |                                   | 59         | % |   |   | 62 | % |   |
| Industrial                        |       |                                   | 16         | % |   |   | 16 | % |   |
| Transportation                    |       |                                   | 7          | % |   |   | 8 | % |   |
| ATE/Semiconductor  test equipment |       |                                   | 7          | % |   |   | 5 | % |   |
| Computer and  Retail              |       |                                   | 4          | % |   |   | 3 | % |   |
| Medical                           |       |                                   | 2          | % |   |   | 3 | % |   |
| Other                             |       |                                   | 5          | % |   |   | 3 | % |   |
| Total                             |       |                                   | 100        | % |   |   | 100 | % |   |

 

Ourcombined 180-day and 90-day backlog are summarized as follows:

| **Backlog and bookings (in millions)** | ** ** | ** ** | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|------------------------------------------------------------|------------|------------|------------|---------------------------------|------------|---------------------------------|------------|
| Combined 180-day  backlog                                  |       |       | $          | 38.0                            |       |                            |       | $ | 39.6 |   |   |
| Combined 90-day  backlog                                   |       |       | $          | 33.9                            |       |                            |       | $ | 34.7 |   |   |

 

Our combined 180-day backlog on December 31, 2004was $38.0 million, a decrease of 4% compared to backlog of$39.6 million on December 31, 2003. The slight decrease in backlogprimarily reflects the shorter lead times within the industry. Our bookingswere not significantly impacted by any new Vendor Managed Inventory (“VMI”)programs during 2004. When VMI programs are initiated by customers, bookingsare canceled (or never placed) and replaced by a forecast. We then supplyproduct to the customer per an agreed-upon electronic “signal” or an orderplaced to ship the goods, and the customer uses the inventory as needed. Undera VMI program, the booking and billing occur simultaneously upon use of theproduct, and therefore there is always a book-to-bill ratio of 1.0 for theseprograms. We may bring additional VMI programs on-line in the future, whichcould result in higher turns business and a lower backlog. As such, we believethat backlog may not necessarily be a reliable indicator of future results overtime.

***Gross Profit(Loss).***   Gross profit for the year endedDecember 31, 2004 was $97.9 million compared with a gross profit of$94.7 million for 2003. As a percentage of net sales, gross profitpercentage decreased to 34.9% for the year ended December 31, 2004 from agross profit percentage of 36.9% for the same period in 2003. Two factorscontributed to the decrease in gross margin during the year endedDecember 31, 2004. First, we recorded $3.1 million, or approximately1 point, in cost of goods sold related to write-offs for excess andobsolete inventory, the majority of which was related to some of our power 

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systems products which arebeing discontinued. Second, during 2004 our product mix was unfavorable due toa decrease in sales of high-power products which carry an above-averagegross margin, as well as significantly higher sales of telecom power systems toone of our largest telecom customers and of other embedded products, which havelower gross margins. We estimate that the product mix and volume sold in 2004compared to 2003 negatively impacted our gross margin by approximately$1.5 million, or nearly one percent.

***Selling, Generaland Administrative Expense.***   Selling, generaland administrative expense increased $5.4 million, or 9%, to$67.8 million for the year ended December 31, 2004 from$62.4 million for 2003. As a percentage of net sales, selling, general andadministrative expense remained constant at 24% for the years endedDecember 31, 2004 and 2003.

Selling expense increased $4.2 million, or 16%,to $29.5 million for the year ended December 31, 2004 from$25.3 million for 2003. Increases were primarily due to $1.5 millionhigher commissions expense during 2004 related to increased sales, increases inour sales force of $0.8 million, as well as foreign currency fluctuationsrelated to the weakening US dollar.

Administrative expense increased $1.2 million, or3%, to $38.3 million for the year ended December 31, 2004 from$37.1 million for 2003. The increase in administrative expense wasprimarily due to costs associated with audit fees related to Sarbanes-Oxleylegislation, legal work associated with patent filings related to new products,various corporate projects, as well as foreign currency fluctuations. Theseincreases were partially offset by cost savings resulting from therestructuring of our European operations.

***Engineering andQuality Assurance Expense.***   Engineering andquality assurance expense increased $1.4 million, or 4% to$42.2 million for the year ended December 31, 2004 from$40.8 million for 2003. As a percentage of net sales, engineering andquality assurance expense decreased to 15% for the year ended December 31,2004 from 16% for the same period in 2003. The increases in engineering andquality assurance expenses were primarily due to foreign currency movements.

***Amortization ofIntangible Assets and Goodwill Impairment.***   Amortizationof intangible assets increased $0.3 million, or 8%, to $3.9 millionfor the year ended December 31, 2004 from $3.6 million for the sameperiod in 2003. The increase in amortization expense was associated with theacquisition of di/dt in February 2003, which resulted in twelve months ofamortization expense recorded during the year ended December 31, 2004compared to ten months of amortization expense recorded during the same periodin 2003.

Other changes in intangible asset balances from periodto period relate primarily to the translation of the intangible asset balancesfrom our subsidiaries’ functional currencies into U.S. dollars.

***Restructuring Charge during Fiscal Year EndedDecember 31, 2004.***   EffectiveJanuary 1, 2003, we adopted SFAS 146. During 2004, we recordedpre-tax cash restructuring charges of $1.1 million primarily related toseverance payments for a reduction in headcount in our European operations andother costs related to our restructuring of the Boston, Massachusetts facilityin 2001. A summary of the restructuring activity recorded under SFAS 146during the year ended December 31, 2004 is as follows, in millions:

| ** **                     | ** ** | **Restructuring  Liabilities at  January 1, 2004** | ** ** | **Restructuring  Charges** | ** ** | **Applications of  Reserve** | ** ** | **Restructuring  Liabilities at  December 31, 2004** | ** ** |
|--------------------------------|------------|-------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------------|------------|---------------------------------------------------------------------|------------|
| Worldwide  workforce reduction |       |                                                              | $          | 0.5                        |       |                              |       | $                                                                   | 0.7        |   |   |   | $ | 1.2 |   |   |   | $ | — |   |   |
| Facilities  closure            |       |                                                              | 5.2        |                       |       |                              | —     |                                                                |       |   | 3.3 |   |   |   | 1.9 |   |   |
| Other                          |       |                                                              | —     |                       |       |                              | 0.4        |                                                                |       |   | — |   |   |   | 0.4 |   |   |
|                           |       |                                                              | $          | 5.7                        |       |                              |       | $                                                                   | 1.1        |   |   |   | $ | 4.5 |   |   |   | $ | 2.3 |   |   |

 

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***Asset Impairment.******  ***During 2004,we recorded asset impairment charges of $2.0 million. In connection withthe restructuring of our European operations during the second quarter of 2004,we recorded $0.7 million to write down the equipment at one of our Europeanfacilities to fair market value. The impairment tests indicated that thecarrying value of manufacturing equipment at this European facility was notrecoverable by the future cash flows from the continuing operations of thatlocation.

In addition, we wrote down our excess Mexico facilityto fair value using current market activity resulting in an impairment chargeof $1.3 million during the third quarter of 2004.

***Loss fromOperations.******  ***As a result of the items above, lossfrom operations increased $3.8 million to a loss of $19.1 million forthe year ended December 31, 2004 from an operating loss of$15.3 million for the same period in 2003.

***Interest Income(Expense), Net.******  ***Net interest income was$1.2 million for the year ended December 31, 2004 compared to netinterest income of $0.6 million for the same period in 2003. The increasein interest income is attributable to our cash management program implementedduring 2004 where we have purchased available-for-sale and held to maturityinvestments in an effort to earn a higher rate of return on our cash, as wellas to a decrease in interest expense resulting from the repayment of ourlong-term debt during the first quarter of 2004.

***Other Income(Expense), Net.******  ***Net other expense was$0.2 million for the year ended December 31, 2004, compared with netother expense of $4.5 million for 2003. This change is primarily due to apartial write-off of $5.7 million for an investment that we held in a privatelyheld company during 2003. Components of other expense during 2004 include thewrite-down of $1.1 million related to an investment we hold in aprivately-held technology company and foreign currency losses, offset by incomerelated to our joint venture and a VAT tax refund in Europe.

***Provision (Benefit)for Income Taxes.******  ***The provision for income taxeswas $3.1 million for the year ended December 31, 2004 at ourprofitable European locations, compared to the benefit for income taxes of$1.0 million for 2003. For the year ended December 31, 2004, werecorded a deferred income tax asset valuation allowance of approximately$10.1 million compared to $5.9 million recorded during the sameperiod in 2003.

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.

**Liquidity and Capital Resources**

Our cash and cash equivalents balance increased$1.6 million, or 4%, to $37.1 million at December 31, 2005 from$35.5 million at December 31, 2004. Our primary uses of cash in 2005consisted of $6.2 million for the acquisition of property and equipment,$5.4 million for operating activities and $4.3 million for the repurchase andretirement of 0.8 million shares of our own common stock. Our primary sourcesof cash in 2005 consisted of $7.9 million proceeds from the sale of propertyand equipment primarily related to our Norway building and Mexico facility,$6.9 million from the issuance of common stock primarily related to stockoption exercises and $3.4 million and $1.7 million related to the net proceedsfrom held to maturity and available for sale investments, respectively.

Cash used in operating activities of $5.4 millionincluded a net decrease in inventory of $10.2 million, of which $6.0 millionrelated to the write-off of excess inventory and other inventory adjustments,and increases of $5.2 million and $4.3 million in accounts receivable, net, andaccounts payable, respectively. In addition, cash used in operating activitiesalso included approximately $8.3 million of cash payments relating to theCompany’s restructuring plan.

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We maintain credit facilities with various banks inEurope and Asia. These credit facilities were acquired primarily as a result ofacquisitions in 1998 and 2000. The aggregate limit on all credit facilities isapproximately $4.0 million. The credit facilities bear interest on amountsoutstanding at various intervals based on published market rates. Some creditagreements require our subsidiaries to maintain certain financial covenants andto provide certain financial reports to the lenders. At December 31, 2005,we had no outstanding balance on any credit facility.

We currently anticipate that our total capitalexpenditures for 2006 will be in the range of $5 to $7 million. Thesecapital expenditures relate primarily to manufacturing equipment and processimprovements, equipment related to research and development and productdevelopment, additions and upgrades to our facilities and informationtechnology infrastructure, and other administrative requirements. The amount ofthese anticipated capital expenditures will frequently change during the yearbased on changes in expected revenues, our financial condition and the generaleconomic 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 a largeacquisition, it may be necessary to raise debt or equity in the private orpublic securities markets.

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 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.**  *StephensInc., a significant stockholder, provided no financial advisory services to usduring the year ended December 31, 2005 and 2004 and less than $0.1million in the year ended December 31, 2003. A former officer of Stephens, Inc.,now retired, is on our Board of Directors.

O’Melveny & Myers LLP provided general legalservices to us of approximately $0.7 million, $1.1 million, and $0.9million for the years ended December 31, 2005, 2004, and 2003,respectively. A former O’Melveny & Myers LLP partner, now retired, ison the Company’s Board of Directors. The Company owed O’Melveny &Myers LLP $0.1 million and $0.1 million at December 31, 2005 and December 31,2004, respectively.

We maintain minority ownership in a number ofinvestments, which are recorded on the balance sheet. These include investmentsin entities with which Power-One has a manufacturing relationship, including ajoint-venture located in China, as well as an investment made in one ofour contract manufacturers in Asia. The joint venture is accounted for underthe equity-method, and the investment in the contract manufacturer isaccounted for under the cost method, since we do not have significant influenceon the contract manufacturer and own approximately 5% of the common equity.During 2003 we recorded an impairment charge on this investment of$5.7 million.

The joint venture and contract manufacturer maypurchase raw components and other goods from Power-One, and may sell finishedgoods to Power-One as well as to other third parties. Power-One records 

37

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revenue on sales to thejoint venture and contract manufacturer only when the components and goods arefor sales to third parties. When the joint venture or contract manufacturerpurchases components that will be assembled and sold back to Power-One, norevenue is recorded. Power-One also has significant and similar relationshipswith other contract manufacturers where no investment has been made. Thesecontract manufacturers may purchase raw components from and sell finished goodsback to Power-One. No revenue is recognized for these transactions. Revenue isrecognized only when the products are for sale to third parties.

In February 2003, we acquired 100% of the equityof di/dt Inc. Prior to the acquisition, we held an exclusive license fromdi/dt for certain di/dt products, under which license we were making royaltypayments to di/dt relating to sales of licensed products. Stephens, Inc.was a significant shareholder in di/dt. Additionally, our outside counsel, O’Melveny &Myers LLP, held a modest equity position in di/dt, and our Chairman of theBoard, Mr. Goldman, held a very small personal position in di/dt via anLLC created by Stephens, Inc. in connection with the original investmentof Stephens, Inc. in di/dt. The total cost of the acquisition, includingsubsequent earn-out payments, was $17.5 million.

During 2005, we spent approximately $80,000 forlodging Company personnel in a Dominican Republic hotel in which our Presidentand Chief Operating Officer, Brad Godfrey, owns a minority interest.

*Summary of ContractualObligations and Commitments.**  *A summary of our future contractual payments relatedto lease obligations and non-cancelable open purchase orders is as follows (inmillions):

| **Year Ending December 31,** | ** ** | ** ** | ** ** | **Operating  Leases** | ** ** | **Non-Cancelable  Purchase  Orders** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|------------|------------|-----------------------|------------|--------------------------------------|------------|-----------|------------|
| 2006                                        |       |       | $          | 4.3                   |       |                                 |       | $         | 1.9        |   |   | $ | 6.2 |   |
| 2007                                        |       |       | 3.1        |                  |       |                                 | —     |      |       | 3.1 |   |
| 2008                                        |       |       | 2.3        |                  |       |                                 | —     |      |       | 2.3 |   |
| 2009                                        |       |       | 1.9        |                  |       |                                 | —     |      |       | 1.9 |   |
| 2010                                        |       |       | 1.7        |                  |       |                                 | —     |      |       | 1.7 |   |
| 2011 and  thereafter                        |       |       | 2.7        |                  |       |                                 | —     |      |       | 2.7 |   |
| Total                                       |       |       | $          | 16.0                  |       |                                 |       | $         | 1.9        |   |   | $ | 17.9 |   |

 

Approximately$5.0 million of the operating lease commitments above were reserved for inthe restructuring charge accrual for the year ended December 31, 2005.

**ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

Market risks relating to our operations resultprimarily from changes in interest rates and changes in foreign currencyexchange rates. Our exposure to interest rate risk results from the financialdebt instruments which arise from transactions entered into during the normalcourse of business. We may enter into derivative financial instrument transactions,such as swaps, in order to manage or reduce our exposure to interest ratechanges related to our portfolio of borrowings. Under no circumstances do weenter into derivative or other financial instrument transactions forspeculative purposes.

***Debt.******  ***At December 31,2005, we have no outstanding balance on any credit facility, and we believethat interest rate volatility would not have a material impact on ourliquidity.

***Foreign Currency.******  ***A significantportion of our business operations are conducted in various countries in Europeand Asia. As a result, we have a certain degree of market risk with respect toour cash flows due to changes in foreign currency exchange rates whentransactions are denominated in currencies other than our functional currency,including inter-company transactions. Historically, we have not activelyengaged in 

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substantialexchange rate hedging activities, and at December 31, 2005, we had notentered into any significant foreign exchange contracts.

**ITEM 8—FINANCIAL STATEMENTS 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.

**ITEM9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURES**

None

**ITEM 9A—CONTROLS AND PROCEDURES**

**Evaluationof Disclosure 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 is recorded, processed,summarized and reported within the required time periods.

As of December 31,2005, we had carried out an evaluation under the supervision and with theparticipation of our Chief Executive Officer and our Chief Financial Officer ofthe effectiveness of our disclosure controls and procedures. Based on thisevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat such disclosure controls and procedures, as defined in Exchange Act Rules 13a—15(e) and15d—15(e), are effective to ensure that information required to be disclosed byus in reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms. The Company reviewsits disclosure controls and procedures on an ongoing basis and may from time totime make changes aimed at enhancing their effectiveness and to ensure that theyevolve with the Company’s business.

**Management’sReport on Internal Control Over Financial Reporting**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting of the Company,as defined in Exchange Act Rules 13a—15(f). Internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with accountingprinciples generally accepted in the United States of America.

Our internal control over financial reporting includesthose policies and procedures that (i) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of our assets; (ii) 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 expenditures ofthe Company are being made only in accordance with authorizations of managementand directors of the Company; and (iii) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the Company’s assets that could have a material effect on thefinancial statements.

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

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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 31,2005. Our management’s assessment of the effectiveness of our internal controlover financial reporting as of December 31, 2005 has been audited byDeloitte & Touche LLP, an independent registered public accountingfirm, as stated in their report which is included herein.

**Reportof Independent Registered Public Accounting Firm**

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

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 31,2005, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards 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 as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely 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.

40

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In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of December 31,2005, is fairly stated, in all material respects, based on the criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission. Also in our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as of December 31,2005, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated financial statements and financial statement schedule as of andfor the year ended December 31, 2005 of the Company and our report dated March 9,2006 expressed an unqualified opinion on those financial statements and thefinancial statement schedule.

Deloitte & ToucheLLPLos Angeles, CaliforniaMarch 9, 2006

**ChangesIn Internal Control Over Financial Reporting**

There have been nosignificant changes in the Company’s internal control over financial reporting,as defined in Exchange Act Rules 13a-15, during the fourth fiscalquarter of 2005 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

**ITEM 9B—OTHERINFORMATION**

Not applicable.

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**PART III**

**ITEM 10—DIRECTORS AND EXECUTIVE OFFICERS OF THECOMPANY**

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 2005, to be held on April 25, 2006, 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 2005, to be held on April 25,2006, and such information is incorporated herein by reference.

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

We adopted a code of ethics that applies to ourprincipal executive officer, principal financial officer, principal accountingofficer, 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 anamendment to, or waiver from, a provision of this code of ethics by postingsuch information on our website, within the “Governance” section of our websiteper the address specified above.

**ITEM 11—EXECUTIVE COMPENSATION**

The information required forby this item will be contained under the caption “Executive OfficerCompensation” in our Proxy Statement related to our Annual Meeting ofStockholders for Fiscal Year 2005, to be held on April 25, 2006, and suchinformation is incorporated herein by reference.

**ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

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 2005, to be held on April 25,2006, and such information is incorporated herein by reference.

**ITEM 13—CERTAIN RELATIONSHIPS 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 2005, to be held on April 25,2006, and is incorporated herein by reference.

**ITEM 14—PRINCIPAL ACCOUNTANT 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 2005, to be held on April 25,2006, and is incorporated herein by reference.

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**PART IV**

**ITEM 15—EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

**(a)(1)     FINANCIALSTATEMENTS**

Thefollowing financial statements are filed as a part of this Annual Report on Form 10-K:

| POWER-ONE, INC.                                                      | ** ** | ** ** | ** ** | **Page** |
|----------------------------------------------------------------------|------------|------------|------------|----------|
| Reports 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 2005 and 2004 Quarters (Unaudited) |       | F-33       |

 

**(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.

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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 on Form 10-Kto be signed on its behalf by the undersigned, thereunto duly authorized.

|                          | POWER-ONE, INC.       |
|--------------------------|----------------------------|
|                     | By:                        | /s/  WILLIAM T. YEATES |
|                     | William T. Yeates          |
|                     | *Chief  Executive Officer* |
| Date: March 9, 2006 |                            |

 

**POWER OF ATTORNEY**

We the undersigneddirectors and officers of Power-One, Inc. hereby constitute and appointWilliam T. Yeates and Paul E. Ross, or any of them, our true and lawfulattorneys and agents, to do any and all acts and things in our name and behalfin our capacities as directors and officers and to execute any and allinstruments for us and in our names in the capacities indicated below, thatsaid attorneys and agents, or either of them, may deem necessary or advisableto enable said corporation to comply with the Securities and Exchange Act of1934, as amended, any rules, regulations, and requirements of the SEC, inconnection with this Annual Report on Form 10-K, includingspecifically, but not limited to, power and authority to sign for us or any ofus in our names and in the capacities indicated below, any and all amendmentsand supplements to this Annual Report on Form 10-K, and we herebyratify and confirm all that the said attorneys and agents, or any of them,shall do or cause to be done by virtue hereof.

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)                                            |       | March 9,  2006 |
| (William T. Yeates)                 |          |                                                                                              |
| /s/ PAUL E. ROSS                    |          | Vice President—Finance,  Treasurer and Chief Financial Officer (Principal Financial Officer) |       | March 9, 2006  |
| (Paul E. Ross)                      |          |                                                                                              |
| /s/ STEVEN J. GOLDMAN               |          | Chairman of the Board of Directors                                                                |       | March 9, 2006  |
| (Steven J. Goldman)                 |          |                                                                                              |
| /s/ KENDALL R. BISHOP               |          | Director                                                                                          |       | March 9, 2006  |
| (Kendall R. Bishop)                 |          |                                                                                              |
| /s/ DR. HANSPETER BRÄNDLI |          | Director                                                                                          |       | March 9, 2006  |
| (Dr. Hanspeter Brändli)   |          |                                                                                              |
| /s/ JON E. M. JACOBY                |          | Director                                                                                          |       | March 9, 2006  |
| (Jon E. M. Jacoby)                  |          |                                                                                              |
| /s/ JAY WALTERS                     |          | Director                                                                                          |       | March 9, 2006  |
| (Jay Walters)                       |          |                                                                                              |
| /s/ MARK MELLIAR-SMITH              |          | Director                                                                                          |       | March 9, 2006  |
| (Mark Melliar-Smith)                |          |                                                                                              |
| /s/ GAYLA J. DELLY                  |          | Director                                                                                          |       | March 9, 2006  |
| (Gayla J. Delly)                    |          |                                                                                              |

 

 

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**FINANCIAL STATEMENTS**

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 2005 and 2004 Quarters (Unaudited) |       | F-33       |
| 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 Directorsand Stockholders ofPower One, Inc.:

We have audited the accompanying consolidated balancesheets of Power-One, Inc. and its subsidiaries (the “Company”) as of December 31,2005 and 2004, 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, 2005. 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 thesefinancial 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).Those standards 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 Companyas of December 31, 2005 and 2004, and the results of its operations andits cash flows for each of the three years in the period ended December 31,2005, in conformity with accounting principles generally accepted in the UnitedStates of America. Also, in our opinion, such financial statement schedule,when considered in relation to the basic consolidated financial statementstaken as a whole, presents fairly, in all material respects, the informationset 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, 2005, based on the criteria establishedin *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated March 9, 2006 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 9, 2006

F-2

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

| ** **                                             | ** ** | **Year Ended  December 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                             | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| NET SALES                                              |       | $                                      | 261,557    |   | $ | 280,279 |   | $ | 256,334 |   |
| COST OF GOODS  SOLD                                    |       | 184,870                                |       | 182,375 |   | 161,668 |   |
| GROSS PROFIT                                           |       | 76,687                                 |       | 97,904 |   | 94,666 |   |
| EXPENSES:                                              |       |                                   |       |   |   |   |   |
| Selling, general and administrative                    |       | 58,561                                 |       | 67,827 |   | 62,427 |   |
| Engineering and quality assurance                      |       | 36,936                                 |       | 42,195 |   | 40,780 |   |
| Amortization of intangibles                            |       | 3,877                                  |       | 3,913 |   | 3,622 |   |
| Restructuring costs                                    |       | 11,135                                 |       | 1,080 |   | 3,128 |   |
| Asset impairment                                       |       | 5,098                                  |       | 1,991 |   | — |   |
| Total expenses                                         |       | 115,607                                |       | 117,006 |   | 109,957 |   |
| LOSS FROM  OPERATIONS                                  |       | (38,920                                | )          | (19,102 | ) | (15,291 | ) |
| INTEREST AND OTHER  INCOME (EXPENSE):                  |       |                                   |       |   |   |   |   |
| Interest income                                        |       | 2,371                                  |       | 1,792 |   | 1,644 |   |
| Interest expense                                       |       | (220                                   | )          | (615 | ) | (1,042 | ) |
| Other income (expense), net                            |       | 307                                    |       | (165 | ) | (4,484 | ) |
| Total interest and other income (expense)              |       | 2,458                                  |       | 1,012 |   | (3,882 | ) |
| LOSS BEFORE  PROVISION (BENEFIT) FOR INCOME TAXES      |       | (36,462                                | )          | (18,090 | ) | (19,173 | ) |
| PROVISION  (BENEFIT) FOR INCOME TAXES                  |       | 1,820                                  |       | 3,100 |   | (969 | ) |
| NET LOSS                                               |       | $                                      | (38,282    | ) | $ | (21,190 | ) | $ | (18,204 | ) |
| BASIC AND DILUTED  LOSS PER SHARE                      |       | $                                      | (0.45      | ) | $ | (0.25 | ) | $ | (0.22 | ) |
| BASIC AND DILUTED  WEIGHTED AVERAGE SHARES OUTSTANDING |       | 84,991                                 |       | 83,757 |   | 82,539 |   |

 

See notes to consolidated financial statements.

F-3

----

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

| ** **                                                                                                                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                      | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                                                                      |       |                  |       |   |   |
| CURRENT ASSETS:                                                                                                                                 |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                       |       | $                     | 37,101     |   | $ | 35,504 |   |
| Available for sale securities                                                                                                                   |       | 5,767                 |       | 7,516 |   |
| Investments held to maturity                                                                                                                    |       | 9,790                 |       | 9,405 |   |
| Accounts  receivable:                                                                                                                           |       |                  |       |   |   |
| Trade, less allowance for doubtful accounts of  $3,733 in 2005 and $4,836 in 2004                                                          |       | 58,877                |       | 56,397 |   |
| Other                                                                                                                                           |       | 4,017                 |       | 4,837 |   |
| Inventories                                                                                                                                     |       | 41,956                |       | 54,311 |   |
| Refundable income taxes                                                                                                                         |       | 101                   |       | 68 |   |
| Prepaid expenses and other current assets                                                                                                       |       | 5,260                 |       | 4,053 |   |
| Total current assets                                                                                                                            |       | 162,869               |       | 172,091 |   |
| INVESTMENTS HELD  TO MATURITY                                                                                                                   |       | 31,048                |       | 34,788 |   |
| PROPERTY AND  EQUIPMENT, net                                                                                                                    |       | 37,715                |       | 57,707 |   |
| GOODWILL, net                                                                                                                                   |       | 31,850                |       | 33,425 |   |
| OTHER INTANGIBLE  ASSETS, net                                                                                                                   |       | 20,658                |       | 24,657 |   |
| OTHER ASSETS                                                                                                                                    |       | 1,533                 |       | 4,385 |   |
| TOTAL                                                                                                                                           |       | $                     | 285,673    |   | $ | 327,053 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                   |       |                  |       |   |   |
| CURRENT LIABILITIES:                                                                                                                            |       |                  |       |   |   |
| Accounts payable                                                                                                                                |       | $                     | 32,268     |   | $ | 29,613 |   |
| Restructuring reserve                                                                                                                           |       | 5,098                 |       | 2,288 |   |
| Deferred income taxes                                                                                                                           |       | 1,270                 |       | 1,497 |   |
| Other accrued expenses                                                                                                                          |       | 21,304                |       | 21,986 |   |
| Total current liabilities                                                                                                                       |       | 59,940                |       | 55,384 |   |
| DEFERRED INCOME  TAXES                                                                                                                          |       | 937                   |       | 633 |   |
| OTHER LIABILITIES                                                                                                                               |       | 301                   |       | 999 |   |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                  |       |                  |       |   |   |
| STOCKHOLDERS’ EQUITY                                                                                                                       |       |                  |       |   |   |
| Common stock, par value $0.001; 300,000 shares  authorized; 85,588 and 84,252 shares issued and outstanding at  December 31, 2005 and 2004 |       | 86                    |       | 84 |   |
| Additional paid-in capital                                                                                                                      |       | 606,315               |       | 602,737 |   |
| Deferred compensation                                                                                                                           |       | —                |       | (44 | ) |
| Accumulated other comprehensive income                                                                                                          |       | 21,164                |       | 32,048 |   |
| Accumulated deficit                                                                                                                             |       | (403,070              | )          | (364,788 | ) |
| Total stockholders’ equity                                                                                                                 |       | 224,495               |       | 270,037 |   |
| TOTAL                                                                                                                                           |       | $                     | 285,673    |   | $ | 327,053 |   |

 

See notes to consolidated financial statements.

F-4

----

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

| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| NET LOSS                                 |       | $                                          | (38,282    | ) | $ | (21,190 | ) | $ | (18,204 | ) |
| OTHER COMPREHENSIVE  INCOME (LOSS)       |       |                                       |       |   |   |   |   |
| Unrealized Gain (Loss) on Investments    |       | (675                                       | )          | (317 | ) | — |   |
| Foreign currency translation adjustments |       | (10,209                                    | )          | 8,318 |   | 5,633 |   |
| COMPREHENSIVE LOSS                       |       | $                                          | (49,166    | ) | $ | (13,189 | ) | $ | (12,571 | ) |

 

See notes to consolidated financial statements.

F-5

----

**POWER-ONE, INC.CONSOLIDATED STATEMENTSOF 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, 2002                                     |       | 79,998,619                                           |       |                    | $          | 80           |       |                                  |       | $                      | 586,038    |        |       |   | $ | — |   |   |   | $ | 18,414 |   |   |   | $ | (325,394 | ) |   | $ | 279,138 |   |
| Net loss                                                        |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   |   |   |   |   | (18,204 | ) |   | (18,204 | ) |
| Other comprehensive loss:                                       |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative translation  adjustment                              |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   | 5,633 |   |   |   |   |   |   | 5,633 |   |
| Total  comprehensive loss                                       |       |                                                 |       |                    |       |         |       |                                  |       |                   |       |        |       |   |   |   |   |   |   |   |   |   |   | (12,571 | ) |
| Issuance of common  stock under stock option and purchase plans |       | 652,159                                              |       |                    | 1          |         |       |                                  | 1,939      |                   |       |        |       |   |   |   |   |   |   |   |   |   |   | 1,940 |   |
| Stock compensation                                              |       | 1,042,314                                            |       |                    | 1          |         |       |                                  | (739       | )                      |       |        | (662       | ) |   |   |   |   |   |   |   |   |   | (1,400 | ) |
| Issuance of common  stock in connection with acquisition        |       | 1,615,462                                            |       |                    | 1          |         |       |                                  | 8,211      |                   |       |        |       |   |   |   |   |   |   |   |   |   |   | 8,212 |   |
| 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          |         |       |                                  | 3,246      |                   |       |        |       |   |   |   |   |   |   |   |   |   |   | 3,247 |   |
| Stock compensation                                              |       | 32,125                                               |       |                    | —     |         |       |                                  | 825        |                   |       |        | 618        |   |   |   |   |   |   |   |   |   |   | 1,443 |   |
| 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          |         |       |                                  | 6,915      |                   |       |        |       |   |   |   |   |   |   |   |   |   |   | 6,917 |   |
| Stock compensation                                              |       | 32,125                                               |       |                    | —     |         |       |                                  | 930        |                   |       |        | 44         |   |   |   |   |   |   |   |   |   |   | 974 |   |
| 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 |   |

 

See notes to consolidated financial statements.

F-6

----

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

| ** **                                                                   | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                        |       |                                       |       |   |   |   |   |
| Net loss                                                                     |       | $                                          | (38,282    | ) | $ | (21,190 | ) | $ | (18,204 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and  amortization                                               |       | 14,949                                     |       | 16,396 |   | 16,049 |   |
| Asset impairment  (a)                                                        |       | 5,098                                      |       | 1,991 |   | — |   |
| Investment write-off  (b)                                                    |       | 2,049                                      |       | 1,118 |   | 5,723 |   |
| Stock compensation                                                           |       | 1,107                                      |       | 1,617 |   | 1,188 |   |
| Tax obligations  associated with stock compensation plans (c)                |       | (133                                       | )          | (174 | ) | (2,588 | ) |
| Exchange (gain) or  loss                                                     |       | (1,075                                     | )          | 148 |   | (1,657 | ) |
| Net (gain) loss on  disposal of property and equipment                       |       | (61                                        | )          | (190 | ) | 360 |   |
| Deferred income  taxes                                                       |       | 409                                        |       | (1,019 | ) | 1,010 |   |
| Changes in operating assets  and liabilities:                                |       |                                       |       |   |   |   |   |
| Accounts  receivable, net                                                    |       | (5,231                                     | )          | 8,050 |   | (7,685 | ) |
| Notes receivable                                                             |       | —                                     |       | 804 |   | 6,681 |   |
| Inventories                                                                  |       | 10,205                                     |       | (1,210 | ) | (103 | ) |
| Refundable income  taxes                                                     |       | (27                                        | )          | 1,088 |   | (1,109 | ) |
| Prepaid expenses  and other current assets                                   |       | (1,376                                     | )          | (279 | ) | 2,934 |   |
| Accounts payable                                                             |       | 4,270                                      |       | (7,290 | ) | 7,373 |   |
| Restructuring  reserve                                                       |       | 2,843                                      |       | (3,404 | ) | (2,620 | ) |
| Accrued expenses                                                             |       | 466                                        |       | 2,552 |   | (15,974 | ) |
| Other liabilities                                                            |       | (638                                       | )          | 32 |   | 49 |   |
| Net cash used in  operating activities                                       |       | (5,427                                     | )          | (960 | ) | (8,573 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                        |       |                                       |       |   |   |   |   |
| Purchases of  available-for-sale investments                                 |       | (252                                       | )          | (7,516 | ) | — |   |
| Purchases of held  to maturity investments                                   |       | (7,810                                     | )          | (44,193 | ) | — |   |
| Proceeds from  available-for-sale investments                                |       | 2,001                                      |       | — |   | — |   |
| Proceeds from held  to maturity investments                                  |       | 11,201                                     |       | — |   | — |   |
| Acquisition of  property and equipment                                       |       | (6,236                                     | )          | (7,330 | ) | (7,316 | ) |
| Proceeds from sale  of property and equipment                                |       | 7,915                                      |       | 1,933 |   | 4,782 |   |
| Other assets                                                                 |       | 123                                        |       | (399 | ) | (553 | ) |
| Investment in  di/dt, net of cash acquired                                   |       | —                                     |       | — |   | (591 | ) |
| Net cash provided  by (used in) investing activities                         |       | 6,942                                      |       | (57,505 | ) | (3,678 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                        |       |                                       |       |   |   |   |   |
| Proceeds from  borrowings on bank credit facilities                          |       | —                                     |       | — |   | 1,234 |   |
| Repayments of  borrowings on bank credit facilities                          |       | —                                     |       | (2,008 | ) | — |   |
| Bank overdraft                                                               |       | —                                     |       | — |   | (11 | ) |
| Repayments of  borrowings on long-term debt                                  |       | —                                     |       | (9,054 | ) | (687 | ) |
| Principal payments  under long-term capital leases                           |       | —                                     |       | — |   | (58 | ) |
| Issuance of common  stock                                                    |       | 6,917                                      |       | 3,247 |   | 1,940 |   |
| Repurchases of  common stock                                                 |       | (4,267                                     | )          | — |   | — |   |
| Net cash provided  by (used in) financing activities                         |       | 2,650                                      |       | (7,815 | ) | 2,418 |   |
| EFFECT OF EXCHANGE  RATE CHANGES ON CASH AND CASH EQUIVALENTS                |       | (2,568                                     | )          | 2,277 |   | 2,231 |   |
| INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                            |       | 1,597                                      |       | (64,003 | ) | (7,602 | ) |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                              |       | 35,504                                     |       | 99,507 |   | 107,109 |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                    |       | $                                          | 37,101     |   | $ | 35,504 |   | $ | 99,507 |   |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                          |       |                                       |       |   |   |   |   |
| Cash paid (received) for:                                                    |       |                                       |       |   |   |   |   |
| Interest                                                                     |       | $                                          | 4          |   | $ | 192 |   | $ | 960 |   |
| Income taxes                                                                 |       | $                                          | 172        |   | $ | (1,285 | ) | $ | 1,151 |   |

----

(a)              The asset impairment charges of $5,098 and $1,991 forthe years ended December 31, 2005 and 2004, respectively, related to theimpairment of property and equipment calculated in accordance with SFAS No. 144.

See notes to consolidated financial statements.

F-7

----

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

(b)              The $2.0 million investment write-off for the yearended December 31, 2005 related to the write-off of a foreign investmentand was recorded as other expense.

The $1.1 millioninvestment write-off for the year ended December 31, 2004 related to a$1.3 million investment in a private technology company that was writtendown to a fair value of $0.2 million and was recorded as other expense.

The $5.7 millioninvestment write-off for the year ended December 31, 2003 related to aninvestment in a privately-held company and was recorded as other expense. TheCompany has approximately a 5% interest in a contract manufacturer in Asia. Thisinvestment is being accounted for under the cost method. This contractmanufacturer is a significant supplier to the Company. During 2003,$5.7 million of the investment was written off as this company recentlywent through a significant restructuring and revised its forecast. This analysisindicated that the investment was impaired, and the Company wrote theinvestment down to fair value based on the valuation analysis performed.

(c)               The total number of shares issued on January 31,2003 (the “Payment Date”) in connection with the Deferred Compensation Plan wasapproximately 0.9 million shares which is net of approximately0.5 million shares that were withheld to satisfy the employees’ taxobligation. The Company paid the tax obligation of $2.6 million in cash inlieu of issuing shares.

**SUPPLEMENTALDISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES**

On February 14, 2003, the Company acquired allthe capital stock of di/dt, Inc. for approximately 1.4 million sharesof the Company’s common stock valued at $6.3 million and $1.0 millioncash and acquisition costs.

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

| Fair value of  tangible assets acquired                         |   | $      | 7,516  |   |
|-----------------------------------------------------------------|--------|--------|--------|--------|
| Fair value of  goodwill                                         |   | 2,183  |   |
| Fair value of  product technology                               |   | 3,818  |   |
| Cash paid for  di/dt’s capital stock and acquisition costs |   | (966   | )      |
| Prior investment  in di/dt                                      |   | (5,074 | )      |
| Fair value of  stock issued for di/dt’s capital stock      |   | (6,337 | )      |
| Liabilities assumed                                             |   | $      | 1,140  |   |

 

Subsequent to the acquisition date, the Companydistributed a total of 0.5 million shares of the Company’s common stock toformer di/dt shareholders during 2003 and 2004 valued at $5.1 million inconnection with the earn-out provision of the acquisition. Earn-out paymentshave been recorded as additional goodwill, and no earn-out provisions extendbeyond December 31, 2004.

See notes to consolidated financial statements.

F-8

----

**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

**NOTE1. GENERAL INFORMATION**

The accompanying consolidated financial statements ofPower-One, Inc. (the “Company” or “Power-One”) reflect the consolidatedresults of its operations for the years ended December 31, 2005, 2004 and2003 and include the accounts of the Company and its subsidiaries, all of whichare wholly owned. The statements were prepared in accordance with accountingprinciples generally accepted in the United States of America and pursuant tothe rules and regulations of the Securities and Exchange Commission (“SEC”).The Company’s reporting period coincides with the 52- or 53-weekperiod ending on the Sunday closest to December 31 and its fiscal quartersare the 13- or 14-week periods ending on the Sunday nearest to March 31,June 30, September 30 and December 31. 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 and at several contract manufacturers located throughout the world,predominantly in Asia.

The Company operates inone industry segment which consists of the design, development and manufactureof power conversion products primarily for the communications infrastructuremarket. The Company sells its products and grants credit to customers in thisindustry, primarily in the United States, Europe, and Asia. Net sales to CiscoSystems and its contract manufacturers, collectively the Company’s largestcustomer, were approximately 15% of sales during each of the years ended December 31,2005, 2004 and 2003. Solectron and its subsidiaries, which are contractmanufacturers for Cisco Systems, represented approximately 12% of the Company’strade accounts receivable balances as of December 31, 2005 and 2004.

**NOTE2. SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING 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 inthe Preparation of the Financial Statements******—***The preparationof the financial statements and related disclosures in conformity withaccounting 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 allowance fordoubtful accounts, inventory valuation, restructuring costs, impairment costs,depreciation and amortization, sales returns, warranty costs, taxes, andcontingencies. Due to the inherent uncertainty involved in making estimates,actual results reported in future periods may differ from those 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

----

**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

The Company generally recognizes revenue at the timeof shipment (or at the time of inventory consumption for customers on VendorManaged Inventory (“VMI”) programs) because this is the point at which revenueis earned and realizable and the earnings process is complete. For mostshipments, title to shipped goods transfers at the shipping point, so the risksand rewards of ownership transfer once the product leaves the Company’swarehouse. Revenue is only recognized when collectibility is reasonablyassured. The Company may charge shipping and handling costs to customers, whichare included in revenue and cost of goods sold.

The Company offers its distributors a standardagreement which includes payment terms, description of rights to return orexchange product, and price discounts. In general, payment is due within30 days of shipment of the product to the distributors. The distributorhas a right to return only if the Company discontinues a product that thedistributor has on hand. The distributor has a right to exchange up to 5% ofthe dollar value of products purchased within the prior six-month period, solong 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) 48, “Revenue RecognitionWhen Right of Return Exists.” Finally, the Company may give price discounts toa distributor at the time a purchase order is received from the distributor forproduct that they will sell to a specific customer. The price discount isavailable for one year following issuance of the purchase order for itemslisted on the purchase order. The Company accrues for the estimated pricediscount at the time revenue is recognized.

The Company has a joint venture in Asia which, alongwith certain of our contract manufacturers, may purchase raw components andother goods from Power-One, and sell finished goods back to Power-One as well asto other third parties. The Company records revenue on sales to the jointventure and contract manufacturer only when the components and goods are forsales to third parties. When the joint venture or contract manufacturerpurchases components that will be assembled and sold back to the Company, norevenue is recorded because the earnings process has not been completed.

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

***Accounts Receivableand Allowance for Doubtful Accounts******—***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******—***The Companyhas investments in certain debt securities that have been classified on thebalance sheet as available-for-sale securities or investments held-to-maturityin accordance with SFAS No. 115, “Accounting for Certain Investments andDebt and Equity Securities,” (SFAS 115). SFAS 115 establishesaccounting and reporting requirements for investments in equity securities thathave readily determinable fair values and for all investments in debtsecurities. Investments held-to-maturity are recorded on the balance sheet atcost. Available-for-sale securities are recorded at fair value, with 

F-10

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

unrealized gains andlosses (net of applicable income taxes) included in accumulated othercomprehensive income. Realized gains and losses are determined using thespecific identification method. The Company also holds certain equityavailable-for-sale securities which have been recorded in other assets on thebalance sheet.

The Company also holds investments in privateenterprises. These investments are included in other assets on the Company’sbalance sheet and are accounted for under the cost or equity method dependingon the nature and circumstances surrounding the investment. The Companymonitors these investments for impairment and makes appropriate reductions incarrying value when necessary.

***Property andEquipment******—***Property andequipment are recorded at cost. Provision for depreciation has been made basedupon 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 are shorter.Property and equipment held for sale has been classified in accordance with theprovisions of Statement of Financial Accounting Standards (SFAS) 144, “Accountingfor the Impairment and Disposal of Long-Lived Assets.”

***Intangible Assets******—***Intangible assetsinclude cost in excess of net assets acquired in connection with theacquisition of the Company in 1995, of Melcher AG in 1998, of IPD in 1999, andof di/dt, Inc. in 2003, which were allocated among certain intangibleitems determined by management to have value, such as the Company’s name,distribution network and product technology. Provision for amortization hasbeen made based upon the estimated useful lives of the intangible assetcategories, which range from three to 20 years, using the straight-linemethod.

***Impairment ofLong-Lived Assets and Goodwill******—***The Companyreviews the recoverability of the carrying value of long-lived assets using themethodology prescribed in SFAS 144, “Accounting for the Impairment andDisposal of Long-Lived Assets.” The Company reviews long-lived assets forimpairment 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, but instead subject it to impairmenttests on at least an annual basis and whenever circumstances suggest thatgoodwill 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 the liabilityis incurred, in contrast to the date of an entity’s commitment to an exit plan.Restructuring costs related to the downsizing of the Company’s operations andprimarily consisted of specific charges that had been incurred or were to beincurred with no future economic benefit. These charges included costs relatedto personnel severance, continuing lease obligations for vacant facilities andwrite-off of leasehold improvements and equipment therein, and certain contracttermination penalties and other shutdown costs.

F-11

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

***Income Taxes******—***Income taxesare provided for taxes currently payable or refundable, and for deferred incometaxes arising from future tax consequences of events that were recognized inthe Company’s financial statements or tax returns. The effects of income taxesare measured based on enacted tax laws and rates.

Additionally, the Company’s subsidiary Power-OneLimited operates in the Dominican Republic in a tax-free enterprise zone and,accordingly, pays no income taxes in connection with its operations in thatcountry. The Company has not provided for the U.S. federal and state income taxthat would be paid on unremitted earnings from this or any other overseassubsidiaries, as there is no intent to remit any such earnings.

***Deferred Income TaxAsset Valuation Allowance******—***The Companyrecords a deferred income tax asset in jurisdictions where it generates a loss.The Company also records a valuation allowance against these deferred incometax assets in accordance with SFAS 109, “Accounting for Income Taxes,”when, in management’s judgment, it is more likely than not that the deferredincome tax assets will not be realized in the foreseeable future.

***Stock Compensation******—***Through theyear ended December 31, 2005, the Company used the intrinsic-value methodof accounting prescribed by APB Opinion No. 25, “Accounting for StockIssued to Employees,” in accounting for stock options granted to employees.Accordingly, the Company has not recognized compensation expense for stockoption grants to employees in the Consolidated Statements of Operations thatwere made at fair market value.

SFAS 123,“Accounting for Stock-Based Compensation,” encourages, but does notrequire, the recognition of compensation expense for employee stock-basedcompensation arrangements using the fair value method of accounting through December 31,2005. The Company has elected the “disclosure only” alternative and hasdisclosed the pro forma net loss per share amounts using the fair value method.In accordance with SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure, an amendment of FASB Statement No. 123,”the required pro forma disclosure is shown below.

| ** **                                                                                         | ** ** | **Year Ended December 31,**                    | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2005**                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                         | ** ** | **(In millions, except  per share data)** | ** ** |
| Net loss, as reported                                                                              |       | $                                                             | (38.3      | ) | $ | (21.2 | ) | $ | (18.2 | ) |
| Add: Stock-based  employee compensation expense included in reported net loss                      |       | 1.1                                                           |       | 1.6 |   | 1.2 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value  based method |       | (20.0                                                         | )          | (15.3 | ) | (23.5 | ) |
| Pro forma net  loss                                                                                |       | $                                                             | (57.2      | ) | $ | (34.9 | ) | $ | (40.5 | ) |
| Loss per share:                                                                                    |       |                                                          |       |   |   |   |   |
| Basic and Diluted—as reported                                                                 |       | $                                                             | (0.45      | ) | $ | (0.25 | ) | $ | (0.22 | ) |
| Basic and  Diluted—pro forma                                                                  |       | $                                                             | (0.67      | ) | $ | (0.42 | ) | $ | (0.49 | ) |

 

Included in the $20.0 million of proforma stock-basedemployee compensation expense for the year ended December 31, 2005 in thetable above, is expense associated with the Company’s decision to acceleratemost of its stock options during the year ended December 31, 2005. TheCompany believes that no further compensation expense will be required infuture periods associated with the affected options.

F-12

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

The pro forma amounts for the fiscal years ended December 31,2005, 2004 and 2003 do not include a tax benefit on the stock compensation dueto the deferred income tax valuation allowance recorded by the Company in eachrespective year. The fair value of each option grant is estimated on the dateof grant using the Black-Scholes model, with the assumptions shown below.

| ** **                                            | ** ** | **Year Ended  December 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk-free  interest rate                              |       | 4.2                                    | %          | 3.9 | % | 3.5 | % |
| Volatility                                            |       | 46.7                                   | %          | 49.3 | % | 72.1 | % |
| Option life,  years                                   |       | 4.8                                    |       | 5.9 |   | 5.9 |   |
| Dividends                                             |       | —                                 |       | — |   | — |   |
| Fair value of  options granted, millions              |       | $                                      | 0.2        |   | $ | 12.1 |   | $ | 13.9 |   |
| Weighted-average  estimated values of options granted |       | $                                      | 2.25       |   | $ | 4.99 |   | $ | 4.10 |   |

 

***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.

***DerivativeInstruments******—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 derivative financialinstruments during the years presented.

***Fair Value of FinancialInstruments******—The***recordedvalues of accounts receivable, notes receivable, accounts payable and accruedexpenses approximate their fair values based on their short-term nature.

***Concentration ofRisk******—Financial***instrumentsthat potentially subject the Company to concentrations of credit risk consistprimarily of cash and cash equivalents placed with high credit qualityinstitutions and trade receivables. The Company sells products and extendscredit to customers, primarily in the United States, Europe and Asia;periodically monitors its exposure to credit losses; and maintains allowancesfor anticipated losses.

F-13

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

***Conversion ofForeign Currencies******—***The reportingcurrency for the consolidated financial statements of the Company is the U.S.dollar. The assets and liabilities of companies whose functional currency isother than the U.S. dollar are included in the consolidation by translating theassets and liabilities at the exchange rates applicable at the end of thereporting period. The statements of operations and cash flows of such companiesare translated at the average exchange rates during the applicable period.Translation gains or losses are accumulated as a separate component ofstockholders’ equity. The Company has not tax-effected the cumulative translationadjustment as there is no intention to remit the earnings.

***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 primarilygeared toward the communication industry, and the sales force sells products fromall divisions. The nature of the production process is similar acrossdivisions, and manufacturing for the different divisions occurs in commonfacilities. Generally, the same engineers with the same qualifications designand manufacture products across divisions. The types and class of customers aresimilar across the divisions and product lines, and products are distributedthrough common channels and distributor networks.

***RecentPronouncements and Accounting Changes******—***In November 2004,the FASB issued SFAS No. 151, “Inventory Costs an amendment of ARB No. 43,Chapter 4” (SFAS No. 151). SFAS 151 amends the guidance in ARB No. 43,Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amountsof idle facility expense, handling costs and wasted material (spoilage). Amongother provisions, the new rule requires that such items be recognized ascurrent-period charges, regardless of whether they meet the criterion of “soabnormal” as stated in ARB No. 43. SFAS No. 151 is effective forfiscal years beginning after June 15, 2005. The Company does not expectthat adoption of SFAS 151 will have a material effect on its financial positionor results of operations.

In December 2004,the FASB issued SFAS 123(R), “Share-Based Payment,” which revises SFAS 123, “Accountingfor Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” The Company will adopt SFAS 123(R) inthe first quarter of fiscal 2006 using the modified prospective method and willcontinue to evaluate the impact of SFAS 123(R) on its operating resultsand financial condition. Under this method, compensation cost will berecognized on or after the effective date for the portion of outstandingawards, for which the requisite service has not yet been rendered, based on thegrant date fair value of those awards previously calculated under SFAS 148 forpro forma disclosures. Valuing a stock option is a complex calculation that canbe performed by a number of valuation methods, such as the Black-Scholes orlattice binomial methods. Each valuation method, however, may utilize a numberof management judgments as calculation inputs, including but not limited to theexpected life of the option, expected forfeitures, and future volatility. TheCompany will recognize the compensation cost for stock-based awards issuedafter December 31, 2005 on a straight-line basis over the requisiteservice period for the entire award. Changes in the Company’s estimates of the valuationassumptions may materially impact the valuation of any options granted andtherefore impact operating results if a substantial number of options isgranted in the future.

F-14

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

In May 2005,the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—areplacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS154). This Statement replaces APB Opinion No. 20, “Accounting Changes,”and FASB Statement No. 3, “Reporting Accounting Changes in InterimFinancial Statements,” and changes the requirements for the accounting for andreporting of a change in accounting principle by requiring retrospectiveapplication to prior periods’ financial statements of changes in accountingprinciple, unless it is impractical to determine either the period-specificeffects or the cumulative effect of the change. It also applies to changesrequired by an accounting pronouncement in the unusual instance that thepronouncement does not include specific transition provisions. In addition, theStatement also requires that a change in depreciation or amortization forlong-lived assets be accounted for as a change in accounting estimate effectedby a change in accounting principle. When a pronouncement includes specifictransition provisions, those provisions should be followed. SFAS 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005. Consequently, the Company will adoptprovisions of SFAS 154 for the fiscal year beginning January 1, 2006.Management currently believes the adoption of the provisions of SFAS 154 willnot have a material impact on its financial position or results of operations.

**NOTE 3. ACQUISITIONS**

On February 14, 2003, the Company completed itsacquisition of di/dt Inc., a Delaware corporation based in Carlsbad,California and a technology innovator in the design and manufacture ofhigh-density DC/DC converters used mainly in communications systems andnetworking environments. The Company acquired di/dt primarily for itsinnovative technology in the DC/DC space.

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.

The net purchase price, plus acquisition costs, wasallocated to tangible assets and intangible assets. The excess of the aggregatepurchase price over the estimated fair values of the net tangible assetsacquired was recognized as goodwill and product technology. Product technologyis being amortized over five years. The consolidated statements of operations,comprehensive income (loss) and cash flows for the fiscal year ended December 31,2003, include ten months of di/dt’s operations. No pro forma information isincluded herein, as di/dt was not material to the Company’s financial positionor results of operations.

Prior to the acquisition,the Company held an exclusive license from di/dt for certain current and prospectivedi/dt products, under which license the Company was making royalty payments todi/dt relating to sales of licensed products. Stephens, Inc., asignificant shareholder of the Company, was also a significant shareholder indi/dt. Additionally, the Company’s outside counsel held a modest equityposition in di/dt, and the Company’s Chairman of the Board, Mr. Goldman,held a very small personal position in di/dt via an LLC created by Stephens, Inc.in connection with the original investment of Stephens, Inc. in di/dt.

F-15

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

**NOTE 4. INVESTMENTS**

The Company has investments in certain debt securitiesthat have been classified on the balance sheet as investments held-to-maturityand certain other securities that have been classified as available-for-salesecurities in accordance with SFAS No. 115, “*Accountingfor Certain Investments in Debt and Equity Securities*”. The Companyalso 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, 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 |   |   |

 

| ** **                                    | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **Amortized Cost**         | ** ** | **Unrealized  Pretax Net Gains  (Losses)** | ** ** | **Fair Value** | ** ** |
| U.S. government  and agencies notes and bonds |       |                            | $          | 39.2 |   |   |   | $ | — |   |   |   | $ | 39.2 |   |   |
| Municipal notes  and bonds                    |       |                            | 2.0        |   |   |   | — |   |   |   | 2.0 |   |   |
| Other fixed  income investments               |       |                            | 10.5       |   |   |   | 0.2 |   |   |   | 10.7 |   |   |
|                                          |       |                            | $          | 51.7 |   |   |   | $ | 0.2 |   |   |   | $ | 51.9 |   |   |

 

| ** **                                | ** ** | **December 31,2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| *Reported as:*                       | ** ** |                      | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| Available-for-sale  securities            |       |                      | $          | 5.8                         | ** ** |   |   | $ | 7.5 | ** ** |   |
| Investments held  to maturity, short-term |       |                      | 9.8        | ** **                  |       |   | 9.4 | ** ** |   |
| Investments held  to maturity             |       |                      | 31.0       | ** **                  |       |   | 34.8 | ** ** |   |
| Total                                     |       |                      | $          | 46.6                        | ** ** |   |   | $ | 51.7 | ** ** |   |

 

Thefair value of the Company’s investments held-to-maturity at December 31,2005, 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 |       |                    | $          | 9.8                 |       |   |   | $ | 9.8 |   |   |
| Due in 1—2 years      |       |                    | 8.0        |                |       |   | 7.8 |   |   |
| Due in 2—5 years      |       |                    | 23.0       |                |       |   | 22.6 |   |   |
|                       |       |                    | $          | 40.8                |       |   |   | $ | 40.2 |   |   |

 

F-16

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

TheCompany also has investments in private enterprises, including a joint-venturelocated in China, that are accounted for under the cost or equity methodsdepending on the nature of the investment. Additionally, the Company has aninvestment in one of its contract manufacturers in Asia, which is classified asan available-for-sale security. As of December 31, 2005, the Company hadrecorded $1.0 million of unrealized losses related to this investment inaccumulated other comprehensive income. All of such investments are included inother assets in the balance sheet.

**NOTE 5. INVENTORIES**

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

| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Raw materials            |       | $                     | 22.8       |   | $ | 29.8 |   |
| Subassemblies-in-process |       | 4.8                   |       | 6.1 |   |
| Finished goods           |       | 14.4                  |       | 18.4 |   |
|                     |       | $                     | 42.0       |   | $ | 54.3 |   |

 

The Company looks athistorical and projected usage for inventory in what is determining 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 2005, 2004 and 2003, the Company wrote off$6.0 million, $3.1 million and $1.4 million, respectively, related to excessinventory and other inventory adjustments, and recorded the charges as costs ofgoods sold.

**NOTE 6. PROPERTY AND EQUIPMENT**

Propertyand equipment consist of the following (in millions):

| ** **                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Land                                                          |       | $                     | —     |   | $ | 1.1 |   |
| Buildings (useful  lives of 20 to 30 years)                   |       | 4.3                   |       | 14.8 |   |
| Factory and  office equipment (useful lives of 3 to 10 years) |       | 70.8                  |       | 83.8 |   |
| Vehicles (useful  lives of 3 to 7 years)                      |       | 0.3                   |       | 0.6 |   |
| Leasehold  improvements (useful lives of 5 to 10 years)       |       | 10.4                  |       | 13.9 |   |
| Construction in  progress                                     |       | 3.2                   |       | 2.7 |   |
|                                                          |       | 89.0                  |       | 116.9 |   |
| Less accumulated  depreciation and amortization               |       | 51.3                  |       | 59.2 |   |
|                                                          |       | $                     | 37.7       |   | $ | 57.7 |   |

 

During the fourth quarter of 2005, the Company soldits excess facility in Norway for net cash proceeds of approximately $5.8million and recorded a gain on the sale of the building of approximately $2.7million against impairment charges. During the first fiscal quarter of 2005,the facility was determined to be excess and was impaired by $2.9 million basedon an independent appraisal of the facility. Additionally, the Company sold itsMexico facility, which was previously impaired, for net cash proceeds of $1.7million and recorded a loss on sale of approximately $0.1 million.

During 2004, the Company sold assets held for sale for$1.5 million and recorded a loss on sale of less than $0.1 million.

F-17

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

During 2003, the Companysold one of its closed facilities that was held for sale for $4.8 millionand recorded a gain on sale of approximately $0.2 million.

**NOTE 7. INTANGIBLE ASSETS**

Intangible assets consistof the following (in millions):

| ** **                     | ** ** | **December 31, 2005**   | ** ** | ** **                    | ** ** |
|--------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **Gross Intangible  Assets** | ** ** | **Accumulated  Amortization** | ** ** | **Net Intangible  Assets** | ** ** | **Weighted Average  Life (In Years)** | ** ** |
| *Non-amortizable  intangibles* |       |                              |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill                       |       |                              | $          | 37.1                          |       |   |   | $ | 5.3 |   |   |   | $ | 31.8 |   |   |   |   |   |   |
| Trade name                     |       |                              | 16.6       |                          |       |   | 5.2 |   |   |   | 11.4 |   |   |   |   |   |   |
| Subtotal                       |       |                              | 53.7       |                          |       |   | 10.5 |   |   |   | 43.2 |   |   |   |   |   |   |
| *Amortizable intangibles*      |       |                              |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Product technology             |       |                              | 24.8       |                          |       |   | 19.8 |   |   |   | 5.0 |   |   |   | 9 |   |   |
| Other                          |       |                              | 10.7       |                          |       |   | 6.4 |   |   |   | 4.3 |   |   |   | 15 |   |   |
| Subtotal                       |       |                              | 35.5       |                          |       |   | 26.2 |   |   |   | 9.3 |   |   |   |   |   |   |
| Total                          |       |                              | $          | 89.2                          |       |   |   | $ | 36.7 |   |   |   | $ | 52.5 |   |   |   |   |   |   |

 

| ** **                     | ** ** | **December 31, 2004**   | ** ** | ** **                    | ** ** |
|--------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **Gross Intangible  Assets** | ** ** | **Accumulated  Amortization** | ** ** | **Net Intangible  Assets** | ** ** | **Weighted Average  Life (In Years)** | ** ** |
| *Non-amortizable  intangibles* |       |                              |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill                       |       |                              | $          | 39.1                          |       |   |   | $ | 5.7 |   |   |   | $ | 33.4 |   |   |   |   |   |   |
| Trade name                     |       |                              | 16.6       |                          |       |   | 5.2 |   |   |   | 11.4 |   |   |   |   |   |   |
| Subtotal                       |       |                              | 55.7       |                          |       |   | 10.9 |   |   |   | 44.8 |   |   |   |   |   |   |
| *Amortizable intangibles*      |       |                              |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Product technology             |       |                              | 25.4       |                          |       |   | 17.3 |   |   |   | 8.1 |   |   |   | 9 |   |   |
| Other                          |       |                              | 10.7       |                          |       |   | 5.5 |   |   |   | 5.2 |   |   |   | 15 |   |   |
| Subtotal                       |       |                              | 36.1       |                          |       |   | 22.8 |   |   |   | 13.3 |   |   |   |   |   |   |
| Total                          |       |                              | $          | 91.8                          |       |   |   | $ | 33.7 |   |   |   | $ | 58.1 |   |   |   |   |   |   |

 

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, but instead subject it to impairmenttests on at least an annual basis and whenever circumstances suggest thatgoodwill may be impaired.

The Company performed an impairment test of goodwilland of the Company’s trade name in accordance with SFAS 142 during thethird quarter of 2005 and 2004. Based on the impairment tests performed using adiscounted cash flow approach, there was no impairment of the goodwill or theCompany’s trade name.

During 2003, the Company completed an acquisition,which was accounted for using the purchase method of accounting. The netpurchase price, plus acquisition costs, was allocated to tangible assets andintangible assets. The excess of the aggregate purchase price over theestimated fair values of the net 

F-18

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

tangible assets acquiredwas recognized as goodwill and product technology in the amount of$2.2 million and $3.8 million, respectively. Product technology isbeing amortized over five years.

Estimated futureamortization expense is as follows, in millions:

| **Year Ending December 31,** | ** ** | ** ** | ** ** | **Amortization  Expense** | ** ** |
|---------------------------------------------|------------|------------|------------|---------------------------|------------|
| 2006                                        |       |       | $          | 3.0                       |       |   |
| 2007                                        |       |       | 2.9        |                      |       |
| 2008                                        |       |       | 1.2        |                      |       |
| 2009                                        |       |       | 0.5        |                      |       |
| 2010                                        |       |       | 0.4        |                      |       |
| Total                                       |       |       | $          | 8.0                       |       |   |

 

As earn-out consideration forattainment of defined operational performance for years 2004 and 2003, theCompany distributed a total of 0.3 and 0.2 million shares during 2004 and2003, respectively, of the Company’s common stock to the former shareholders ofdi/dt. These payments were recorded as additional goodwill.

The changes in the carrying amount of goodwill forthe years ended December 31, 2005 and 2004 are as follows (in millions):

| ** **                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Beginning balance                             |       | $                     | 33.4       |   | $ | 29.1 |   |
| Increase in  goodwill related to acquisition  |       | —                |       | 3.2 |   |
| Changes due to  foreign currency fluctuations |       | (1.6                  | )          | 1.1 |   |
| Ending balance                                |       | $                     | 31.8       |   | $ | 33.4 |   |

 

**NOTE8. CREDIT FACILITIES AND BORROWINGS**

In February 2004, the Company elected to repayfrom its cash on hand the long-term debt of $9.1 million, which had beenincurred for the purchase of a subsidiary’s office and manufacturing facilityin Norway.

In addition, the Company maintains credit facilitieswith various banks in Europe and Asia. These credit facilities were acquiredprimarily as a result of acquisitions in 1998 and 2000. The aggregate limit onall credit facilities is approximately $4.0 million. The credit facilitiesbear interest on amounts outstanding at various intervals based on publishedmarket rates. Some credit agreements require the Company’s subsidiaries tomaintain certain financial covenants and to provide certain financial reportsto the lenders. At December 31, 2005 and 2004, the Company had nooutstanding balance on any credit facility.

At December 31, 2005and 2004, the Company was in compliance with all debt covenants.

F-19

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

**NOTE 9. OTHER ACCRUED EXPENSES**

Otheraccrued expenses consist of the following (in millions):

| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Accrued payroll  and related expenses |       | $                     | 4.0        |   | $ | 5.3 |   |
| Accrued income  taxes                 |       | 5.1                   |       | 5.1 |   |
| Accrued bonuses                       |       | 4.0                   |       | 2.1 |   |
| Accrued  warranties                   |       | 2.0                   |       | 3.4 |   |
| Other accrued  expenses               |       | 6.2                   |       | 6.1 |   |
|                                  |       | $                     | 21.3       |   | $ | 22.0 |   |

 

**NOTE10. RESTRUCTURING COSTS AND ASSET IMPAIRMENT CHARGES**

During 2005, the Company implemented a restructuringplan which was accounted for in accordance with SFAS 146, “Accounting for CostsAssociated with Disposal Activities.” The Company recorded pre-tax charges of$11.1 million for restructuring costs and pre-tax non-cash charges of $5.1million in asset impairment costs during the year ended December 31, 2005related to the restructuring of its worldwide operations.

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.

During 2003, the Company announced a restructuringplan and recorded pre-tax charges of $3.1 million in accordance withSFAS 146 related to the restructuring of the Company’s manufacturing andengineering facilities, of which $0.9 million were cash charges and$2.2 million were pre-tax charges related to lease obligations.

The restructuring costsand asset impairment charges are classified as operating expenses. Allrestructuring obligations have been or will be settled with cash.

**Restructuring Costs**

As of December 31, 2005 the remainingrestructuring obligations relate to facilities closures and severance. Theliabilities related to facilities closures contain continuing leaseobligations, the longest of which extends into 2011.

F-20

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

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

| ** **                     | ** ** | **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 |   |   |

 

Asummary of the restructuring activity during the year ended December 31,2004 is as follows (in millions):

| ** **                     | ** ** | **Restructuring  Liabilities at  January 1, 2004** | ** ** | **Restructuring  Charges** | ** ** | **Applications of  Reserve** | ** ** | **Restructuring  Liabilities at  December 31, 2004** | ** ** |
|--------------------------------|------------|-------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------------|------------|---------------------------------------------------------------------|------------|
| Worldwide  workforce reduction |       |                                                              | $          | 0.5                        |       |                              |       | $                                                                   | 0.7        |   |   |   | $ | 1.2 |   |   |   | $ | — |   |   |
| Facilities  closure            |       |                                                              | 5.2        |                       |       |                              | —     |                                                                |       |   | 3.3 |   |   |   | 1.9 |   |   |
| Other                          |       |                                                              | —     |                       |       |                              | 0.4        |                                                                |       |   | — |   |   |   | 0.4 |   |   |
|                           |       |                                                              | $          | 5.7                        |       |                              |       | $                                                                   | 1.1        |   |   |   | $ | 4.5 |   |   |   | $ | 2.3 |   |   |

 

The2005, 2004 and 2003 restructuring charges are comprised of the following (inmillions):

| ** **                     | ** ** | **Restructuring Costs  Year Ended  December 31,** | ** ** |
|--------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Worldwide  workforce reduction |       | $                                                                | 4.7        |   | $ | 0.7 |   | $ | 0.9 |   |
| Facilities  closure            |       | 6.2                                                              |       | — |   | 2.2 |   |
| Other costs                    |       | 0.2                                                              |       | 0.4 |   | — |   |
| Total                          |       | $                                                                | 11.1       |   | $ | 1.1 |   | $ | 3.1 |   |

 

**2005 Restructuring Costs**

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,consolidation of excess facilities and continuing lease obligations thereon,contract termination costs, and other shutdown costs. The Company expects topay the remaining severance obligations as of December 31, 2005 during thefirst quarter of 2006. The facilities closure charge includes $4.3 million ofcontinuing lease obligations related to a North American facility. Inaccordance with SFAS 146, 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 $1.0 million which theCompany paid out during 2005. All restructuring charges are expected to besettled with cash.

F-21

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

**2004 Restructuring Costs**

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. All severance and related benefits were paid out during2004. The $0.4 million of other restructuring charges were for settlementpayments and legal costs resulting from a settlement agreement related to theclosure of the Boston, Massachusetts facility during 2001. A settlementagreement was reached during the fourth quarter of 2004 between the Company andthe employees impacted by the 2001 restructuring of the Boston facility.

**2003 Restructuring Costs**

The $0.9 million of restructuring charge forworkforce reduction during 2003 was related to 49 positions eliminated duringthe fourth quarter of 2003, of which 27 were located in Norway and 22 werelocated in North America. The reductions in Norway were comprised ofmanufacturing positions and were part of the Company’s plan to consolidatemanufacturing facilities internally and shift production to outside contractmanufacturers. All remaining severance and related benefits were paid outduring 2004.

The facilities closurecharge of $2.2 million mainly represents a portion of the continuing leaseobligations for a North American facility, which has been partially vacatedwith no future economic benefit. Due to the industry downturn and the slowrecovery that has followed, a significant portion of these premises is unusedand the Company has determined that no economic benefit will be gained from aportion of this facility. In accordance with SFAS 146, the Companymeasured and recognized a liability for the fair value of the future paymentsremaining on the lease, offset by estimated sublease rents.

**Impairmentof Fixed Assets, Purchased Intangible Assets and Certain Investments**

During 2005, 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. The Company identified certain long-lived assets associated with the2005 restructuring whose carrying value would not be recoverable from futurecash flows, and recorded an impairment charge of $5.1 million for these assetsfor the year ended December 31, 2005. These assets consisted of an ownedbuilding in Norway that was initially held for use and written down to fairmarket 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 include cash components.

During the first quarter of 2005, the Companydetermined that an investment in a foreign enterprise, recorded in other assetson the balance sheet, was impaired. The impairment charge of $2.0 million wasrecorded in other expense and primarily resulted from a forecast reduction forthe enterprise and the related cash flow.

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 

F-22

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

that the carrying valuesof the fixed assets would not be recovered from future cash flows. In addition,the Company recorded non-cash asset impairment charges of $1.3 millionwhen it wrote down the book value of an idle facility in Mexico to fair valuewhich the Company determined based on current market activity.

During the year ended December 31,2004, the Company recorded a $1.1 million investment write-off related toa $1.3 million investment in a privately-held technology company which waswritten down to a fair market value of $0.2 million. The impairment charge of$1.1 million was recorded in other expense.

**NOTE 11. COMMON STOCK**

***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 terminate the option tofurther increase shares issuable under this plan, to grant to non-employees,and to reprice shares. The Company can issue either qualified or non-qualifiedstock options, restricted stock and restricted stock units under the 1996 Plan.At December 31, 2005, 16.7 million shares were reserved under the1996 plan, of which 1.1 million were available for future grants. Theoption price is determined by the Board of Directors based on the fair marketvalue of the Company’s common stock on the date of grant. The existing optionsgenerally vest over four- and seven-year terms. Those options with seven-yearvesting terms include accelerated vesting provisions that allow for vestingover five years if certain performance measures are met. In connection with theissuance of stock options in 1997 and 2002, the Company has computedcompensation cost for the difference between the estimated fair market valuesand the option exercise prices at the date of grant totaling approximately$0.2 million and $0.9 million, respectively, which is being amortizedover the vesting periods of the options. There was no material compensationexpense recorded in 2005, 2004 and 2003 related to these stock options.

In September 2001, the Board of Directorsapproved a stock option plan for the issuance of 2.5 million shares ofcommon stock (the “2001 Plan”). The Company only issued non-qualified stockoptions under the 2001 Plan, and did not issue options under the 2001 Plan to amember of the Board of Directors or an executive officer (i.e. an officer asdefined under and subject to Section 16 of the Securities Exchange Act of1934). The Board of Directors determined the option price based on the fairmarket value of the Company’s common stock on the date of grant. All optionsunder the 2001 Plan were granted at fair market value. Options granted underthe 2001 Plan generally vest over four years. In May 2004, the Board ofDirectors approved an amendment to this plan whereby the Company may not grantadditional awards under the 2001 Plan and the Company may not reprice optionspreviously granted under this plan. As of December 31, 2005, approximately1.8 million shares of common stock were issued and outstanding under the2001 Plan.

In May 2004, the Board of Directors andshareholders approved the adoption of the Power-One 2004 stock incentive plan(the “2004 Plan”) for the issuance of 4.8 million shares of common stock.Under this plan, the Company can issue stock options, stock appreciation rights,restricted stock, stock bonuses and other forms of awards denominated in commonstock or units as well as cash bonus awards. The option price is determined bythe Board of Directors based on the fair market value of the Company’s commonstock on the date of grant. The existing options generally vest over four-yearterms. At December 31, 2005, 4.7 million shares were available forfuture grants.

***Stock Awards******—******In***fiscalyear 2003, the Company began granting employees stock awards such as restrictedshares and stock units in addition to stock options. The stock award programoffers certain key 

F-23

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

employees the opportunityto earn shares of the Company’s stock over time. Stock awards are grants thatentitle the holder to shares of common stock as the award vests, generally overa four-year period.

During the year ended December 31, 2005, theCompany issued 1.3 million stock units to key employees which vest over fouryears. The company recorded stock compensation expense on a straight-line basisrelated to this grant of $0.9 million during the year ended December 31,2005. During the year ended December 31, 2003, the Company issued0.3 million restricted stock shares and stock units, resulting incompensation expense of $1.6 million and $0.6 million and deferredcompensation of $44,000 and $0.7 million, for the years ended December 31,2004 and 2003, respectively.

Thefollowing activity has occurred under our plan:

| ** **                                      | ** ** | **Millions of  Options** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|------------------------------------------------|------------|
| Awards  outstanding—December 31, 2002 |       |                          | —     |                                           |       |   | $ | — |   |   |
| Awards granted                                  |       |                          | 0.3        |                                           |       |   | $ | 7.32 |   |   |
| Awards vested                                   |       |                          | (0.1       | )                                              |       |   | $ | 6.18 |   |   |
| Awards cancelled                                |       |                          | —     |                                           |       |   | $ | — |   |   |
| Awards  outstanding—December 31, 2003 |       |                          | 0.2        |                                           |       |   | $ | 7.73 |   |   |
| Awards granted                                  |       |                          | —     |                                           |       |   | $ | — |   |   |
| Awards vested                                   |       |                          | (0.1       | )                                              |       |   | $ | 7.37 |   |   |
| Awards cancelled                                |       |                          | —     |                                           |       |   | $ | — |   |   |
| Awards  outstanding—December 31, 2004 |       |                          | 0.1        |                                           |       |   | $ | 8.48 |   |   |
| Awards granted                                  |       |                          | 1.3        |                                           |       |   | $ | 4.44 |   |   |
| Awards vested                                   |       |                          | (0.1       | )                                              |       |   | $ | 8.48 |   |   |
| Awards cancelled                                |       |                          | (0.1       | )                                              |       |   | $ | 4.42 |   |   |
| Awards  outstanding—December 31, 2005 |       |                          | 1.2        |                                           |       |   | $ | 4.44 |   |   |

*** ***

***Stock Options******—******On***February 23,2005, the Board of Directors of the Company authorized accelerating the vestingof 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, which stock options have an exercise price greater than$5.00. The closing price of the Company’s common stock on theNASDAQ National Market to be used for measurement of compensation as ofthe date of acceleration was $5.93. As a result of the acceleration, options toacquire approximately 3.8 million shares of the Company’s common stock, whichotherwise would have vested from time to time over the next four years,became immediately exercisable. All other terms and conditions applicable tooutstanding stock option grants remain in effect. The Board of Directors’decision to accelerate the vesting of the affected stock options was inresponse to the issuance by the SFAS 123 (R), “Share-Based Payment,” whichwill require the Company to treat unvested stock options as an expenseeffective at the beginning of the Company’s first fiscal quarter of 2006. Byaccelerating the vesting of the affected stock options now, the Company electedto recognize an immaterial amount of 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. The Company believes that no furthercompensation expense will be required in future periods associated with theaffected options.

Total options exercisable under the 1996 Plan, the2001 Plan and the 2004 Plan as of December 31, 2005, 2004 and 2003 were9.9 million, 8.7 million and 5.6 million, respectively. Weightedaverage exercise 

F-24

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

prices under the1996 Plan, the 2001 Plan and the 2004 Plan as ofDecember 31, 2005, 2004 and 2003 were $9.73, $10.47 and $11.47,respectively.

Stockoption activity of the Company is as follows:

| ** **                                       | ** ** | **Millions of  Options** | ** ** | **Exercise Price  per Option** | ** ** | **Weighted Average  Exercise Price** | ** **               |
|--------------------------------------------------|------------|-------------------------------|------------|------------------------------------------|------------|------------------------------------------------|--------------------------|
| Options  outstanding—December 31, 2002 |       |                          | 11.1       |                                     |       | $                                              | 0.10 -  $83.75           |   |   | $ | 10.51 |   |   |
| Options granted                                  |       |                          | 3.4        |                                     |       | $                                              | 4.31 -  $12.46           |   |   | $ | 5.89 |   |   |
| Options exercised                                |       |                          | (0.6       | )                                        |       | $0.10 - $  9.00                      |                     |   | $ | 2.78 |   |   |
| Options cancelled                                |       |                          | (1.2       | )                                        |       | $                                              | 2.05 -  $83.75           |   |   | $ | 13.15 |   |   |
| 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 |   |   |

 

The following table summarizes information regardingoptions outstanding at December 31, 2005:

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of Exercise Prices** | ** ** | ** **                   | ** ** | **Millions  Outstanding**    | ** ** | **Remaining  Contractual Life** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Millions  Exercisable** | ** ** | **Weighted Average  Exercise Price** | ** ** |
| $  0.34  - $  2.05      |       |                         | 0.7        |                         |       |   | 2.08 yrs |   |   |   | $ | 1.55 |   |   |   | 0.7 |   |   |   | $ | 1.55 |   |   |
| $  2.32  - $  5.76      |       |                         | 1.6        |                         |       |   | 5.20 yrs |   |   |   | $ | 4.39 |   |   |   | 1.1 |   |   |   | $ | 4.26 |   |   |
| $  5.77  - $  5.77      |       |                         | 2.0        |                         |       |   | 5.75 yrs |   |   |   | $ | 5.77 |   |   |   | 2.0 |   |   |   | $ | 5.77 |   |   |
| $  5.86  - $  8.92      |       |                         | 1.7        |                         |       |   | 7.01 yrs |   |   |   | $ | 6.78 |   |   |   | 1.7 |   |   |   | $ | 6.78 |   |   |
| $  8.99  - $  9.12      |       |                         | 1.6        |                         |       |   | 8.54 yrs |   |   |   | $ | 9.12 |   |   |   | 1.6 |   |   |   | $ | 9.12 |   |   |
| $  9.13  - $20.00                 |       |                         | 1.5        |                         |       |   | 5.40 yrs |   |   |   | $ | 12.64 |   |   |   | 1.5 |   |   |   | $ | 12.64 |   |   |
| $20.25 -  $82.22                            |       |                         | 1.3        |                         |       |   | 4.36 yrs |   |   |   | $ | 25.80 |   |   |   | 1.3 |   |   |   | $ | 25.80 |   |   |
| $  0.34 -  $82.22                 |       |                         | 10.4       |                         |       |   | 5.84 yrs |   |   |   | $ | 9.48 |   |   |   | 9.9 |   |   |   | $ | 9.73 |   |   |
|                                             |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

*** ***

***Deferred Compensation Plan******—******On***October 4,2001, the Company’s Board of Directors approved a Deferred Compensation Plan(the “Deferred Plan”). The purpose of the Deferred Plan was to motivate andretain eligible employees and non-employee directors by permitting them todefer compensation into stock units that would be paid out in the form ofshares of the Company’s common stock in January 2003. For the periodbeginning on October 22, 2001 and ending on October 20, 2002 (the “DeferralPeriod”), eligible employees elected irrevocably to defer up to 50% of theirbase salary and eligible directors elected irrevocably to defer up to 100% oftheir compensation related to regularly scheduled meetings. The Company matchedthe deferral at 100% in January 2003. The Deferred Plan provided for theseamounts to be settled in the Company’s common stock on the first day followingthe public release of earnings of the Company for the fiscal year ending December 31,2002 which was January 31, 2003 (the “Payment Date”). For participantsunder the Plan as of October 31, 2001, the number of shares of the Company’scommon stock distributed to the employee or director on the Payment Date wasequal to the sum of (i) amount 

F-25

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

deferred plus (ii) the100% Company match, divided by $6.00. Participants (i.e. new employees)entering the Plan after October 31, 2001 received a number of shares ofthe Company’s common stock on the Payment Date equal to the sum of (i) amountdeferred plus (ii) the 100% Company match, divided by the average of theCompany’s stock price over the ten trading days preceding the first day of theCompany’s applicable pay period which follows the participant’s irrevocableelection to participate.

The Company recognized theamount deferred by the employees and directors as compensation expense ratablyduring the Deferral Period. The Company recognized the amount matched by theCompany as compensation expense ratably during the period beginning on October 22,2001 and ending on the Payment Date. Compensation expense recognized by theCompany was equal to the total number of shares to be distributed to eachemployee and director multiplied by the fair market value, or $8.43, on the measurementdate, October 18, 2001. For the year ended December 31, 2003 theCompany recorded approximately $0.5 million in compensation expenserelated to the Deferred Plan. No compensation expense was recognized during2005 or 2004 under the Deferred Plan.

The stock unit equivalentof the amount deferred by the employee vested at the end of each pay period,whereas the stock unit equivalent of the Company’s match vested on the PaymentDate. The Plan provided for certain prorating of vesting and for distributionof shares in the event employment or director service ends (either voluntarilyor involuntarily) before the Payment Date. The total number of shares issued onthe Payment Date in connection with this plan was approximately0.9 million shares which is net of approximately 0.5 million sharesthat were withheld to satisfy the employees’ tax obligation. The Company paidthe tax obligation of $2.6 million in cash in lieu of issuing shares.

***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 under APB 25, Paragraph 7 as itmeets the following criteria: all full-time employees are able to participatein the plan; the stock is offered equally to all eligible employees; thepurchase right is limited to a reasonable time period; and the discount fromthe market price of the stock is reasonable and in compliance with Section 423of the Internal Revenue Code. No compensation cost is recognized for sharesissued under this plan. Substantially all of the Company’s domestic employeesmay contribute from two to eight percent of their qualified earnings toward thepurchase of the Company’s common stock. Through the year ended December 31,2005, the plan provided the participants the opportunity to purchase shares at85% of the fair market value on either the first day or the last day of eachsix-month offering period, whichever was lower. Effective January 1, 2006,the plan will provide the participants the opportunity to purchase shares at95% of the fair market value on the last day of the respective offering period.The offering periods generally run from January 1 through June 30 andJuly 1 through December 31. At December 31, 2005, 2004 and 2003there were 0.5 million, 0.4 million and 0.3 million sharesissued cumulatively under this plan, respectively.

***Treasury******Stock******—******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, 2005, theCompany had repurchased and retired 0.8 million shares of its common stock atan average price of $5.43 per share for an aggregate purchase price of $4.3 million.

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

**NOTE 12. RETIREMENT PLANS**

The Company sponsors orparticipates in various retirement and pension plans, including defined benefitand defined contribution plans. Most international employees are covered bygovernment-sponsored programs where the costs to the Company are notsignificant. The Company has a 401(k) profit sharing plan covering allU.S. employees, subject to certain participation, age and vesting requirements.The plan provides for a partial Company match at either a discretionary amountor up to specified percentages. Total Company contributions were$0.3 million, $0.5 million, and $0.4 million for the years endedDecember 31, 2005, 2004 and 2003, respectively.

**NOTE 13. INCOME TAXES**

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

| ** **         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| United States      |       | $                                          | (32.0      | ) | $ | (17.4 | ) | $ | (20.7 | ) |
| Non-United  States |       | (4.5                                       | )          | (0.7 | ) | 1.5 |   |
| Total              |       | $                                          | (36.5      | ) | $ | (18.1 | ) | $ | (19.2 | ) |

 

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

| ** **                            | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | ** 2005 **                       | ** ** | ** 2004 ** | ** ** | ** 2003 ** | ** ** |
| Current:                              |       |                                       |       |   |   |   |   |   |   |
| Federal                               |       |                                       | $          | — |   |   | $ | — |   | $ | — |   |
| State                                 |       |                                       | —     |   |   | — |   | — |   |
| Foreign                               |       |                                       | 1.2        |   |   | 4.3 |   | (2.7 | ) |
| Total current                         |       |                                       | 1.2        |   |   | 4.3 |   | (2.7 | ) |
| Deferred:                             |       |                                       |       |   |   |   |   |   |   |
| Federal                               |       |                                       | —     |   |   | — |   | — |   |
| State                                 |       |                                       | —     |   |   | — |   | — |   |
| Foreign                               |       |                                       | 0.6        |   |   | (1.2 | ) | 1.7 |   |
| Total deferred                        |       |                                       | 0.6        |   |   | (1.2 | ) | 1.7 |   |
| Provision (benefit) for  income taxes |       |                                       | $          | 1.8 |   |   | $ | 3.1 |   | $ | (1.0 | ) |

 

F-27

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

Thecomponents of deferred income tax assets (liabilities) are as follows (in millions):

| ** **                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **Federal**                                | ** ** | **State** | ** ** | **Foreign** | ** ** | **Federal** | ** ** | **State** | ** ** | **Foreign** | ** ** |
| Current:                             |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Uniform capitalization               |       | $                                          | 0.3        |   | $ | 0.1 |   |   | $ | — |   |   | $ | 0.6 |   | $ | 0.1 |   |   | $ | — |   |   |
| Sales discount reserve               |       | 0.5                                        |       | 0.1 |   |   | — |   |   | 0.7 |   | 0.1 |   |   | — |   |   |
| Bad debt reserve                     |       | 0.4                                        |       | 0.1 |   |   | 1.1 |   |   | 0.6 |   | 0.1 |   |   | — |   |   |
| Inventory reserve                    |       | 3.5                                        |       | 0.6 |   |   | (1.1 | ) |   | 2.4 |   | 0.4 |   |   | (0.3 | ) |   |
| Warranty reserve                     |       | 0.5                                        |       | 0.1 |   |   | — |   |   | 1.0 |   | 0.2 |   |   | 0.1 |   |   |
| Other                                |       | 1.2                                        |       | 0.2 |   |   | 0.2 |   |   | 0.5 |   | 0.1 |   |   | (0.2 | ) |   |
| Subtotal                             |       | 6.4                                        |       | 1.2 |   |   | 0.2 |   |   | 5.8 |   | 1.0 |   |   | (0.4 | ) |   |
| Valuation allowance                  |       | (6.4                                       | )          | (1.2 | ) |   | (1.5 | ) |   | (5.8 | ) | (1.0 | ) |   | (1.1 | ) |   |
| Total current                        |       | —                                     |       | — |   |   | (1.3 | ) |   | — |   | — |   |   | (1.5 | ) |   |
| Non-current:                         |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOL                                  |       | 85.9                                       |       | 5.7 |   |   | 14.4 |   |   | 81.1 |   | 4.4 |   |   | 11.8 |   |   |
| Intangible assets                    |       | 2.9                                        |       | 3.1 |   |   | — |   |   | (1.5 | ) | (0.3 | ) |   |   |   |   |
| Restructuring allowance              |       | 1.3                                        |       | 0.4 |   |   | 0.1 |   |   | 0.7 |   | 0.1 |   |   |   |   |   |
| Fixed assets                         |       | 0.2                                        |       | 0.1 |   |   | (0.2 | ) |   | (0.8 | ) | 2.1 |   |   | 1.4 |   |   |
| Other                                |       | (0.2                                       | )          | 0.6 |   |   | (0.6 | ) |   | 2.6 |   | 1.1 |   |   | (0.1 | ) |   |
| Subtotal                             |       | 90.1                                       |       | 9.9 |   |   | 13.7 |   |   | 82.1 |   | 7.4 |   |   | 13.1 |   |   |
| Valuation allowance                  |       | (90.1                                      | )          | (9.9 | ) |   | (14.6 | ) |   | (82.1 | ) | (7.4 | ) |   | (13.7 | ) |   |
| Total non-current                    |       | —                                     |       | — |   |   | (0.9 | ) |   | — |   | — |   |   | (0.6 | ) |   |
| Net deferred  income tax liabilities |       | $                                          | —     |   | $ | — |   |   | $ | (2.2 | ) |   | $ | — |   | $ | — |   |   | $ | (2.1 | ) |   |

 

The Company records a deferred income tax asset injurisdictions where it generates a loss for income tax purposes. Due tovolatility in the industry within which the Company operates, the Companyrecords a valuation allowance against these deferred income tax assets inaccordance with SFAS 109 when, in management’s judgment, the deferredincome tax assets will likely not be realized in the foreseeable future. Forthe years ended December 31, 2005, 2004 and 2003, the Company recordedvaluation allowances against deferred income tax assets of $14.3 million,$10.1 million and $5.9 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,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | **Amount**                                 | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Provision for  income taxes at statutory rate |       |                                       | $          | (12.8 | ) |   | (35 | ) |   | $ | (6.3 | ) |   | (35 | ) |   | $ | (6.7 | ) |   | (35 | ) |
| Foreign income  taxed at different rates      |       |                                       | 3.4        |   |   | 9 |   |   | 3.3 |   |   | 18 |   |   | (1.7 | ) |   | (9 | ) |
| Non-deductible  goodwill                      |       |                                       | 0.7        |   |   | 2 |   |   | 0.5 |   |   | 3 |   |   | — |   |   | — |   |
| Other                                         |       |                                       | 0.7        |   |   | 2 |   |   | — |   |   | — |   |   | 0.3 |   |   | 2 |   |
| Valuation  allowance net of state taxes       |       |                                       | 9.8        |   |   | 27 |   |   | 5.6 |   |   | 31 |   |   | 7.1 |   |   | 37 |   |
|                                          |       |                                       | $          | 1.8 |   |   | 5 | % |   | $ | 3.1 |   |   | 17 | % |   | $ | (1.0 | ) |   | (5 | )% |

 

F-28

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

As of December 31,2005, the Company had net operating loss (NOL) carry-forwards for U.S.federal and state income tax purposes of approximately $245 million and $94 million,respectively. These operating loss carry-forwards expire in various yearsbeginning in 2021 and 2012, respectively. The Company also has foreign NOLs invarious countries totaling approximately $54 million.

**NOTE14. COMMITMENTS AND CONTINGENCIES**

***Leases******—******The*** Companyleases facilities in various locations around the world under lease agreementsexpiring at various dates through 2014 in North America, 2011 in Europe and2010 in Asia.

Additionally, the Company also leases several vehicleswith leases expiring in 2007.

Futureminimum lease payments for operating leases as of December 31, 2005 are asfollows (in millions):

| **Years Ending December 31,** | ** ** | ** ** | ** ** | **Operating  Leases** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------------|------------|
| 2006                                         |       |       | $          | 4.3                   |       |   |
| 2007                                         |       |       | 3.1        |                  |       |
| 2008                                         |       |       | 2.3        |                  |       |
| 2009                                         |       |       | 1.9        |                  |       |
| 2010                                         |       |       | 1.7        |                  |       |
| 2011 and  thereafter                         |       |       | 2.7        |                  |       |
| Total minimum lease  payments                |       |       | $          | 16.0                  |       |   |

 

Total rent expense was approximately$4.7 million, $7.2 million, and $5.9 million for the years endedDecember 31, 2005, 2004 and 2003, respectively. Approximately$5.0 million and $1.9 million of operating lease commitments abovewere reserved for in the restructuring charge accruals as of December 31,2005 and December 31, 2004, respectively. The Company intends to seeksubleases 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. and Silicon Laboratories, Inc.*United States District Court, Eastern District of Texas, Civil Action No. 2-05-CV-463(LED). This combined action initiated by the Company against ArtesynTechnologies on September 30, 2005, and against Silicon Laboratories on December 14,2005, alleges that certain products of the named defendants infringe certainpatents held by the Company which focus on technologies relating to digitalpower management and control. The Complaint seeks certain injunctive reliefagainst and compensatory damages from each defendant. Trial proceedings are inthe very initial stages of discovery and related procedural matters.

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

**NOTE 15. 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 warrantyaccrual account for the years ended December 2005, 2004 and 2003 ispresented below, in millions:**

| ** **                                                                       | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                       | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Beginning balance                                                                |       | $ 3.4            |       | $ 3.3 |   | $ 3.8 |   |
| Charges and costs  accrued                                                       |       | 0.9                   |       | 1.0 |   | 1.1 |   |
| Adjustments related to  pre-existing warranties (including changes in estimates) |       | (0.1                  | )          | — |   | — |   |
| Less repair costs  incurred                                                      |       | (2.1                  | )          | (1.0 | ) | (1.7 | ) |
| Change due to foreign  currency                                                  |       | (0.1                  | )          | 0.1 |   | 0.1 |   |
| Ending balance                                                                   |       | $ 2.0            |       | $ 3.4 |   | $ 3.3 |   |

 

**NOTE16. BUSINESS GEOGRAPHICAL LOCATIONS**

TheCompany has manufacturing and/or research and development operations in theUnited States, Dominican Republic, Switzerland, Slovakia, Ireland and China.The following table summarizes the Company’s revenues and long-lived assets indifferent geographic locations (in millions):

| ** **                | ** ** | **Years Ended December 31,** | ** **   |               |
|---------------------------|------------|---------------------------------------------|--------------|--------------------|
| ** **                | ** ** | **2005**                                    | ** **   | **2004**           | ** ** | **2003** | ** ** |   |
| ** **                | ** ** | **Embedded  products**                      | ** **   | **Power  systems** | ** ** | **Total** | ** ** | **Embedded  products** | ** ** | **Power  systems** | ** ** | **Total** | ** ** | **Embedded  products** | ** ** | **Power  systems** | ** ** | **Total** | ** ** |   |
|                      |       |                                        |         |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues:(a)              |       |                                        |         |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| North America             |       |                                        | $ 91.8  |               |   |   | $ 14.9 |   |   | $ 106.7 |   |   | $ 112.5 |   |   |   | $ 20.3 |   |   | $ 132.8 |   |   | $ 91.1 |   |   |   | $ 18.7 |   |   | $ 109.8 |   |
| United Kingdom            |       |                                        | 7.3          |               |   |   | 3.8 |   |   | 11.1 |   |   | 9.2 |   |   |   | 4.1 |   |   | 13.3 |   |   | 9.1 |   |   |   | 7.0 |   |   | 16.1 |   |
| Other European  countries |       |                                        | 42.8         |               |   |   | 39.7 |   |   | 82.5 |   |   | 46.1 |   |   |   | 37.7 |   |   | 83.8 |   |   | 40.3 |   |   |   | 39.9 |   |   | 80.2 |   |
| Malaysia                  |       |                                        | 25.5         |               |   |   | 1.0 |   |   | 26.5 |   |   | 19.5 |   |   |   | 1.3 |   |   | 20.8 |   |   | 25.7 |   |   |   | — |   |   | 25.7 |   |
| Other Asian  countries    |       |                                        | 18.9         |               |   |   | 15.6 |   |   | 34.5 |   |   | 12.8 |   |   |   | 11.6 |   |   | 24.4 |   |   | 6.9 |   |   |   | 12.9 |   |   | 19.8 |   |
| Other foreign  countries  |       |                                        | 0.2          |               |   |   | 0.1 |   |   | 0.3 |   |   | 0.1 |   |   |   | 5.1 |   |   | 5.2 |   |   | 0.1 |   |   |   | 4.6 |   |   | 4.7 |   |
| Total                     |       |                                        | $ 186.5 |               |   |   | $ 75.1 |   |   | $ 261.6 |   |   | $ 200.2 |   |   |   | $ 80.1 |   |   | $ 280.3 |   |   | $ 173.2 |   |   |   | $ 83.1 |   |   | $ 256.3 |   |

----

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

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

 

| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Long-Lived Assets:      |       |                  |       |   |   |
| United States           |       | $ 54.6           |       | $ 66.2 |   |
| Switzerland             |       | 12.2                  |       | 15.5 |   |
| Dominican Republic      |       | 12.6                  |       | 9.1 |   |
| Slovakia                |       | 7.0                   |       | 7.9 |   |
| Norway                  |       | 1.9                   |       | 13.3 |   |
| Other foreign countries |       | 1.9                   |       | 3.8 |   |
| Total                   |       | $ 90.2           |       | $ 115.8 |   |

 

**NOTE 17. EARNINGS (LOSS) PER SHARE (EPS)**

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

| ** **                            | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                            | ** ** | **(Loss)**                                 | ** ** | **Average  Shares** | ** ** | **Per  Share** | ** ** | **(Loss)** | ** ** | **Average  Shares** | ** ** | **Per  Share** | ** ** | **(Loss)** | ** ** | **Average  Shares** | ** ** | **Per  Share** | ** ** |
| Net loss                              |       | $ (38.3                               | )          |   |   |   |   |   |   | $ (21.2 | ) |   |   |   |   |   |   | $ (18.2 | ) |   |   |   |   |   |   |
| Basic and Diluted  shares outstanding |       |                                       |       |   | 85.0 |   |   |   |   |   |   |   | 83.8 |   |   |   |   |   |   |   | 82.5 |   |   |   |   |
| Basic and Diluted  loss per share     |       | $ (38.3                               | )          |   | 85.0 |   |   | $ (0.45 | ) | $ (21.2 | ) |   | 83.8 |   |   | $ (0.25 | ) | $ (18.2 | ) |   | 82.5 |   |   | $ (0.22 | ) |

 

The dilutive effect ofstock options outstanding at December 31, 2005, 2004 and 2003 was notincluded in the calculations of diluted loss per share for the years ended December 31,2005, 2004 and 2003 because to do so would have had an anti-dilutive effect asthe Company had a net loss for these periods. Dilutive stock options have ananti-dilutive effect on EPS in a period with a net loss, and therefore areexcluded from the EPS computation. Stock options for which the exercise priceexceeds the average market price over the period have an anti-dilutive effecton EPS and, accordingly, are excluded from the calculation. The weightedaverage number of such options excluded from the diluted loss per sharecomputation was approximately 1.0 million, 2.8 million and2.7 million for the years ended December 31, 2005, 2004 and 2003,respectively.

**NOTE 18. RELATED PARTY TRANSACTIONS**

Stephens, Inc., a significant stockholder,provided no financial advisory services to us during the year ended December 31,2005 and 2004, and less than $0.1 million in year ended December 31,2003. The Company had no payables to Stephens, Inc., at December 31,2005 and 2004. A former officer of Stephens, Inc., now retired, is on theCompany’s Board of Directors.

O’Melveny & Myers LLP provided general legalservices to us of approximately $0.7 million, $1.1 million, and$0.9 million for the years ended December 31, 2005, 2004 and 2003,respectively. A former O’Melveny & Myers LLP partner, now retired, ison the Company’s Board of Directors. The Company owed O’Melveny &Myers LLP $0.1 million and $0.1 million at December 31, 2005 and December 31,2004, respectively.

The Company has an interest in one of its contractmanufacturers in Asia of approximately 5%. This investment is being accountedfor under the cost method. This contract manufacturer is a significant supplierto the Company. During the fourth quarter of 2003, the Company recorded awrite-down of 

F-31

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**POWER-ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

approximately$5.7 million in other expense to reduce the book value of its equityinvestment held in that contract manufacturer.

In February 2003, the Company acquired 100% ofthe equity of di/dt Inc. Prior to acquisition, the Company held anexclusive license from di/dt for certain di/dt products, under which licensethe Company was making royalty payments to di/dt relating to sales of licensedproducts. Stephens, Inc. was a significant shareholder in di/dt.Additionally, the Company’s outside counsel, O’Melveny & Myers LLP,held a modest equity position in di/dt, and the Company’s Chairman of theBoard, Mr. Goldman, held a small personal position in di/dt via an LLCcreated by Stephens, Inc. in connection with the original investment ofStephens, Inc. in di/dt. The total cost of the acquisition, includingsubsequent earn-out payments, was $17.5 million.

During 2005, we spentapproximately $80,000 for lodging Company personnel in a Dominican Republichotel in which our President and Chief Operating Officer, Brad Godfrey, owns aminority interest.

**NOTE 19. RESEARCH AND DEVELOPMENT**

Research and development expenses were $22.0 million,$29.4 million, and $28.5 million for the years ended December 31,2005, 2004 and 2003, respectively.

F-32

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**POWER-ONE, INC.QUARTERLY FINANCIAL DATA FOR THE2005 AND 2004 QUARTERS (Unaudited)(In millions, except per share data)**

| ** **                         | ** ** | **2005 Quarters Ended** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|
| ** **                         | ** ** | **Mar. 31**                  | ** ** | **Jun. 30** | ** ** | **Sept. 30** | ** ** | **Dec. 31(1)** | ** ** |
| Net sales                          |       |                              | $          | 66.7 |   |   | $ | 63.4 |   |   | $ | 67.2 |   |   |   | $ | 64.3 |   |   |
| Gross profit                       |       |                              | 16.2       |   |   | 15.9 |   |   | 22.8 |   |   |   | 21.8 |   |   |
| Income (loss)  from operations     |       |                              | (25.7      | ) |   | (15.1 | ) |   | — |   |   |   | 1.9 |   |   |
| Net Income (loss)                  |       |                              | (28.4      | ) |   | (14.8 | ) |   | 1.5 |   |   |   | 3.4 |   |   |
| Diluted earnings (loss)  per share |       |                              | (0.34      | ) |   | (0.17 | ) |   | 0.02 |   |   |   | 0.04 |   |   |
|                                    |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **             | ** ** | **2004 Quarters Ended** | ** ** |
|------------------------|------------|-----------------------------------|------------|
| ** **             | ** ** | **Mar. 31**                  | ** ** | **Jun. 30** | ** ** | **Sept. 30** | ** ** | **Dec. 31(2)** | ** ** |
| Net sales              |       |                              | $          | 68.7 |   |   | $ | 72.5 |   |   | $ | 67.2 |   |   |   | $ | 71.9 |   |   |
| Gross profit           |       |                              | 24.7       |   |   | 28.4 |   |   | 24.5 |   |   |   | 20.3 |   |   |
| Loss from  operations  |       |                              | (3.1       | ) |   | (1.2 | ) |   | (4.5 | ) |   |   | (10.3 | ) |   |
| Net loss               |       |                              | (2.8       | ) |   | (3.9 | ) |   | (5.4 | ) |   |   | (9.1 | ) |   |
| Diluted loss per share |       |                              | (0.03      | ) |   | (0.05 | ) |   | (0.06 | ) |   |   | (0.11 | ) |   |
|                        |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          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 in the fourthquarter of 2005 primarily for severance and related benefits related to itsworkforce reduction in Europe.

(2)          During the fourthquarter of 2004, the Company recorded net $0.2 million of restructuringcharges primarily for settlement payments and legal fees related to additionalpersonnel and legal costs resulting from the closure of the Boston,Massachusetts facility during 2001.

F-33

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**SUPPLEMENTAL SCHEDULE II: VALUATION AND QUALIFYINGACCOUNTS**

**FOREACH OF THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003**

**(In millions)**

| **Descriptions**                         | ** ** | ** ** | ** ** | **Balance at  Beginning of  Period** | ** ** | **Charged to  Costs and  Expenses (1)** | ** ** | **Deductions (2)** | ** ** | **Foreign  Currency  Impact** | ** ** | **Balance at  End of Period** | ** ** |
|------------------------------------------|------------|------------|------------|------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------|------------|-------------------------------|------------|----------------------------------------------|------------|
| Allowance for doubtful  accounts:        |       |       |       |                                           |       |                                                   |       |                    |       |                          |       |                                         |       |   |   |   |   |   |   |   |   |
| *Year  ended December 31,*          |       |       |       |                                           |       |                                                   |       |                    |       |                          |       |                                         |       |   |   |   |   |   |   |   |   |
| 2005                                     |       |       | $          | 4.8                                            |       |                                                   |       | $                       | 0.9        |                          |       |                                         | $          | (1.8 | ) |   |   | $ | (0.2 | ) |   |   | $ | 3.7 |   |   |
| 2004                                     |       |       | 4.4        |                                           |       |                                                   | 1.1        |                    |       |                          | (0.9       | )                                            |       |   | 0.2 |   |   |   | 4.8 |   |   |
| 2003                                     |       |       | 6.6        |                                           |       |                                                   | 0.2        |                    |       |                          | (2.5       | )                                            |       |   | 0.1 |   |   |   | 4.4 |   |   |
| Accrued sales  discounts and returns:    |       |       |       |                                           |       |                                                   |       |                    |       |                          |       |                                         |       |   |   |   |   |   |   |   |   |
| *Year  ended December 31,*          |       |       |       |                                           |       |                                                   |       |                    |       |                          |       |                                         |       |   |   |   |   |   |   |   |   |
| 2005                                     |       |       | $          | 1.9                                            |       |                                                   |       | $                       | 10.4       |                          |       |                                         | $          | (10.7 | ) |   |   | $ | — |   |   |   | $ | 1.6 |   |   |
| 2004                                     |       |       | 1.1        |                                           |       |                                                   | 13.3       |                    |       |                          | (12.5      | )                                            |       |   | — |   |   |   | 1.9 |   |   |
| 2003                                     |       |       | 0.9        |                                           |       |                                                   | 6.8        |                    |       |                          | (6.6       | )                                            |       |   | — |   |   |   | 1.1 |   |   |
| Deferred tax  asset valuation allowance: |       |       |       |                                           |       |                                                   |       |                    |       |                          |       |                                         |       |   |   |   |   |   |   |   |   |
| *Year  ended December 31,*          |       |       |       |                                           |       |                                                   |       |                    |       |                          |       |                                         |       |   |   |   |   |   |   |   |   |
| 2005                                     |       |       | $          | 111.1                                          |       |                                                   |       | $                       | 14.3       |                          |       |                                         | $          | — |   |   |   | $ | (1.7 | ) |   |   | $ | 123.7 |   |   |
| 2004                                     |       |       | 99.7       |                                           |       |                                                   | 10.1       |                    |       |                          | (0.6       | )                                            |       |   | 1.9 |   |   |   | 111.1 |   |   |
| 2003                                     |       |       | 93.8       |                                           |       |                                                   | 5.9        |                    |       |                          | (0.8       | )                                            |       |   | 0.8 |   |   |   | 99.7 |   |   |

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(1)          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.

(2)          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     |       | 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     |       | Amended and Restated  Bylaws of the Company dated May 3, 2005                                                                                                                                                                                                               |
| 3.5(c)  |       | Amended and Restated  Bylaws of the Company dated February 6, 2006                                                                                                                                                                                                          |
| 4.1(b)  |       | Specimen Common Stock  Certificate                                                                                                                                                                                                                                               |
| 4.2(d)  |       | 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(e)  |       | Certificate of Designations  of Junior Participating Preferred Stock of the Company                                                                                                                                                                                              |
| 10.1(b) |       | Form of  Indemnification Agreement between the Company and its directors, executive  officers and certain other officers                                                                                                                                                    |
| 10.2(f) |       | Amended and Restated  1996 Stock Incentive Plan, dated January 25, 2002                                                                                                                                                                                                     |
| 10.3(g) |       | Employee Stock Purchase  Plan                                                                                                                                                                                                                                                    |
| 10.4(h) |       | Letter of Agreement  between the Company and the President and Chief Operating Officer                                                                                                                                                                                           |
| 10.5(i) |       | Power-One 2001  Stock Option Plan, dated September 28, 2001                                                                                                                                                                                                                 |
| 10.6(j) |       | Summary of named Executive  Officer Compensation                                                                                                                                                                                                                                 |
| 10.7    |       | Summary of Director  Compensation                                                                                                                                                                                                                                                |
| 10.8(k) |       | Power-One 2001  Deferred Compensation Plan, dated October 5, 2001                                                                                                                                                                                                           |
| 10.9(l) |       | Power-One 2004  Stock Option Plan, dated May 4, 2004                                                                                                                                                                                                                        |
| 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)    Previouslyfiled as an exhibit to the Registration Statement on Form S-1 ofPower-One, Inc.

(b)   Previouslyfiled as an exhibit to the Quarterly Report on Form 10-Q for theQuarterly Period Ended October 1, 2000 and filed on November 15,2000.

(c)    Incorporatedby reference from the Form 8-K dated February 6, 2006 and filedon February 6, 2006.

(d)   Previouslyfiled as an exhibit to the Registration Statement on Form 8-A ofPower-One, Inc.

(e)    Previouslyfiled as an exhibit to Form 8-K dated July 26, 2000 and filedon August 9, 2000.

S-2

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(f)    Previouslyfiled as an exhibit to the Annual Report on Form 10-K for the Fiscalyear ended Decemeber 31, 2001

(g)    Previouslyfiled as an exhibit to the Registration Statement on Form S-8 onDecember 12, 1997.

(h)   Previouslyfiled as an exhibit to the Annual Report on Form 10-K for the FiscalYear Ended January 2, 2000 and filed on April 3, 2000.

(i)    Previouslyfiled as an exhibit to the Registration Statement on Form S-8 onSeptember 28, 2001.

(j)     Incorporatedby reference from the Form 8-K dated February 6, 2006 and filedon February 10, 2006.

(k)   Previouslyfiled as an exhibit to the Registration Statement on Form S-8 onOctober 5, 2001.

(l)    Previouslyfiled as an appendix to the Proxy Statement filed March 26, 2004.

S-3

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