** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

----

**FORM 10-Q**

* (Mark One)*

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

** **

**For the quarterly periodended March 26, 2006**

 

**or**

** **

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

** **

**For the transition periodfrom               to               **

** **

**CommissionFile Number: 1-12432**

**AMERICAN POWER CONVERSION CORPORATION**

(*Exact nameof registrant as specified in its charter*)
| MASSACHUSETTS                                                      | 04-2722013                               |
|--------------------------------------------------------------------|------------------------------------------|
| *(State  or other jurisdiction of  incorporation or organization)* | *(I.R.S.  employer  identification no.)* |

 

132 FAIRGROUNDS ROAD, WEST KINGSTON, RHODE ISLAND 02892401-789-5735*(Address and telephone number of principalexecutive offices)*

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

YES x         NO o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated fileror a non-accelerated filer. See definition of  “accelerated filer and large accelerated filer”in Rule 12b-2 of the Exchange Act.

Large acceleratedfiler x         Acceleratedfiler o         Non-accelerated filer o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

YES o         NO x

Registrant’s Common Stockoutstanding, $0.01 par value, at April 27, 2006 —192,772,000 shares.

 

----

**AMERICANPOWER CONVERSION CORPORATION**

**INDEX**
|                                           | ** ** | ** **                                                                                                                            | ** ** | **Page No.** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| **Part I - Financial  Information:** |       |                                                                                                                                  |       |
| Item 1.                                   |       | Consolidated  Condensed Financial Statements:                                                                                         |       |              |       |
|                                      |       |                                                                                                                                  |       |              |       |
|                                      |       | Consolidated  Condensed Balance Sheets - March 26, 2006 and December 31, 2005  (Unaudited)              |       | 3 - 4             |       |
|                                      |       |                                                                                                                                  |       |              |       |
|                                      |       | Consolidated  Condensed Statements of Income - Three Months Ended March 26, 2006 and  March 27, 2005 (Unaudited)            |       | 5                 |       |
|                                      |       |                                                                                                                                  |       |              |       |
|                                      |       | Consolidated  Condensed Statements of Cash Flows - Three Months Ended March 26, 2006  and March 27, 2005 (Unaudited)        |       | 6                 |       |
|                                      |       |                                                                                                                                  |       |              |       |
|                                      |       | Notes to Consolidated Condensed Financial Statements (Unaudited)                                                                      |       | 7 - 14            |       |
|                                      |       |                                                                                                                                  |       |              |       |
| Item 2.                                   |       | Management’s Discussion and Analysis of Financial Condition  and Results of Operations        |       | 15 - 27           |       |
|                                      |       |                                                                                                                                  |       |              |       |
| Item 3.                                   |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                           |       | 28                |       |
|                                      |       |                                                                                                                                  |       |              |       |
| Item  4.                                  |       | Controls  and Procedures                                                                                                              |       | 28                |       |
|                                      |       |                                                                                                                                  |       |              |       |
| **Part II  - Other Information:**    |       |                                                                                                                                  |       |
| ** **                                | ** ** | ** **                                                                                                                            |       |              |       |
| Item  1.                                  |       | Legal  Proceedings                                                                                                                    |       | 29                |       |
|                                      |       |                                                                                                                                  |       |              |       |
| Item  1A.                                 |       | Risk  Factors                                                                                                                         |       | 29                |       |
|                                      |       |                                                                                                                                  |       |              |       |
| Item 2.                                   |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                          |       | 30                |       |
|                                      |       |                                                                                                                                  |       |              |       |
| Item 6.                                   |       | Exhibits                                                                                                                              |       | 31                |       |
|                                      |       |                                                                                                                                  |       |              |       |
| **Signatures**                            |       | 32                                                                                                                                    |       |
| ** **                                |       |                                                                                                                                  |       |              |       |
| **Exhibit Index**                    | ** ** | 33                                                                                                                                    | ** ** |

 

2

----

**PART I- CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

**ITEM 1. FINANCIALSTATEMENTS**

**AMERICAN POWER CONVERSIONCORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED BALANCE SHEETS*In thousands except per share amount**(Unaudited)***

**ASSETS**
| ** **                                                                                         | ** ** | **March 26,  2006** | ** **    | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------------|---------------|-----------------------------|------------|
| Current assets:                                                                                    |       |                     |          |                        |       |
| Cash and cash  equivalents                                                                         | ** ** | **$**                    | **224,794**   |                        | $          | 262,414 |   |
| Short term  investments (Note 3)                                                                   | ** ** | **425,574**              |          | 511,181                     |       |
| Accounts  receivable, less allowance for doubtful accounts of $15,077 in 2006 and  $14,995 in 2005 | ** ** | **366,553**              |          | 374,694                     |       |
| Inventories:                                                                                       |       |                     |          |                        |       |
| Raw materials                                                                                      | ** ** | **243,546**              |          | 215,260                     |       |
| Work-in-process and finished goods                                                                 | ** ** | **346,017**              |          | 326,563                     |       |
| Total  inventories                                                                                 | ** ** | **589,563**              |          | 541,823                     |       |
|                                                                                               |       |                     |          |                        |       |
| Prepaid expenses  and other current assets                                                         | ** ** | **60,462**               |          | 59,181                      |       |
| Deferred income  taxes                                                                             | ** ** | **63,808**               |          | 60,139                      |       |
|                                                                                               |       |                     |          |                        |       |
| Total current  assets                                                                              | ** ** | **1,730,754**            |          | 1,809,432                   |       |
|                                                                                               |       |                     |          |                        |       |
| Property, plant and  equipment:                                                                    |       |                     |          |                        |       |
| Land, buildings and improvements                                                                   | ** ** | **76,556**               |          | 75,549                      |       |
| Machinery and equipment                                                                            | ** ** | **238,686**              |          | 229,768                     |       |
| Office equipment, furniture and fixtures                                                           | ** ** | **103,145**              |          | 101,144                     |       |
| Purchased software                                                                                 | ** ** | **57,479**               |          | 53,275                      |       |
|                                                                                               | ** ** | **475,866**              |          | 459,736                     |       |
| Less accumulated  depreciation and amortization                                                    | ** ** | **303,572**              |          | 293,692                     |       |
| Net property,  plant and equipment                                                                 | ** ** | **172,294**              |          | 166,044                     |       |
|                                                                                               |       |                     |          |                        |       |
| Long term  investments (Note 3)                                                                    | ** ** | **587**                  |          | 562                         |       |
| Goodwill (Note  4)                                                                                 | ** ** | **17,951**               |          | 15,781                      |       |
| Other  intangibles, net (Note 4)                                                                   | ** ** | **32,810**               |          | 36,115                      |       |
| Deferred income  taxes                                                                             | ** ** | **50,789**               |          | 42,427                      |       |
| Other assets                                                                                       | ** ** | **4,891**                |          | 5,101                       |       |
|                                                                                               |       |                     |          |                        |       |
| Total assets                                                                                       | ** ** | **$**                    | **2,010,076** |                        | $          | 2,075,462 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

3

----

**LIABILITIES ANDSHAREHOLDERS’ EQUITY**
| ** **                                                | ** ** | **March 26,  2006** | ** **    | **December 31,  2005** | ** ** |
|-----------------------------------------------------------|------------|--------------------------|---------------|-----------------------------|------------|
| Current liabilities:                                      |       |                     |          |                        |       |
| Accounts payable                                          | ** ** | **$**                    | **173,555**   |                        | $          | 176,345 |   |
| Accrued  compensation                                     | ** ** | **43,858**               |          | 41,798                      |       |
| Accrued sales  and marketing programs                     | ** ** | **48,668**               |          | 47,826                      |       |
| Accrued warranty  (Note 5)                                | ** ** | **13,229**               |          | 13,272                      |       |
| Other accrued  expenses                                   | ** ** | **57,844**               |          | 60,013                      |       |
| Deferred revenue                                          | ** ** | **42,671**               |          | 41,793                      |       |
| Income taxes  payable                                     | ** ** | **44,387**               |          | 39,755                      |       |
|                                                      |       |                     |          |                        |       |
| Total current  liabilities                                | ** ** | **424,212**              |          | 420,802                     |       |
|                                                      |       |                     |          |                        |       |
| Deferred tax  liability                                   | ** ** | **11,380**               |          | 14,911                      |       |
|                                                      |       |                     |          |                        |       |
| Total  liabilities                                        | ** ** | **435,592**              |          | 435,713                     |       |
|                                                      |       |                     |          |                        |       |
| Shareholders’ equity  (Notes 6, 7, 8 and 9):         |       |                     |          |                        |       |
| Common stock, $0.01 par  value;                           |       |                     |          |                        |       |
| authorized  450,000 shares in 2006 and 2005;              |       |                     |          |                        |       |
| issued 192,697 shares in 2006 and 195,778 shares in  2005 | ** ** | **1,927**                |          | 1,958                       |       |
| Additional  paid-in capital                               | ** ** | **71,493**               |          | 131,862                     |       |
| Retained  earnings                                        | ** ** | **1,499,060**            |          | 1,504,093                   |       |
| Accumulated  other comprehensive income                   | ** ** | **2,004**                |          | 1,836                       |       |
|                                                      |       |                     |          |                        |       |
| Total  shareholders’ equity                          | ** ** | **1,574,484**            |          | 1,639,749                   |       |
|                                                      |       |                     |          |                        |       |
| Total liabilities and  shareholders’ equity          | ** ** | **$**                    | **2,010,076** |                        | $          | 2,075,462 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

4

----

**AMERICAN POWER CONVERSIONCORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF INCOME*In thousands**(Unaudited)***
| ** **                                      | ** ** | **Three months ended** | ** **  |
|-------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                      | ** ** | **March 26,  2006**         | ** **  | **March 27,  2005** | ** ** |
|                                            |       |                             |        |   |   |
| Net sales (Note  10)                            | ** ** | **$**                            | **478,793** |   | $ | 408,003 |   |
|                                            |       |                             |        |   |   |
| Cost of goods  sold                             | ** ** | **321,005**                      |        | 243,552 |   |
|                                            |       |                             |        |   |   |
| Gross profit                                    | ** ** | **157,788**                      |        | 164,451 |   |
|                                            |       |                             |        |   |   |
| Operating expenses:                             |       |                             |        |   |   |
| Marketing,  selling, general and administrative | ** ** | **121,984**                      |        | 100,579 |   |
| Research and  development                       | ** ** | **22,535**                       |        | 20,239 |   |
| Total operating  expenses                       | ** ** | **144,519**                      |        | 120,818 |   |
|                                            |       |                             |        |   |   |
| Operating income                                | ** ** | **13,269**                       |        | 43,633 |   |
|                                            |       |                             |        |   |   |
| Other income,  net                              | ** ** | **5,434**                        |        | 3,794 |   |
|                                            |       |                             |        |   |   |
| Earnings before  income taxes                   | ** ** | **18,703**                       |        | 47,427 |   |
|                                            |       |                             |        |   |   |
| Income taxes                                    | ** ** | **4,208**                        |        | 11,382 |   |
|                                            |       |                             |        |   |   |
| Net income                                      | ** ** | **$**                            | **14,495**  |   | $ | 36,045 |   |
|                                            |       |                             |        |   |   |
| Basic earnings  per share                       | ** ** | **$**                            | **0.07**    |   | $ | 0.19 |   |
|                                            |       |                             |        |   |   |
| Basic weighted  average shares outstanding      | ** ** | **194,662**                      |        | 192,422 |   |
|                                            |       |                             |        |   |   |
| Diluted earnings  per share                     | ** ** | **$**                            | **0.07**    |   | $ | 0.18 |   |
|                                            |       |                             |        |   |   |
| Diluted weighted  average shares outstanding    | ** ** | **197,305**                      |        | 198,258 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

5

----

**AMERICAN POWER CONVERSIONCORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS*In thousands**(Unaudited)***
| ** **                                                                                   | ** **   | **Three months ended** | ** **   |
|----------------------------------------------------------------------------------------------|--------------|----------------------------------|--------------|
| ** **                                                                                   | ** **   | **March 26,  2006**         | ** **   | **March 27,  2005** | ** ** |
| ***Cash  flows from operating activities***                                                  | * *     | * *                         | * *     | * * | * * |
| Net income                                                                                   | ** **   | **$**                            | **14,495**   |   | $ | 36,045 |   |
| Adjustments to  reconcile net income to net cash (used in) provided by operating activities: |         |                             |         |   |   |
| Depreciation and  amortization of property, plant and equipment                              | ** **   | **10,641**                       |         | 8,654 |   |
| Amortization of  other intangibles                                                           | ** **   | **3,305**                        |         | 2,948 |   |
| Provision for  doubtful accounts                                                             | ** **   | **526**                          |         | 535 |   |
| Provision for  inventories                                                                   | ** **   | **4,779**                        |         | 760 |   |
| Share-based  compensation expense                                                            | ** **   | **4,111**                        |         | 3,067 |   |
| Deferred income  taxes                                                                       | ** **   | **(15,562**                      | **)**        | (3,405 | ) |
| Other non-cash  items, net                                                                   | ** **   | **168**                          |         | (404 | ) |
| Changes in operating  assets and liabilities:                                                |         |                             |         |   |   |
| Accounts receivable                                                                          | ** **   | **7,615**                        |         | (698 | ) |
| Inventories                                                                                  | ** **   | **(52,519**                      | **)**        | (17,625 | ) |
| Prepaid expenses and other current assets                                                    | ** **   | **(1,281**                       | **)**        | (4,506 | ) |
| Other assets                                                                                 | ** **   | **(1,960**                       | **)**        | (1,915 | ) |
| Accounts payable                                                                             | ** **   | **(2,790**                       | **)**        | (5,123 | ) |
| Accrued expenses                                                                             | ** **   | **1,568**                        |         | (5,661 | ) |
| Income taxes payable                                                                         | ** **   | **4,632**                        |         | 21,870 |   |
| Net cash (used in) provided by operating activities                                          | ** **   | **(22,272**                      | **)**        | 34,542 |   |
|                                                                                         |         |                             |         |   |   |
| ***Cash  flows from investing activities***                                                  | * *     | * *                         | * *     | * * | * * |
| Purchases of  held-to-maturity securities                                                    | ** **   | **—**                       |         | (358,614 | ) |
| Maturities of  held-to-maturity securities                                                   | ** **   | **—**                       |         | 344,549 |   |
| Purchases of  available-for-sale securities                                                  | ** **   | **(1,300,103**                   | **)**        | (439,450 | ) |
| Sales of available-for-sale  securities                                                      | ** **   | **1,385,685**                    |         | 463,799 |   |
| Capital  expenditures, net of capital grants                                                 | ** **   | **(16,891**                      | **)**        | (4,987 | ) |
| Net cash provided by investing activities                                                    | ** **   | **68,691**                       |         | 5,297 |   |
|                                                                                         |         |                             |         |   |   |
| ***Cash  flows from financing activities***                                                  | * *     | * *                         | * *     | * * | * * |
| Purchases of  common stock                                                                   | ** **   | **(70,277**                      | **)**        | — |   |
| Proceeds from  issuances of common stock                                                     | ** **   | **4,813**                        |         | 8,732 |   |
| Tax effect of  stock options                                                                 | ** **   | **953**                          | ** **   | — | ** ** |
| Dividends paid  on common stock                                                              | ** **   | **(19,528**                      | **)**        | (19,255 | ) |
| Net cash used in financing activities                                                        | ** **   | **(84,039**                      | **)**        | (10,523 | ) |
|                                                                                         |         |                             |         |   |   |
| Net change in  cash and cash equivalents                                                     | ** **   | **(37,620**                      | **)**        | 29,316 |   |
| Cash and cash  equivalents at beginning of period                                            | ** **   | **262,414**                      |         | 72,721 |   |
| Cash and cash  equivalents at end of period                                                  | ** **   | **$**                            | **224,794**  |   | $ | 102,037 |   |
|                                                                                         |         |                             |         |   |   |
| ***Supplemental  cash flow disclosures***                                                    | *** *** | *** ***                     | *** *** | *** *** | *** *** |
| Cash paid during the  period for:                                                            |         |                             |         |   |   |
| Income taxes (net of  refunds)                                                               | ** **   | **$**                            | **14,164**   |   | $ | (6,282 | ) |

 

*See accompanying notes to consolidated condensed financialstatements.*

6

----

**AMERICANPOWER CONVERSION CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS*(Unaudited)***

**1.****              ManagementRepresentation**

The accompanyingunaudited consolidated condensed financial statements should be read inconjunction with the consolidated financial statements included in the AmericanPower Conversion Corporation (APC) Annual Report on Form 10-K forthe year ended December 31, 2005. In the opinion of management, theaccompanying unaudited consolidated condensed financial statements contain alladjustments (consisting of only normal recurring accruals) necessary to presentfairly the consolidated financial position and the consolidated results ofoperations and cash flows for the interim periods. The results of operationsfor the interim periods are not necessarily indicative of results to beexpected for the full year.

**2.****              Principlesof Consolidation**

The accompanyingconsolidated condensed financial statements include the financial statements ofAmerican Power Conversion Corporation and its wholly-owned subsidiaries. Allsignificant intercompany accounts and transactions are eliminated inconsolidation.

**3.****              Investments**

APCclassifies as short term its investments with original maturities greater thanthree months and less than or equal to one year, and as long term itsinvestments with remaining maturities greater than one year. APC has noinvestments with maturity dates greater than one year except for auction ratesecurities and variable rate demand obligations. Held-to-maturity securitiesare carried at amortized cost. Available-for-sale securities are recorded atfair value with net unrealized gains and losses reported, net of income taxes,in other comprehensive income. Management determines the appropriateclassification of securities at the time of purchase and re-evaluates suchdesignation as of each balance sheet date. Securities are classified asheld-to-maturity when APC has the positive intent and ability to hold suchsecurities to maturity. APC invests its excess cash principally in auction ratesecurities and variable rate demand obligations which have long-term underlyingmaturities, however the market is highly liquid and the interest rates resetfrequently.

At March 26, 2006 and December 31,2005, APC’s held-to-maturity investments included $5.0 million and $5.0million, respectively, with contractual maturities of one year or less. At March 26,2006 and December 31, 2005, APC had no held-to-maturity investments withcontractual maturities longer than one year. At March 26, 2006 and December 31,2005, APC’s available-for-sale auction rate debt securities (ARS’s) included$298.4 million and $364.5 million, respectively, with contractual maturitiesbetween approximately 1 to 42 years. In addition, at March 26, 2006, APC’savailable-for-sale ARS’s included $11.1 million that had underlying equityinvestments. At March 26, 2006 and December 31, 2005, APC’savailable-for-sale variable rate demand obligations (VRDN’s) included $111.1million and $136.7 million, respectively, with contractual maturities between13 and 33 years. Both the ARS’s and VRDN’s resemble short-term instrumentsbecause they contain features (i.e., interest rate reset and put options,respectively) that allow for the sale of the instrument on a predeterminedschedule ranging from 7 to 49 days depending on the type of instrument and itsparticular features.

Proceedsfrom the sales of investment securities available-for-sale were $1.386 billionand $463.8 million in the first quarters of 2006 and 2005, respectively.

7

----

 
| ** **                         | ** ** | **Amortized  Cost**     | ** **  | **Gross Unrealized  Holding Gains** | ** ** | **Gross Unrealized  Holding Losses** | ** ** | **Fair  Value** | ** ** |
|------------------------------------|------------|-------------------------|-------------|-----------------------------------------------|------------|------------------------------------------------|------------|-----------------|------------|
| ** **                         | ** ** | **(In thousands)** | ** **  |
| **At March 26, 2006**         | ** ** | ** **              | ** **  | ** **                                    | ** ** | ** **                                     | ** ** | ** **      | ** ** |
| ** **                         | ** ** | ** **              | ** **  | ** **                                    | ** ** | ** **                                     | ** ** | ** **      | ** ** |
| **Available-for-sale**             | ** ** | ** **              | ** **  | ** **                                    | ** ** | ** **                                     | ** ** | ** **      | ** ** |
| Auction rate  securities           | ** ** | **$**                   | **309,500** | ** **                                    | **$**      | **—**                                     | ** ** | **$**           | **—** | ** ** | **$** | **309,500** | ** ** |
| Variable rate  demand obligations  | ** ** | **111,074**             | ** **  | **—**                                    | ** ** | **—**                                     | ** ** | **111,074**     | ** ** |
| Equity  investments                | ** ** | **488**                 | ** **  | **99**                                        | ** ** | **—**                                     | ** ** | **587**         | ** ** |
|                               | ** ** | **421,062**             | ** **  | **99**                                        | ** ** | **—**                                     | ** ** | **421,161**     | ** ** |
| **Held-to-maturity**               | ** ** | ** **              | ** **  | ** **                                    | ** ** | ** **                                     | ** ** | ** **      | ** ** |
| U.S. government  agency securities | ** ** | **5,000**               | ** **  | **—**                                    | ** ** | **—**                                     | ** ** | **5,000**       | ** ** |
|                               | ** ** | **5,000**               | ** **  | **—**                                    | ** ** | **—**                                     | ** ** | **5,000**       | ** ** |
|                               | ** ** | **$**                   | **426,062** | ** **                                    | **$**      | **99**                                         | ** ** | **$**           | **—** | ** ** | **$** | **426,161** | ** ** |
| **At December 31, 2005**      | ** ** | ** **              | ** **  | ** **                                    | ** ** | ** **                                     | ** ** | ** **      | ** ** |
| ** **                         | ** ** | ** **              | ** **  | ** **                                    | ** ** | ** **                                     | ** ** | ** **      | ** ** |
| **Available-for-sale**             | ** ** | ** **              | ** **  | ** **                                    | ** ** | ** **                                     | ** ** | ** **      | ** ** |
| Auction rate  securities           |       | $                       | 369,481     |                                          | $          | —                                         |       | $               | —     |   | $ | 369,481 |   |
| Variable rate  demand obligations  |       | 136,700                 |        | —                                        |       | —                                         |       | 136,700         |       |
| Equity  investments                |       | 481                     |        | 81                                            |       | —                                         |       | 562             |       |
|                               |       | 506,662                 |        | 81                                            |       | —                                         |       | 506,743         |       |
| **Held-to-maturity**               | ** ** | ** **              | ** **  | ** **                                    | ** ** | ** **                                     | ** ** | ** **      | ** ** |
| U.S. government  agency securities |       | 5,000                   |        | —                                        |       | (28                                            | )          | 4,972           |       |
|                               |       | 5,000                   |        | —                                        |       | (28                                            | )          | 4,972           |       |
|                               |       | $                       | 511,662     |                                          | $          | 81                                             |       | $               | (28        | ) | $ | 511,715 |   |

 

**4.****              Goodwill and OtherIntangible Assets**

At each of March 26, 2006 and December 31, 2005, goodwill of$15.9 million and $15.8 million, respectively, was associated with the SmallSystems segment. At March 26, 2006, goodwill of $2.1 million wasassociated with the Large Systems segment and originated during the firstquarter of 2006 from a payment of escrowed purchase price consideration.Amortized intangible assets were as follows:
| ** **                         | ** ** | ** **                                  | ** ** | **March 26, 2006** | ** **  | **December 31, 2005** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|------------------------------|-------------|---------------------------------|------------|
| **Amortized  Intangible  Assets**  | ** ** | **Weighted  Average  Amortization  Period** | ** ** | **Gross  Carrying  Amount**  | ** **  | **Accumulated  Amortization**   | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                         | ** ** | **($ in thousands)**              | ** ** |
| Technology                         |       | 8  years                                    | ** ** | **$**                        | **87,319**  | ** **                      | **$**      | **58,731** |   | $ | 87,319 |   | $ | 55,958 |   |
| Customer lists                     |       | 9  years                                    | ** ** | **11,100**                   | ** **  | **8,001**                       |       | 11,100 |   | 7,610 |   |
| Tradenames                         |       | 9  years                                    | ** ** | **3,957**                    | ** **  | **2,834**                       |       | 3,957 |   | 2,693 |   |
| Total amortized  intangible assets |       | 8 years                                     | ** ** | **$**                        | **102,376** | ** **                      | **$**      | **69,566** |   | $ | 102,376 |   | $ | 66,261 |   |

 

Aggregateamortization expense related to APC’s other intangible assets for each of thefirst quarters of 2006 and 2005 was $3.3 million and $2.9 million,respectively. Estimated aggregated amortization for each of the next fivesucceeding fiscal years is $13.2 million for 2006, $11.1 million for 2007, $6.6million for 2008, $2.6 million for 2009, and $1.2 million for 2010. There areno expected residual values related to these intangible assets.

8

----

 

**5.****              WarrantyLiability**
| ** **          | ** ** | **Product  Warranty  Liability at  Beginning  of Quarter** | ** ** | **Accruals for  Product  Warranties  Issued During  the Quarter** | ** ** | **Adjustments  to Accruals  for Preexisting  Warranties** | ** ** | **Warranty  Payments** | ** ** | **Product  Warranty  Liability at  End of  Quarter** | ** ** |
|---------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|------------------------|------------|----------------------------------------------------------------|------------|
| ** **          | ** ** | **(In thousands)**                                              | ** ** |
| First Quarter  2006 | ** ** | **$**                                                                | **13,272** | ** **                                                                       | **$**      | **7,315**                                                           | ** ** | **$**                  | **—** | ** **                                                     | **$**      | **(7,358** | **)** | **$** | **13,229** | ** ** |
|                |       |                                                                 |       |                                                                             |       |                                                                |       |                   |       |                                                           |       |
| First Quarter 2005  |       | $                                                                    | 13,092     |                                                                             | $          | 5,334                                                               |       | $                      | —     |                                                           | $          | (6,414 | ) | $ | 12,012 |   |

 

**6.****              EarningsPer Share**

Basic earnings pershare is computed by dividing net income by the weighted average number ofcommon shares outstanding during the period. Diluted earnings per share iscomputed by dividing net income by the weighted average number of common sharesand dilutive potential common shares outstanding during the period. Under the treasurystock method, the unexercised options are assumed to be exercised and theunvested restricted stock units are assumed to be vested at the beginning ofthe period or at issuance, if later. The assumed proceeds are then used topurchase common shares at the average market price during the period. Potentialcommon shares for which inclusion would have the effect of increasing dilutedearnings per share (i.e., antidilutive) are excluded from the computation.

|                                                                                                                                | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                     | ** ** | **March 26,  2006**         | ** ** | **March 27,  2005** | ** ** |
| ** **                                                                                                                     | ** ** | **(In thousands)**          | ** ** |
| Basic weighted  average shares outstanding                                                                                     | ** ** | **194,662**                      |       | 192,422 |   |
| Net effect of  dilutive potential common shares outstanding based on the treasury stock method  using the average market price | ** ** | **2,643**                        |       | 5,836 |   |
| Diluted weighted  average shares outstanding                                                                                   | ** ** | **197,305**                      |       | 198,258 |   |
| Antidilutive potential  common shares excluded from the computation above                                                      | ** ** | **2,490**                        |       | 2,607 |   |

 

**7.****              Shareholders’Equity**

***Common Stock and Paid-in Capital.***In February 2006,APC’s Board of Directors approved a stock repurchase program which authorizesup to $200 million to repurchase outstanding shares of APC’s common stock. Thepurchases would be made on the open market based on market and businessfactors. The duration of the repurchase program is two years but may besuspended or discontinued at any time without prior notice. APC commenced therepurchase of its common stock in February 2006. The decrease in commonstock and paid-in capital during the first quarter of 2006 reflected APC’s firstquarter repurchase on the open market of approximately 3.4 million shares ofits common stock, at an average price of $20.39 per share, totaling $70million; such shares have been deemed authorized but not issued. This decreasewas partially offset by stock issuances relating to stock-based employeebenefit programs, as well as to the financial statement recognition of the taxbenefit afforded to the company as a result of the disposition of option sharesby APC employees. Accounting rules require this corporate tax benefit tobe recorded as an increase in paid-in capital.

9

----

***Dividends.***Dividends of $0.10 per share weredeclared and paid in each of the first quarters of 2006 and 2005. It is theintention of the Board of Directors to pay a comparable quarterly dividend on agoing forward basis contingent upon continued capital availability and adetermination that cash dividends continue to be in the best interests of APCand its shareholders.

**8.****             ****Comprehensive Income**

The components ofcomprehensive income, net of tax, were as follows:

|                                                          | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **March 26,  2006**         | ** ** | **March 27,  2005** | ** ** |
| ** **                                               | ** ** | **(In thousands)**          | ** ** |
|                                                     |       |                             |       |   |   |
| Net income                                               | ** ** | **$**                            | **14,495** |   | $ | 36,045 |   |
| Other  comprehensive income (loss), net of tax:          |       |                             |       |   |   |
| Change in foreign currency translation adjustment        | ** ** | **150**                          |       | (404 | ) |
| Net unrealized gain on investments, net of income  taxes | ** ** | **18**                           |       | — |   |
| Other comprehensive income (loss)                        | ** ** | **168**                          |       | (404 | ) |
| Comprehensive income                                     | ** ** | **$**                            | **14,663** |   | $ | 35,641 |   |

 

**9.****              Share-Based Payments**

Effective January 1,2006, APC adopted the fair value recognition provisions Statement of FinancialAccounting Standards No. 123 (revised 2004), *Share-BasedPayment*, using the modified-prospective transition method. Underthis transition method, compensation cost recognized in the first quarter offiscal 2006 includes compensation cost for all share-based payments grantedthrough January 1, 2006, but for which the requisite service period hadnot been completed as of January 1, 2006, based on the grant date fairvalues estimated in accordance with the original provisions of SFAS 123.Compensation cost for all share-based payments granted subsequent to January 1,2006 will be based on grant date fair values estimated in accordance with theprovisions of SFAS 123R. There were no grants during the quarter ended March 26,2006. Results for prior periods have not been restated.

As a result of theadoption of SFAS 123R, APC’s income before income taxes and net income for thefirst quarter ended March 26, 2006 are $1.0 million and $0.8 millionlower, respectively, than if APC had continued to account for share-basedcompensation under APB Opinion No. 25. APC recognized a total of $4.1million of share-based compensation cost for the first quarter ended March 26,2006. APC did not record a cumulative effect of change in accounting principlerelated to forfeitures of stock-based awards since such forfeitures were notmaterial. As of March 26, 2006, there was $15.4 million of totalunrecognized compensation cost related to outstanding share-based compensationarrangements. That cost is expected to be recognized over a weighted-averageperiod of 1.6 years. APC utilizes a FASB Interpretation No. 28 attributionmodel for the timing of the recognition of compensation expense.

Prior to the adoption ofSFAS 123R, APC presented all tax benefits of deductions resulting from theexercise of stock options as operating cash flows in APC’s ConsolidatedCondensed Statements of Cash Flows. SFAS 123R requires the cash flows resultingfrom tax deductions in excess of the compensation cost recognized for thosestock options (excess tax benefits) to be classified as financing cash flows.

10

----

 

The following tableillustrates the effect on net income and earnings per share as if APC hadapplied the fair value recognition provisions of SFAS 123 for the first quarterended March 27, 2005:
| ** **                                                                                                                                    | ** ** | ** **  | ** **   | **Three months ended**                                 | ** **   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|--------------|------------------------------------------------------------------|--------------|
| ** **                                                                                                                                    | ** ** | ** **  | *** *** | **March 27, 2005**                                     | *** *** |
| ** **                                                                                                                                    | ** ** | ** **  | ** **   | **(In thousands except  per share amounts)** | ** **   |
| Net income                                                                                                                                    |       | As reported |         | $                                                                | 36,045       |   |
| Add:  Compensation expense recognized during the period, net of related tax effects                                                           |       |        | ** **   | 2,377                                                            | ** **   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | Pro forma   |         | (3,780                                                           | )            |
| Net income                                                                                                                                    |       | Pro forma   |         | $                                                                | 34,642       |   |
| Basic earnings  per share                                                                                                                     |       | As reported |         | $                                                                | 0.19         |   |
|                                                                                                                                          |       | Pro forma   |         | $                                                                | 0.18         |   |
|                                                                                                                                          |       |        |         |                                                             |         |
| Diluted earnings  per share                                                                                                                   |       | As reported |         | $                                                                | 0.18         |   |
|                                                                                                                                          |       | Pro forma   |         | $                                                                | 0.18         |   |

 

For all of APC’sstock-based compensation plans, the fair value of each grant was estimated atthe date of grant using the Black-Scholes option pricing model. Black-Scholesutilizes assumptions related to volatility, the risk-free interest rate,dividend yield, and employee exercise behavior. Expected volatilities utilizedin the model are based on the historical volatility of APC’s stock price. Therisk-free interest rate is derived from the U.S. Treasury yield curve in effectat the time of grant. The model incorporates exercise and post-vestingforfeiture assumptions based on an analysis of historical data. The expectedlife of fiscal 2006 grants will be derived from historical information andother factors. No stock options were issued during the first quarters ended March 26,2006 and March 27, 2005.

At March 26, 2006,APC had one active stock-based compensation plan, the 2004 Long-Term IncentivePlan (2004 LTI Plan), and an employee stock purchase plan (ESPP), which aredescribed more fully below. At March 26, 2006, there were 10.1 millionshares available for future grants under the 2004 LTI Plan. During the firstquarter of 2006, there were no shares granted under the LTI Plan or under theESPP. APC has a policy of issuing new shares to satisfy stock option exercises.

On June 10, 2004,APC’s shareholders approved APC’s LTI Plan, which replaced APC’s 1997 StockOption Plan (1997 Plan). The 2004 LTI Plan will enable APC to utilize sharespreviously not distributed under the 1997 Plan. No further grants will be madefrom the 1997 Plan. Awards under the 2004 LTI Plan may be in the form ofincentive stock options, non-qualified stock options, restricted stock,restricted stock units, performance restricted stock, performance restrictedstock units, or any other equity-based interests as the Compensation Committeeof APC’s Board of Directors shall determine. The number of shares of commonstock that may be delivered in satisfaction of awards granted under the 2004LTI Plan shall be equal to (a) the number of shares of common stock thatremain available for grant under the 1997 Plan as of June 10, 2004, plus (b) anyshares of common stock underlying outstanding awards under the 1997 Plan thatafter June 10, 2004 expire or terminate without being exercised or thatwould otherwise again become available for issuance under the 1997 Plan, and inno event shall exceed an aggregate of 15 million shares.

On April 21, 1997,APC’s shareholders approved the 1997 Stock Option Plan and on June 19,1987 approved the 1987 Stock Option Plan (collectively the 1997 and 1987Plans). The 1997 and 1987 Plans authorized the grant of options for up to 12.0million shares and 21.6 million shares, respectively, of common stock. On June 11,2002 and May 7, 1999, APC’s shareholders authorized an additional 9.5million shares and 12.0 million shares, respectively, under the 1997 StockOption Plan, resulting in an aggregate of 33.5 million shares available forgrant under the 1997 Stock Option Plan.

11

----

 

Options granted under APC’sstock-based compensation plans are either (a) options intended toconstitute incentive stock options (ISOs) under the Internal Revenue Code of1986 (the Code) or (b) non-qualified options. Incentive stock options maybe granted under the Plans to employees or officers of APC. Non-qualifiedoptions may be granted to consultants, directors (whether or not they areemployees), employees or officers of APC.

ISOs granted under APC’sstock-based compensation plans may not be granted at a price less than the fairmarket value of the common stock on the date of grant (or 110% of fair marketvalue in the case of employees or officers holding 10% or more of the votingstock of APC). The aggregate fair market value of shares, for which ISOsgranted to any employee are exercisable for the first time by such employeeduring any calendar year (under all stock option plans of APC and any relatedcorporation), may not exceed $100,000. Non-qualified options granted under thePlan may not be granted at a price less than the lesser of (a) the bookvalue per share of common stock as of the end of the fiscal year of APCimmediately preceding the date of such grant, or (b) 50% of the fairmarket value of the common stock on the date of grant.

Options granted under the1997 and 1987 Plans before December 1, 1995 vested 25% at the end of thefirst year and 12.5% at the end of each six month period thereafter. Optionsgranted after December 1, 1995 and before February 14, 1997 vested20% at the end of the second year and 20% at the end of each year thereafter.Options granted after February 14, 1997 vest 25% at the end of the firstyear and 12.5% at the end of each six month period thereafter. Options grantedunder the 2004 LTI Plan, generally vest 25% at the end of each year.

On April 21, 1997,APC’s shareholders approved the 1997 Non-employee Director Stock Option Planand on May 20, 1993 approved the 1993 Non-employee Director Stock OptionPlan (collectively the Director Plans). The 1997 and 1993 Director Plansauthorized the grant of options for up to 400,000 shares and 80,000 shares ofcommon stock, respectively. In the first quarters of 2006 and 2005, allnon-employee directors were entitled to participate in the 1997 Non-EmployeeDirector Stock Option Plan, with each receiving no option grants during thosequarters.

Options granted under the1997 Director Plan, and the options granted on August 9, 2001 under the1997 Stock Option Plan, vest 25% at the end of the second year and 9.375% atthe end of each six month period thereafter. Options granted under the 1993Director Plan vested 25% at the end of the first year and 25% annuallythereafter.

Options granted under allstock-based compensation plans after January 1, 1993 expire not more thanten years from the date of grant (five years in the case of ISOs granted to tenpercent shareholders). The outstanding options at March 26, 2006 expire atvarious dates through 2015. Options granted terminate within a specified periodof time following termination of an optionee’s employment or position as adirector or consultant with APC.

A summary of the status of stock options outstandingunder APC’s stock-based compensation plan as of March 26, 2006, andchanges during the first quarter ending on that date is presented below:
| ** **                           | ** ** | **Options**                                                                              | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** **     | **Aggregate  Intrinsic  Value** | ** ** |
|--------------------------------------|------------|------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------------|----------------|---------------------------------|------------|
| ** **                           | ** ** | **(In thousands except years and per share amounts)** | ** ** |
| Outstanding at  January 1, 2006 |       | 11,757                                                                                   |       | $                                      | 15.69      |                                                |           |                            |       |   |
| Exercised                            |       | (360                                                                                     | )          | $                                      | 13.09      |                                                |           |                            | $          | 1.8 |   |
| Terminated                           |       | (76                                                                                      | )          | $                                      | 18.04      |                                                |           |                            |       |   |
| Outstanding at  March 26, 2006  |       | 11,321                                                                                   |       | $                                      | 15.75      |                                                | 4.5 years |                            | $          | 74.4 |   |
| Exercisable at  March 26, 2006  |       | 9,615                                                                                    |       | $                                      | 15.62      |                                                | 4.0 years |                            | $          | 60.2 |   |

 

12

----

***Stock Purchase Plan.***On April 21, 1997, APC’sshareholders approved an Employee Stock Purchase Plan (the Plan) to providesubstantially all employees an opportunity to purchase shares of its commonstock through payroll deductions, in an aggregate amount up to 10% of eligiblecompensation. Semiannually, participant account balances are used to purchaseshares of stock at the lesser of 85% of the fair market value of shares on thegrant date or the exercise date. The aggregate number of shares purchased by anemployee may not exceed 3,000 shares annually (subject to limitations imposedby the Internal Revenue Code). The employee stock purchase plan expires on February 11,2007. A total of 2.0 million shares are available for purchase under the Plan.No shares were issued under the Plan during the first quarters of 2006 and2005.

***Restricted Stock Units.***Also under theaforementioned 2004 LTI Plan, APC’s Compensation and Stock Option Committee ofthe Board of Directors approved the award of restricted stock units (RSU’s). Asummary of the status of RSU’s as of March 26, 2006 and changes during thefirst quarter then ended is presented below:

|                                     | ** ** | **Number  of RSU’s**      | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|-------------------------------------|------------|-------------------------------------|------------|----------------------------------------------------|------------|
| ** **                          | ** ** | **(Shares in thousands)** | ** ** |
| Non-vested at  January 1, 2006 |       | 1,137                               |       | $                                                  | 19.82      |   |
| Terminated                          |       | (54                                 | )          | $                                                  | 22.35      |   |
| Non-vested at  March 26, 2006  |       | 1,083                               |       | $                                                  | 19.69      |   |

 

Under the 2004 LTIPlan, if APC awards a dividend on its common stock prior to the vesting date ofan RSU, the holder of the restricted stock unit would be entitled to receive onthe vesting date a dividend equivalent payment. Dividend equivalents arerecognized as compensation expense when the dividend is declared. The RSUawards will vest, and the underlying common stock will concurrently issue,ratably over four years, whereby the units granted will vest 25% on June 30in the year following the date approved, and 25% on June 30 of each yearthereafter.

**10.****       OperatingSegment Information**

***Basis for presentation.***APC operatesprimarily within one industry consisting of three reportable operating segmentsby which it manages its business and from which various offerings are commonlycombined to develop a total solution for the customer. These efforts primarilyincorporate the design, manufacture, and marketing of power protectionequipment and related software and accessories for computer, communications,and related equipment. APC’s three segments are: Small Systems, Large Systems,and “Other.” Each of these segments address global markets.

***Small Systems.***The Small Systems segment develops powerdevices and accessories for servers and networking equipment commonly used inlocal area and wide area networks and for personal computers and sensitiveelectronics. Major product offerings include the Back-UPS®, Smart-UPS®, andSymmetra® Power Array® single-phase family of uninterruptible power supplies(UPSs). Also included are SurgeArrest® surge suppressors as well as cabling andconnectivity products. Additional accessories and software products are offeredto enhance the management of these networks, including APC’s PowerChute®software and NetShelter® server enclosures. Products are sold to home andcommercial users primarily through an indirect selling model consisting ofcomputer distributors and dealers, value-added resellers, mass merchandisers,catalog merchandisers, E-commerce vendors, and strategic partnerships.

13

----

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

***“Other” Segment.***The “Other” segment principally consists ofdesktop and notebook computer accessories and replacement batteries. Thedistribution model of products in the “Other” segment is consistent with thatof the Small Systems segment.

APC measures theprofitability of its segments based on gross margin. Segment gross marginsexclude certain expenses which are managed outside the reportable segments.Costs excluded from segment profit are operating expenses, primarily consistingof R&D, selling and corporate expenses, and income taxes. Expenditures foradditions to long-lived assets are not tracked or reported by the operatingsegments, although depreciation expense is allocated to and reported by theoperating segments.

Summary operating segment information is as follows:

|                                    | ** ** | **Three months ended** | ** **  |
|------------------------------------|------------|----------------------------------|-------------|
| ** **                         | ** ** | **March 26,  2006**         | ** **  | **March 27,  2005** | ** ** | **Increase  (Decrease)** | ** ** |
| ** **                         | ** ** | **($ in thousands)**   | ** **  |
| **Segment  net sales**             | ** ** | ** **                       | ** **  | ** ** | ** ** | ** ** | ** ** |
| Small Systems                      | ** ** | **$**                            | **350,893** |   | $ | 307,461 |   | 14.1 | % |
| Large Systems                      | ** ** | **107,106**                      |        | 80,673 |   | 32.8 | % |
| Other                              | ** ** | **17,501**                       |        | 17,333 |   | 1.0 | % |
| Total segment  net sales           | ** ** | **475,500**                      |        | 405,467 |   | 17.3 | % |
| Shipping and  handling revenues    | ** ** | **3,293**                        |        | 2,536 |   | 29.9 | % |
| Total net sales                    | ** ** | **$**                            | **478,793** |   | $ | 408,003 |   | 17.4 | % |
|                               |       |                             |        |   |   |   |   |
| **Segment  profits**               | ** ** | ** **                       | ** **  | ** ** | ** ** | ** ** | ** ** |
| Small Systems                      | ** ** | **$**                            | **144,786** |   | $ | 146,507 |   | (1.2 | %) |
| Large Systems                      | ** ** | **17,339**                       |        | 17,447 |   | (0.6 | %) |
| Other                              | ** ** | **9,456**                        |        | 10,266 |   | (7.9 | %) |
| Total segment  profits             | ** ** | **171,581**                      |        | 174,220 |   | (1.5 | %) |
| Shipping and  handling net costs   | ** ** | **13,793**                       |        | 9,769 |   | 41.2 | % |
| Other indirect  operating expenses | ** ** | **144,519**                      |        | 120,818 |   | 19.6 | % |
| Other income,  net                 | ** ** | **5,434**                        |        | 3,794 |   | 43.2 | % |
| Earnings before income  taxes      | ** ** | **$**                            | **18,703**  |   | $ | 47,427 |   | (60.6 | %) |

 

**11.****       Litigation**

APC is involved in various claims and legal actions arising in theordinary course of business. While management currently believes that resolvingall pending legal matters, individually or in aggregate, will not have amaterial adverse impact on APC’s financial position, litigation and claims aresubject to inherent uncertainties, including the risk of an unfavorable outcome,and management’s view of these matters may change in the future. An unfavorableoutcome could include monetary damages or, in cases where injunctive relief issought, an injunction prohibiting certain activities. Were an unfavorable finaloutcome to occur, there exists the possibility of a material adverse impact onAPC’s financial position, cash flows and results of operations for the periodin which the effect becomes reasonably estimable.

14

----

| **ITEM 2.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|-------------------------------------------------------------------------------------------------|

 

We beginManagement’s Discussion and Analysis of Financial Condition and Results ofOperations (MD&A) with a discussion of our business outlook for 2006. Wealso provide a discussion of our Results of Operations for the first quarter of2006 compared to the first quarter of 2005. This discussion includes anoverview of our operating results and the directions in which our markets,segments, and geographies are moving. We then provide a Liquidity and FinancialResources discussion of the significant changes in our balance sheet during thefirst quarter of 2006, and cash flows for the first quarter of 2006 compared tothe first quarter of 2005, as well as our contractual obligations and foreigncurrency activity. This is followed by a discussion of the Critical AccountingPolicies that we believe are important to our business operations andunderstanding of our results of operations. We conclude with information aboutfactors that may affect our future results.

This MD&Ashould be read in conjunction with the other sections of this report, including“Item 1. Financial Statements” and also our Annual Report on Form 10-Kfor the year ended December 31, 2005, including “Item 1. Business;” “Item6. Selected Financial Data;” “Item 8. Financial Statements and SupplementaryData;” and “Item 9A. Controls and Procedures.”

Inaddition to historical consolidated financial information, the following discussioncontains forward-looking statements that reflect our plans, estimates andbeliefs. Our actual results could differ materially from those discussed in theforward-looking statements. Factors that could cause or contribute to thesedifferences include those discussed below and elsewhere in this Form 10-Q.

**BUSINESSOUTLOOK**

We are generally pleasedwith APC’s top line performance during our first quarter of 2006, but haveidentified opportunities for improvement. For the eleventh consecutive quarterAPC’s year-over-year revenue growth was in double-digits. We are confident thatthe strong year-over-year revenue growth can be attributed to what we believeis an improved macro-economic environment for IT spending and is the result ofour continued investments in research and development, sales and marketingactivities and the growing adoption of APC’s network-critical physicalinfrastructure, or NCPI, architecture. The investments we have continued tomake to educate the market and drive adoption of the technology, we believe,are meeting our strategic objectives as customers are embracing the modular,standardized approach APC has pioneered in network-critical physicalinfrastructure.

As strong as our revenueresults were in the first quarter, we are disappointed in our operatingperformance. Developing and managing the internal capabilities necessary tomeet the supply and order fulfillment requirements of two distinct businessmodels, that is, a transaction-oriented products business and acustomer-focused systems solutions business, is a complicated and difficulttask. To support these two businesses, we are working to lower manufacturingcosts and improve product delivery to our global customer base. This includestransitioning more Large Systems manufacturing overseas and populating globaldistribution centers with a broader portfolio of products and this hasgenerated incremental costs and product availability disruptions. During thefirst quarter we made strides to improve our order fulfillment process andreduce our reliance on expedited shipping methods, particularly related to airfreight. We even saw our gross margin stabilize and increase slightly from thefourth quarter despite the typical seasonal sequential decline in revenue andvolume. However, our freight and logistics costs remain at levels higher thanthey were prior to the recent transitions of Large Systems productmanufacturing overseas and we have more work to do to reach optimal levels ofefficiency in the process.

In building this new businesswe endeavored to increase service levels to our customers by establishing moredistribution centers throughout North America, particularly over the past year.It has now become clear to us that, although we have been successful in someincremental improvement in service levels, the costs to accomplish thisimprovement were much greater than anticipated. As a result, we are now takingcorrective actions to reduce these logistics and warehousing expenses.

15

----

As we look forward to theremainder of 2006, we will be implementing plans to continue transforming APCinto a lean, ambidextrous, customer-centric enterprise. To accomplish this, wewill need to: (1) optimize operational efficiency, (2) deploy andimprove distribution capabilities in all regions globally, (3) acceleratethe responsiveness of the supply chain to minimize availability issues for themore complex solutions, and (4) improve demand to supply signalingcapabilities to support both business models. Some of these initiatives, duringimplementation, may result in our incurring incremental costs prior toachieving the desired outcomes. Additionally, these initiatives will take time,some more than others, to implement, but we are committed to makingsignificant, meaningful, and timely progress.

We believe that we arevery well positioned competitively, financially and strategically. We willcontinue to be focused on empowering IT professionals with the knowledge, toolsand solutions they need to effectively design, build and manage network-criticalphysical infrastructure. Our objective is for APC to become a trusted, globalpartner for the long term, committed to solving our customers’ network-criticalphysical infrastructure problems of today and helping them anticipate theirchallenges of tomorrow, thereby allowing our customers to focus on their corecompetencies. We believe that we can accomplish this by dramatically reducingour customers’ level of complexity and their total cost of ownership involvedin designing, building, and managing the network-critical physicalinfrastructure that is at the very core of maintaining business continuity,application availability, and network reliability.

Additionally, we continueto plan for revenue growth in all three of our reportable segments: Small Systems,Large Systems and “Other.” As in recent quarters, we expect the rate of revenuegrowth of our Large Systems segment to be greater than the growth expected forSmall Systems due to the assumed continued success of our overall strategy andthe acceptance of our products in specific market segments.

Overall gross margins for2006 are currently expected to continue to be impacted by increased operationalcosts and a shift in product mix toward the faster-growing, lower-margin LargeSystems products. Gross margins, particularly for Small Systems products, areexpected to continue to be impacted by our response to competitive pricereductions. While we expect to continue to strive for favorable componentpricing arrangements with our material suppliers, the recent trends ofcommodity prices, particularly for steel, copper and lead, are expected to putupward pressure on our product materials costs, but we also expect partialoffset from material cost reductions, particularly for Large Systems products,typically seen after transitioning to low-cost factories. Increased operationalcosts, including freight and warehousing, are associated with the management ofour supply chain. These costs are tied to fulfilling customer orders andreducing overall long-term costs through the stocking of global third-partydistribution centers, expediting of product to meet customer demand, and thetransition cost of shifting production to lower cost manufacturing locations.We expect this could continue in the near term, however ultimately it isexpected these transitions will allow for lower manufacturing costs. In theshort-term, each transition is the equivalent of a new product introduction toa facility and comes with a learning curve and initial supply chaininefficiencies. Operational cost improvement initiatives, including redesign ofour supply chain processes and elimination of redundant manufacturing costs,are expected to cause incremental costs in the short-term, but ultimatelyresult in long-term gross margin improvement. Gross margin variability couldcontinue to result from changing revenue levels, which are dependent on unitvolumes, prices and currency trends as well as the mix of products sold, unitcosts and yield issues associated with production at our factories, transfersof production to our low cost facilities, excess manufacturing capacity, coststo comply with new and existing environmental regulations (including, but notlimited to, the European Union’s directive on waste electrical and electronicequipment (WEEE) and directives relating to restriction of hazardous substances(RoHS)), excess inventory, supply chain inefficiencies, inventory obsolescence(including potential exposure from WEEE and RoHS compliance) and variations ininventory valuation.

We have dedicated effortsto optimize our overall manufacturing capacity and locations over recent yearsand we will continue to plan for future capacity requirements based on theassumed continued acceptance and demand for our products in the specific marketsegments they were designed to address. We currently expect that capitalspending will be between $80 million and $100 million in 2006, compared to $49million in 2005. We expect that most of our incremental capital spending for2006 will go toward acquiring and expanding a building for a customerTechnology Learning Center, to be based in St. Louis, Missouri, andmaintaining, upgrading, and expanding our current manufacturing capacity, aswell as investments to upgrade current hardware and software office technologies.

16

----

We are committed tosustaining our R&D efforts to meet the future needs of our customers acrossall segments and potentially expanding into emerging, high-growth areas. Wecontinue to advance our NCPI systems in addition to ensuring our end-to-endoffering is the best in the industry. We will remain focused on aggressivelydriving the growth of our network-critical physical infrastructure solutions,which will require sustaining and increasing our operating expense investmentsin sales and marketing, as well as making incremental investments in globalcustomer education initiatives.

Our investment postureremains intact and we are firmly committed to supporting the level of sales andmarketing spending necessary to educate customers and channel partners on theinherent performance and total cost of ownership benefits of a modular,standardized solution such as InfraStruXure.

In February 2006,APC’s Board of Directors approved a stock repurchase program which authorizesup to $200 million to repurchase outstanding shares of APC’s common stock. Thepurchases would be made on the open market based on market and businessfactors. APC commenced the repurchase of its common stock in February 2006and, as of the end of the first quarter, had repurchased approximately 3.4million shares on the open market at an average price of approximately $20.39per share, totaling $70 million. The duration of the repurchase program is twoyears but may be suspended or discontinued at any time without prior notice.

We currently expect ourtax rate to be approximately 21 - 23% for the full year 2006. The estimatedeffective tax rate is based on current tax law and the current expected income.The tax rate may be affected by the jurisdictions in which profits are determinedto be earned and taxed, our ability to successfully implement additional taxsavings planning opportunities and our ability to realize deferred tax assets.

We are currently a partyto various legal proceedings and claims. We currently do not believe that theultimate outcome of current legal proceedings and claims will have a materialadverse effect on our financial position or overall trends in results ofoperations. However, litigation is subject to inherent uncertainties, includingthe risk of an unfavorable outcome, and management’s view of these matters maychange in the future. An unfavorable outcome could include monetary damages or,in cases where injunctive relief is sought, an injunction prohibiting certainactivities. If an unfavorable outcome were to occur in any specific period,there exists the possibility of a material adverse impact on the results ofoperations of that period or future periods. We believe that, given our currentliquidity and cash and investment balances, even an adverse judgment in currentlegal proceedings and claims would not have a material impact on cash andinvestments or liquidity.

**RESULTSOF OPERATIONS**

**COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 26,2006 AND MARCH 27, 2005**

**Revenues**

Net sales in thefirst quarter of 2006 were $478.8 million, an increase of 17.4% compared to$408.0 million for the comparable period in 2005, attributable to strengthacross all of our product segments and all of our major geographies. We areconfident that the strong year-over-year growth can be attributed to what webelieve is an improved macro-economic environment for IT spending and is theresult of our continued investments in sales and marketing activities and thegrowing adoption of APC’s network-critical physical infrastructure, or NCPI,architecture.

Each of ouroperating segments contributed to the strong top line performance. The LargeSystems segment, which is a focus of our data center initiatives andincorporates 3-phase UPS products, cooling, services and other related products,again posted the strongest gains for APC. We continued to make investments insupporting our efforts in these network-critical physical infrastructuremarkets and our top line advances highlight the resulting strong performance.Led by solid growth in our Smart-UPS family, the Small Systems segment alsocontinues to produce strong results that reflect APC’s position as a preferredpartner in the mid-market and consumer power protection markets. For furtherinformation about revenues by segment, refer to the *SegmentResults* section below.

17

----

***Revenues by Geography.***Weexperienced growth in all regions during the quarter. In addition to a strongperformance in the U.S., our emerging geographies, including Russia, Brazil,and India, were healthy contributors to our top line growth.

Thefollowing table summarizes our revenues on a geographic basis for the firstquarters ended March 26, 2006 and March 27, 2005.
| ** **                                  | ** ** | **Three months ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **March 26,  2006**         | ** ** | **% of  Total** | ** ** | **March 27,  2005** | ** ** | **% of  Total** | ** ** |
| ** **                                  | ** ** | **($ in millions)**    | ** ** |
| North and Latin  America (the Americas)     | ** ** | **$**                            | **247.3**  | ** ** | **51.7%** |   | $ | 204.2 |   | 50.0% |   |
| Europe, the  Middle East, and Africa (EMEA) | ** ** | **137.0**                        | ** ** | **28.6%** |   | 116.7 |   | 28.6% |   |
| Asia                                        | ** ** | **94.5**                         | ** ** | **19.7%** |   | 87.1 |   | 21.4% |   |
| Total Net Sales                             | ** ** | **$**                            | **478.8**  | ** ** | **100.0%** |   | $ | 408.0 |   | 100.0% |   |

 

In the first quarter of 2006, netsales of the Americas increased 21.1% over the first quarter of 2005. EMEAincreased 17.4% in the first quarter of 2006 over the first quarter of 2005 andAsia increased 8.5% in the first quarter of 2006 over the first quarter of2005.

In the first quarter of 2006, on aconstant currency basis, EMEA increased 22.9% and Asia increased 13.9% over thefirst quarter of 2005. In the first quarter of 2006, on a constant currencybasis, EMEA’s revenues would have been higher by $6.3 million, principally dueto weakening of the Euro and British pound, and Asia’s revenues would have beenhigher by $4.7 million, principally due to weakening of the Japanese yen andAustralian dollar. In the first quarter of 2005, on a constant currency basis,EMEA’s revenues would have been lower by $3.2 million, principally due tostrengthening of the Euro and British pound, and Asia’s revenues would havebeen lower by $1.0 million, principally due to strengthening of the Japaneseyen and Australian dollar. In total, the impact of currency exchange ratechanges worldwide reduced our net sales in the first quarter of 2006 by $10.0million, and increased our net sales in the first quarter of 2005 by $4.5million. We believe constant currency information is useful for an understandingof our operating results. Revenues on a constant currency basis differ fromrevenues presented in accordance with accounting principles generally acceptedin the United States.

**Cost of Goods Sold**

Cost of goods sold was $321.0 million or 67.0% of net sales in the firstquarter of 2006 compared to $243.6 million or 59.7% of net sales in the firstquarter of 2005. Gross margins for the first quarter of 2006 were 33.0% of netsales, approximately 730 basis points lower than in the first quarter of 2005.Nearly three percentage points of the year-over-year decline were associatedwith price actions and the negative impact of currency fluctuations.

Additionally, approximately four percentage points of the decline wereattributable to higher operational costs, primarily freight and logisticscosts, resulting from production shifts to lower-cost locations anddistribution center transitions and, to a lesser degree, manufacturing costinefficiencies caused by redundant capacity. Although we reduced our relianceon expedited shipment methods during the quarter, particularly air freight,overall freight and logistics costs remain higher than prior year levels. Goingforward, we will be taking additional steps to further improve our processesand efficiencies. Commodity prices also pressured gross margins in the quarter.The top three commodities impacting our cost of goods sold are lead, copper andsteel. In the first quarter of 2006, steel pricing growth trends have begun to moderate both year-over-yearand sequentially, but both lead and copper are up approximately 50%year-over-year, and could continue to impact component costs during 2006.

For furtherinformation about gross margins by segment, refer to the *SegmentResults* section below.

18

----

 

***Inventory Reserves.***Total inventory reserves at March 26,2006 were $54.6 million compared to $48.6 million at December 31, 2005.The increase in total inventory reserves reflected routine provisioning thatwas necessary as a result of applying APC’s inventory reserve methodologythroughout the quarter, offset by the physical disposition of inventoriescovered by APC’s inventory reserves. APC’s reserve estimate methodologyinvolves quantifying the total inventory position having potential lossexposure. Loss exposure generally results from several business factors,including product or component discontinuance, unplanned changes in demand,product design changes, and factory transitions. Quantifying such loss exposureis the result of combining the cost of inventories specifically identified ashaving little or no opportunity for sale or use (thus available for physicaldisposition) plus the cost of inventories having a high risk of no future saleor use based upon an analysis of on-hand quantities compared to historical andanticipated future sale or use. APC maintains an on-going business process forthe physical disposition of inventories previously identified. Inventorywrite-offs occur at the time of physical disposition. Inventories, oncereserved, are not written back up as such reserve adjustments are considered tobe a permanent decrease to the cost basis of the excess or obsolete inventory.

**SegmentResults**(Also refer to Note 10 of Notes to ConsolidatedFinancial Statements in Item 1 of this report for important informationregarding APC’s reportable segments)

|                                    | ** ** | **Three months ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **March 26,  2006**         | ** ** | **March 27,  2005** | ** ** | **Increase  (Decrease)** | ** ** |
| ** **                         | ** ** | **($ in millions)**    | ** ** |
| **Segment  net sales**             |       |                             |       |   |   |   |   |
| Small Systems                      | ** ** | **$**                            | **350.9**  |   | $ | 307.5 |   | 14.1 | % |
| Large Systems                      | ** ** | **107.1**                        |       | 80.7 |   | 32.8 | % |
| Other                              | ** ** | **17.5**                         |       | 17.3 |   | 1.0 | % |
| Total segment  net sales           | ** ** | **475.5**                        |       | 405.5 |   | 17.3 | % |
| Shipping and  handling revenues    | ** ** | **3.3**                          |       | 2.5 |   | 29.9 | % |
| Total net sales                    | ** ** | **$**                            | **478.8**  |   | $ | 408.0 |   | 17.4 | % |
| **Segment  profits**               |       |                             |       |   |   |   |   |
| Small Systems                      | ** ** | **$**                            | **144.8**  |   | $ | 146.5 |   | (1.2 | %) |
| Large Systems                      | ** ** | **17.3**                         |       | 17.4 |   | (0.6 | %) |
| Other                              | ** ** | **9.5**                          |       | 10.3 |   | (7.9 | %) |
| Total segment  profits             | ** ** | **171.6**                        |       | 174.2 |   | (1.5 | %) |
| Shipping and  handling net costs   | ** ** | **13.8**                         |       | 9.8 |   | 41.2 | % |
| Other indirect  operating expenses | ** ** | **144.5**                        |       | 120.8 |   | 19.6 | % |
| Other income,  net                 | ** ** | **5.4**                          |       | 3.8 |   | 43.2 | % |
| Earnings before income  taxes      | ** ** | **$**                            | **18.7**   |   | $ | 47.4 |   | (60.6 | %) |

 

***Small Systems.***Netsales for products in the Small Systems segment, which provides powerprotection, UPS and management products for the PC, server and networkingmarkets, increased in the first quarter of 2006 by 14.1% over the comparableperiod in 2005. The primary drivers of quarterly growth in this segment camefrom across the Smart-UPS family highlighted by growth in the Smart-UPS RTonline UPS, as well as InfraStruXure-related solutions, including racks andpower distribution units.

First quarter 2006 gross margins for the Small Systems segment of 41.3%declined 640 basis points from the comparable period in 2005. In addition to the aforementioned higherfreight and logistics costs, price discounting, commodity price increases, andcurrency were factors in the year-over-year decline.

***Large Systems.***Net sales for products in the Large Systemssegment, consisting primarily of 3-phase UPS, services, precision coolingand ancillary products for data centers, facilities and communicationapplications, increased 32.8% in the first quarter of 2006 over the comparableperiod in 2005. Growth in InfraStruXure-related solutions, including Symmetra 3-phase,the UPS component of our InfraStruXure solution, continue to support this segment’s strong top line performance.Approximately 30% of the Large Systems revenue in the quarter came fromInfraStruXure sales. This segment also benefited from healthy revenuecontributions from broadband products driven by fiber to the home programs withservice providers and our Smart-UPS VT 3-phase UPS which replaces lowerkVA legacy Silcon products.

19

----

First quarter 2006 gross margins for the Large Systemssegment of 16.2% decreased 540 basis points over the comparable period in 2005.While the aforementioned higher freight and logistics costs contributed to thedownward pressure on margins in this segment, product mix, particularly relatedto the growth of lower margin offerings in our broadband family, andunfavorable manufacturing absorption also impacted the year-over-year margincomparison, as did negative foreign currency trends. Continuing material costsavings partially offset these unfavorable factors.

***“Other” Segment.***Net sales for products in the “Other”segment, consisting principally of mobile accessories and replacementbatteries, increased 1.0% in the first quarter of 2006 over the comparableperiod in 2005 mainly attributable to organic growth of existing productsacross the segment.

First quarter 2006 gross margins for the “Other” segment of 54.0%decreased 520 basis points from the comparable prior year level, pricing,material costs, and to a lesser extent, currency trends, negatively impactedthis segment’s gross margins.

## **Operating Expenses**

***Marketing, Selling, General, andAdministrative (SG&A) Expenses.*** SG&A expenses inthe first quarter of 2006 were $122.0 million or 25.5% of net sales compared to$100.6 million or 24.7% of net sales in the first quarter of 2005. We continue to support our data center initiatives,with a primary focus on increasing the awareness of our existing andprospective customers, particularly in relation to our InfraStruXurearchitecture. Our investment priorities remain intact and areconcentrated on driving InfraStruXure and data center-related initiatives,including sales and service staffing, education, and sales generation. Theinvestments we are making in these areas are essential to branding the datacenter, and establishing APC as a leader in the network-critical physical infrastructuremarket. We also recorded nearly $3 million in incremental costs year-over-yearassociated with the newly acquired Netbotz business, including amortization ofintangibles. Additionally, pursuant toour adoption of SFAS 123R, we recorded approximately $1 million in incrementalstock-based compensation during the quarter, for a total equity compensationexpense of $4 million, when combined with costs associated with restrictedstock units; the majority of these costs were classified in operating expenses.

The allowance for bad debts was 4.0% of gross accounts receivable at March 26,2006, substantially unchanged from 3.8% at December 31, 2005. Accountsreceivable balances outstanding over 60 days represented 13.7% of totalreceivables at March 26, 2006 compared to 12.7% at December 31, 2005.A majority of U.S. and international customer balances continue to be coveredby receivables insurance. We continue to experience strong collectionperformance. Write-offs of uncollectable accounts represent less than 1% of netsales for both periods.

***Research andDevelopment (R&D).***R&D expenditures were $22.5 million or 4.7% of net sales in the firstquarter of 2006 and $20.2 million or 5.0% of net sales in the first quarter of2005. We are committed to sustaining our R&D efforts to meet the futureneeds of our customers across all segments and potentially expanding intoemerging, high-growth areas. We continue to advance our NCPI systems inaddition to ensuring our end-to-end offering is the best in the industry. Webelieve that continued product innovation through development is necessary forour existing products to remain competitive in our markets, as well as creatingopportunities from new product introductions. The increases in total R&Dspending primarily reflect increased numbers of software and hardware engineersand costs associated with new product development and engineering support.

**Other Income, Net and Income Taxes**

***Other Income, Net.***Other income is comprised principally ofinterest income which increased during the first quarter of 2006 dueprincipally to higher average cash balances available for investment as well asrising interest rates compared to first quarter of 2005.

20

----

 

At March 26,2006, APC had $651.0 million of total cash and investments, down from $774.2million at December 31, 2005. We manage APC’s cash and investment balancesto preserve principal and liquidity while maximizing our return on the totalinvestment portfolio. We diversify our investment portfolio by investing inmultiple types of investment-grade securities with multiple investment brokers.Based on APC’s investment portfolio and interest rates, at March 26, 2006,a 100 basis point increase or decrease in interest rates would have resulted inan increase or decrease of approximately $7 million in our annual interestincome.

***Income Taxes.******  ***Oureffective income tax rates for the first quarters of 2006 and 2005 wereapproximately 22.5% and 24.0%, respectively. The decrease in the first quarterof 2006 compared to the first quarter of 2005 is due to the tax savings from anincreasing portion of taxable earnings anticipated to be generated from APC’soperations in jurisdictions currently having lower income tax rates than thepresent U.S. statutory income tax rate. This shift resulted partially from ourproduct transitions to lower cost, lower tax, manufacturing locations. APC has tax holidays in China and Indiawhich reduce or eliminate the income taxes paid in those countries. Althoughthis could have the effect of increasing APC’s foreign taxes, we expect APC’seffective income tax rate to remain considerably lower than the U.S. statutoryfederal corporate tax rate of 35%.

**LIQUIDITYAND FINANCIAL RESOURCES**

**Working Capital**

Working capital at March 26, 2006 was$1.307 billion compared to $1.389 billion at December 31, 2005. Our totalcash, cash equivalents, and short-term investments decreased to $650.4 millionat March 26, 2006 from $773.6 million at December 31, 2005. InFebruary 2006, APC’s Board of Directors approved a stock repurchaseprogram which authorizes up to $200 million to repurchase outstanding shares ofAPC’s common stock. The purchases would be made on the open market based onmarket and business factors. The duration of the repurchase program is twoyears but may be suspended or discontinued at any time without prior notice.APC commenced the repurchase of its common stock in February 2006. Thefirst quarter 2006 decrease in our cash, cash equivalents, and short-terminvestments position reflected APC’s first quarter repurchase on the openmarket of approximately 3.4 million shares of its common stock, at an averageprice of $20.39 per share, totaling $70 million. In addition, APC’s continued positive operating results allowed us topay a quarterly dividend and continue to internally finance the capitalinvestment, R&D, sales and marketing spending required to expand ouroperations.

**Cash Flows**

The table below summarizes our cash flows for the first quarters ended March 26,2006 and March 27, 2005.

|                                                      | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **March 26,  2006**         | ** ** | **March 27,  2005** | ** ** |
| ** **                                           | ** ** | **(In millions)**           | ** ** |
|                                                 |       |                             |       |   |   |
| Net cash (used  in) provided by operating activities | ** ** | **$**                            | **(22.3**  | **)** | $ | 34.5 |   |
| Net cash  provided by investing activities           | ** ** | **68.7**                         |       | 5.3 |   |
| Net cash used in  financing activities               | ** ** | **(84.0**                        | **)**      | (10.5 | ) |
| **Net  change in cash and cash equivalents**         | ** ** | **(37.6**                        | **)**      | 29.3 |   |
| ** **                                           | ** ** | ** **                       | ** ** |   |   |
| Cash and cash  equivalents at beginning of period    | ** ** | **262.4**                        |       | 72.7 |   |
| Cash and cash  equivalents at end of period          | ** ** | **$**                            | **224.8**  |   | $ | 102.0 |   |

 

***Cash Flows from OperatingActivities****.*During the first quarter of2006, our operating cash flows funded increased inventory as discussed below.Our cash flows from operations for the first quarter of 2005 reflectedhigher profit levels, partially offsetby increased inventory.

21

----

 

***Cash Flows from InvestingActivities****.*Our investing activitiescash flows were used mainly for the purchase of available-for-sale securitiesand for capital spending, principally manufacturing and office equipment,purchased software applications, and building improvements. Our investmentapproach and the composition of our investment portfolio remained relativelyconstant overall with no investments having maturity dates greater than oneyear, except for our auction rate securities and variable rate demandobligations. Capital spending in thefirst quarters of 2006 and 2005 focused on funding additional equipment needsand improving existing factories, principally in the U.S., India, and thePhilippines, as well as continuing investment in information technologies.

***Cash Flows from FinancingActivities****.*Our cash flows fromfinancing activities included the afore-mentioned first quarter 2006 repurchaseof approximately 3.4 million of our common shares on the open market at anaverage price of approximately $20.39 per share, totaling $70 million, as wellas payment of common stock dividends of approximately $19.5 million and $19.3million during the first quarters of 2006 and 2005, respectively. Theseoutflows were partially offset by proceeds from issuances of common stockrelating to employee stock plans during each of the periods presented.

**Inventories**

Worldwide inventories were $589.6 million at March 26, 2006, up from$541.8 million at December 31, 2005. Our inventory typically increases inthe first quarter due to seasonally lower revenue in the first quarter. Also,higher levels of on-hand finished goods were required to ensure productavailability as we navigate our aforementioned supply chain issues, and to meetincreasing current and anticipated demand, particularly InfraStruXure demand,as well as to manage the requirements associated with continuing transfers ofproduction of a wide range of Small and Large Systems products to and among ourlow cost manufacturing regions. In addition, we increased our inventory levelsstrategically to support in-region lead time initiatives, as well as to supportcontinuing new product introductions. Inventory levels as a percentage ofquarterly sales were 123% in the first quarter of 2006, up from 94% in thefourth quarter of 2005 and 118% in the first quarter of 2005. The first quarter increase over thecomparable quarter last year was due in part to the typical first quarter 2006inventory build combined with the typical seasonal decline in net sales fromthe fourth quarter to the sequential first quarter of the following year. Therewere no inventory charges, other than APC’s standard provisioning, during thefirst quarters of 2006 and 2005.

**Contractual Obligations**

The following tablesummarizes our significant contractual obligations at March 26, 2006, andthe effect such obligations are expected to have on our liquidity and cashflows in future periods. This table excludes amounts already recorded on ourbalance sheet as current liabilities at March 26, 2006.
| ** **                   | ** ** | ** **             | ** ** | **Payments Due By Period** | ** ** | ** **         | ** ** |
|------------------------------|------------|------------------------|------------|-------------------------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **Total**              | ** ** | **Less than  1 year**           | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                   | ** ** | **(In millions)** | ** ** |
| Operating Lease  Obligations |       | $                      | 29.8       |                                      | $          | 7.1                |       | $ | 13.6 |   | $ | 6.4 |   | $ | 2.7 |   |
|                              |            |                        |            |                                           |            |                    |            |  |  |  |  |  |  |  |  |  |

 

APC’s non-cancelable operating leases, primarily forwarehousing and office space, expire at various dates through 2019. Theseleases contain renewal options for periods ranging from one to 14 years andrequire APC to pay its proportionate share of utilities, taxes, and insurance.APC is not able to determine the aggregate amount of purchase orders thatrepresent contractual obligations for the purchase of goods and services, assuch purchase orders may represent authorizations to purchase rather thanbinding agreements. For the purposes of this disclosure, contractualobligations for the purchase of goods and services are defined as agreementsthat are enforceable and legally binding on APC and that specify allsignificant terms, including: fixed or minimum quantities to be purchased;fixed, minimum, or variable price provisions; the approximate timing of thetransaction, and contain no provisions allowing for cancellation withoutsignificant penalty. Our purchase orders for raw materials or purchasedfinished products are based on our current manufacturing needs and/or demandforecasts and are fulfilled by our vendors within short time horizons. We donot have significant agreements for the purchase of raw materials or finishedproducts specifying minimum quantities or set prices that exceed our expectedrequirements for three months.

22

----

**Capital Expenditures and Capital Commitments**

Duringthe first quarters of 2006 and 2005, our capital expenditures, net of capitalgrants, amounted to approximately $16.9 million and $5.0 million, respectively,consisting primarily of manufacturing and office equipment, purchased softwareapplications, and building improvements. Capital spending in the first quartersof 2006 and 2005 focused on funding additional equipment needs and improvingexisting factories, principally in the U.S., India, and the Philippines,as well as continuing investment ininformation technologies. Substantially all of APC’s net capital expenditureswere financed from available operating cash.

We have dedicated effortsto optimize our overall manufacturing capacity and locations over recent yearsand we will continue to plan for future capacity requirements based on theassumed continued acceptance and demand for our products in the specific marketsegments they were designed to address. We currently expect that capitalspending will be between $80 million and $100 million in 2006, compared to $49million in 2005. We expect that most of our incremental capital spending for2006 will go toward acquiring and expanding a building for a customerTechnology Learning Center, to be based in St. Louis, Missouri, andmaintaining, upgrading, and expanding our current manufacturing capacity, aswell as investments to upgrade current hardware and software officetechnologies. During April 2006, we acquired the leased facility currentlyoccupied in St. Louis for $14.3 million as the first major step toward ourTechnology Learning Center. The purchase price was paid from available cash.

We had no material capital commitments during the first quarters of 2006and 2005, or at March 26, 2006 and December 31, 2005.

APC has agreements with the Industrial DevelopmentAuthority of Ireland, otherwise known as the IDA. Under these agreements, wereceive grant monies for costs incurred for machinery, equipment, and buildingimprovements for our Galway and Castlebar facilities. These grants are equal to40% and 60%, respectively, of such costs up to a maximum of $13.1 million forGalway and $1.3 million for Castlebar. Such grant monies are subject to APCmeeting certain employment goals and maintaining operations in Ireland untiltermination of the respective agreements. Under separate agreements with theIDA, we receive direct reimbursement of training costs at our Galway andCastlebar facilities for up to $3,000 and $12,500, respectively, per newemployee hired. Also refer to Note 15 of Notes to Consolidated FinancialStatements in Item 8 of American Power Conversion Corporation’s Annual Reporton Form 10-K for the year ended December 31, 2005.

APC also has an agreement with the IDA for aresearch and development grant towards the costs of a project for thedevelopment of software products. The availability of the grant is contingenton meeting certain milestones in the progress of the project as well as meetingcertain employment goals on the project within the Galway facility. The amountof grant assistance available on satisfaction of all conditions is 28% of theeligible expenditure to a maximum of €714,588. At March 26, 2006, no grantclaims had been claimed or received.

**Borrowing Facilities and Financial Commitments**

APChad no borrowing facilities or significant financial commitments, other thanthose required in the normal course of business, during the first quarters of2006 and 2005, or at March 26, 2006 and December 31, 2005.

**Off-Balance-Sheet Arrangements**

APChad no significant off-balance sheet arrangements during the first quarters of2006 and 2005, or at March 26, 2006 and December 31, 2005.

**Stock Repurchase Program**

In February 2006,APC’s Board of Directors approved a stock repurchase program which authorizesup to $200 million to repurchase outstanding shares of APC’s common stock. Thepurchases would be made on the open market based on market and businessfactors. APC commenced the repurchase of its common stock in February 2006and, as of the end of the first quarter, had repurchased approximately 3.4million shares on the open market at an average price of approximately $20.39per share, totaling $70 million. The duration of the repurchase program is twoyears but may be suspended or discontinued at any time without prior notice.

23

----

**Quarterly Cash Dividends**

Dividends of $0.10per share were declared and paid in each of the first quarters of 2006 and2005. It is the intention of the Board of Directors to pay a comparablequarterly dividend on a going forward basis contingent upon continued capitalavailability and a determination that cash dividends continue to be in the bestinterests of APC and its shareholders.

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

**Foreign Currency Activity**

We invoice our customers in various currencies. Realized and unrealizedtransaction gains or losses are included in the results of operations and aremeasured based upon the effect of changes in exchange rates on the actual orexpected amount of functional currency cash flows. Transaction gains and losseswere not material to the results of operations in the first quarters of 2006and 2005.

The table belowsummarizes information on balances that are sensitive to foreign currencyexchange rates and presents such amounts in U.S. dollar equivalents.

 
| ** **                       | ** ** | **March 26, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **Accounts Receivable** | ** ** | **Liabilities**                 | ** ** | **Accounts Receivable** | ** ** | **Liabilities** | ** ** |
| ** **                       | ** ** | **(In millions)**       | ** ** |
| U.S. dollar  functional currency | ** ** | **$**                        | **85.3**   | ** **                      | **$**      | **86.2** |   | $ | 98.6 |   | $ | 93.8 |   |
| Swiss franc functional  currency | ** ** | **$**                        | **15.1**   | ** **                      | **$**      | **6.7** |   | $ | 14.4 |   | $ | 5.8 |   |

 

APC also had non-tradereceivables denominated in Euros of approximately U.S.$0.9 million and U.S.$1.4million at March 26, 2006 and December 31, 2005, respectively.

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

**CRITICALACCOUNTING POLICIES**

The discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. The U.S.Securities and Exchange Commission has defined critical accounting policies asthose that are both most important to the portrayal of our financial conditionand results and which require our most difficult, complex or subjectivejudgments or estimates. Based on this definition, we have identified thepolicies below as critical to our business operations and the understanding ofour results of operations. The impact and any associated risks related to thesepolicies on our business operations is discussed throughout Management’sDiscussion and Analysis of Financial Condition and Results of Operations wheresuch policies affect our reported and expected financial results. For allfinancial statement periods presented, there have been no materialmodifications to the application of these critical accounting policies. For adetailed discussion on the application of these and other accounting policies,also refer to Note 1 of Notes to Consolidated Financial Statements in Item 8 ofAmerican Power Conversion Corporation’s Annual Report on Form 10-Kfor the year ended December 31, 2005.

24

----

On an on-going basis, weevaluate the judgments and estimates underlying all of our accounting policies,including those related to revenue recognition, product returns, bad debts,inventories, impairment of long-lived assets, deferred tax valuationallowances, restructuring reserves and contingencies, and litigation. We baseour estimates on historical experience and on various other assumptions thatare believed to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Materiallydifferent results in the amount and timing of our actual results for any periodcould occur if we made different judgments or utilized different estimates.Actual results may differ from those estimates.

Our criticalaccounting policies are as follows:

***Revenue Recognition.***We follow very specific and detailed guidelines inmeasuring revenue; however, certain judgments affect the application of ourrevenue policy. Revenue results are difficult to predict, and any shortfall inrevenue or delay in recognizing revenue could cause our operating results tovary significantly from quarter to quarter. In general, revenue is recognizedwhen title has passed at the time of delivery of product for all of ouroperating segments as stipulated by the delivery terms for the salestransactions. In addition, prior to revenue recognition, we require persuasiveevidence of the arrangement, that the price is fixed or determinable, and thatcollectibility is reasonably assured. This requires us to assess at the pointof delivery whether these criteria have been met. When management determinesthat such criteria have been met, revenue is recognized. Installation is notapplicable for a majority of Small Systems and all “Other” segment productsbased on the nature of the products sold. Generally, revenue associated withLarge Systems sales is also recognized at the time of delivery and/orinstallation pursuant to the delivery and/or installation terms. Delivery termsvary, but often include origin-based terms (e.g., FOB Shipping Point andEx-works) and destination-based terms (e.g., DDU/DDP (delivered dutyunpaid/delivered duty paid)). We record estimated reductions to revenue forcustomer programs and incentive offerings, including special pricingagreements, price protection, co-operative advertising and other volume baseddiscounts at the time of sale.

Our arrangements do not generallyinclude acceptance clauses. However, if an arrangement includes a customerspecified acceptance provision, acceptance can occur at our factory prior todelivery or at the customers’ site. Revenue recognition will occur uponmanagement’s determination of acceptance by the customer consistent with theagreed-upon delivery terms for the sale. As we continue to introduce newproducts and enter into new product and service arrangements with customers, weanticipate that installation and customer acceptance provisions may become morecommon, and therefore increasingly significant for determining delivery andperformance and consequently our entitlement to recognize revenue.

Certain LargeSystems product lines and, at times, one product line included in the SmallSystems segment, require electrical hardwire installation or duct installationwhich is performed by the customer or their contracted licensedcontractor/electrician. Where we do not perform such installation, revenuerecognition at the time of delivery is proper as customer acceptance of theunit is not required. Also, payment by the customer is not contingent uponinstallation of the product.

We offer additionalservices to customers depending on the type of product the customer haspurchased, including product-based and professional services. Revenue isrecognized at the time services are provided or is deferred and recognized overthe service period (where applicable). The fair value of these services arebased upon the rates that we charge customers in separately negotiatedtransactions and such services are not essential to the functionality of thedelivered product.

For all sales, exceptthose completed over the Internet, we use a binding purchase order as evidenceof an arrangement. For sales over the Internet, we use a credit cardauthorization as evidence of an arrangement. Sales through certain customersare evidenced by a master agreement governing the relationship together withbinding purchase orders on a transaction by transaction basis.

25

----

 

***EstimatingValuation Allowances and Accrued Liabilities — Allowances for Sales Returns,Doubtful Accounts, Inventory Obsolescence and Product Recall, and Assessment ofthe Probability of the Outcome of our Current Litigation.***Significantmanagement judgments that affect the application of our revenue policy alsoinclude estimates of potential future product returns related to current periodproduct revenue. We analyze historical returns, current economic trends, andchannel inventories when evaluating the adequacy of the sales returns and otherallowances. Significant management judgments and estimates must be made andused in connection with establishing the sales returns and other allowances inany accounting period. Material differences may result in the amount and timingof our revenue for any period if management made different judgments orutilized different estimates.

We provide limited rightsof return to distributors and retailers for our Small Systems product lines. Weprovide appropriate reserves for returns at the time that related revenue isrecognized, based on historical patterns of returns and contractual provisionsin accordance with the provisions of Statement of Financial AccountingStandards No. 48, *Revenue RecognitionWhen Right of Return Exists*, and U.S. Securities and ExchangeCommission Staff Accounting Bulletin No. 104. Returns of Large Systemsproducts generally do not occur. Historically, returns have representedapproximately 3% of gross sales and have not differed significantly from priorestimates.

Similarly, we mustmake estimates of the uncollectability of our accounts receivable. Managementspecifically analyzes accounts receivable balances in view of customercredit-worthiness, customer concentrations, historical bad debts, currenteconomic trends, and changes in our customer payment terms when evaluating theadequacy of the allowance for doubtful accounts. A majority of U.S. and international customer balances continue to becovered by receivables insurance. Historically, write-offs of uncollectable accounts have represented less than 1%of net sales.

Our inventoryreserve estimate methodology involves quantifying the total inventory positionhaving potential loss exposure. Loss exposure generally results from severalbusiness factors, including product or component discontinuance, unplannedchanges in demand, product design changes, and factory transitions. Quantifyingsuch loss exposure is the result of combining the cost of inventoriesspecifically identified as having little or no opportunity for sale or use(thus available for physical disposition) plus the cost of inventories having ahigh risk of no future sale or use based upon an analysis of on-hand quantitiescompared to historical and anticipated future sale or use. We maintain anon-going business process for the physical disposition of inventoriespreviously identified. Inventory write-offs occur at the time of physicaldisposition. Inventories, once reserved, are not written back up as suchreserve adjustments are considered to be a permanent decrease to the cost basisof the excess or obsolete inventory. If actual market conditions are lessfavorable than those projected by management, additional inventory write-downsmay be required.

We are, and may inthe future become, involved in litigation involving our business, products oroperations. For pending claims for which there is an estimable range of lossgreater than zero, we record the best estimate of liability within the range.If no point within the range is considered the best estimate, we record theminimum estimated liability. Because of uncertainties related to theidentifiable range of loss on any pending claims, we may be unable to make areasonable estimate of the liability that could result from an unfavorableoutcome. As additional information becomes available, we assess the potentialliability related to our pending claims and revise our estimates. Suchrevisions in our estimates of the potential liability could materially impactour results of operation and financial position. The litigation process isinherently uncertain and includes the risk of an unexpected, unfavorableresult. We may be materially adversely impacted by any such litigation.

***Valuation ofLong-lived Tangible and Intangible Assets including Goodwill.***Weassess the impairment of long-lived tangible and intangible assets on anongoing basis and whenever events or changes in circumstances indicate that thecarrying value may not be recoverable. Should our assessment of long-lived andamortizable intangible assets suggest impairment, we would determinerecoverability based on an estimate of future undiscounted cash flows resultingfrom our use of the asset and its eventual disposition. Factors we considerthat could trigger an impairment review include the following:

26

----

 

·     significant underperformance relative toexpected historical or projected future operating results;

·                  significantchanges in the manner of our use of the acquired assets or the strategy for ouroverall business;

·                  significantnegative industry or economic trends; and

·                  significanttechnological changes, which would render equipment and manufacturing process,obsolete.

We evaluate eachof our reporting units with goodwill during the fourth quarter of each fiscalyear or more frequently if impairment indicators arise. Impairment losses aredetermined based upon the excess of carrying amounts over discounted expectedfuture cash flows of the underlying business.

***Accounting forIncome Taxes.***As part of the process of preparing ourconsolidated financial statements, we are required to estimate our income taxesin each of the jurisdictions in which we operate. This process involvesestimating our actual current tax exposure together with assessing temporarydifferences resulting from differing treatment of items, such as deferredrevenue, for tax and accounting purposes. These differences result in deferredtax assets and liabilities, which are included within our consolidated balancesheet. We must then assess the likelihood that our deferred tax assets will berecovered from future taxable income. Expectations about future taxable incomeincorporate numerous assumptions about actions, elections and strategies tominimize income taxes in future years. Our ability to take such actions, makepreferred elections and implement tax-planning strategies may be adverselyimpacted by enacted changes in tax laws and/or tax rates, as well as successfulchallenges by tax authorities resulting from differing interpretations of taxlaws and regulations.

APC is routinelyunder audit by federal, foreign, state, or local authorities in the areas ofincome taxes and the remittance of sales and use taxes. These audits includequestioning the timing and amount of deductions, the nexus of income amongvarious tax jurisdictions and compliance with federal, foreign, state, andlocal tax laws. In evaluating the exposure associated with various tax filingpositions, we often accrue for probable exposures. To the extent APC were toprevail in matters for which accruals have been established or were to berequired to pay amounts in excess of reserves, APC’s effective tax rate in agiven financial statement period could be materially affected.

To the extent we believethat recovery of deferred tax assets is not likely, we must establish avaluation allowance. To the extent we establish a valuation allowance orincrease this allowance in a period, we must include an expense within the taxprovision in the consolidated statements of income. Significant management judgmentis required in determining our provision for income taxes, our deferred taxassets and liabilities and any valuation allowance recorded against our netdeferred tax assets. At March 26, 2006 and December 31, 2005, weprovided a valuation allowance on certain of our deferred tax assets, primarilyconsisting of net operating losses generated in 2001 through the first quarterof 2006 for the start up and continuing operations of Brazilian operations,because of uncertainty regarding their realizability. The valuation allowanceis based on our estimates of taxable income by jurisdiction in which we operateand the period over which our deferred tax assets will be recoverable. In theevent that actual results differ from these estimates or we adjust these estimatesin future periods we may need to establish an additional valuation allowancewhich could materially impact our financial position and results of operations.

**RECENTLYISSUED ACCOUNTING STANDARDS**

We have determinedthat there are no recently issued accounting standards expected to have amaterial impact on APC’s consolidated financial position or results ofoperations.

27

----

 

**ITEM 3. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We, in the normalcourse of business, are exposed to market risks relating to fluctuations inforeign currency exchange rates. The information required under this sectionrelated to such risks is included in the *ForeignCurrency Activity* section of Management’s Discussion and Analysis ofFinancial Condition and Results of Operations in Item 2 of this report and isincorporated herein by reference.

We, in the normalcourse of business, are also exposed to market risks relating to fluctuationsin interest rates and the resulting rates of return on investments inmarketable securities. The information required under this section related tosuch risks is included in the *Other Income,Net* section of Management’s Discussion and Analysis of FinancialCondition and Results of Operations in Item 2 of this report and isincorporated herein by reference.

**ITEM 4. CONTROLS AND PROCEDURES**

**(A)      Evaluation of disclosure controls and procedures**

As of the end of the periodcovered by this report, management carried out an evaluation, under thesupervision and with the participation of APC’s Chief Executive Officer andChief Financial Officer, of the effectiveness of disclosure controls andprocedures as defined in Rule 13a-15(e) of the SecuritiesExchange Act of 1934, as amended. Based on such evaluation, the Chief ExecutiveOfficer and Chief Financial Officer have concluded that as of the end of theperiod covered by this report, APC’s disclosure controls and procedures wereeffective in timely alerting them to material information required to beincluded in APC’s periodic filings with the U.S. Securities and ExchangeCommission.

**(B)      Changes in internal control over financial reporting**

There were no changes inour internal control over financial reporting during APC’s last fiscal quarterthat have materially affected, or are reasonably likely to materially affect,APC’s internal control over financial reporting.

***Limitations Inherent in all Controls*****.**APC’s management, including ourChief Executive Officer and our Chief Financial Officer, recognize that ourdisclosure controls and our internal controls (discussed above) cannot preventall error or all attempts at fraud. Any controls system, no matter how wellcrafted and operated, can only provide reasonable, and not absolute, assuranceof achieving the desired control objectives, and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures. Because of the inherent limitations in anycontrol system, no evaluation or implementation of a control system can providecomplete assurance that all control issues and all possible instances of fraudhave been or will be detected.

28

----

 

**PART II- OTHER INFORMATION**

**ITEM 1. LEGALPROCEEDINGS**

APC is involved in claimsand legal actions arising in the ordinary course of business. While managementcurrently believes that resolving all pending legal matters, individually or inaggregate, will not have a material adverse impact on APC’s financial position,litigation and other claims are subject to inherent uncertainties, includingthe risk of an unfavorable outcome, and management’s view of these matters maychange in the future. An unfavorable outcome could include monetary damages or,in cases where injunctive relief is sought, an injunction prohibiting certainactivities. Were an unfavorable final outcome to occur, there exists thepossibility of a material adverse impact on APC’s financial position, cashflows and results of operations for the period in which the effect becomesreasonably estimable.

**ITEM 1A. RISKFACTORS**

**FACTORSTHAT MAY AFFECT FUTURE RESULTS**

This document containsforward-looking statements that involve risks and uncertainties, particularlyin the *Business Outlook* sectionof this MD&A. You can identify forward-looking statements by the use offorward-looking terminology including “believes,” “expects,” “may,” “will,” “should,”“seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates,” or “anticipates”or the negative of these words and phrases or other variations of these wordsand phrases or comparable terminology. Our actual results could differmaterially from those anticipated in these forward looking statements as aresult of certain factors, including the risks faced by us described below andelsewhere in this document.

We caution readersnot to place undue reliance on any such forward-looking statements, which speakonly as of the date they are made. We disclaim any obligation to publiclyupdate or revise any such statements to reflect any change in our expectationsor in events, conditions, or circumstances on which any such statements may bebased, or that may affect the likelihood that actual results will differ fromthose set forth in the forward-looking statements.

The factors thatcould cause actual results to differ materially include the following: APC’sability to improve the execution of its operations processes and eliminateoperational waste and excess expense; depending on market circumstances, APCmay not complete its previously approved stock repurchase program; the impactof increasing competition which could adversely affect APC’s revenues andprofitability; the impact of foreign currency exchange rate fluctuations; theimpact on demand, component availability and pricing, and logistics, and thedisruption of manufacturing operations that result from labor disputes, war,acts of terrorism or political instability; ramp up, expansion, transfer andrationalization of global manufacturing capacity; the potential impact ofcomplying with changing environmental regulations; impact on order managementand fulfillment, financial reporting and supply chain management processes as aresult of APC’s reliance on a variety of computer systems; the discovery of alatent defect in any of APC’s products; APC’s ability to effectively alignoperating expenses and production capacity with the current demand environment;general worldwide economic conditions, and, in particular, the possibility thatthe PC and related markets decline; growth rates in the power protectionindustry and related industries; product mix changes and the potential negativeimpact on gross margins from such changes; changes in the seasonality of demandpatterns; inventory risks due to shifts in market demand; componentconstraints, shortages, pricing and quality; risk of nonpayment of accountsreceivable; the uncertainty of the litigation process including risk of anunexpected, unfavorable result of current or future litigation; and the risksdescribed from time to time in APC’s filings with the Securities and ExchangeCommission.

For a discussionof these and other risk factors, please refer to “Item 1A. Risk Factors”included in our Annual Report on Form 10-K for the year ended December 31,2005.

29

----

 

**ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

The following table summarizesinformation relating to purchases made by APC of shares of our common stockduring the first quarter ended March 26, 2006.

**ISSUER PURCHASES OF EQUITY SECURITIES**

 
| **Period**                                       | ** ** | **Total  Number  of Shares  Purchased**                         | ** ** | **Average  Price  Paid per  Share** | ** ** | **Total Number  of Shares  Purchased as  Part of  Publicly  Announced  Plans or  Programs** | ** ** | **Approximate  Dollar Value  of Shares  that May Yet  Be Purchased  Under the  Plans or  Programs** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **(In thousands except per share amounts)** | ** ** |
| January 1, 2006 to January 22, 2006    |       | —                                                               |       | $                                        | —     |                                                                                                                 | —     |                                                                                                                                   | $          | — |   |
| January 23,  2006 to February 19, 2006 |       | 970                                                                  |       | $                                        | 20.20      |                                                                                                                 | 970        |                                                                                                                                   | $          | 180,389 |   |
| February 20,  2006 to March 26, 2006   |       | 2,474                                                                |       | $                                        | 20.46      |                                                                                                                 | 2,474      |                                                                                                                                   | $          | 149,335 |   |
| Total                                            |       | 3,444                                                                |       | $                                        | 20.39      |                                                                                                                 | 3,444      |                                                                                                                                   | $          | 129,723 |   |

 

On February 1, 2006,APC’s Board of Directors approved a stock repurchase program which authorizesup to $200 million to repurchase outstanding shares of APC’s common stock. Thepurchases would be made on the open market based on market and businessfactors. APC commenced the repurchase of its common stock in February 2006and, as of the end of the first quarter, had repurchased approximately 3.4million shares on the open market at an average price of approximately $20.39per share (compared to a volume weighted average price of $20.40 per share),totaling $70 million. The duration of the repurchase program is two years butmay be suspended or discontinued at any time without prior notice.

30

----

 

**ITEM 6. EXHIBITS**
| Exhibit No. 3.01 | Articles of Organization of APC, as amended,  previously filed as an exhibit to APC’s Quarterly Report on Form 10-Q  for the fiscal quarter ended June 27, 1999 and incorporated herein by  reference (File No. 1-12432)                           |
|----------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit No. 3.02 | By-Laws of APC, as  amended and restated, previously filed as an exhibit to APC’s Annual Report  on Form 10-K for the fiscal year ended December 31, 1998 and  incorporated herein by reference (File No. 1-12432)                                 |
| Exhibit No. 31.1 | Certification of Rodger  B. Dowdell, Jr., Chief Executive Officer, pursuant to Rules 13a-14(a) and  15d-14(a) of the Securities Exchange Act of 1934, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed  herewith) |
| Exhibit No. 31.2 | Certification of  Richard J. Thompson, Chief Financial Officer, pursuant to Rules 13a-14(a) and  15d-14(a) of the Securities Exchange Act of 1934, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed  herewith)         |
| Exhibit No. 32.1 | Certification of Rodger  B. Dowdell, Jr., Chief Executive Officer, pursuant to Rules 13a-14(b) and  15d-14(b) of the Securities Exchange Act of 1934, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed  herewith) |
| Exhibit No. 32.2 | Certification of  Richard J. Thompson, Chief Financial Officer, pursuant to Rules 13a-14(b) and  15d-14(b) of the Securities Exchange Act of 1934, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed  herewith)         |

 

31

----

**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

**AMERICANPOWER CONVERSION CORPORATION**

Date:  May 5, 2006
|  |   | /s/ Richard J. Thompson |   |   |
|--|--------|-------------------------|--------|--------|

Richard J. Thompson*Chief Financial Officer**(Principal Accounting And Financial Officer)*

32

----

 

**AMERICANPOWER CONVERSION CORPORATION AND SUBSIDIARIES**

**EXHIBIT INDEX**

 
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                       | ** ** | **Page  No.** |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|
|            |       |                                                                                                                                                                                                                                                                  |       |          |
| 3.01            |       | Articles of Organization of APC, as amended,  previously filed as an exhibit to APC’s Quarterly Report on Form 10-Q  for the fiscal quarter ended June 27, 1999 and incorporated herein by  reference (File No. 1-12432)                          |       |          |
|            |       |                                                                                                                                                                                                                                                                  |       |          |
| 3.02            |       | By-Laws of APC, as amended and restated, previously  filed as an exhibit to APC’s Annual Report on Form 10-K for the  fiscal year ended December 31, 1998 and incorporated herein by reference  (File No. 1-12432)                                |       |          |
|            |       |                                                                                                                                                                                                                                                                  |       |          |
| 31.1            |       | Certification of Rodger B. Dowdell, Jr., Chief  Executive Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of  the Securities Exchange Act of 1934, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 (filed herewith) |       | 34            |
|            |       |                                                                                                                                                                                                                                                                  |       |          |
| 31.2            |       | Certification of Richard J. Thompson, Chief  Financial Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of  the Securities Exchange Act of 1934, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 (filed herewith)         |       | 35            |
|            |       |                                                                                                                                                                                                                                                                  |       |          |
| 32.1            |       | Certification of Rodger B. Dowdell, Jr., Chief  Executive Officer, pursuant to Rules 13a-14(b) and 15d-14(b) of  the Securities Exchange Act of 1934, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 (filed herewith) |       | 36            |
|            |       |                                                                                                                                                                                                                                                                  |       |          |
| 32.2            |       | Certification of Richard J. Thompson, Chief Financial  Officer, pursuant to Rules 13a-14(b) and 15d-14(b) of  the Securities Exchange Act of 1934, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 (filed herewith)         |       | 37            |

 

33

----