**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

** **

**(Mark One)**
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                        |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                    |
| ** ** | ** ** | **For the  quarterly period ended September 25, 2005**                                                                                                                                                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                                                                          |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                          |
| ** ** | ** ** | **For the  transition period from                          to                        ** |

 

**Commission File Number: 1-12432**

 

**AMERICAN POWER CONVERSIONCORPORATION**

(Exact name of registrant as specified in its charter)

 
| **MASSACHUSETTS**                                                | ** ** | **04-722013**                         |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. employer  identification no.) |

 

**132 FAIRGROUNDS ROAD, WEST KINGSTON,RHODE ISLAND 02892**

**401-789-5735**

(Address and telephone number of principal executive offices)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

YES  ý       NOo

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

YES  ý       NO o

 

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

YES  o       NO ý

 

Registrant’s Common Stock outstanding, $0.01 par value, at October 24,2005 –195,311,000 shares

 

 

----

 

FORM 10-Q

September 25, 2005

 

**AMERICAN POWER CONVERSION CORPORATION**

 

**INDEX**

 
| **Part I - Financial Information:** |       |
|------------------------------------------|------------|
|                                     |       |   |   |
|                                     | Item 1.    | Consolidated Condensed Financial  Statements: |   |
|                                     |       | Consolidated Condensed  Balance Sheets -  September 25, 2005 and December 31, 2004 (Unaudited) |   |
|                                     |       |   |   |
|                                     |       | Consolidated Condensed  Statements of Income -  Three Months and Nine Months Ended  September 25, 2005 and September 26, 2004 (Unaudited) |   |
|                                     |       |   |   |
|                                     |       | Consolidated Condensed  Statements of Cash Flows -  Three Months and Nine Months Ended  September 25, 2005 and September 26, 2004 (Unaudited) |   |
|                                     |       |   |   |
|                                     |       | Notes to Consolidated Condensed  Financial Statements (Unaudited) |   |
|                                     |       |   |   |
|                                     | Item 2.    | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
|                                     |       |   |   |
|                                     | Item 3.    | Quantitative and Qualitative  Disclosures About Market Risk |   |
|                                     |       |   |   |
|                                     | Item 4.    | Controls and Procedures |   |
|                                     |       |   |   |
| **Part II - Other Information:**    | ** ** |
| ** **                               | ** ** | ** ** | ** ** |
|                                     | Item 1.    | Legal Proceedings |   |
|                                     |       |   |   |
|                                     | Item 6.    | Exhibits |   |
|                                     |       |   |   |
| **Signatures**                           |       |   |
|                                     |       |   |
| **Exhibit Index**                   | ** ** | ** ** |

 

2

----

 

**PART I - FINANCIALINFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

**AMERICAN POWER CONVERSION CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED CONDENSED BALANCESHEETS**

***In thousands except per share amount***

***(Unaudited)***

 

**ASSETS**

 
| ** **                                                                                        | ** ** | **September 25,  2005** | ** **    | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------|---------------|-----------------------------|------------|
| Current assets:                                                                                   |       |                         |          |                        |       |
| Cash and cash equivalents                                                                         | ** ** | **$**                        | **161,501**   |                        | $          | 72,721 |   |
| Short term investments (Note 4)                                                                   | ** ** | **622,902**                  |          | 642,853                     |       |
| Accounts receivable, less allowance for doubtful accounts  of $16,737 in 2005 and $16,180 in 2004 | ** ** | **386,101**                  |          | 327,547                     |       |
| Inventories:                                                                                      | ** ** | ** **                   | ** **    | ** **                  | ** ** |
| Raw materials                                                                                     | ** ** | **197,974**                  |          | 212,883                     |       |
| Work-in-process and finished goods                                                                | ** ** | **289,250**                  |          | 253,044                     |       |
| Total inventories                                                                                 | ** ** | **487,224**                  |          | 465,927                     |       |
|                                                                                              |       |                         |          |                        |       |
| Prepaid expenses and other current assets                                                         | ** ** | **53,817**                   |          | 39,294                      |       |
| Deferred income taxes                                                                             | ** ** | **57,597**                   |          | 57,018                      |       |
|                                                                                              |       |                         |          |                        |       |
| Total current assets                                                                              | ** ** | **1,769,142**                |          | 1,605,360                   |       |
|                                                                                              |       |                         |          |                        |       |
| Property, plant and equipment:                                                                    |       |                         |          |                        |       |
| Land, buildings and improvements                                                                  | ** ** | **70,740**                   |          | 69,371                      |       |
| Machinery and equipment                                                                           | ** ** | **224,977**                  |          | 217,462                     |       |
| Office equipment, furniture and fixtures                                                          | ** ** | **98,049**                   |          | 92,452                      |       |
| Purchased software                                                                                | ** ** | **48,630**                   |          | 40,817                      |       |
| ** **                                                                                        |       | **442,396**                  |          | 420,102                     |       |
| Less accumulated depreciation and amortization                                                    | ** ** | **287,996**                  |          | 265,251                     |       |
| Net property, plant and equipment                                                                 | ** ** | **154,400**                  |          | 154,851                     |       |
|                                                                                              |       |                         |          |                        |       |
| Long term investments (Note 4)                                                                    | ** ** | **493**                      |          | 5,542                       |       |
| Goodwill (Note 5)                                                                                 | ** ** | **7,179**                    |          | 7,179                       |       |
| Other intangibles, net (Note 5)                                                                   | ** ** | **30,752**                   |          | 39,627                      |       |
| Deferred income taxes                                                                             | ** ** | **36,750**                   |          | 28,687                      |       |
| Other assets                                                                                      | ** ** | **5,637**                    |          | 2,626                       |       |
|                                                                                              |       |                         |          |                        |       |
| Total assets                                                                                      | ** ** | **$**                        | **2,004,353** |                        | $          | 1,843,872 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

3

----

 

**LIABILITIES AND SHAREHOLDERS’ EQUITY**

 
| ** **                                                                                                                            | ** ** | **September 25,  2005** | ** **    | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|---------------|-----------------------------|------------|
| Current liabilities:                                                                                                                  |       |                         |          |                        |       |
| Accounts payable                                                                                                                      | ** ** | **$**                        | **142,831**   |                        | $          | 132,213 |   |
| Accrued compensation                                                                                                                  | ** ** | **44,586**                   |          | 43,869                      |       |
| Accrued sales and marketing programs                                                                                                  | ** ** | **51,546**                   |          | 43,209                      |       |
| Accrued warranty (Note 6)                                                                                                             | ** ** | **12,309**                   |          | 13,092                      |       |
| Other accrued expenses                                                                                                                | ** ** | **50,460**                   |          | 46,929                      |       |
| Deferred revenue                                                                                                                      | ** ** | **39,402**                   |          | 35,522                      |       |
| Income taxes payable                                                                                                                  | ** ** | **18,874**                   |          | 11,330                      |       |
|                                                                                                                                  |       |                         |          |                        |       |
| Total current liabilities                                                                                                             | ** ** | **360,008**                  |          | 326,164                     |       |
|                                                                                                                                  |       |                         |          |                        |       |
| Deferred tax liability                                                                                                                | ** ** | **16,350**                   |          | 15,449                      |       |
|                                                                                                                                  |       |                         |          |                        |       |
| Total liabilities                                                                                                                     | ** ** | **376,358**                  |          | 341,613                     |       |
|                                                                                                                                  |       |                         |          |                        |       |
| Shareholders’ equity (Notes 7, 8, 9 and 10):                                                                                     |       |                         |          |                        |       |
| Common stock, $0.01 par value; authorized 450,000  shares in 2005 and 2004; issued 195,300 shares in 2005 and 192,137 shares in  2004 | ** ** | **1,953**                    |          | 1,921                       |       |
| Additional paid-in capital                                                                                                            | ** ** | **117,973**                  |          | 60,081                      |       |
| Retained earnings                                                                                                                     | ** ** | **1,506,155**                |          | 1,437,691                   |       |
| Accumulated other comprehensive income                                                                                                | ** ** | **1,914**                    |          | 2,566                       |       |
|                                                                                                                                  |       |                         |          |                        |       |
| Total shareholders’ equity                                                                                                       | ** ** | **1,627,995**                |          | 1,502,259                   |       |
|                                                                                                                                  |       |                         |          |                        |       |
| Total liabilities and shareholders’ equity                                                                                       | ** ** | **$**                        | **2,004,353** |                        | $          | 1,843,872 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

4

----

 

**AMERICAN POWER CONVERSION CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTSOF INCOME**

***In thousands except earnings per share***

***(Unaudited)***

 
| ** **                                      | ** ** | **Nine months ended**  | ** **    | **Three months ended** | ** ** |
|-------------------------------------------------|------------|------------------------|---------------|------------------------|------------|
| ** **                                      | ** ** | **September 25,** | ** **    | **September 26,** | ** ** | **September 25,** | ** ** | **September 26,** | ** ** |
| ** **                                      | ** ** | **2005**               | ** **    | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                            |       |                   |          |                   |       |   |   |   |   |
| Net sales (Note  11)                            | ** ** | **$**                  | **1,400,898** |                   | $          | 1,189,085 | ** ** | **$** | **512,289** |   | $ | 441,671 |   |
|                                            |       |                   |          |                   |       |   |   |   |   |
| Cost of goods  sold                             | ** ** | **869,526**            |          | 713,785                | ** ** | **323,633** |   | 264,985 |   |
|                                            |       |                   |          |                   |       |   |   |   |   |
| Gross profit                                    | ** ** | **531,372**            |          | 475,300                | ** ** | **188,656** |   | 176,686 |   |
|                                            |       |                   |          |                   |       |   |   |   |   |
| Operating  expenses:                            |       |                   |          |                   |       |   |   |   |   |
| Marketing,  selling, general and administrative | ** ** | **314,474**            |          | 276,455                | ** ** | **108,276** |   | 95,623 |   |
| Research and  development                       | ** ** | **65,175**             |          | 61,611                 | ** ** | **22,200** |   | 21,762 |   |
|                                            |       |                   |          |                   |       |   |   |   |   |
| Total operating  expenses                       | ** ** | **379,649**            |          | 338,066                | ** ** | **130,476** |   | 117,385 |   |
|                                            |       |                   |          |                   |       |   |   |   |   |
| Operating income                                | ** ** | **151,723**            |          | 137,234                | ** ** | **58,180** |   | 59,301 |   |
|                                            |       |                   |          |                   |       |   |   |   |   |
| Other income,  net                              | ** ** | **14,431**             |          | 6,463                  | ** ** | **5,448** |   | 2,475 |   |
|                                            |       |                   |          |                   |       |   |   |   |   |
| Earnings before  income taxes                   | ** ** | **166,154**            |          | 143,697                | ** ** | **63,628** |   | 61,776 |   |
|                                            |       |                   |          |                   |       |   |   |   |   |
| Income tax  expense (benefit)                   | ** ** | **39,559**             |          | 15,090                 | ** ** | **14,953** |   | (5,390 | ) |
|                                            |       |                   |          |                   |       |   |   |   |   |
| Net income                                      | ** ** | **$**                  | **126,595**   |                   | $          | 128,607 | ** ** | **$** | **48,675** |   | $ | 67,166 |   |
|                                            |       |                   |          |                   |       |   |   |   |   |
| Basic earnings  per share                       | ** ** | **$**                  | **0.65**      |                   | $          | 0.65 | ** ** | **$** | **0.25** |   | $ | 0.34 |   |
|                                            |       |                   |          |                   |       |   |   |   |   |
| Basic weighted  average shares outstanding      | ** ** | **193,588**            |          | 198,649                | ** ** | **194,890** |   | 195,925 |   |
|                                            |       |                   |          |                   |       |   |   |   |   |
| Diluted earnings  per share                     | ** ** | **$**                  | **0.63**      |                   | $          | 0.63 | ** ** | **$** | **0.24** |   | $ | 0.34 |   |
|                                            |       |                   |          |                   |       |   |   |   |   |
| Diluted weighted  average shares outstanding    | ** ** | **199,686**            |          | 203,472                | ** ** | **200,740** |   | 199,208 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

5

----

 

**AMERICAN POWER CONVERSION CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTSOF CASH FLOWS**

***In thousands***

***(Unaudited)***

 
| ** **                                                                         | ** ** | **Nine months ended**        |        | **Three months ended**       | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------|-------------|------------------------------|------------|
| ** **                                                                         | ** ** | **September 25,  2005** | ** **  | **September 26,  2004** |       | **September 25,  2005** | ** ** | **September 26,  2004** | ** ** |
| ***Cash  flows from operating activities***                                        |       |                         | ** **  |                         |       |   | ** ** |   |   |
| Net income                                                                         | ** ** | **$**                        | **126,595** | ** **                   | $          | 128,607 |   | **$** | **48,675** | ** ** | $ | 67,166 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                         | ** **  |                         |       |   | ** ** |   |   |
| Depreciation and amortization of property, plant and  equipment                    | ** ** | **27,808**                   | ** **  | 27,349                       |       | **9,418** | ** ** | 9,055 |   |
| Loss on disposal of property, plant and equipment                                  | ** ** | **—**                   | ** **  | 776                          |       | **—** | ** ** | 776 |   |
| Amortization of other intangibles                                                  | ** ** | **8,843**                    | ** **  | 8,713                        |       | **2,948** | ** ** | 2,916 |   |
| Provision for doubtful accounts                                                    | ** ** | **1,748**                    | ** **  | (1,090                       | )          | **1,090** | ** ** | (1,231 | ) |
| Provision for inventories                                                          | ** ** | **8,373**                    | ** **  | 17,476                       |       | **5,052** | ** ** | 13,000 |   |
| Compensation expense – Restricted Stock Units                                 | ** ** | **6,853**                    | ** **  | —                       |       | **1,161** | ** ** | — |   |
| Deferred income taxes                                                              | ** ** | **(7,740**                   | **)**       | (6,092                       | )          | **(3,311** | **)** | 4,040 |   |
| Other non-cash items, net                                                          | ** ** | **(652**                     | **)**       | 1,957                        |       | **253** | ** ** | 142 |   |
| Changes in operating assets and liabilities:                                       |       |                         | ** **  |                         |       |   | ** ** |   |   |
| Accounts receivable                                                                | ** ** | **(60,302**                  | **)**       | (42,437                      | )          | **(28,982** | **)** | (35,694 | ) |
| Inventories                                                                        | ** ** | **(29,670**                  | **)**       | (80,029                      | )          | **(21,720** | **)** | (21,718 | ) |
| Prepaid expenses and other current assets                                          | ** ** | **(14,523**                  | **)**       | (12,456                      | )          | **(6,052** | **)** | (8,047 | ) |
| Other assets                                                                       | ** ** | **(2,980**                   | **)**       | (1,552                       | )          | **(806** | **)** | (1,355 | ) |
| Accounts payable                                                                   | ** ** | **10,618**                   | ** **  | 29,600                       |       | **7,331** | ** ** | 6,782 |   |
| Accrued expenses                                                                   | ** ** | **15,682**                   | ** **  | 22,740                       |       | **18,686** | ** ** | 17,913 |   |
| Income taxes payable                                                               | ** ** | **18,136**                   | ** **  | (9,178                       | )          | **8,177** | ** ** | (17,249 | ) |
| Net cash provided by operating activities                                          | ** ** | **108,789**                  | ** **  | 84,384                       |       | **41,920** | ** ** | 36,496 |   |
|                                                                               |       |                         | ** **  |                         |       |   | ** ** |   |   |
| ***Cash flows from investing  activities***                                        |       |                         | ** **  |                         |       |   | ** ** |   |   |
| Purchases of held-to-maturity securities                                           | ** ** | **(710,849**                 | **)**       | (520,348                     | )          | **(86,005** | **)** | (275,018 | ) |
| Maturities of held-to-maturity securities                                          | ** ** | **702,475**                  | ** **  | 393,150                      |       | **54,178** | ** ** | 226,966 |   |
| Purchases of available-for-sale securities                                         | ** ** | **(1,525,260**               | **)**       | (2,176,400                   | )          | **(599,735** | **)** | (553,050 | ) |
| Sales of available-for-sale securities                                             | ** ** | **1,558,634**                | ** **  | 2,377,550                    |       | **647,604** | ** ** | 732,875 |   |
| Capital expenditures                                                               | ** ** | **(27,357**                  | **)**       | (22,959                      | )          | **(12,042** | **)** | (10,492 | ) |
| Proceeds from sale of property, plant and equipment                                | ** ** | **—**                   | ** **  | 787                          |       | **—** | ** ** | 787 |   |
| Net cash (used in) provided by investing activities                                | ** ** | **(2,357**                   | **)**       | 51,780                       |       | **4,000** | ** ** | 122,068 |   |
|                                                                               |       |                         | ** **  |                         |       |   | ** ** |   |   |
| ***Cash flows from financing  activities***                                        |       |                         | ** **  |                         |       |   | ** ** |   |   |
| Proceeds from issuances of common stock                                            | ** ** | **40,479**                   | ** **  | 9,201                        |       | **12,972** | ** ** | 2,345 |   |
| Dividends paid on common stock                                                     | ** ** | **(58,131**                  | **)**       | (51,309                      | )          | **(19,510** | **)** | (19,291 | ) |
| Purchases of common stock                                                          | ** ** | **—**                   | ** **  | (150,000                     | )          | **—** | ** ** | (150,000 | ) |
| Net cash used in financing activities                                              | ** ** | **(17,652**                  | **)**       | (192,108                     | )          | **(6,538** | **)** | (166,946 | ) |
|                                                                               |       |                         | ** **  |                         |       |   | ** ** |   |   |
| Net change in cash and cash equivalents                                            | ** ** | **88,780**                   | ** **  | (55,944                      | )          | **39,382** | ** ** | (8,382 | ) |
| Cash and cash equivalents at beginning of period                                   | ** ** | **72,721**                   | ** **  | 141,214                      |       | **122,119** | ** ** | 93,652 |   |
| Cash and cash equivalents at end of period                                         | ** ** | **$**                        | **161,501** | ** **                   | $          | 85,270 |   | **$** | **161,501** | ** ** | $ | 85,270 |   |
|                                                                               |       |                         | ** **  |                         |       |   | ** ** |   |   |
| ***Supplemental cash flow  disclosures***                                          |       |                         | ** **  |                         |       |   | ** ** |   |   |
| Cash paid during the period for:                                                   |       |                         | ** **  |                         |       |   | ** ** |   |   |
| Income taxes (net of refunds)                                                      | ** ** | **$**                        | **23,810**  | ** **                   | $          | 27,980 |   | **$** | **9,827** | ** ** | $ | 11,202 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

6

----

 

**AMERICAN POWER CONVERSION CORPORATION ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED CONDENSEDFINANCIAL STATEMENTS**

***(Unaudited)***

 

**1.****              ManagementRepresentation**

 

The accompanying unaudited consolidated condensed financial statementsshould be read in conjunction with the consolidated financial statementsincluded in the American Power Conversion Corporation (APC) Annual Report on Form 10-Kfor the year ended December 31, 2004. 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.****              Restructuring**

 

In early 2002, APC announced global headcount reductions which impactedpersonnel worldwide, principally in the U.S., U.K., Ireland, and thePhilippines, throughout a broad range of functions within the organization. Themajority of these terminations were the result of APC’s decision to consolidateits Philippines-based manufacturing operations, resulting in the closing of APC’smanufacturing facility in the province of Laguna. Such restructuring actionswere announced during the first quarter of 2002 and substantially completed bythe end of 2002.

 

In the first quarter of 2002, APC recorded $7.3 million of relatedrestructuring costs of which $4.8 million and $2.5 million were classified incost of goods sold and operating expenses, respectively. These costs includedthe effects of approximately 941 employee terminations, principally 54% inmanufacturing, 14% in sales, and 13% in research and development, based onseverance agreements, as well as facilities closures in the Philippines, U.S.and U.K., and the related impairment of tangible assets, principally buildingsand manufacturing equipment, based on management’s assessment of market data.These costs were not allocated to APC’s operating segments, but rather wereclassified as indirect operating expenses for segment reporting consistent withAPC’s classification for its internal financial reporting. In connection withAPC’s decision to consolidate its Philippines-based manufacturing operations,APC closed manufacturing facilities located in the Philippines province ofLaguna, in Maryland, and also in the U.K. In connection with the closure of aleased facility in the U.K., APC recognized a lease liability during the firstquarter of 2002. All related restructuring liabilities were fully settledduring the first quarter ended March 27, 2005.

 

7

----

 

**4.****              Investments**

 

APCinvests its excess cash principally in certificates of deposit, corporate andmunicipal bonds and notes, U.S. government agency securities, and auction ratesecurities. APC classifies as short term its investments with originalmaturities greater than three months and less than or equal to one year, and aslong term its investments with remaining maturities greater than one year andless than or equal to two years. APC has no investments with maturity datesgreater than two years, except for auction rate securities. Auction ratesecurities have long-term underlying maturities, however the market is highlyliquid and the interest rates reset every 7, 28 or 35 days. APC classifies itsauction rate securities as short term available-for-sale securities. Managementdetermines the appropriate classification of securities at the time of purchaseand re-evaluates such designation as of each balance sheet date. Securities areclassified as held-to-maturity when APC has the positive intent and ability tohold such securities to maturity. Held-to-maturity securities are carried atamortized cost. Available-for-sale securities are recorded at fair value withnet unrealized gains and losses reported, net of income taxes, in othercomprehensive income.

 

At September 25, 2005 and December 31,2004, APC’s held-to-maturity investments included $454.2 million and $440.3million, respectively, with contractual maturities of one year or less. At December 31,2004, APC’s held-to-maturity investments included $5.5 million with contractualmaturities between one to two years; at September 25, 2005, there were nocontractual maturities between one to two years. APC’s available-for-saleauction rate securities included $128.8 million and $95.0 million,respectively, with contractual maturities between 8 to 40 years.

 

Proceedsfrom the sales of investment securities available-for-sale were $647.6 millionand $732.9 million in the third quarters of 2005 and 2004, respectively, andwere $1.559 billion and $2.378 billion in the first nine months of 2005 and2004, respectively.

 
| ** **                         | ** ** | **Amortized  Cost** | ** **  | **Gross Unrealized  Holding Gains** | ** ** | **Gross Unrealized  Holding Losses** | ** ** | **Fair  Value** | ** ** |
|------------------------------------|------------|---------------------|-------------|-------------------------------------|------------|--------------------------------------|------------|-----------------|------------|
| ** **                         | ** ** | **(In thousands)**  | ** **  |
| **At September 25,  2005**    |       |                |        |                                |       |                                 |       |            |       |
|                               |       |                |        |                                |       |                                 |       |            |       |
| **Held-to-maturity**               | ** ** | ** **          | ** **  | ** **                          | ** ** | ** **                           | ** ** | ** **      | ** ** |
| Certificates of  deposit           | ** ** | **$**               | **361,116** | ** **                          | **$**      | **—**                           | ** ** | **$**           | **—** | ** ** | **$** | **361,116** | ** ** |
| Corporate bonds  and notes         | ** ** | **88,036**          | ** **  | **—**                          | ** ** | **—**                           | ** ** | **88,036**      | ** ** |
| U.S. government  agency securities | ** ** | **5,000**           | ** **  | **—**                          | ** ** | **(11**                              | **)**      | **4,989**       | ** ** |
| ** **                         | ** ** | **454,152**         | ** **  | **—**                          | ** ** | **(11**                              | **)**      | **454,141**     | ** ** |
| **Available-for-sale**             |       |                |        |                                |       |                                 |       |            |       |
| Auction rate  securities           | ** ** | **168,750**         | ** **  | **—**                          | ** ** | **—**                           | ** ** | **168,750**     | ** ** |
| Equity  investments                | ** ** | **493**             | ** **  | **—**                          |       | —                               | ** ** | **493**         | ** ** |
| ** **                         | ** ** | **169,243**         | ** **  | **—**                          | ** ** | **—**                           | ** ** | **169,243**     | ** ** |
| ** **                         | ** ** | ** **          | ** **  | ** **                          | ** ** | ** **                           | ** ** | ** **      | ** ** |
| ** **                         | ** ** | **$**               | **623,395** | ** **                          | **$**      | **—**                           | ** ** | **$**           | **(11**    | **)** | **$** | **623,384** | ** ** |
| **At December 31,  2004**     |       |                |        |                                |       |                                 |       |            |       |
|                               |       |                |        |                                |       |                                 |       |            |       |
| **Held-to-maturity**               | ** ** | ** **          | ** **  | ** **                          | ** ** | ** **                           | ** ** | ** **      | ** ** |
| Certificates of  deposit           |       | $                   | 127,241     |                                | $          | —                               |       | $               | —     |   | $ | 127,241 |   |
| Corporate bonds  and notes         |       | 283,573             |        | 6                                   |       | (1                                   | )          | 283,578         |       |
| U.S. government  agency securities |       | 35,000              |        | —                              |       | (106                                 | )          | 34,894          |       |
|                               |       | 445,814             |        | 6                                   |       | (107                                 | )          | 445,713         |       |
| **Available-for-sale**             |       |                |        |                                |       |                                 |       |            |       |
| Auction rate  securities           |       | 202,075             |        | —                              |       | —                               |       | 202,075         |       |
| Equity  investments                |       | 506                 |        | —                              |       | —                               |       | 506             |       |
|                               |       | 202,581             |        | —                              |       | —                               |       | 202,581         |       |
|                               |       |                |        |                                |       |                                 |       |            |       |
|                               |       | $                   | 648,395     |                                | $          | 6                                    |       | $               | (107       | ) | $ | 648,294 |   |

 

8

----

 

**5.****              Goodwilland Other Intangible Assets**

 

At each of September 25,2005 and December 31, 2004, goodwill of $7.2 million was associated withthe Small Systems segment. Amortized intangible assets were as follows:

 
| ** **                         | ** ** | ** **                                  | ** ** | **September 25, 2005** | ** ** | **December 31, 2004**    | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| **Amortized  Intangible  Assets**  | ** ** | **Weighted  Average  Amortization  Period** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                         | ** ** | **(In thousands)**                          | ** ** |
| Technology                         |       | 6 years                                     | ** ** | **$**                       | **81,007** | ** **                    | **$**      | **52,542** |   | $ | 81,040 |   | $ | 45,071 |   |
| Customer lists                     |       | 5 years                                     | ** ** | **8,900**                   | ** ** | **7,218**                     |       | 8,900 |   | 6,210 |   |
| Tradenames                         |       | 5 years                                     | ** ** | **3,157**                   | ** ** | **2,552**                     |       | 3,157 |   | 2,189 |   |
| Total amortized  intangible assets |       | 6 years                                     | ** ** | **$**                       | **93,064** | ** **                    | **$**      | **62,312** |   | $ | 93,097 |   | $ | 53,470 |   |

 

Aggregate amortization expense related to APC’s other intangible assetsfor the third quarters of 2005 and 2004 was $2.9 million and $2.9 million,respectively, and for the first nine months of 2005 and 2004 was $8.8 millionand $8.7 million, respectively. Estimated aggregated amortization for each ofthe next five succeeding fiscal years is $11.8 million for 2005, $11.8 millionfor 2006, $9.6 million for 2007, $5.2 million for 2008, and $1.2 million for2009. There are no expected residual values related to these intangible assets.

 

**6.****              WarrantyLiability and Product Recall**

 
| ** **               | ** ** | **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)**                                         | ** ** |
| **Third  Quarter 2005**  | ** ** | **$**                                                      | **11,683** | ** **                                                            | **$**      | **6,895**                                                 | ** ** | **$**                  | **—** | ** **                                           | **$**      | **(6,269** | **)** | **$** | **12,309** | ** ** |
| **Second  Quarter 2005** | ** ** | **$**                                                      | **12,012** | ** **                                                            | **$**      | **9,189**                                                 | ** ** | **$**                  | **—** | ** **                                           | **$**      | **(9,518** | **)** | **$** | **11,683** | ** ** |
| **First  Quarter 2005**  | ** ** | **$**                                                      | **13,092** | ** **                                                            | **$**      | **5,334**                                                 | ** ** | **$**                  | **—** | ** **                                           | **$**      | **(6,414** | **)** | **$** | **12,012** | ** ** |
|                     |       |                                                       |       |                                                                  |       |                                                      |       |                   |       |                                                 |       |
| **Third  Quarter 2004**  |       | $                                                          | 11,934     |                                                                  | $          | 5,418                                                     |       | $                      | —     |                                                 | $          | (4,870 | ) | $ | 12,482 |   |
| **Second  Quarter 2004** |       | $                                                          | 12,001     |                                                                  | $          | 5,001                                                     |       | $                      | —     |                                                 | $          | (5,068 | ) | $ | 11,934 |   |
| **First  Quarter 2004**  |       | $                                                          | 11,709     |                                                                  | $          | 6,291                                                     |       | $                      | —     |                                                 | $          | (5,999 | ) | $ | 12,001 |   |

 

***ProductRecall.***  In early2003, APC announced a product recall due to potential safety issues. The totalnumber of affected devices recalled worldwide is approximately 2.1 million withapproximately 900,000 devices recalled in the United States. The recall islimited to two specific models in APC’s Back-UPS® CS product line, the Back-UPSCS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt models.

 

As of September 25,2005, APC had incurred approximately 93% of currently estimated total recallcosts of $14.1 million. Our estimation of remaining recall costs of $1.0million, principally for U.S. recall activity, continues to be subject toactual return rates and per unit repair costs (which can vary by country) aswell as estimates for other recall-related costs expected to be incurred. Weexpect that future amounts will not differ materially from our currentestimates.

 

9

----

 

**7.****              EarningsPer Share**

 

Basic earnings per shareis computed by dividing net income by the weighted average number of commonshares outstanding during the period. Diluted earnings per share is computed bydividing net income by the weighted average number of common shares anddilutive potential common shares outstanding during the period. Under thetreasury stock method, the unexercised options are assumed to be exercised andthe unvested restricted stock units are assumed to be vested at the beginningof the 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.

 
| ** **                                                                                                                    | ** ** | **Nine months ended**        | ** ** | **Three months ended**       | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                    | ** ** | **September 25,  2005** | ** ** | **September 26,  2004** | ** ** | **September 25,  2005** | ** ** | **September 26,  2004** | ** ** |
| ** **                                                                                                                    | ** ** | **(In thousands)**           | ** ** |
| Basic weighted average shares outstanding                                                                                     | ** ** | **193,588**                  |       | 198,649                      | ** ** | **194,890** |   | 195,925 |   |
| Net effect of dilutive potential common shares  outstanding based on the treasury stock method using the average market price | ** ** | **6,098**                    |       | 4,823                        | ** ** | **5,850** |   | 3,283 |   |
| Diluted weighted average shares outstanding                                                                                   | ** ** | **199,686**                  |       | 203,472                      | ** ** | **200,740** |   | 199,208 |   |
| Antidilutive potential common shares excluded from  the computation above                                                     | ** ** | **515**                      |       | 2,706                        | ** ** | **131** |   | 2,996 |   |

 

**8.****              Shareholders’Equity**

 

***Paid-inCapital.***  Theincreases in paid-in capital during the third quarter and first nine months of2005 reflected stock issuances relating to stock-based employee benefitprograms, as well as to the financial statement recognition of the tax benefitafforded to the company as a result of the disposition of option shares by APCemployees. Accounting rules require this corporate tax benefit to berecorded as an increase in paid-in capital.

 

***RestrictedStock Units.***  Inaddition, under APC’s 2004 Long-Term Incentive Plan, APC’s Compensation andStock Option Committee of the Board of Directors approved the award ofrestricted stock units (RSU) as follows:

 
| ** **               | ** ** | ** ** | ** ** | **Weighted Average**    | ** ** |
|--------------------------|------------|------------|------------|-------------------------|------------|
| **Date Approved**        | ** ** | **RSUs**   | ** ** | **Fair Value per unit** | ** ** |
| September 19,  2005 |       | 212,750    |       | $                       | 25.93      |   |
| June 30,  2005      |       | 20,000     |       | $                       | 23.59      |   |
| June 23,  2005      |       | 50,000     |       | $                       | 24.35      |   |
| October 25,  2004   |       | 951,825    |       | $                       | 16.25      |   |

 

Under the recognition and measurement principles ofAPB Opinion No. 25, *Accounting for StockIssued to Employees*, and related Interpretations, approximately $1.2million and $6.9 million of stock-based employee compensation cost wasreflected in net income and paid-in capital for such units in the third quarterand first nine months of 2005, respectively. The RSU awards will vest, and theunderlying common stock will concurrently issue, ratably over four years,whereby the units granted will vest 25% on June 30 in the year followingthe date approved, and 25% on June 30 of each year thereafter.

 

***Dividends.***  Quarterly cash dividends of $0.08 per sharewere declared and paid in the first and second quarters of 2004. In June 2004,APC’s Board of Directors approved a 25% increase in its quarterly cash dividendraising the quarterly payout to $0.10 per share. Dividends of $0.10 per sharewere declared and paid in each subsequent quarter through the third quarter of2005. 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.

 

10

----

 

**9.****              Comprehensive Income**

 

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

 
| ** **                                        | ** ** | **Nine months ended**        | ** **  | **Three months ended**       | ** ** |
|---------------------------------------------------|------------|------------------------------|-------------|------------------------------|------------|
| ** **                                        | ** ** | **September 25,  2005** | ** **  | **September 26,  2004** | ** ** | **September 25,  2005** | ** ** | **September 26,  2004** | ** ** |
| ** **                                        | ** ** | **(In thousands)**           | ** **  |
| Net income                                        | ** ** | **$**                        | **126,595** |                         | $          | 128,607 | ** ** | **$** | **48,675** |   | $ | 67,166 |   |
| Other  comprehensive income (loss), net of tax:   |       |                         |        |                         |       |   |   |   |   |
| Change in foreign currency translation adjustment | ** ** | **(652**                     | **)**       | 1,957                        | ** ** | **253** |   | 142 |   |
| Other comprehensive income (loss)                 | ** ** | **(652**                     | **)**       | 1,957                        | ** ** | **253** |   | 142 |   |
| Comprehensive  income                             | ** ** | **$**                        | **125,943** |                         | $          | 130,564 | ** ** | **$** | **48,928** |   | $ | 67,308 |   |

 

**10.****       Stock-Based Compensation**

 

On June 10, 2004,APC’s shareholders approved APC’s 2004 Long-Term Incentive Plan (2004 LTIPlan), which replaced the 1997 Stock Option Plan. At September 25, 2005,APC had one active stock-based compensation plan, the aforementioned 2004 LTIPlan, and an employee stock purchase plan (ESPP), which are described morefully in Note 10 of Notes to Consolidated Financial Statements in Item 8 of APC’sForm 10-K for the year ended December 31, 2004. As permitted byStatement of Financial Accounting Standards No. 123 as amended by No. 148,*Accounting for Stock-Based Compensation*,APC accounts for those plans under the recognition and measurement principlesof APB Opinion No. 25, *Accounting for StockIssued to Employees*, and related Interpretations. No stock-basedemployee compensation cost related to stock options is reflected in net income,as all options granted under those plans had an exercise price equal to themarket value of the underlying common stock on the date of grant. The followingtable illustrates the effect on net income and earnings per share if APC hadapplied the fair value recognition provisions of Statement 123 to stock-basedemployee compensation:

 
| ** **                                                                                                                                    | ** ** | ** **  | ** ** | **Nine months ended**                       | ** **  | **Three months ended**       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|---------------------------------------------|-------------|------------------------------|------------|
| ** **                                                                                                                                    | ** ** | ** **  | ** ** | **September 25,  2005**                | ** **  | **September 26,  2004** | ** ** | **September 25,  2005** | ** ** | **September 26,  2004** | ** ** |
| ** **                                                                                                                                    | ** ** | ** **  | ** ** | **(In thousands except per share amounts)** | ** **  |
|                                                                                                                                          |       |        |       |                                        | ** **  |                         |       |   |   |   |   |
| Net income                                                                                                                                    |       | As reported | ** ** | **$**                                       | **126,595** | ** **                   | $          | 128,607 | ** ** | **$** | **48,675** | ** ** | $ | 67,166 |   |
| Add: Compensation expense recognized during the  period, net of related tax effects                                                           | ** ** | ** **  |       | **5,222**                                   | ** **  | —                       | ** ** | **888** | ** ** | — |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | Pro forma   | ** ** | **(9,656**                                  | **)**       | (8,319                       | )          | **(2,516** | **)** | (3,368 | ) |
| Net income                                                                                                                                    |       | Pro forma   | ** ** | **$**                                       | **122,161** | ** **                   | $          | 120,288 |   | **$** | **47,047** | ** ** | $ | 63,798 |   |
|                                                                                                                                          |       |        |       |                                        | ** **  |                         |       |   | ** ** |   |   |
| Basic earnings per share                                                                                                                      |       | As reported | ** ** | **$**                                       | **0.65**    | ** **                   | $          | 0.65 | ** ** | **$** | **0.25** | ** ** | $ | 0.34 |   |
|                                                                                                                                          | ** ** | Pro forma   |       | **$**                                       | **0.63**    | ** **                   | $          | 0.61 | ** ** | **$** | **0.24** | ** ** | $ | 0.33 |   |
|                                                                                                                                          |       |        |       |                                        | ** **  |                         |       |   | ** ** |   |   |
| Diluted earnings per share                                                                                                                    |       | As reported | ** ** | **$**                                       | **0.63**    | ** **                   | $          | 0.63 | ** ** | **$** | **0.24** | ** ** | $ | 0.34 |   |
|                                                                                                                                          | ** ** | Pro forma   |       | **$**                                       | **0.61**    | ** **                   | $          | 0.59 | ** ** | **$** | **0.23** | ** ** | $ | 0.32 |   |

 

11

----

 

***RestrictedStock Units. ***Alsounder the aforementioned 2004 LTI Plan, APC’s Compensation and Stock OptionCommittee of the Board of Directors approved the award of restricted stockunits (RSU) as follows:

 
| ** **               | ** ** | ** ** | ** ** | **Weighted Average**    | ** ** |
|--------------------------|------------|------------|------------|-------------------------|------------|
| **Date Approved**        | ** ** | **RSUs**   | ** ** | **Fair Value per unit** | ** ** |
| September 19,  2005 |       | 212,750    |       | $                       | 25.93      |   |
| June 30,  2005      |       | 20,000     |       | $                       | 23.59      |   |
| June 23,  2005      |       | 50,000     |       | $                       | 24.35      |   |
| October 25,  2004   |       | 951,825    |       | $                       | 16.25      |   |

 

Under the recognition and measurement principles ofAPB Opinion No. 25, *Accounting for StockIssued to Employees*, and related Interpretations, approximately $1.2million and $6.9 million of stock-based employee compensation cost wasreflected in net income and paid-in capital for such units in the third quarterand first nine months of 2005, respectively. Under the 2004 LTI Plan, if APCawards a dividend on its common stock prior to the vesting date of an RSU, theholder of the restricted stock unit would be entitled to receive on the vestingdate a dividend equivalent payment. Dividend equivalents are recognized ascompensation expense when the dividend is declared. The RSU awards will vest,and the underlying common stock will concurrently issue, ratably over fouryears, whereby the units granted will vest 25% on June 30 in the year followingthe date approved, and 25% on June 30 of each year thereafter.

 

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

 

***Share-BasedPayment.****** ***In December 2004,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 123 (revised 2004), *Share-BasedPayment*, which is a revision of Statement No. 123 as amended byNo. 148, *Accounting for Stock-Based Compensation*.Statement No. 123(R) supercedes APB Opinion No. 25. Generally, theapproach in Statement 123(R) is similar to the approach described in Statement123. However, Statement 123(R) requires all share-based payments to employees,including grants of employee stock options, to be recognized in the incomestatement based on their fair values at the date of grant. Pro forma disclosureis no longer an alternative. The U.S. Securities and Exchange Commission hasextended this Statement’s effective date to the beginning of a company’s nextfiscal year, beginning after June 15, 2005. This Statement is effective forAPC beginning with the first quarter of 2006.

 

Statement 123(R) permitspublic companies to adopt its requirements using one of two methods. The “modifiedprospective” method requires compensation cost to be recognized beginning withthe Statement’s effective date (a) based on the requirements of Statement123(R) for all share-based payments granted after the effective date and (b) basedon the requirements of Statement 123 for all awards granted to employees priorto the effective date of Statement 123(R) that remain unvested on the effectivedate. The “modified retrospective” method includes the requirements of themodified prospective method described above, but also permits entities torestate based on the amounts previously recognized under Statement 123 forpurposes of pro forma disclosures either (a) all prior periods presentedor (b) prior interim periods of the year of adoption.

 

In April 2005, theU.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 107.The Bulletin confirms the latitude in Statement 123(R)’s provisions onselecting models for valuing share options and clarifies other positions onaccounting and disclosure for share-based-payment arrangements. In addition,the Bulletin permits registrants to choose from different models to estimatethe fair value of share options, provides guidance on developing assumptionsused in the models, and addresses the interaction between Statement 123(R) andother SEC literature.

 

APC has yet to determinewhich method to use in adopting Statement 123(R). As permitted by Statement123, APC currently accounts for share-based payments to employees using APBOpinion No. 25’s intrinsic value method and, as such, generally recognizesno compensation cost for employee stock options. Accordingly, the adoption ofStatement 123(R)’s fair value method will have a significant impact on APC’sresults of operations, although it will have no impact on APC’s overallfinancial position. APC is evaluating Statement 123(R) and has not yetdetermined the amount of expense related to share-based payments which will beincurred in future periods.

 

12

----

 

**11.****       OperatingSegment Information**

 

***Basis forpresentation. ***APCoperates primarily within one industry consisting of three reportable operatingsegments by which it manages its business and from which various offerings arecommonly combined to develop a total solution for the customer. These effortsprimarily incorporate the design, manufacture, and marketing of powerprotection equipment and related software and accessories for computer,communications, and related equipment. APC’s three segments are: Small Systems,Large Systems, and “Other.” Each of these segments address global markets.

 

***Small Systems.***  The Small Systems segmentdevelops power devices and accessories for servers and networking equipmentcommonly used in local area and wide area networks and for personal computersand sensitive electronics. Major product offerings include the Back-UPS,Smart-UPS®, and Symmetra® Power Array® single-phase family of UPSs. Alsoincluded are SurgeArrest® surge suppressors as well as cabling and connectivityproducts. Additional accessories and software products are offered to enhancethe management of these networks, including APC’s PowerChute® software andNetShelter® server enclosures. Products are sold to home and commercial usersprimarily through an indirect selling model consisting of computer distributorsand dealers, value-added resellers, mass merchandisers, catalog merchandisers,E-commerce vendors, and strategic partnerships.

 

***Large Systems.***  The Large Systems segmentprovides systems, products and services that primarily provide back-up power,power distribution and cooling for data centers, facilities, and communicationsequipment for both commercial and industrial applications. Product offeringsinclude major components of InfraStruXureTM systems, Silcon® UPSs, NetworkAIR®precision cooling equipment, DC and broadband power systems, and services.Products are sold to commercial users through both a direct and indirectselling model consisting of value-added resellers and strategic partnerships.Additionally, APC utilizes manufacturer representatives to identify and secureprojects.

 

***“Other” Segment.***  The Other segment consists principallyof mobile accessories and replacement battery products. The distribution modelof products in the Other segment is consistent with that of the Small Systemssegment.

 

APC measures the profitability of its segments based on gross margin.Segment gross margins exclude certain expenses which are managed outside thereportable segments. Costs excluded from segment profit are operating expenses,primarily consisting of R&D, selling and corporate expenses, and incometaxes. In addition, APC’s third quarter 2004 excess inventory provision was notallocated to APC’s operating segments, but rather was classified as an indirectoperating expense for segment reporting consistent with APC’s classificationfor its internal financial reporting. Expenditures for additions to long-livedassets are not tracked or reported by the operating segments, althoughdepreciation expense is allocated to and reported by the operating segments.

 

Summary operating segment information is as follows:

 
| ** **                         | ** **   | **Nine months ended**        | ** **    | **Three months ended**       | ** ** |
|------------------------------------|--------------|------------------------------|---------------|------------------------------|------------|
| ** **                         | ** **   | **September 25,  2005** | ** **    | **September 26,  2004** | ** ** | **September 25,  2005** | ** ** | **September 26,  2004** | ** ** |
| ** **                         | ** **   | **(In thousands)**           | ** **    |
| **Segment  net sales**             | *** *** | *** ***                 | ** **    | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Small Systems                      | ** **   | **$**                        | **1,053,959** |                         | $          | 919,830 | ** ** | **$** | **390,267** |   | $ | 343,593 |   |
| Large Systems                      | ** **   | **285,956**                  |          | 214,458                      | ** ** | **100,407** |   | 78,226 |   |
| Other                              | ** **   | **52,242**                   |          | 46,726                       | ** ** | **18,550** |   | 16,820 |   |
| Total segment  net sales           | ** **   | **1,392,157**                |          | 1,181,014                    | ** ** | **509,224** |   | 438,639 |   |
| Shipping and  handling revenues    | ** **   | **8,741**                    |          | 8,071                        | ** ** | **3,065** |   | 3,032 |   |
| Total net sales                    | ** **   | **$**                        | **1,400,898** |                         | $          | 1,189,085 | ** ** | **$** | **512,289** |   | $ | 441,671 |   |
|                               |         |                         |          |                         |       |   |   |   |   |
| **Segment  profits**               |         |                         |          |                         |       |   |   |   |   |
| Small Systems                      | ** **   | **$**                        | **482,281**   |                         | $          | 443,841 | ** ** | **$** | **174,785** |   | $ | 168,551 |   |
| Large Systems                      | ** **   | **53,088**                   |          | 37,935                       | ** ** | **16,453** |   | 17,425 |   |
| Other                              | ** **   | **30,700**                   |          | 29,816                       | ** ** | **11,190** |   | 11,142 |   |
| Total segment  profits             | ** **   | **566,069**                  |          | 511,592                      | ** ** | **202,428** |   | 197,118 |   |
| Shipping and  handling net costs   | ** **   | **34,696**                   |          | 24,792                       | ** ** | **13,772** |   | 8,932 |   |
| Provision for  excess inventory    | ** **   | **—**                   |          | 11,500                       | ** ** | **—** |   | 11,500 |   |
| Other indirect  operating expenses | ** **   | **379,650**                  |          | 338,066                      | ** ** | **130,476** |   | 117,385 |   |
| Other income,  net                 | ** **   | **14,431**                   |          | 6,463                        | ** ** | **5,448** |   | 2,475 |   |
| Earnings before  income taxes      | ** **   | **$**                        | **166,154**   |                         | $          | 143,697 | ** ** | **$** | **63,628** |   | $ | 61,776 |   |

 

13

----

 

**12.****       Litigation**

 

As previouslyreported in APC’s Form 10-Q for the quarters ended March 27,2005and June 26, 2005, on February 5, 2004, Liebert Corporation andZonatherm Products, Inc., Liebert’s sales representative firm in theChicago area, filed a lawsuit in the Circuit Court of Cook County, Illinois,Chancery Division (the “Circuit Court”) against APC, Aerico, LLC, a salesrepresentative firm formed by former employees of Zonatherm Products, and theformer employees of Zonatherm Products who formed Aerico, LLC. The lawsuitalleged willful violation of the Illinois Trade Secrets Act, tortiousinterference with contract, tortious interference with prospective economicadvantage, civil conspiracy and conspiracy to breach fiduciary duties. Liebertand Zonatherm are seeking compensatory and punitive damages and injunctiverelief. On February 18, 2004, the Circuit Court denied plaintiffs’ motionfor a temporary restraining order. On July 16, 2004, the Circuit Courtdismissed without prejudice all claims except the Illinois Trade Secret Actclaim. On August 6, 2004, plaintiffs filed a second amended complaintreasserting the claims dismissed by the Circuit Court on July 16, 2004. OnAugust 20, 2004, the Circuit Court denied plaintiffs’ motion forpreliminary injunction as to violation of the Illinois Trade Secrets Act. On September 21,2004, plaintiffs filed a Notice of Appeal of the August 20, 2004 rulingwith the Illinois Appellate Court. On January 12, 2005, the Circuit Courtdismissed without prejudice all claims against APC except the Illinois TradeSecret Act claim. On March 1, 2005 the Illinois Appellate Court issued anopinion on the appeal pursuant to which it affirmed the Circuit Court on theissue of the non-trade secret nature of plaintiffs’ customer lists, andremanded the matter for the Circuit Court to enter an injunction against one ofthe individual former employees of Zonatherm from using certain pricing books.On March 16, 2005, plaintiffs filed a third amended complaint reassertingclaims substantially similar to those dismissed by the Circuit Court in its January 12,2005 ruling. On May 19, 2005, APC filed a motion to dismiss plaintiffs’third amended complaint. On May 24, 2005, the Circuit Court issued a preliminaryinjunction against one of the former employees of Zonatherm enjoining him fromusing certain of plaintiffs’ pricing books. No injunction was issued againstAPC. On June 30, 2005, plaintiffs filed an appeal with the IllinoisAppellate Court seeking to expand the scope of the Circuit Court’s injunction.On August 23, 2005, the Illinois Appellate Court reversed in part theCircuit Court’s entry of a preliminary injunction and directed the trial courtto further enjoin the former Zonatherm employee from contacting customers onplaintiffs’ customer contact list. Again, no injunction was entered againstAPC. The August 23, 2005 Order is currently the subject of an appeal tothe Illinois Supreme Court. Because APC was not affected by the Appellate Court’sAugust 23 Order, it is not party to that appeal. On September 12,2005, the Circuit Court dismissed without prejudice all counts in plaintiffs’third amended complaint alleged against APC, except for plaintiffs’ claims forviolation of the Illinois Trade Secret Act and for conspiracy to breachfiduciary duties.

 

In addition, APCis involved in various other claims and legal actions arising in the ordinarycourse 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,the litigation and other claims noted above are subject to inherentuncertainties, including the risk of an unfavorable outcome, and management’sview of these matters may change in the future. An unfavorable outcome couldinclude monetary damages or, in cases where injunctive relief is sought, aninjunction prohibiting certain activities. Were an unfavorable final outcome tooccur, there exists the possibility of a material adverse impact on APC’sfinancial position, cash flows and results of operations for the period inwhich the effect becomes reasonably estimable.

 

**13.****       Subsequent Event**

 

**NetBotzAcquisition**

Earlyin the fourth quarter of 2005, APC completed the acquisition of privately heldNetBotz, Inc., a leader in IP-based environmental and video monitoringsolutions, for $31 million in cash plus direct costs of the acquisition. APC’scash outlays associated with this acquisition were financed from operatingcash. This acquisition will be accounted for as a purchase of a business and,accordingly, NetBotz results of operations will be included in APC’sconsolidated financial statements from the date of acquisition.

 

14

----

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

 

We begin Management’s Discussion and Analysis of Financial Conditionand Results of Operations (MD&A) with a discussion of our business outlookfor the remainder of 2005. We also provide a discussion of our Results ofOperations for the third quarter and first nine months of 2005 compared to the thirdquarter and first nine months of 2004. This discussion includes an overview ofour operating results and the directions in which our markets, segments, andgeographies are moving. We then provide a Liquidity and Capital Resourcesdiscussion of the significant changes in our balance sheet during the first ninemonths of 2005, and cash flows for the third quarter and first nine months of2005 compared to the third quarter and first nine months of 2004, as well asour contractual obligations and foreign currency activity. This is followed bya discussion of the Critical Accounting Policies that we believe are importantto our business operations and understanding of our results of operations. Weconclude with information about factors that may affect our future results.

 

This MD&A should be read in conjunction with the other sections ofthis report, including “Item 1. Financial Statements” and also our AnnualReport on Form 10-K for the year ended December 31, 2004, including “Item1: Business;” “Item 6: Selected Financial Data;” “Item 8: Financial Statementsand Supplementary Data;” and “Item 9A: Controls and Procedures.”

 

Inaddition to historical consolidated financial information, the followingdiscussion contains forward-looking statements that reflect our plans,estimates and beliefs. Our actual results could differ materially from thosediscussed in the forward-looking statements. Factors that could cause orcontribute to these differences include those discussed below and elsewhere inthis Form 10-Q.

 

**BUSINESSOUTLOOK**

 

Although there continuesto be uncertainty around interest rate levels, energy costs and, in general,macroeconomic conditions and their potential impact on corporate investment andconsumer spending, we maintain a cautious but optimistic outlook for ourbusiness. While the events of the third quarter identified opportunities forimprovement, we are generally pleased with APC’s performance during our third quarterand first nine months of 2005. For the ninth consecutive quarter APC’syear-over-year revenue growth was in double-digits. We are confident that thestrong year-over-year growth can be attributed to what we believe is anattractive macro-economic environment for IT spending and is the result of ourcontinued investments in sales and marketing activities and the growingadoption of APC’s network-critical physical infrastructure, or NCPI, architecture.The investment we have made to educate the market and drive adoption of thetechnology, we believe, is meeting our strategic objectives as customers areembracing the modular, standardized approach APC has pioneered innetwork-critical physical infrastructure.

 

Against this background,we are planning for continued growth in annual revenue and increasing grossprofit and operating profit dollars for the full year 2005. We believe that weare very 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 managenetwork-critical physical infrastructure. Our objective is for APC to become atrusted, global partner for the long term, committed to solving our customers’network-critical physical infrastructure problems of today, and helping themanticipate their challenges of tomorrow, thereby allowing them to focus ontheir core competencies. We believe that we can accomplish this by dramaticallyreducing our 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.

 

As we look ahead into thefourth quarter of 2005, we continue to plan for revenue growth in all three ofour reportable segments: Small Systems, Large Systems and “Other.” As in recentquarters, we expect the rate of revenue growth of our Large Systems segment tobe greater than the growth expected for Small Systems due to the assumedcontinued success of our overall strategy and the acceptance of our products inspecific market segments.

 

15

----

 

Overall gross margins for2005 have been and are currently expected to continue to be impacted by increasedoperational costs and a shift in product mix toward the faster-growing,lower-margin Large Systems products. Gross margins, particularly for SmallSystems products, are expected to continue to be impacted by planned pricereductions that we anticipate will be partially offset by the favorable impactof the expected cost reduction of our products, particularly material costs, asa result of assumed unit volume growth. We also expect to continue, albeit to alesser degree than in 2004, favorable pricing arrangements with our suppliers. Increasedoperational costs, including freight and warehousing, are associated with themanagement of our supply chain. These costs are tied to fulfilling customerorders and reducing overall long-term costs through the stocking of globalthird-party distribution centers, expediting of product to meet customer demand,and the transition cost of shifting production to lower cost manufacturinglocations. We expect this could continue through at least the end of the year,however ultimately it is expected these transitions will allow for lower manufacturingcosts. In the short-term each transition is the equivalent of a new productintroduction to a facility and comes with a learning curve and initial supplychain inefficiencies. Gross margin variability could continue to result fromchanging revenue levels, which are dependent on unit volumes, prices andcurrency trends as well as the mix of products sold, unit costs and yieldissues associated with production at our factories, transfers of production toour low cost facilities, excess manufacturing capacity, excess inventory, supplychain inefficiencies, inventory obsolescence and variations in inventoryvaluation.

 

We have dedicatedsignificant efforts to optimize our overall manufacturing capacity andlocations over recent years and we will continue to plan for future capacity requirementsbased on the assumed continued acceptance and demand for our products in thespecific market segments they were designed to address. We currently expectthat capital spending will be between $35 million and $45 million in 2005,compared to $29.3 million in 2004. We expect that most of our capital spendingfor 2005 will go toward maintaining, upgrading and expanding our currentmanufacturing capacity, as well as investments to upgrade current hardware andsoftware office technologies.

 

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 our 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.

 

We currently expect our tax rate to be approximately 24% for the fullyear 2005, excluding the potential tax impact of the repatriation of offshoreearnings discussed below. The estimated effective tax rate is based on currenttax law and the current expected income. The tax rate may be affected by thejurisdictions in which profits are determined to be earned and taxed, ourability to successfully implement additional tax savings planning opportunitiesand our ability to realize deferred tax assets.

 

***AmericanJobs Creation Act of 2004 — Repatriation of Foreign Earnings. ***In October 2004, the American JobsCreation Act of 2004 was enacted. This Act repealed the tax code’sextraterritorial income (ETI) exclusion in response to the World TradeOrganization’s challenge that the ETI exclusion was a prohibited tax subsidy.The repeal will be phased in through 2006. The Act replaced the ETI exclusionwith a 3% domestic deduction for domestic production activities effective forAPC’s 2005 tax year. The Act also provides for a temporary 85% dividendsreceived deduction on certain foreign earnings repatriated during a one-yearperiod. The deduction would result in an approximate 5.25% federal tax rate onthe repatriated earnings. To qualify for the deduction, the earnings must bereinvested in the United States pursuant to a domestic reinvestment planestablished by a company’s chief executive officer and approved by its board ofdirectors. Certain other criteria in the Jobs Act must be satisfied as well.The maximum amount of APC’s foreign earnings that qualify for the temporarydeduction is $500 million. For APC, the one-year period during which thequalifying distributions can be made is 2005. No qualifying distributions weremade during 2004.

 

16

----

 

APC is in theprocess of evaluating whether it will repatriate any foreign earnings under therepatriation provisions of the Jobs Act and, if so, the amount that it willrepatriate. The range of reasonably possible amounts that APC is consideringfor repatriation, which would be eligible for the temporary deduction, is zeroto approximately $500 million. If APC determines to repatriate foreignearnings, we are likely to repatriate amounts in the high end of our range. APCexpects to determine the amounts and sources of foreign earnings to berepatriated, if any, during the fourth quarter of fiscal 2005. Use of the fundswill be governed by a domestic reinvestment plan, as required by the Jobs Act.

 

Repatriation ofthe maximum amount eligible for the temporary deduction, which is $500 million,could result in additional United States federal income tax expense, which APC currentlyestimates to be between zero and $20million, in fiscal 2005. We were able to lower our previously estimated rangeof zero to $38.2 million as a result of favorable IRS guidance released in May 2005.Repatriation also would substantiallyincrease liquidity in the United States, although use of the additionalliquidity would be restricted by the domestic reinvestment plan. There would bea corresponding reduction in liquidity at APC’s foreign subsidiaries.

 

We are currently a partyto various legal proceedings and claims. The costs to litigate APC’soutstanding litigation matters were significant in 2004 and we expect suchcosts in 2005 to be less than the levels incurred during the prior year, as aresult of our settling two patent infringement suits. We currently do notbelieve that the ultimate outcome of current legal proceedings and claims willhave a material adverse effect on our financial position or overall trends inresults of operations. However, litigation is subject to inherent uncertainties,including the risk of an unfavorable outcome, and management’s view of thesematters may change in the future. An unfavorable outcome could include monetarydamages or, in cases where injunctive relief is sought, an injunctionprohibiting certain activities. If an unfavorable outcome were to occur in anyspecific period, there exists the possibility of a material adverse impact onthe results of operations of that period or future periods. We believe that,given our current liquidity and cash and investment balances, even an adversejudgment in current legal proceedings and claims would not have a materialimpact on cash and investments or liquidity.

 

The statements below donot include any impact related to the expensing of stock options according to Statementof Financial Accounting Standards No. 123(R), *Share-BasedPayment*, which will be effective for APC beginning with the firstquarter of 2006. The pro forma earnings impact of expensing of stock options onour results of operations for the third quarters and first nine months of 2005and 2004 is described in Note 10 of Notes to Consolidated Financial Statementsin Item 1 of this report.

 

**RESULTSOF OPERATIONS**

 

**COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 25,2005 AND SEPTEMBER 26, 2004**

 

**Revenues**

Net sales were $512.3 million for the third quarter of 2005, anincrease of 16.0% compared to $441.7 million for the comparable period in 2004.Net sales for the first nine months of 2005 were $1.401 billion, an increase of17.8% compared to $1.189 billion for the same period in 2004. These increaseswere attributable to strength across all of our product segments, particularlythe Large Systems segment, as well as growth across all of our majorgeographies.

 

InfraStruXure, our datacenter solution products and services, remainedthe leading driver of growth in APC’s Large Systems segment, which continued toset the pace for total company growth. 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 Back-UPS desktop UPS and our Smart-UPS network UPS, theSmall Systems segment continues to produce strong results that reflect APC’sposition as a preferred partner in the mid-market and consumer power protectionmarkets. Management believes that increasingly APC solutions, particularly ourInfraStruXure architecture, are being specified for network-critical physicalinfrastructure requirements. Forfurther information about revenues by segment, refer to the *Segment Results* section below.

 

17

----

 

***Revenues by Geography.**** *The following table summarizes our revenues on a geographic basis for thethree and nine month periods ended September 25, 2005 and September 26,2004.

 
| ** **                                 | ** ** | **Nine months ended** | ** **  | **Three months ended** | ** ** |
|--------------------------------------------|------------|-----------------------|-------------|------------------------|------------|
| ** **                                 | ** ** | **Sept. 25,  2005**   | ** **  | **% of  Total**        | ** ** | **Sept. 26,  2004** | ** ** | **% of  Total** | ** ** | **Sept. 25,  2005** | ** ** | **% of  Total** | ** ** | **Sept. 26,  2004** | ** ** | **% of  Total** | ** ** |
| ** **                                 | ** ** | **(In millions)**     | ** **  |
| North and Latin America  (the Americas)    | ** ** | **$**                 | **730.3**   | ** **             | **52.1**   | **%** | $ | 601.1 |   | 50.6 | % | **$** | **268.3** | ** ** | **52.4** | **%** | $ | 226.1 |   | 51.2 | % |
| Europe, the Middle East, and Africa (EMEA) | ** ** | **405.8**             | ** **  | **29.0**               | **%**      | 367.5 |   | 30.9 | % | **148.9** | ** ** | **29.1** | **%** | 137.7 |   | 31.2 | % |
| Asia                                       | ** ** | **264.8**             | ** **  | **18.9**               | **%**      | 220.5 |   | 18.5 | % | **95.1** | ** ** | **18.5** | **%** | 77.9 |   | 17.6 | % |
| Total Net Sales                            | ** ** | **$**                 | **1,400.9** | ** **             | **100.0**  | **%** | $ | 1,189.1 |   | 100.0 | % | **$** | **512.3** | ** ** | **100.0** | **%** | $ | 441.7 |   | 100.0 | % |

 

The Americas’ net sales increased 18.7% in the thirdquarter of 2005 over the third quarter of 2004, and increased 21.5% in thefirst nine months of 2005 over the first nine months of 2004. EMEA’s net sales increased8.1% in the third quarter of 2005 over the third quarter of 2004, and increased10.4% in the first nine months of 2005 over the first nine months of 2004. Asia’snet sales increased 22.0% in the third quarter of 2005 over the third quarterof 2004, and increased 20.0% in the first nine months of 2005 over the first ninemonths of 2004.

 

**Cost of Goods Sold**

Cost of goods sold was $323.6million or 63.2% of net sales in the third quarter of 2005 compared to $265.0million or 60.0% of net sales in the third quarter of 2004. Cost of goods soldwas $869.5 million or 62.1% of net sales in the first nine months of 2005compared to $713.8 million or 60.0% of net sales in the first nine months of2004. Gross margins for the third quarter of 2005 were 36.8% of net sales,approximately 320 basis points lower than in the third quarter of 2004. Grossmargins for the first nine months of 2005 were 37.9% of net sales,approximately 210 basis points lower than in the first nine months of 2004. Costof goods sold was negatively impacted by increased operational costs, includingfreight and warehousing associated with long-term customer satisfactionobjectives. These costs were tied to fulfilling customer orders and reducingoverall long-term costs through the stocking of global third-party distributioncenters and the expediting of product to meet customers’ demand. Additionally,the transition cost of shifting production to lower cost manufacturinglocations continued to negatively impact cost of goods sold in the quarter. Thelower third quarter and first nine months 2005 gross margins were alsoattributable to a segment mix shift toward our Large Systems segment, as wellas the unfavorable impact of price discounting in the Small Systems segment. Wedid not experience the benefit of favorable currency comparisons we had priorto the second quarter 2005. For further information about gross marginsby segment, refer to the *Segment Results*section below.

 

***Provision for excess inventory***.  Additionally, third quarter 2004 grossmargins included the effects of a $11.5 million incremental charge for excessinventory related to specifically-identified finished goods and raw materialsinventories deemed obsolete as the result of recently commenced efforts toreduce the number of unique product offerings in several of our product lines,as well as the result of new product introductions. There were no additionalinventory charges, other than APC’s standard provisioning, during the thirdquarters and first nine months of 2005 and 2004.

 

***Inventory Reserves.***  Totalinventory reserves at September 25, 2005 were $45.4 million compared to $39.4million at December 31, 2004. The increase in total inventory reserves reflectedroutine provisioning that was necessary as a result of applying APC’s inventoryreserve methodology throughout the year, substantially offset by the physicaldisposition of inventories covered by APC’s inventory reserves. APC’s reserveestimate methodology involves quantifying the total inventory position havingpotential loss exposure. Loss exposure generally results from several businessfactors, including product or component discontinuance, unplanned changes indemand, product design changes, and factory transitions. Quantifying such lossexposure is the result of combining the cost of inventories specificallyidentified as having little or no opportunity for sale or use (thus availablefor physical disposition) plus the cost of inventories having a high risk of nofuture sale or use based upon an analysis of on-hand quantities compared tohistorical and anticipated future sale or use. APC maintains an on-goingbusiness process for the physical disposition of inventories previouslyidentified. Inventory write-offs occur at the time of physical

 

18

----

 

disposition. Inventories,once reserved, are not written back up as such reserve adjustments areconsidered to be a permanent decrease to the cost basis of the excess orobsolete inventory.

 

**Segment Results**(Also refer toNote 11 of Notes to Consolidated Financial Statements in Item 1 of this reportfor important information regarding APC’s reportable segments)

 
| ** **                         | ** ** | **Nine months ended**        | ** **    | **Three months ended**       | ** ** |
|------------------------------------|------------|------------------------------|---------------|------------------------------|------------|
| ** **                         | ** ** | **September 25,  2005** | ** **    | **September 26,  2004** | ** ** | **September 25,  2005** | ** ** | **September 26,  2004** | ** ** |
| ** **                         | ** ** | **(In thousands)**           | ** **    |
| **Segment  net sales**             |       |                         |          |                         |       |   |   |   |   |
| Small Systems                      | ** ** | **$**                        | **1,053,959** |                         | $          | 919,830 | ** ** | **$** | **390,267** |   | $ | 343,593 |   |
| Large Systems                      | ** ** | **285,956**                  |          | 214,458                      | ** ** | **100,407** |   | 78,226 |   |
| Other                              | ** ** | **52,242**                   |          | 46,726                       | ** ** | **18,550** |   | 16,820 |   |
| Total segment  net sales           | ** ** | **1,392,157**                |          | 1,181,014                    | ** ** | **509,224** |   | 438,639 |   |
| Shipping and  handling revenues    | ** ** | **8,741**                    |          | 8,071                        | ** ** | **3,065** |   | 3,032 |   |
| Total net sales                    | ** ** | **$**                        | **1,400,898** |                         | $          | 1,189,085 | ** ** | **$** | **512,289** |   | $ | 441,671 |   |
|                               |       |                         |          |                         |       |   |   |   |   |
| **Segment  profits**               |       |                         |          |                         |       |   |   |   |   |
| Small Systems                      | ** ** | **$**                        | **482,281**   |                         | $          | 443,841 | ** ** | **$** | **174,785** |   | $ | 168,551 |   |
| Large Systems                      | ** ** | **53,088**                   |          | 37,935                       | ** ** | **16,453** |   | 17,425 |   |
| Other                              | ** ** | **30,700**                   |          | 29,816                       | ** ** | **11,190** |   | 11,142 |   |
| Total segment  profits             | ** ** | **566,069**                  |          | 511,592                      | ** ** | **202,428** |   | 197,118 |   |
| Shipping and  handling net costs   | ** ** | **34,696**                   |          | 24,792                       | ** ** | **13,772** |   | 8,932 |   |
| Provision for  excess inventory    | ** ** | **—**                   |          | 11,500                       | ** ** | **—** |   | 11,500 |   |
| Other indirect  operating expenses | ** ** | **379,650**                  |          | 338,066                      | ** ** | **130,476** |   | 117,385 |   |
| Other income,  net                 | ** ** | **14,431**                   |          | 6,463                        | ** ** | **5,448** |   | 2,475 |   |
| Earnings before  income taxes      | ** ** | **$**                        | **166,154**   |                         | $          | 143,697 | ** ** | **$** | **63,628** |   | $ | 61,776 |   |

 

***Small Systems***.  Netsales for products in the Small Systems segment, which provides powerprotection, UPS and management products for the PC,server and networking markets, increased in the third quarter of 2005 by 13.6%over the third quarter of 2004, and increased in the first nine months of 2005by 14.6% over the first nine months of 2004. Our Back-UPS desktop UPS andSmart-UPS network UPS, in particular high kVA units and the new online Smart-UPSRT® series, and InfraStruXure-related solutions including NetShelter racks andpower distribution, were key contributors to this segment’s continued strongperformance.

** **

Third quarter and first nine months 2005 grossmargins for the Small Systems segment of 44.8% and 45.8%, respectively, declined430 basis points and 250 basis points, respectively, from the comparable periodsin 2004. The aforementioned increased operational costs, including warehousingand transportation costs incurred to meet customer product and delivery needs, andprice discounting outweighed improvements from select product outsourcing andproduct mix within this segment.

 

***Large Systems.***  Netsales for products in the Large Systems segment, consisting primarily of 3-phaseUPS, services, precision cooling and ancillary products for data centers,facilities and communication applications, increased in the third quarter of2005 by 28.4% over the third quarter of 2004, and increased in the first ninemonths of 2005 by 33.3% over the first nine months of 2004. The Large Systemssegment continued to outpace the growth of our other segments. InfraStruXure-relatedrevenue continued to be a driver of growth in this segment, including our Symmetra3-phase, the UPS component of our InfraStruXure solution, and ancillary products. We also experiencedstrong demand for our broadband solution, addressing fiber to the home and relatedapplications, as well as our new Smart-UPS VT line, used in 3-phaseapplications.

 

Third quarter and first nine months 2005 gross marginsfor the Large Systems segment of 16.4% and 18.6%, respectively, decreased 590basis points and increased 90 basis points, respectively, from the comparableperiods in 2004. The aforementioned increased operational costs and product mixwithin the segment were the primary drivers of the third quarter decline andwere only partially offset by continued cost improvements largely in thethree-phase UPS and cooling products. Product mix within this segment wasinfluenced by strong growth from certain product

 

19

----

 

categories, includingbroadband and Smart-UPS VT, that currently carry lower gross margin than theblended segment average.

 

***“Other” Segment.***  Netsales for products in the Other segment, consisting principally of mobile accessoriesand replacement battery products, increased in the third quarter of 2005 by 10.3%over the third quarter of 2004, and increased in the first nine months of 2005by 11.8% over the first nine months of 2004. The improvement was mainlyattributable to organic growth of existing products across the segment.

 

Third quarter and first ninemonths 2005 gross margins for the Other segment of 60.3% and 58.8%,respectively, decreased 590 basis points and 500 basis points, respectively,from the comparable periods in 2004, driven principally by an unfavorable mixshift toward lower gross margin mobile accessories.

 

## **OperatingExpenses**

 

***Marketing, Selling, General, and Administrative (SG&A)Expenses.***SG&A expenses in the third quarter of 2005 were $108.3 million or 21.1% ofnet sales compared to $95.6 million or 21.7% of net sales in the third quarterof 2004. SG&A expenses in the first nine months of 2005 were $314.5 millionor 22.4% of net sales compared to $276.5 million or 23.2% of net sales in thefirst nine months of 2004.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 InfraStruXure architecture.The increase in total spending in the first nine months of 2005 reflectedongoing sales and promotional efforts which involve expanding our sales andsupport teams, developing new channels such as manufacturer representatives andengineering contractors, and increasing sales and marketing support of our corereseller channels, as well as funding our educational efforts throughhigh-level customer and partner events. In addition, the year-over-yearincrease in operating expenses included incremental compensation costsassociated with restricted stock units awarded during the fourth quarter of2004 and during the nine months ended September 25, 2005.

 

The allowance for bad debts was 4.2% of grossaccounts receivable at September 25, 2005 compared to 4.7% at December 31,2004. Accounts receivable balances outstanding over 60 days represented 15.1%of total receivables at September 25, 2005 compared to 11.7% at December 31,2004. This increase is due in part to a growing portion of our businessattributable to sales where longer payment terms are customary combined withtiming of certain third quarter and first nine months 2005 collections inEurope. A majority of U.S. and international customer balances continue to becovered by receivables insurance. We continue to experience strong collectionperformance. Write-offs of uncollectable accounts have represented less than 1%of net sales.

 

***Research and Development (R&D).*** R&D expenditures were $22.2 million or 4.3% of net sales in the thirdquarter of 2005, up from $21.8 million or 4.9% of net sales in the thirdquarter of 2004. R&D expenditures were $65.2 million or 4.7% of net salesin the first nine months of 2005, up from $61.6 million or 5.2% of net sales inthe first nine months of 2004. We continue to commit resources to support ourinvestment in research and development with a primary focus on driving productinnovation through increasing engineering efforts. We believe that continuedproduct innovation through development is necessary for our existing productsto remain competitive in our markets, as well as creating opportunities fromnew product introductions. The increases in total R&D spending primarilyreflect increased numbers of software and hardware engineers and costsassociated with new product development and engineering support.

 

**Other Income, Net and Income Taxes**

 

***Other Income, Net.***  Otherincome is comprised principally of interest income which increased during the thirdquarter and first nine months of 2005 due principally to higher average cashbalances available for investment as well as rising interest rates.

 

At September 25, 2005, APC had $784.9million of total cash and investments, up from $721.1 million at December 31,2004. We manage APC’s cash and investment balances to preserve principal andliquidity while maximizing our return on the total investment portfolio. Wediversify our investment portfolio by investing in multiple types of

 

20

----

 

investment-grade securities with multiple investmentbrokers. Based on APC’s investment portfolio and interest rates, at September 25,2005, a 100 basis point increase or decrease in interest rates would haveresulted in an increase or decrease of approximately $8 million in our annualinterest income.

 

***Income Taxes.***  Our effective income tax rate wasapproximately 23.5% and -8.7% for the third quarters and 23.8% and 10.5% forthe first nine months ended September 25, 2005 and September 26,2004, respectively. The increase in 2005 from 2004 was principally attributableto a net tax credit of approximately $20.8 million associated with the reversalof income tax provisioning resulting mainly from the favorable outcome of taxaudits by U.S. federal and state taxing authorities which occurred in 2004 (andhas not occurred in 2005). We expect APC’seffective income tax rate to remain considerably lower than the U.S. statutoryfederal corporate tax rate of 35%, due to the tax savings from an increasingportion of taxable earnings anticipated to be generated from APC’s operationsin jurisdictions currently having lower income tax rates than the present U.S.statutory income tax rate. This shift resulted partially from our producttransitions to lower cost, lower tax, manufacturing locations. APC has tax holidays in China and India whichreduce or eliminate the income taxes paid in those countries.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

**Working Capital**

Working capital at September 25, 2005was $1.409 billion compared to $1.279 billion at December 31, 2004. Ourcash, cash equivalents, and short-term investments position increased to $784.4million at September 25, 2005 from $715.6 million at December 31,2004. APC’s continued positive operating results allowed us to pay a quarterlydividend and continue to internally finance the capital investment, R&D,sales and marketing spending required to expand our operations.

 

**Cash Flows**

The table below summarizes our cash flows forthe third quarters and first nine months ended September 25, 2005 and September 26,2004.

 
| ** **                                           | ** ** | **Nine months ended**        | ** **  | **Three months ended**       | ** ** |
|------------------------------------------------------|------------|------------------------------|-------------|------------------------------|------------|
| ** **                                           | ** ** | **September 25,  2005** | ** **  | **September 26,  2004** | ** ** | **September 25,  2005** | ** ** | **September 26,  2004** | ** ** |
| ** **                                           | ** ** | **(In thousands)**           | ** **  |
| Net cash  provided by operating activities           | ** ** | **$**                        | **108,789** | ** **                   | $          | 84,384 |   | **$** | **41,920** | ** ** | $ | 36,496 |   |
|                                                 |       |                         | ** **  |                         |       |   | ** ** |   |   |
| Net cash (used  in) provided by investing activities | ** ** | **(2,357**                   | **)**       | 51,780                       |       | **4,000** | ** ** | 122,068 |   |
|                                                 |       |                         | ** **  |                         |       |   | ** ** |   |   |
| Net cash used in  financing activities               | ** ** | **(17,652**                  | **)**       | (192,108                     | )          | **(6,538** | **)** | (166,946 | ) |
|                                                 |       |                         | ** **  |                         |       |   | ** ** |   |   |
| Net change in  cash and cash equivalents             | ** ** | **88,780**                   | ** **  | (55,944                      | )          | **39,382** | ** ** | (8,382 | ) |
| Cash and cash  equivalents at beginning of period    | ** ** | **72,721**                   | ** **  | 141,214                      |       | **122,119** | ** ** | 93,652 |   |
| Cash and cash  equivalents at end of period          | ** ** | **$**                        | **161,501** | ** **                   | $          | 85,270 |   | **$** | **161,501** | ** ** | $ | 85,270 |   |

 

***Cash Flows from Operating Activities****.*  Ourcash flows from operations for the third quarter and first nine months of 2005 reflectedsolid earnings, partially offset by higher working capital needs, in particularincreased inventory and higher accountsreceivable balances consistent with our strong sales growth.

 

***Cash Flows from Investing Activities****.*  Ourinvesting activities cash flows were used mainly for capital spending,principally manufacturing and office equipment, purchased softwareapplications, and building improvements, and for the purchase ofheld-to-maturity securities, substantially offset by the net sales ofavailable-for-sale securities. Our investment approach and the composition ofour investment portfolio remained relatively constant overall with no investmentshaving maturity dates greater than two years, except for our auctionrate securities.

 

21

----

 

***Cash Flows from Financing Activities****.*  Ourcash flows from financing activities included the payment of common stockdividends of approximately $19.5 million and $19.3 million during the thirdquarters of 2005 and 2004, respectively, and $58.1 million and $51.3 millionduring the first nine months of 2005 and 2004, respectively, as well as repurchaseon the open market of approximately 9.3 million shares of our common stock, atan average price of $16.09 per share totaling $150 million, in the thirdquarter of 2004. These outflows were partially offset by proceeds fromissuances of common stock relating to employee stock plans during each of theperiods presented.

 

**Inventories**

Worldwide inventories were $487.2 million at September 25,2005, up from $465.9 million at December 31, 2004. A decrease in rawmaterials was more than offset by an increase in finished goods during thefirst nine months of 2005. The decrease in raw materials can be attributed toour efforts to improve our supply chain management of component inventories.However, higher levels of on-hand finished goods were required duringthe first nine months of 2005 to meet increasing current and anticipateddemand, particularly for InfraStruXure product offerings, as well as to managethe supply chain 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. Despite increasing inventory levels, dayssales in inventory was 135 days at September 25, 2005, down from 144 daysat June 26 2005, 157 days at December 31, 2004 and 166 days at September 26,2004, reflecting our strong third quarter 2005 net sales performance.

 

***Provision for excess inventory***.  Additionally, third quarter 2004 grossmargins included the effects of a $11.5 million incremental charge for excessinventory related to specifically-identified finished goods and raw materialsinventories deemed obsolete as the result of recently commenced efforts toreduce the number of unique product offerings in several of our product lines,as well as the result of new product introductions. There were no additionalinventory charges, other than APC’s standard provisioning, during the thirdquarters and first nine months of 2005 and 2004.

 

**Contractual Obligations**

Thefollowing table summarizes our significant contractual obligations at September 25,2005, and the effect such obligations are expected to have on our liquidity andcash flows in future periods. This table excludes amounts already recorded onour balance sheet as current liabilities at September 25, 2005.

 
| ** **                   | ** ** | **Payments Due By Period** | ** ** |
|------------------------------|------------|----------------------------|------------|
| ** **                   | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                   | ** ** | **(In millions)**          | ** ** |
| Operating Lease  Obligations |       | $                          | 23.8       |   | $ | 2.1 |   | $ | 12.3 |   | $ | 7.8 |   | $ | 1.6 |   |
|                              |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

## **APC’s non-cancelable operating leases, primarily forwarehousing and office space, expire at various dates through 2011. Theseleases contain renewal options for periods ranging from one to seven 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.**

## ** **

**CapitalExpenditures and Capital Commitments**

During the third quarters of 2005 and 2004,our capital expenditures, net of capital grants, amounted to approximately $12.0million and $10.5 million, respectively. During the first nine months of 2005and 2004, our capital expenditures, net of capital grants, amounted toapproximately $27.4 million and $23.0 million, respectively. Our

 

22

----

 

capital spending duringthe third quarters and first nine months of 2005 and 2004 consisted primarilyof manufacturing and office equipment, purchased software applications, andbuilding improvements. Such spending focused on funding additional equipmentneeds and improving existing factories, principally in the U.S., India, thePhilippines, Ireland, and China, as well as continuing investment ininformation technologies. Substantially all of APC’s net capital expenditureswere financed from available operating cash.

 

We have dedicated significant efforts torationalize our overall manufacturing capacity over the past three years and wewill continue to plan for future capacity requirements based on the assumedcontinued acceptance and demand for our products in the specific marketsegments they were designed to address. We currently expect that capitalspending will be between $35 million and $45 million in 2005, compared to $29.3million in 2004. We expect that most of the capital spending for 2005 will continueto go toward maintaining, upgrading, and expanding current manufacturingcapacity, as well as investing to upgrade current hardware and software officetechnologies.

 

We had no material capital commitments duringthe third quarters and first nine months of 2005 and 2004, or at September 25,2005 and December 31, 2004.

 

APChas agreements with the Industrial Development Authority of Ireland, otherwiseknown as the IDA. Under these agreements, we receive grant monies for costsincurred for machinery, equipment, and building improvements for our Galway andCastlebar facilities. These grants are equal to 40% and 60%, respectively, ofsuch costs up to a maximum of $13.1 million for Galway and $1.3 million forCastlebar. Such grant monies are subject to APC meeting certain employmentgoals and maintaining operations in Ireland until termination of the respectiveagreements. Under separate agreements with the IDA, we receive directreimbursement of training costs at our Galway and Castlebar facilities for upto $3,000 and $12,500, respectively, per new employee hired. Also refer to Note16 of Notes to Consolidated Financial Statements in Item 8 of American PowerConversion Corporation’s Annual Report on Form 10-K for the year ended December 31,2004.

 

APCalso has an agreement with the IDA for a research and development grant towardsthe costs of a project for the development of software products. Theavailability of the grant is contingent on meeting certain milestones in theprogress of the project as well as meeting certain employment goals on theproject within the Galway facility. The amount of grant assistance available onsatisfaction of all conditions is 28% of the eligible expenditure to a maximumof €714,588. At September 25, 2005, no grant claims had been claimed orreceived.

 

**Borrowing Facilities and Financial Commitments**

APChad no borrowing facilities or significant financial commitments, other thanthose required in the normal course of business, during the third quarters andfirst nine months of 2005 and 2004, or at September 25, 2005 and December 31,2004.

 

**Off-Balance-Sheet Arrangements**

APChad no significant off-balance sheet arrangements during the third quarters andfirst nine months of 2005 and 2004, or at September 25, 2005 and December 31,2004.

 

**Quarterly Cash Dividends**

Quarterly cash dividends of $0.08 per share were declared and paid inthe first and second quarters of 2004. In June 2004, APC’s Board ofDirectors approved a 25% increase in its quarterly cash dividend raising the quarterlypayout to $0.10 per share. Dividends of $0.10 per share were declared and paidin each subsequent quarter through the third quarter of 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.

 

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

 

23

----

 

## **Foreign Currency Activity**

## **We invoice our customersin various currencies. Realized and unrealized transaction gains or losses areincluded in the results of operations and are measured based upon the effect ofchanges in exchange rates on the actual or expected amount of functionalcurrency cash flows. Transaction gains and losses were not material to theresults of operations in the third quarters and first nine months of 2005 and2004.**

## ** **

The table below summarizes information on balancesthat are sensitive to foreign currency exchange rates and presents such amountsin U.S. dollar equivalents. APC’s U.S. dollar functional currency entities aresensitive to changes principally in the Euro and British pound. APC’s Swissfranc functional currency entity is sensitive to changes principally in theEuro and U.S. dollar.

 
| ** **                       | ** ** | **September 25, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| **(In millions)**                | ** ** | **Accounts  Receivable**    | ** ** | **Liabilities**            | ** ** | **Accounts  Receivable** | ** ** | **Liabilities** | ** ** |
| * *                         | * *   | * *                    | * *   | * *                   | * *   | * * | * * | * * | * * |
| U.S. dollar  functional currency | ** ** | **$**                       | **87.4**   | ** **                 | **$**      | **92.0** |   | $ | 97.6 |   | $ | 101.9 |   |
| Swiss franc  functional currency | ** ** | **$**                       | **16.1**   | ** **                 | **$**      | **5.0** |   | $ | 17.2 |   | $ | 8.4 |   |

 

APC also had non-trade receivables denominated inEuros of approximately U.S.$0.9 million and U.S.$0.8 million at September 25,2005 and December 31, 2004, respectively.

 

We continually review our foreign exchange exposureand consider various risk management techniques, including the netting offoreign currency receipts and disbursements, rate protection agreements withcustomers/vendors and derivatives arrangements, including foreign exchangecontracts. We presently do not utilize rate protection agreements or derivativearrangements.

 

**NetBotzAcquisition**

Earlyin the fourth quarter of 2005, APC completed the acquisition of privately heldNetBotz, Inc., a leader in IP-based environmental and video monitoringsolutions, for $31 million in cash plus direct costs of the acquisition. APC’s cashoutlays associated with this acquisition were financed from operating cash.This acquisition will be accounted for as a purchase of a business and,accordingly, NetBotz results of operations will be included in APC’sconsolidated financial statements from the date of acquisition.

 

**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-K for theyear ended December 31, 2004.

 

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,

 

24

----

 

the results of which formthe 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 critical accounting policies are as follows:

 

***Revenue Recognition. ***Wefollow very specific and detailed guidelines in measuring revenue; however,certain judgments affect the application of our revenue policy. Revenue resultsare difficult to predict, and any shortfall in revenue or delay in recognizingrevenue could cause our operating results to vary significantly from quarter toquarter. In general, revenue is recognized when title has passed at the time ofdelivery of product for all of our operating segments as stipulated by thedelivery terms for the sales transactions. In addition, prior to revenuerecognition, we require persuasive evidence of the arrangement, that the priceis fixed or determinable, and that collectibility is reasonably assured.Installation is not applicable for Small Systems and “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)).

 

Certain Large Systems product lines and, at times, one product lineincluded in the Small Systems segment, require electrical hardwire installationor duct installation which is performed by the customer or their contractedlicensed contractor/electrician. Where we do not perform such installation,revenue recognition at the time of delivery is proper as customer acceptance ofthe unit 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 with bindingpurchase orders on a transaction by transaction basis.

 

Our arrangements do notgenerally include acceptance clauses. However, if an arrangement includes acustomer specified acceptance provision, acceptance generally occurs at ourfactory prior to delivery. As we continue to introduce new products, 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.

 

***Estimating Valuation Allowances and Accrued Liabilities –Allowances for Sales Returns, Doubtful Accounts, Inventory Obsolescence andProduct Recall, and Assessment of the Probability of the Outcome of our CurrentLitigation. ***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

 

25

----

 

Bulletin No. 104.Returns of Large Systems products generally do not occur. Historically, returnshave represented approximately 3% of gross sales and have not differedsignificantly from prior estimates.

 

Similarly, we must make estimates of the uncollectability of ouraccounts receivable. Management specifically analyzes accounts receivablebalances in view of customer credit-worthiness, customer concentrations,historical bad debts, current economic trends, and changes in our customerpayment terms when evaluating the adequacy of the allowance for doubtfulaccounts. Commencing in August 2004,we expanded APC’s receivables insurance coverage to include U.S.-based sales. Amajority of U.S. and international customer balances continue to be covered byreceivables insurance. Historically, write-offs of uncollectable accounts have represented less than 1%of net sales.

 

Our inventory reserve estimate methodology involves quantifying thetotal inventory position having potential loss exposure. Loss exposuregenerally results from several business factors, including product or componentdiscontinuance, unplanned changes in demand, product design changes, andfactory transitions. Quantifying such loss exposure is the result of combiningthe cost of inventories specifically identified as having little or noopportunity for sale or use (thus available for physical disposition) plus thecost of inventories having a high risk of no future sale or use based upon ananalysis of on-hand quantities compared to historical and anticipated futuresale or use. We maintain an on-going business process for the physicaldisposition of inventories previously identified. Inventory write-offs occur atthe time of physical disposition. Inventories, once reserved, are not writtenback up as such reserve adjustments are considered to be a permanent decreaseto the cost basis of the excess or obsolete inventory. If actual marketconditions are less favorable than those projected by management, additionalinventory write-downs may be required.

 

In early 2003, APC announced a product recall due topotential safety issues. The total number of affected devices recalledworldwide is approximately 2.1 million with approximately 900,000 devicesrecalled in the United States. The recall is limited to two specific models inAPC’s Back-UPS® CS product line, the Back-UPS CS 350 and the Back-UPS CS 500,in both 120-volt and 230-volt models. As of September 25, 2005, APC hadincurred approximately 93% of currently estimated total recall costs of $14.1million. Our estimation of remaining recall costs of $1.0 million, principallyfor U.S. recall activity, continues to be subject to actual return rates andper unit repair costs (which can vary by country) as well as estimates forother recall-related costs expected to be incurred. The most significant risksassociated with our return rate assumptions include varying degrees of productrecall regulation by geography as well as varying consumer awareness levels andaccess to timely recall information. Actual per unit repair cost includesprincipally transportation costs which will be influenced by the proximity of customerlocations to the service center location as well as the priority level ofdelivery requirements. We expect that actual future amounts will not differmaterially from our current estimates.

 

We are, and may in thefuture become, involved in litigation involving our business, products oroperations. For pending claims for which there is an estimatable 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 of Long-lived Tangible and Intangible Assetsincluding 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 relativeto expected historical or projected future operating results;

•                  significant changes in the manner ofour use of the acquired assets or the strategy for our overall business;

•                  significant negative industry oreconomic trends; and

•                  significant technological changes,which would render equipment and manufacturing process, obsolete.

 

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

 

***Accounting for Income 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.

 

***AmericanJobs Creation Act of 2004 — Repatriation of Foreign Earnings. ***In October 2004, the American JobsCreation Act of 2004 was enacted. This Act repealed the tax code’sextraterritorial income (ETI) exclusion in response to the World TradeOrganization’s challenge that the ETI exclusion was a prohibited tax subsidy.The repeal will be phased in through 2006. The Act replaced the ETI exclusionwith a 3% domestic deduction for domestic production activities effective forAPC’s 2005 tax year. The Act also provides for a temporary 85% dividendsreceived deduction on certain foreign earnings repatriated during a one-yearperiod. The deduction would result in an approximate 5.25% federal tax rate onthe repatriated earnings. To qualify for the deduction, the earnings must bereinvested in the United States pursuant to a domestic reinvestment planestablished by a company’s chief executive officer and approved by its board ofdirectors. Certain other criteria in the Jobs Act must be satisfied as well.The maximum amount of APC’s foreign earnings that qualify for the temporarydeduction is $500 million. For APC, the one-year period during which thequalifying distributions can be made is 2005. No qualifying distributions weremade during 2004.

 

APC is in theprocess of evaluating whether it will repatriate any foreign earnings under therepatriation provisions of the Jobs Act and, if so, the amount that it willrepatriate. The range of reasonably possible amounts that APC is consideringfor repatriation, which would be eligible for the temporary deduction, is zeroto approximately $500 million. If APC determines to repatriate foreignearnings, we are likely to repatriate amounts in the high end of our range. APCexpects to determine the amounts and sources of foreign earnings to berepatriated, if any, during the fourth quarter of fiscal 2005. Use of the fundswill be governed by a domestic reinvestment plan, as required by the Jobs Act.

 

Repatriation ofthe maximum amount eligible for the temporary deduction, which is $500 million,could result in additional United States federal income tax expense, which APCcurrently estimates to be between zero and $20 million, in fiscal 2005. We were able to lower our previouslyestimated range of zero to $38.2 million as a result of favorable IRS guidancereleased in May 2005. Repatriationalso would substantially increase liquidity in the United States, although useof the additional liquidity would be restricted by the domestic reinvestment plan.There would be a corresponding reduction in liquidity at APC’s foreignsubsidiaries.

 

APC is routinely under audit by federal, foreign, state, or localauthorities in the areas of income taxes and the remittance of sales and usetaxes. These audits include questioning the timing and amount of deductions,the nexus of income among various tax jurisdictions and compliance withfederal, foreign, state, and local tax laws. In evaluating the exposureassociated with various tax filing positions, we often accrue for probableexposures. To the extent APC were to prevail in matters for which accruals havebeen established or were to be required to pay amounts in excess of reserves,APC’s effective tax rate in a given financial statement period could bematerially affected.

 

27

----

 

To the extent we believe that recovery of deferred tax assets is notlikely, we must establish a valuation allowance. To the extent we establish avaluation allowance or increase this allowance in a period, we must include anexpense within the tax provision in the consolidated statements of income.Significant management judgment is required in determining our provision forincome taxes, our deferred tax assets and liabilities and any valuationallowance recorded against our net deferred tax assets. At September 25,2005 and December 31, 2004, we provided a valuation allowance on certainof our deferred tax assets, primarily consisting of net operating lossesgenerated in 2001 through the third quarter of 2005 for the start up andcontinuing operations of Brazilian operations, because of uncertainty regardingtheir realizability. The valuation allowance is based on our estimates oftaxable income by jurisdiction in which we operate and the period over whichour deferred tax assets will be recoverable. In the event that actual resultsdiffer from these estimates or we adjust these estimates in future periods wemay need to establish an additional valuation allowance which could materiallyimpact our financial position and results of operations.

 

## **RECENTLY ISSUEDACCOUNTING STANDARDS**

## ** **

***Accountingfor Electronic Equipment Waste Obligations. ***In June 2005, the Financial AccountingStandards Board issued Staff Position No. 143-1, *Accountingfor Electronic Equipment Waste Obligations.*This Position addressesthe accounting for obligations associated with Directive 2002/96/EC on WasteElectrical and Electronic Equipment (the “Directive”) adopted by the EuropeanUnion. This Position refers to and paraphrases various provisions of theDirective. This Statement is effective for APC upon adoption of the Directiveby the individual European Union countries. This Statement may have a materialimpact on our consolidated financial position or results of operations. We are currentlyevaluating the country-specific implementation requirements to determine the impactof the Position’s provisions.

 

***Accounting Changes and Error Corrections. ***In May 2005, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No.154, *AccountingChanges and Error Corrections*. This Statement changes therequirements for the accounting for and reporting of a change in accountingprinciple. It requires retrospective application to prior periods’ financial statementsof changes in accounting principle, unless it is impracticable to determineeither the period specific effects or the cumulative effect of the change. ThisStatement applies to all voluntary changes in accounting principle. It alsoapplies to changes required by an accounting pronouncement in the unusualinstance that the pronouncement does not include specific transitionprovisions. When a pronouncement includes specific transition provisions, thoseprovisions should be followed. This Statement is effective for APCbeginning with the first quarter of 2006. It is not expected to have a materialimpact on our consolidated financial position or results of operations.

 

***Accounting for Conditional Asset Retirement Obligations. ***In March 2005, the Financial Accounting Standards Board issuedInterpretation No. 47, *Accounting for ConditionalAsset Retirement Obligations*. This Interpretation clarifies that theterm “conditional asset retirement obligation” as used in Statement No. 143,*Accounting for Asset Retirement Obligations*,refers to a legal obligation to perform an asset retirement activity in whichthe timing and (or) method of settlement are conditional on a future event thatmay or may not be within the control of the entity. This Interpretation alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. This Interpretationis effective no later than the end of fiscal years ending after December 15,2005 (December 31, 2005, for calendar year enterprises). This Statement iseffective for APC beginning with the fourth quarter of 2005. Adoption of the guidance in this consensus isnot expected to have a material impact on our consolidated financial positionor results of operations.

 

***Share-BasedPayment.***  In December 2004,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 123 (revised 2004), *Share-BasedPayment*, which is a revision of Statement No. 123 as amended byNo. 148, *Accounting for Stock-Based Compensation*.Statement No. 123(R) supercedes APB Opinion No. 25. Generally, theapproach in Statement 123(R) is similar to the approach described in Statement123. However, Statement 123(R) requires all share-based payments to employees,including grants of employee stock options, to be recognized in the incomestatement based on their fair values at the date of grant. Pro forma disclosureis no longer an alternative. The U.S. Securities and Exchange Commission hasextended this Statement’s effective date to the beginning of a company’s nextfiscal year. This Statement is effective for APC beginning with the first quarterof 2006.

 

28

----

 

Statement 123(R)permits public companies to adopt its requirements using one of two methods.The “modified prospective” method requires compensation cost to be recognizedbeginning with the Statement’s effective date (a) based on therequirements of Statement 123(R) for all share-based payments granted after theeffective date and (b) based on the requirements of Statement 123 for allawards granted to employees prior to the effective date of Statement 123(R)that remain unvested on the effective date. The “modified retrospective” methodincludes the requirements of the modified prospective method described above,but also permits entities to restate based on the amounts previously recognizedunder Statement 123 for purposes of pro forma disclosures either (a) allprior periods presented or (b) prior interim periods of the year ofadoption.

 

In April 2005,the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 107.The Bulletin confirms the latitude in Statement 123(R)’s provisions onselecting models for valuing share options and clarifies other positions onaccounting and disclosure for share-based-payment arrangements. In addition,the Bulletin permits registrants to choose from different models to estimatethe fair value of share options, provides guidance on developing assumptions usedin the models, and addresses the interaction between Statement 123(R) and otherSEC literature.

 

APC has yet todetermine which method to use in adopting Statement 123(R). As permitted byStatement 123, APC currently accounts for share-based payments to employeesusing APB Opinion No. 25’s intrinsic value method and, as such, generallyrecognizes no compensation cost for employee stock options. Accordingly, theadoption of Statement 123(R)’s fair value method will have a significant impacton APC’s results of operations, although it will have no impact on APC’soverall financial position. APC is evaluating Statement 123(R) and has not yetdetermined the amount of expense related to share-based payments which will beincurred in future periods.

 

## **FACTORS THAT MAY AFFECTFUTURE RESULTS**

 

This document containsforward-looking statements that involve risks and uncertainties. Our actualresults could differ materially from those anticipated in these forward lookingstatements as a result of certain factors, including the risks faced by usdescribed below and elsewhere in this document.

 

The factors that couldcause actual results to differ materially include the following: APC’s abilityto improve the execution of its operations processes and eliminate operationalwaste and excess expense; costs to maintain compliance with the provisions ofthe Sarbanes-Oxley Act of 2002 are greater than currently anticipated; theimpact of increasing competition which could adversely affect APC’s revenuesand profitability; the impact of foreign currency exchange rate fluctuations;the impact on demand, component availability and pricing, and logistics, andthe disruption of manufacturing operations that result from labor disputes,war, acts of terrorism or political instability; ramp up, expansion, transferand rationalization 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, including Oracle 11iwhich is periodically upgraded; the discovery of a latent defect in any of APC’sproducts; APC’s ability to effectively align operating expenses and productioncapacity with the current demand environment; general worldwide economicconditions, and, in particular, the possibility that the PC and related marketsdecline; growth rates in the power protection industry and related industries;product mix changes and the potential negative impact on gross margins fromsuch changes; changes in the seasonality of demand patterns; inventory risksdue to shifts in market demand; component constraints, shortages, pricing andquality; risk of nonpayment of accounts receivable; the uncertainty of thelitigation process including risk of an unexpected, unfavorable result ofcurrent or future litigation; and the risks described from time to time in APC’sfilings with the Securities and Exchange Commission.

 

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

 

29

----

 

For a discussion of these and other risk factors, please refer to Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations included in our Annual Report on Form 10-K for the year ended December 31,2004.

 

**ITEM3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

We, in the normal courseof business, are exposed to market risks relating to fluctuations in foreigncurrency exchange rates. The information required under this section relatedto such risks is included in the *ForeignCurrency Activity* section of Management’s Discussion andAnalysis of Financial Condition and Results of Operations in Item 2 of thisreport and is incorporated herein by reference.

 

We, in the normal courseof business, are also exposed to market risks relating to fluctuations ininterest rates and the resulting rates of return on investments in marketablesecurities. The information required under this section related to suchrisks is included in the *Other Income, Net*section of Management’s Discussion and Analysis of Financial Condition andResults of Operations in Item 2 of this report and is incorporated herein byreference.

 

**ITEM 4.  CONTROLSAND PROCEDURES**

 

**(A)****             Evaluation ofdisclosure controls and procedures**

 

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

 

**(B)****             Changes in internalcontrols 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 inall Controls*****.**APC’s management, includingour Chief 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.

 

30

----

 

**PART II - OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

As previously reported in APC’s Form 10-Q for the quarters ended March 27,2005 and June 26, 2005, on February 5, 2004, LiebertCorporation and Zonatherm Products, Inc., Liebert’s sales representativefirm in the Chicago area, filed a lawsuit in the Circuit Court of Cook County,Illinois, Chancery Division (the “Circuit Court”) against APC, Aerico, LLC, asales representative firm formed by former employees of Zonatherm Products, andthe former employees of Zonatherm Products who formed Aerico, LLC. The lawsuitalleged willful violation of the Illinois Trade Secrets Act, tortiousinterference with contract, tortious interference with prospective economicadvantage, civil conspiracy and conspiracy to breach fiduciary duties. Liebertand Zonatherm are seeking compensatory and punitive damages and injunctiverelief. On February 18, 2004, the Circuit Court denied plaintiffs’ motionfor a temporary restraining order. On July 16, 2004, the Circuit Court dismissedwithout prejudice all claims except the Illinois Trade Secret Act claim. On August 6,2004, plaintiffs filed a second amended complaint reasserting the claimsdismissed by the Circuit Court on July 16, 2004. On August 20, 2004,the Circuit Court denied plaintiffs’ motion for preliminary injunction as toviolation of the Illinois Trade Secrets Act. On September 21, 2004,plaintiffs filed a Notice of Appeal of the August 20, 2004 ruling with theIllinois Appellate Court. On January 12, 2005, the Circuit Court dismissedwithout prejudice all claims against APC except the Illinois Trade Secret Actclaim. On March 1, 2005 the Illinois Appellate Court issued an opinion onthe appeal pursuant to which it affirmed the Circuit Court on the issue of the non-tradesecret nature of plaintiffs’ customer lists, and remanded the matter for the CircuitCourt to enter an injunction against one of the individual former employees ofZonatherm from using certain pricing books. On March 16, 2005, plaintiffsfiled a third amended complaint reasserting claims substantially similar tothose dismissed by the Circuit Court in its January 12, 2005 ruling. On May 19,2005, APC filed a motion to dismiss plaintiffs’ third amended complaint. On May 24,2005, the Circuit Court issued a preliminary injunction against one of theformer employees of Zonatherm enjoining him from using certain of plaintiffs’ pricingbooks. No injunction was issued against APC. On June 30, 2005, plaintiffsfiled an appeal with the Illinois Appellate Court seeking to expand the scopeof the Circuit Court’s injunction. On August 23, 2005, the Illinois Appellate Courtreversed in part the Circuit Court’s entry of a preliminary injunction anddirected the trial court to further enjoin the former Zonatherm employee fromcontacting customers on plaintiffs’ customer contact list. Again, no injunctionwas entered against APC. The August 23, 2005 Order is currently thesubject of an appeal to the Illinois Supreme Court. Because APC was notaffected by the Appellate Court’s August 23 Order, it is not party to thatappeal. On September 12, 2005, the Circuit Court dismissed withoutprejudice all counts in plaintiffs’ third amended complaint alleged againstAPC, except for plaintiffs’ claims for violation of the Illinois Trade SecretAct and for conspiracy to breach fiduciary duties.

 

In addition, APC is involved in various other claims and legal actionsarising 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,the litigation and other claims noted above are subject to inherentuncertainties, including the risk of an unfavorable outcome, and management’sview of these matters may change in the future. An unfavorable outcome couldinclude monetary damages or, in cases where injunctive relief is sought, aninjunction prohibiting certain activities. Were an unfavorable final outcome tooccur, there exists the possibility of a material adverse impact on APC’sfinancial position, cash flows and results of operations for the period inwhich the effect becomes reasonably estimable.

 

31

----

 

**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 Current Report on Form 8-K dated October 29,  2004, and incorporated herein by reference (File No. 1-12432)                                                                                                                                                         |
|                       |   |                                                                                                                                                                                                                                                                                                                                                                      |
| Exhibit No. 10.1 |   | Form of Amendment to Change-in-Control  Severance Agreement between APC and each of Rodger B. Dowdell, Jr., Neil  E. Rasmussen, Aaron L. Davis, Edward D. Bednarcik and Edward W. Machala,  previously filed as an exhibit to APC’s Current Report on Form 8-K dated  July 29, 2005 and incorporated herein by reference (File No. 1-12432) |
|                       |   |                                                                                                                                                                                                                                                                                                                                                                      |
| Exhibit No. 10.2 |   | Change-in-Control Severance Agreement, dated July 11,  2005, between APC and Richard J. Thompson, previously filed as an exhibit to  APC’s Current Report on Form 8-K dated July 11, 2005 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)                                                                                                             |

 

32

----

 

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.

 

**AMERICAN POWER CONVERSION CORPORATION**

 

Date:  November 4, 2005

 

 

/s/ Richard J. Thompson

 

Richard J. Thompson

*Senior Vice President, Finance, and Chief FinancialOfficer*

*(Principal Accounting and Financial Officer)*

 

33

----

 

**AMERICAN POWER CONVERSION CORPORATION ANDSUBSIDIARIES**

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                            | ** ** | ** ** |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                       |       |       |
| 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  Current Report on Form 8-K dated October 29, 2004 and incorporated herein  by reference (File No. 1-12432)                                                                                                                                                          |       |       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                       |       |       |
| 10.1                |       | Form of  Amendment to Change-in-Control Severance Agreement between APC and each of  Rodger B. Dowdell, Jr., Neil E. Rasmussen, Aaron L. Davis, Edward D.  Bednarcik and Edward W. Machala, previously filed as an exhibit to APC’s  Current Report on Form 8-K dated July 29, 2005 and incorporated herein  by reference (File No. 1-12432) |       |       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                       |       |       |
| 10.2                |       | Change-in-Control  Severance Agreement, dated July 11, 2005, between APC and Richard J.  Thompson, previously filed as an exhibit to APC’s Current Report on Form 8-K  dated July 11, 2005 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)                                                                                                      |       |       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                       |       |       |
| 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)                                                                                                              |       |       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                       |       |       |
| 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)                                                                                                      |       |       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                       |       |       |
| 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)                                                                                                              |       |       |

 

34

----