** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

*(Mark One)*

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

For the quarterly periodended September 24, 2006

or

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

For the transition periodfrom                             to                             

**CommissionFile Number: 1-12432**

**AMERICAN POWER CONVERSION CORPORATION**

(*Exact nameof registrant as specified in its charter*)

| MASSACHUSETTS                      |   | 04-2722013             |
|------------------------------------|--------|------------------------|
| *(State  or other jurisdiction of* |   | *(I.R.S.  employer*    |
| *incorporation  or organization)*  |   | *identification  no.)* |

 

132 FAIRGROUNDS ROAD, WEST KINGSTON, RHODE ISLAND02892

401-789-5735

(*Address andtelephone number of principal executive offices*)

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

YES x   NO o

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.

Large acceleratedfiler x         Acceleratedfiler o         Non-accelerated filer o

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

YES o    NO x

Registrant’s Common Stock outstanding, $0.01 parvalue, at October 26, 2006 —189,940,000 shares

 

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FORM 10-QSeptember 24, 2006

**AMERICANPOWER CONVERSION CORPORATION**

**INDEX**
|                                           | ** ** | ** **                                                                                                                                   | ** ** | **Page No.** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| **Part I -  Financial Information:** |       |                                                                                                                                         |       |              |       |
|                                      |       |                                                                                                                                         |       |              |       |   |   |
| Item  1.                                  |       | Consolidated  Condensed Financial Statements:                                                                                                |       |              |       |   |   |
|                                      |       | Consolidated Condensed Balance Sheets - September 24,  2006 and December 31, 2005 (Unaudited)                                                |       |              | 3-4        |   |   |
|                                      |       |                                                                                                                                         |       |              |       |   |   |
|                                      |       | Consolidated Condensed Statements of Income - Three  Months and Nine Months Ended September 24, 2006 and September 25, 2005  (Unaudited)     |       |              | 5          |   |   |
|                                      |       |                                                                                                                                         |       |              |       |   |   |
|                                      |       | Consolidated Condensed Statements of Cash Flows -  Three Months and Nine Months Ended September 24, 2006 and September 25, 2005  (Unaudited) |       |              | 6          |   |   |
|                                      |       |                                                                                                                                         |       |              |       |   |   |
|                                      |       | Notes to Consolidated Condensed Financial Statements  (Unaudited)                                                                            |       |              | 7-15       |   |   |
|                                      |       |                                                                                                                                         |       |              |       |   |   |
| Item 2.                                   |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                  |       |              | 15-30      |   |   |
|                                      |       |                                                                                                                                         |       |              |       |   |   |
| Item 3.                                   |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                                  |       |              | 30         |   |   |
|                                      |       |                                                                                                                                         |       |              |       |   |   |
| Item 4.                                   |       | Controls and Procedures                                                                                                                      |       |              | 31         |   |   |
|                                      |       |                                                                                                                                         |       |              |       |   |   |
| **Part  II -  Other  Information:**  |       |                                                                                                                                         |       |              |       |
|                                      |       |                                                                                                                                         |       |              |       |   |   |
| Item  1.                                  |       | Legal  Proceedings                                                                                                                           |       |              | 31         |   |   |
|                                      |       |                                                                                                                                         |       |              |       |   |   |
| Item  1A.                                 |       | Risk  Factors                                                                                                                                |       |              | 32         |   |   |
|                                      |       |                                                                                                                                         |       |              |       |   |   |
| Item 2.                                   |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                                 |       |              | 33         |   |   |
|                                      |       |                                                                                                                                         |       |              |       |   |   |
| Item 6.                              |       | Exhibits                                                                                                                                     |       |              | 34         |   |   |
|                                      |       |                                                                                                                                         |       |              |       |   |   |
| **Signatures**                            |       |                                                                                                                                         | 35         |              |       |
| ** **                                |       |                                                                                                                                         |       |              |       |
| **Exhibit Index**                         |       |                                                                                                                                         | 36         |              |       |

 

2

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FORM 10-QSeptember 24, 2006

**PART I -CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

**ITEM1.  FINANCIAL STATEMENTS**

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

**ASSETS**
| ** **                                                                                        | ** ** | **September 24,  2006** | ** **    | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------|---------------|-----------------------------|------------|
| Current assets:                                                                                   | ** ** | ** **                   |          |                        |       |
| Cash and cash  equivalents                                                                        | ** ** | **$**                        | **187,566**   |                        | $          | 262,414 |   |
| Short term investments  (Note 3)                                                                  | ** ** | **323,175**                  |          | 511,181                     |       |
| Accounts receivable,  less allowance for doubtful accounts of $15,065 in 2006 and $14,995 in 2005 | ** ** | **415,469**                  |          | 374,694                     |       |
| Inventories:                                                                                      | ** ** | ** **                   |          | ** **                  | ** ** |
| Raw materials                                                                                     | ** ** | **226,468**                  |          | 215,260                     |       |
| Work-in-process  and finished goods                                                               | ** ** | **410,066**                  |          | 326,563                     |       |
| Total inventories                                                                                 | ** ** | **636,534**                  |          | 541,823                     |       |
|                                                                                              | ** ** | ** **                   |          |                        |       |
| Prepaid expenses and  other current assets                                                        | ** ** | **76,561**                   |          | 59,181                      |       |
| Deferred income taxes                                                                             | ** ** | **69,835**                   |          | 60,139                      |       |
|                                                                                              | ** ** | ** **                   |          |                        |       |
| Total current assets                                                                              | ** ** | **1,709,140**                |          | 1,809,432                   |       |
|                                                                                              | ** ** | ** **                   |          |                        |       |
| Property, plant and  equipment:                                                                   | ** ** | ** **                   |          |                        |       |
| Land, buildings  and improvements                                                                 | ** ** | **91,511**                   |          | 75,549                      |       |
| Machinery and  equipment                                                                          | ** ** | **248,898**                  |          | 229,768                     |       |
| Office  equipment, furniture and fixtures                                                         | ** ** | **109,711**                  |          | 101,144                     |       |
| Purchased  software                                                                               | ** ** | **66,274**                   |          | 53,275                      |       |
|                                                                                              | ** ** | **516,394**                  |          | 459,736                     |       |
| Less accumulated  depreciation and amortization                                                   | ** ** | **320,059**                  |          | 293,692                     |       |
| Net property, plant and  equipment                                                                | ** ** | **196,335**                  |          | 166,044                     |       |
|                                                                                              | ** ** | ** **                   |          |                        |       |
| Long term investments  (Note 3)                                                                   | ** ** | **330**                      |          | 562                         |       |
| Goodwill (Note 4)                                                                                 | ** ** | **18,202**                   |          | 15,781                      |       |
| Other intangibles, net  (Note 4)                                                                  | ** ** | **26,338**                   |          | 36,115                      |       |
| Deferred income taxes                                                                             | ** ** | **44,535**                   |          | 42,427                      |       |
| Other assets                                                                                      | ** ** | **3,954**                    |          | 5,101                       |       |
|                                                                                              | ** ** | ** **                   |          |                        |       |
| Total assets                                                                                      | ** ** | **$**                        | **1,998,834** |                        | $          | 2,075,462 |   |

 

*See accompanying notes toconsolidated condensed financial statements.*

3

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FORM 10-QSeptember 24, 2006

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

**LIABILITIES AND SHAREHOLDERS’ EQUITY**
| ** **                                                | ** ** | **September 24,  2006** | ** **    | **December 31,  2005** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|---------------|-----------------------------|------------|
| Current liabilities:                                      | ** ** | ** **                   |          |                        |       |
| Accounts payable                                          | ** ** | **$**                        | **175,027**   |                        | $          | 176,345 |   |
| Accrued compensation                                      | ** ** | **56,445**                   |          | 41,798                      |       |
| Accrued sales and  marketing programs                     | ** ** | **54,059**                   |          | 47,826                      |       |
| Accrued warranty (Note  5)                                | ** ** | **14,284**                   |          | 13,272                      |       |
| Other accrued expenses                                    | ** ** | **74,866**                   |          | 60,013                      |       |
| Deferred revenue                                          | ** ** | **49,736**                   |          | 41,793                      |       |
| Income taxes payable                                      | ** ** | **12,928**                   |          | 39,755                      |       |
|                                                      | ** ** | ** **                   |          |                        |       |
| Total current  liabilities                                | ** ** | **437,345**                  |          | 420,802                     |       |
|                                                      | ** ** | ** **                   |          |                        |       |
| Deferred tax liability                                    | ** ** | **11,894**                   |          | 14,911                      |       |
|                                                      | ** ** | ** **                   |          |                        |       |
| Total liabilities                                         | ** ** | **449,239**                  |          | 435,713                     |       |
|                                                      | ** ** | ** **                   |          |                        |       |
| Shareholders’ equity  (Notes 6, 7, 8 and 9):         | ** ** | ** **                   |          |                        |       |
| Common stock, $0.01 par  value;                           | ** ** | ** **                   |          |                        |       |
| authorized  450,000 shares in 2006 and 2005;              | ** ** | ** **                   |          |                        |       |
| issued 189,873  shares in 2006 and 195,778 shares in 2005 | ** ** | **1,899**                    |          | 1,958                       |       |
| Additional paid-in  capital                               | ** ** | **14,134**                   |          | 131,862                     |       |
| Retained earnings                                         | ** ** | **1,530,692**                |          | 1,504,093                   |       |
| Accumulated other  comprehensive income                   | ** ** | **2,870**                    |          | 1,836                       |       |
|                                                      | ** ** | ** **                   |          |                        |       |
| Total shareholders’  equity                          | ** ** | **1,549,595**                |          | 1,639,749                   |       |
|                                                      | ** ** | ** **                   |          |                        |       |
| Total liabilities and shareholders’ equity           | ** ** | **$**                        | **1,998,834** |                        | $          | 2,075,462 |   |

 

*See accompanying notes toconsolidated condensed financial statements.*

4

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FORM 10-QSeptember 24, 2006

**AMERICAN POWER CONVERSIONCORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF INCOME*In thousands except earnings per share**(Unaudited)***
| ** **                                      | ** ** | **Nine months ended** | ** **    | **Three months ended** | ** ** |
|-------------------------------------------------|------------|---------------------------------|---------------|----------------------------------|------------|
| ** **                                      | ** ** | **September 24,**          | ** **    | **September 25,**           | ** ** | **September 24,** | ** ** | **September 25,** | ** ** |
| ** **                                      | ** ** | **2006**                        | ** **    | **2005**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                            |       |                            |          |                             |       |   |   |   |   |
| Net sales (Note 10)                             | ** ** | **$**                           | **1,660,096** |                             | $          | 1,400,898 | ** ** | **$** | **621,318** |   | $ | 512,289 |   |
|                                            |       |                            |          |                             |       |   |   |   |   |
| Cost of goods sold                              | ** ** | **1,102,911**                   |          | 869,526                          | ** ** | **410,546** |   | 323,633 |   |
|                                            |       |                            |          |                             |       |   |   |   |   |
| Gross profit                                    | ** ** | **557,185**                     |          | 531,372                          | ** ** | **210,772** |   | 188,656 |   |
|                                            |       |                            |          |                             |       |   |   |   |   |
| Operating expenses:                             |       |                            |          |                             |       |   |   |   |   |
| Marketing, selling,  general and administrative | ** ** | **405,113**                     |          | 314,474                          | ** ** | **147,292** |   | 108,276 |   |
| Research and  development                       | ** ** | **75,061**                      |          | 65,175                           | ** ** | **26,699** |   | 22,200 |   |
|                                            |       |                            |          |                             |       |   |   |   |   |
| Total operating  expenses                       | ** ** | **480,174**                     |          | 379,649                          | ** ** | **173,991** |   | 130,476 |   |
|                                            |       |                            |          |                             |       |   |   |   |   |
| Operating income                                | ** ** | **77,011**                      |          | 151,723                          | ** ** | **36,781** |   | 58,180 |   |
|                                            |       |                            |          |                             |       |   |   |   |   |
| Other income, net                               | ** ** | **15,148**                      |          | 14,431                           | ** ** | **4,796** |   | 5,448 |   |
|                                            |       |                            |          |                             |       |   |   |   |   |
| Earnings before income  taxes                   | ** ** | **92,159**                      |          | 166,154                          | ** ** | **41,577** |   | 63,628 |   |
|                                            |       |                            |          |                             |       |   |   |   |   |
| Income taxes (benefit)                          | ** ** | **7,836**                       |          | 39,559                           | ** ** | **(3,545** | **)** | 14,953 |   |
|                                            |       |                            |          |                             |       |   |   |   |   |
| Net income                                      | ** ** | **$**                           | **84,323**    |                             | $          | 126,595 | ** ** | **$** | **45,122** |   | $ | 48,675 |   |
|                                            |       |                            |          |                             |       |   |   |   |   |
| Basic earnings per  share                       | ** ** | **$**                           | **0.44**      |                             | $          | 0.65 | ** ** | **$** | **0.24** |   | $ | 0.25 |   |
|                                            |       |                            |          |                             |       |   |   |   |   |
| Basic weighted average  shares outstanding      | ** ** | **192,115**                     |          | 193,588                          | ** ** | **190,064** |   | 194,890 |   |
|                                            |       |                            |          |                             |       |   |   |   |   |
| Diluted earnings per  share                     | ** ** | **$**                           | **0.43**      |                             | $          | 0.63 | ** ** | **$** | **0.24** |   | $ | 0.24 |   |
|                                            |       |                            |          |                             |       |   |   |   |   |
| Diluted weighted average shares outstanding     | ** ** | **194,755**                     |          | 199,686                          | ** ** | **191,895** |   | 200,740 |   |

 

*See accompanying notes toconsolidated condensed financial statements.*

5

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FORM 10-QSeptember 24, 2006

**AMERICAN POWER CONVERSIONCORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS*In thousands**(Unaudited)***
| ** **                                                                         | ** **   | **Nine months ended** | ** **   | **Three months ended** | ** **   |
|------------------------------------------------------------------------------------|--------------|---------------------------------|--------------|----------------------------------|--------------|
| ** **                                                                         | ** **   | **September 24,  2006**    | ** **   | **September 25,  2005**     | ** **   | **September 24,  2006** | ** ** | **September 25,  2005** | ** ** |
| ***Cash  flows from operating activities***                                        | * *     | * *                        | * *     | * *                         | * *     | * * | * * | * * | * * |
| Net income                                                                         | ** **   | **$**                           | **84,323**   |                             | $            | 126,595 | ** ** | **$** | **45,122** |   | $ | 48,675 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |         |                            |         |                             |         |   |   |   |   |
| Depreciation and  amortization of property, plant and equipment                    | ** **   | **31,859**                      |         | 27,808                           | ** **   | **10,891** |   | 9,418 |   |
| Gain on sale of  property, plant and equipment                                     | ** **   | **(739**                        | **)**        | —                           | ** **   | **—** |   | — |   |
| Amortization of other  intangibles                                                 | ** **   | **9,918**                       |         | 8,843                            | ** **   | **3,306** |   | 2,948 |   |
| Provision for doubtful  accounts                                                   | ** **   | **3,578**                       |         | 1,748                            | ** **   | **2,223** |   | 1,090 |   |
| Provision for  inventories                                                         | ** **   | **23,925**                      |         | 8,373                            | ** **   | **8,797** |   | 5,052 |   |
| Share-based  compensation expense                                                  | ** **   | **11,934**                      |         | 6,853                            | ** **   | **3,811** |   | 1,161 |   |
| Deferred income taxes                                                              | ** **   | **(14,821**                     | **)**        | (7,740                           | )            | **(1,400** | **)** | (3,311 | ) |
| Other non-cash items,  net                                                         | ** **   | **1,034**                       |         | (652                             | )            | **20** |   | 253 |   |
| Changes in operating  assets and liabilities:                                      |         |                            |         |                             |         |   |   |   |   |
| Accounts  receivable                                                               | ** **   | **(44,353**                     | **)**        | (60,302                          | )            | **(21,805** | **)** | (28,982 | ) |
| Inventories                                                                        | ** **   | **(118,636**                    | **)**        | (29,670                          | )            | **(37,770** | **)** | (21,720 | ) |
| Prepaid expenses  and other current assets                                         | ** **   | **(17,380**                     | **)**        | (14,523                          | )            | **(13,860** | **)** | (6,052 | ) |
| Other assets                                                                       | ** **   | **(1,415**                      | **)**        | (2,980                           | )            | **(427** | **)** | (806 | ) |
| Accounts payable                                                                   | ** **   | **(1,318**                      | **)**        | 10,618                           | ** **   | **12,739** |   | 7,331 |   |
| Accrued expenses                                                                   | ** **   | **44,688**                      |         | 15,682                           | ** **   | **27,323** |   | 18,686 |   |
| Income taxes  payable                                                              | ** **   | **(26,827**                     | **)**        | 18,136                           | ** **   | **(21,716** | **)** | 8,177 |   |
| Net cash (used in)  provided by operating activities                               | ** **   | **(14,230**                     | **)**        | 108,789                          | ** **   | **17,254** |   | 41,920 |   |
|                                                                               |         |                            |         |                             |         |   |   |   |   |
| ***Cash  flows from investing activities***                                        | * *     | * *                        | * *     | * *                         | * *     | * * | * * | * * | * * |
| Purchases of  held-to-maturity securities                                          | ** **   | **—**                      |         | (710,849                         | )            | **—** |   | (86,005 | ) |
| Maturities of  held-to-maturity securities                                         | ** **   | **5,000**                       |         | 702,475                          | ** **   | **—** |   | 54,178 |   |
| Purchases of  available-for-sale securities                                        | ** **   | **(3,479,146**                  | **)**        | (1,525,260                       | )            | **(913,006** | **)** | (599,735 | ) |
| Sales of  available-for-sale securities                                            | ** **   | **3,662,384**                   |         | 1,558,634                        | ** **   | **926,732** |   | 647,604 |   |
| Capital expenditures                                                               | ** **   | **(62,648**                     | **)**        | (27,357                          | )            | **(14,086** | **)** | (12,042 | ) |
| Proceeds from sale of  property, plant and equipment                               | ** **   | **1,237**                       |         | —                           | ** **   | **—** |   | — |   |
| Net cash provided by  (used in) investing activities                               | ** **   | **126,827**                     |         | (2,357                           | )            | **(360** | **)** | 4,000 |   |
|                                                                               |         |                            |         |                             |         |   |   |   |   |
| ***Cash  flows from financing activities***                                        | * *     | * *                        | * *     | * *                         | * *     | * * | * * | * * | * * |
| Purchases of common  stock                                                         | ** **   | **(142,328**                    | **)**        | —                           | ** **   | **(12,835** | **)** | — |   |
| Proceeds from issuances  of common stock                                           | ** **   | **10,700**                      |         | 40,479                           | ** **   | **586** |   | 12,972 |   |
| Tax effect of stock  options                                                       | ** **   | **1,907**                       |         | —                           | ** **   | **(102** | **)** | — |   |
| Dividends paid on  common stock                                                    | ** **   | **(57,724**                     | **)**        | (58,131                          | )            | **(19,055** | **)** | (19,510 | ) |
| Net cash used in  financing activities                                             | ** **   | **(187,445**                    | **)**        | (17,652                          | )            | **(31,406** | **)** | (6,538 | ) |
|                                                                               |         |                            |         |                             |         |   |   |   |   |
| Net change in cash and  cash equivalents                                           | ** **   | **(74,848**                     | **)**        | 88,780                           | ** **   | **(14,512** | **)** | 39,382 |   |
| Cash and cash  equivalents at beginning of period                                  | ** **   | **262,414**                     |         | 72,721                           | ** **   | **202,078** |   | 122,119 |   |
| Cash and cash  equivalents at end of period                                        | ** **   | **$**                           | **187,566**  |                             | $            | 161,501 | ** ** | **$** | **187,566** |   | $ | 161,501 |   |
|                                                                               |         |                            |         |                             |         |   |   |   |   |
| ***Supplemental  cash flow disclosure***                                           | *** *** | *** ***                    | *** *** | *** ***                     | *** *** | *** *** | *** *** | *** *** | *** *** |
| Cash paid during the  period for:                                                  |         |                            |         |                             |         |   |   |   |   |
| Income taxes (net of refunds)                                                      | ** **   | **$**                           | **47,460**   |                             | $            | 23,810 | ** ** | **$** | **19,621** |   | $ | 9,827 |   |

 

*See accompanying notes toconsolidated condensed financial statements.*

6

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FORM10-QSeptember 24, 2006

**AMERICAN POWER CONVERSION CORPORATION ANDSUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS*(Unaudited)***

**1.****              ManagementRepresentation**

The accompanyingunaudited consolidated condensed financial statements should be read inconjunction with the consolidated financial statements included in the AmericanPower Conversion Corporation (APC) Annual Report on Form 10-K for the yearended December 31, 2005. In the opinion of management, the accompanyingunaudited consolidated condensed financial statements contain all adjustments(consisting of only normal recurring accruals) necessary to present fairly theconsolidated financial position and the consolidated results of operations andcash flows for the interim periods. The results of operations for the interimperiods are not necessarily indicative of results to be expected for the fullyear.

**2.****              Principles ofConsolidation**

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

**3.****              Investments**

APCclassifies as short term its investments with original maturities greater than threemonths and less than or equal to one year, and as long term its investmentswith remaining maturities greater than one year. APC has no investments withmaturity dates greater than one year except for auction rate securities andvariable rate demand obligations. 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. Management determines the appropriate classification ofsecurities at the time of purchase and re-evaluates such designation as of eachbalance sheet date. Securities are classified as held-to-maturity when APC hasthe positive intent and ability to hold such securities to maturity. APCinvests its excess cash principally in auction rate securities and variablerate demand obligations which have long-term underlying maturities, however themarket is highly liquid and the interest rates reset frequently.

At September 24, 2006, APC had noheld-to-maturity investments. At December 31, 2005, APC’s held-to-maturityinvestments included $5.0 million with contractual maturities of one year orless; APC had no held-to-maturity investments with contractual maturitieslonger than one year. At September 24, 2006 and December 31, 2005, APC’savailable-for-sale auction rate debt securities (ARS’s) included $225.9 millionand $364.5 million, respectively, with contractual maturities betweenapproximately eight to 41 years. At September 24, 2006 and December 31, 2005,APC’s available-for-sale variable rate demand obligations (VRDN’s) included$97.3 million and $136.7 million, respectively, with contractual maturitiesbetween six and 35 years. Both the ARS’s and VRDN’s resemble short-terminstruments because they contain features (i.e., interest rate reset and putoptions, respectively) that allow for the sale of the instrument on apredetermined schedule of one to 49 days depending on the type of instrumentand its particular features.

Proceeds from the salesof investment securities available-for-sale were $927 million and $648 millionin the third quarters of 2006 and 2005, respectively, and were $3.662 billionand $1.559 billion in the first nine months of 2006 and 2005, respectively.

7

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| ** **                         | ** ** | **Amortized  Cost**     | ** **  | **Gross Unrealized  Holding Gains** | ** ** | **Gross Unrealized  Holding Losses** | ** ** | **Fair  Value** | ** ** |
|------------------------------------|------------|-------------------------|-------------|-----------------------------------------------|------------|------------------------------------------------|------------|-----------------|------------|
| ** **                         | ** ** | **(In thousands)** | ** **  |
| **At  September 24, 2006**         | ** ** | ** **              | ** **  | ** **                                    | ** ** | ** **                                     |       |            |       |
| ** **                         | ** ** | ** **              | ** **  | ** **                                    | ** ** | ** **                                     |       |            |       |
| **Available-for-sale**             | ** ** | ** **              | ** **  | ** **                                    | ** ** | ** **                                     | ** ** | ** **      | ** ** |
| Auction rate  securities           | ** ** | **$**                   | **225,875** | ** **                                    | **$**      | **—**                                     | ** ** | **$**           | **—** | ** ** | **$** | **225,875** | ** ** |
| Variable rate  demand obligations  | ** ** | **97,300**              | ** **  | **—**                                    | ** ** | **—**                                     | ** ** | **97,300**      | ** ** |
| Equity  investments                | ** ** | **330**                 | ** **  | **—**                                    | ** ** | **—**                                     | ** ** | **330**         | ** ** |
|                               | ** ** | **$**                   | **323,505** | ** **                                    | **$**      | **—**                                     | ** ** | **$**           | **—** | ** ** | **$** | **323,505** | ** ** |
| **At  December 31, 2005**          | ** ** | ** **              | ** **  | ** **                                    | ** ** | ** **                                     |       |            |       |
| ** **                         | ** ** | ** **              | ** **  | ** **                                    | ** ** | ** **                                     |       |            |       |
| **Available-for-sale**             | ** ** | ** **              | ** **  | ** **                                    | ** ** | ** **                                     | ** ** | ** **      | ** ** |
| Auction rate  securities           |       | $                       | 369,481     |                                          | $          | —                                         |       | $               | —     |   | $ | 369,481 |   |
| Variable rate  demand obligations  |       | 136,700                 |        | —                                        |       | —                                         |       | 136,700         |       |
| Equity  investments                |       | 481                     |        | 81                                            |       | —                                         |       | 562             |       |
|                               |       | 506,662                 |        | 81                                            |       | —                                         |       | 506,743         |       |
| **Held-to-maturity**               |       |                    |        |                                          |       |                                           |       |            |       |
| U.S. government  agency securities |       | 5,000                   |        | —                                        |       | (28                                            | )          | 4,972           |       |
|                               |       | 5,000                   |        | —                                        |       | (28                                            | )          | 4,972           |       |
|                               |       | $                       | 511,662     |                                          | $          | 81                                             |       | $               | (28        | ) | $ | 511,715 |   |

 

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

At each of September 24, 2006 and December 31, 2005, goodwill of $15.9million and $15.8 million, respectively, was associated with the Small Systemssegment. At September 24, 2006, goodwill of $2.3 million was associated withthe Large Systems segment and originated during the first and third quarters of2006 ($2.1 million and $0.2 million, respectively) from payments of escrowedpurchase price consideration. Amortized intangible assets were as follows:
| ** **                         | ** ** | ** **                                  | ** ** | **September 24, 2006** | ** **  | **December 31, 2005** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| **Amortized  Intangible  Assets**  | ** ** | **Weighted  Average  Amortization  Period** | ** ** | **Gross  Carrying  Amount**      | ** **  | **Accumulated  Amortization**   | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                         | ** ** | ** **                                  | ** ** | **($ in thousands)**   | ** **  |
| Technology                         |       | 8 years                                     | ** ** | **$**                            | **87,460**  | ** **                      | **$**      | **64,279** |   | $ | 87,319 |   | $ | 55,958 |   |
| Customer lists                     |       | 9 years                                     | ** ** | **11,100**                       | ** **  | **8,784**                       |       | 11,100 |   | 7,610 |   |
| Tradenames                         |       | 9 years                                     | ** ** | **3,957**                        | ** **  | **3,116**                       |       | 3,957 |   | 2,693 |   |
| Total amortized  intangible assets |       | 8 years                                     | ** ** | **$**                            | **102,517** | ** **                      | **$**      | **76,179** |   | $ | 102,376 |   | $ | 66,261 |   |

 

Aggregateamortization expense related to APC’s other intangible assets for the thirdquarters of 2006 and 2005 was $3.3 million and $2.9 million, respectively, andfor the first nine months of 2006 and 2005 was $9.9 million and $8.8 million,respectively. Estimated aggregated amortization for each of the next fivesucceeding fiscal years is $13.2 million for 2006, $11.1 million for 2007, $6.6million for 2008, $2.6 million for 2009, and $1.2 million for 2010. There areno expected residual values related to these intangible assets.

8

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**5.****              WarrantyLiability**
| ** **           | ** ** | **Product  Warranty  Liability at  Beginning  of Quarter** | ** ** | **Accruals for**Product  Warranties  Issued During  the Quarter | ** ** | **Adjustments  to Accruals  for Preexisting  Warranties** | ** ** | **Warranty  Payments** | ** ** | **Product  Warranty  Liability at  End of  Quarter** | ** ** |
|----------------------|------------|----------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|------------------------|------------|----------------------------------------------------------------|------------|
| ** **           | ** ** | **(In thousands)**                                              | ** ** |
| Third Quarter  2006  | ** ** | **$**                                                                | **13,348** |                                                                           | **$**      | **15,481**                                                          | ** ** | **$**                  | **—** | ** **                                                     | **$**      | **(14,545** | **)** | **$** | **14,284** | ** ** |
| Second Quarter  2006 | ** ** | **$**                                                                | **13,229** |                                                                           | **$**      | **11,388**                                                          | ** ** | **$**                  | **—** | ** **                                                     | **$**      | **(11,269** | **)** | **$** | **13,348** | ** ** |
| First Quarter  2006  | ** ** | **$**                                                                | **13,272** | ** **                                                                     | **$**      | **7,315**                                                           | ** ** | **$**                  | **—** | ** **                                                     | **$**      | **(7,358** | **)** | **$** | **13,229** | ** ** |
|                 |       |                                                                 |       |                                                                           |       |                                                                |       |                   |       |                                                           |       |
| 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 |   |

 

**6.****              Earnings Per Share**

Basic earnings per share is computed by dividing netincome by the weighted average number of common shares outstanding during theperiod. Diluted earnings per share is computed by dividing net income by theweighted average number of common shares and dilutive potential common sharesoutstanding during the period. Under the treasury stock method, the unexercisedoptions are assumed to be exercised and the unvested restricted stock units areassumed to be vested at the beginning of the period or at issuance, if later.The assumed proceeds are then used to purchase common shares at the averagemarket price during the period. Potential common shares for which inclusionwould have the effect of increasing diluted earnings per share (i.e.,antidilutive) are excluded from the computation.
| ** **                                                                                                                     | ** ** | **Nine months ended** | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                     | ** ** | **September 24,  2006**    | ** ** | **September 25,  2005**     | ** ** | **September 24,  2006** | ** ** | **September 25,  2005** | ** ** |
| ** **                                                                                                                     | ** ** | **(In thousands)**         | ** ** |
| Basic weighted  average shares outstanding                                                                                     | ** ** | **192,115**                     | ** ** | 193,588                          | ** ** | **190,064** |   | 194,890 |   |
| Net effect of  dilutive potential common shares outstanding based on the treasury stock  method using the average market price | ** ** | **2,640**                       | ** ** | 6,098                            | ** ** | **1,831** |   | 5,850 |   |
| Diluted weighted  average shares outstanding                                                                                   | ** ** | **194,755**                     | ** ** | 199,686                          | ** ** | **191,895** |   | 200,740 |   |
| Antidilutive potential  common shares excluded from the computation above                                                      | ** ** | **2,751**                       | ** ** | 515                              | ** ** | **3,077** |   | 131 |   |

 

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

***CommonStock and Paid-in Capital.***  In February 2006, APC’s Board of Directorsapproved a stock repurchase program which authorizes up to $200 million torepurchase outstanding shares of APC’s common stock. The purchases would bemade on the open market based on market and business factors. The duration ofthe repurchase program is two years but may be suspended or discontinued at anytime without prior notice. APC commenced the repurchase of its common stock inFebruary 2006.

The decrease in commonstock and paid-in capital during the third quarter of 2006 reflected APC’sthird quarter repurchase on the open market of approximately 0.7 million sharesof its common stock, at an average price of $17.42 per share, totaling $12.8million. The decrease in common stock and paid-in capital during the first ninemonths of 2006 reflected APC’s first nine months repurchase on the open marketof approximately 7.1 million shares of its common stock, at an average price of$20.01 per share, totaling $142.3 million. Such shares have been deemedauthorized but not issued. These decreases were partially offset by stockissuances relating to stock-based employee benefit programs, as well as to thefinancial statement recognition of stock-based compensation and the tax benefitafforded to APC as a result of the disposition of option shares by APCemployees. Accounting rules require this compensation expense and corporate taxbenefit to be recorded as an increase in paid-in capital.

9

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***Dividends.*** Dividends of $0.10 per share were declared and paid in each of thefirst, second, and third quarters of 2006 and 2005. It is the intention of theBoard of Directors to pay a comparable quarterly dividend on a going forwardbasis contingent upon continued capital availability and a determination thatcash dividends continue to be in the best interests of APC and itsshareholders.

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

The components of comprehensive income, net of tax, are as follows:
| ** **                                               | ** ** | **Nine months ended** | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **September 24,  2006**    | ** ** | **September 25,  2005**     | ** ** | **September 24,  2006** | ** ** | **September 25,  2005** | ** ** |
| ** **                                               | ** ** | **(In thousands)**         | ** ** |
| Net income                                               | ** ** | **$**                           | **84,323** | ** **                       | $          | 126,595 | ** ** | **$** | **45,122** | ** ** | $ | 48,675 |   |
| Other  comprehensive income (loss), net of tax:          | ** ** | ** **                      | ** ** |                             | ** ** | ** ** | ** ** |   |   |
| Change in foreign currency translation adjustment        | ** ** | **1,115**                       | ** ** | (652                             | )          | **74** | ** ** | 253 |   |
| Net unrealized loss on investments, net of income  taxes | ** ** | **(81**                         | **)**      | —                           | ** ** | **(54** | **)** | — |   |
| Other comprehensive income (loss)                        | ** ** | **1,034**                       | ** ** | (652                             | )          | **20** | ** ** | 253 |   |
|                                                     | ** ** | ** **                      | ** ** |                             | ** ** | ** ** | ** ** |   |   |
| Comprehensive income                                     | ** ** | **$**                           | **85,357** | ** **                       | $          | 125,943 | ** ** | **$** | **45,142** | ** ** | $ | 48,928 |   |

 

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

Effective January 1,2006, APC adopted the fair value recognition provisions of Statement ofFinancial Accounting Standards No. 123 (revised 2004), *Share-BasedPayment*, using the modified-prospective transition method. Underthis transition method, compensation cost recognized in the first quarter offiscal 2006 included compensation cost for all share-based payments grantedthrough January 1, 2006, but for which the requisite service period had notbeen completed as of January 1, 2006, based on the grant date fair valuesestimated in accordance with the original provisions of SFAS 123. Compensationcost for all share-based payments granted subsequent to January 1, 2006 will bebased on grant date fair values estimated in accordance with the provisions ofSFAS 123R. Compensation cost for grants during the third quarter endedSeptember 24, 2006 and the second quarter ended June 25, 2006 were notmaterial. There were no grants during the first quarter ended March 26, 2006.Results for prior periods have not been restated.

As a result of theadoption of SFAS 123R, APC’s income before income taxes for the third quarterand first nine months ended September 24, 2006 was $1.0 million and $3.0million lower, respectively, and net income for the third quarter and firstnine months ended September 24, 2006 was $0.8 million and $2.3 million lower,respectively, than if APC had continued to account for share-based compensationunder APB Opinion No. 25. APC recognized a total of $3.8 million and $11.9 millionof share-based compensation cost for the third quarter and first nine monthsended September 24, 2006. APC did not record a cumulative effect of change inaccounting principle related to forfeitures of stock-based awards since suchforfeitures were not material. As of September 24, 2006, there was $19.0million of total unrecognized compensation cost related to outstandingshare-based compensation arrangements. That cost is expected to be recognizedover a remaining weighted-average period of 1.5 years. APC utilizes a FASBInterpretation No. 28 attribution model for the timing of the recognition ofcompensation expense.

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

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The followingtable illustrates the effect on net income and earnings per share as if APC hadapplied the fair value recognition provisions of SFAS 123 for the third quarterand first nine months ended September 25, 2005:
| ** **                                                                                                                                    | ** ** | ** **  | ** ** | **Nine months  ended**                                          | ** ** | **Three months  ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|----------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                    | ** ** | ** **  | ** ** | **September 25,  2005**                                         | ** ** | **September 25,  2005** | ** ** |
| ** **                                                                                                                                    | ** ** | ** **  | ** ** | **(In thousands except per share amounts)** | ** ** |
| Net income                                                                                                                                    |       | As reported |       | $                                                                    | 126,595    |                         | $          | 48,675 |   |
| 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                                                               | )          | (2,516                       | )          |
| Net income                                                                                                                                    |       | Pro forma   |       | $                                                                    | 122,161    |                         | $          | 47,047 |   |
|                                                                                                                                          |       |        |       |                                                                 |       |                         |       |
| Basic earnings  per share                                                                                                                     |       | As reported |       | $                                                                    | 0.65       |                         | $          | 0.25 |   |
|                                                                                                                                          |       | Pro forma   |       | $                                                                    | 0.63       |                         | $          | 0.24 |   |
|                                                                                                                                          |       |        |       |                                                                 |       |                         |       |
| Diluted earnings  per share                                                                                                                   |       | As reported |       | $                                                                    | 0.63       |                         | $          | 0.24 |   |
|                                                                                                                                          |       | Pro forma   |       | $                                                                    | 0.61       |                         | $          | 0.23 |   |

 

For all of APC’sstock-based compensation plans, the fair value of each grant was estimated atthe date of grant using the Black-Scholes option pricing model. Black-Scholesutilizes assumptions related to volatility, the risk-free interest rate,dividend yield, and employee exercise behavior. Expected volatilities utilizedin the model are based on the historical volatility of APC’s stock price. Therisk-free interest rate is derived from the U.S. Treasury yield curve in effectat the time of grant. The model incorporates exercise and post-vestingforfeiture assumptions based on an analysis of historical data. The expectedlife of fiscal 2006 grants has been derived from historical information andother factors.

At September 24, 2006,APC had one active stock-based compensation plan, the 2004 Long-Term IncentivePlan (2004 LTI Plan), and an employee stock purchase plan (ESPP), which aredescribed more fully below. At September 24, 2006, there were 9.8 millionshares available for future grants under the 2004 LTI Plan.

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

On April 21, 1997, APC’sshareholders approved the 1997 Stock Option Plan and on June 19, 1987 approvedthe 1987 Stock Option Plan (collectively the 1997 and 1987 Plans). The 1997 and1987 Plans authorized the grant of options for up to 12.0 million shares and21.6 million shares, respectively, of common stock. On June 11, 2002 and May 7,1999, APC’s shareholders authorized an additional 9.5 million shares and 12.0million shares, respectively, under the 1997 Stock Option Plan, resulting in anaggregate of 33.5 million shares available for grant under the 1997 StockOption Plan.

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

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

Options granted under the1997 and 1987 Plans before December 1, 1995 vested 25% at the end of the firstyear and 12.5% at the end of each six month period thereafter. Options grantedafter December 1, 1995 and before February 14, 1997 vested 20% at the end ofthe second year and 20% at the end of each year thereafter. Options grantedafter February 14, 1997 vest 25% at the end of the first year and 12.5% at theend of each six month period thereafter. Options granted under the 2004 LTIPlan generally vest 25% at the end of each year.

On April 21, 1997, APC’sshareholders approved the 1997 Non-employee Director Stock Option Plan and onMay 20, 1993 approved the 1993 Non-employee Director Stock Option Plan(collectively the Director Plans). The 1997 and 1993 Director Plans authorizedthe grant of options for up to 400,000 shares and 80,000 shares of commonstock, respectively. In the first nine months of 2006 and 2005, allnon-employee directors were entitled to participate in the 1997 Non-EmployeeDirector Stock Option Plan, with each receiving no option grants during thosequarters.

Options granted under the1997 Director Plan, and the options granted on August 9, 2001 under the 1997Stock Option Plan, vest 25% at the end of the second year and 9.375% at the endof each six month period thereafter. Options granted under the 1993 DirectorPlan vested 25% at the end of the first year and 25% annually thereafter.

Options granted under allstock-based compensation plans after January 1, 1993 expire not more than tenyears from the date of grant (five years in the case of ISOs granted to tenpercent shareholders). The outstanding options at September 24, 2006 expire at variousdates through 2016. Options granted terminate within a specified period of timefollowing termination of an optionee’s employment or position as a director orconsultant with APC.

A summary of the status of stock options outstandingunder APC’s stock-based compensation plan as of September 24, 2006, and changesduring the first nine months ending on that date is presented below. APC has apolicy of issuing new shares to satisfy stock option exercises.
| ** **                         | ** ** | **Options**                                                                              | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------|------------|------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **(In thousands except years and per share amounts)** | ** ** |
|                               |       |                                                                                     |       |                                   |       |                                                |       |                            |       |
| Outstanding at  January 1, 2006    |       | 11,757                                                                                   |       | $                                      | 15.69      |                                                |       |                            |       |   |
| Granted                            |       | 162                                                                                      |       | $                                      | 18.98      |                                                |       |                            |       |   |
| Exercised                          |       | (877                                                                                     | )          | $                                      | 12.55      |                                                |       |                            | $          | 7,542 |   |
| Terminated                         |       | (315                                                                                     | )          | $                                      | 20.00      |                                                |       |                            |       |   |
| Outstanding at  September 24, 2006 |       | 10,727                                                                                   |       | $                                      | 15.87      |                                                | 3.7 years  |                            | $          | 55,068 |   |
|                               |       |                                                                                     |       |                                   |       |                                                |       |                            |       |
| Exercisable at  September 24, 2006 |       | 9,453                                                                                    |       | $                                      | 15.60      |                                                | 3.2 years  |                            | $          | 46,580 |   |

 

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***StockPurchase Plan.***  OnApril 21, 1997, APC’s shareholders approved an Employee Stock Purchase Plan(the Plan) to provide substantially all employees an opportunity to purchaseshares of its common stock through payroll deductions, in an aggregate amountup to 10% of eligible compensation. Semiannually, participant account balancesare used to purchase shares of stock at the lesser of 85% of the fair marketvalue of shares on the grant date or the exercise date. The aggregate number ofshares purchased by an employee may not exceed 3,000 shares annually (subjectto limitations imposed by the Internal Revenue Code). The Plan expires onFebruary 11, 2017. A total of 3.0 million shares are authorized for purchaseunder the Plan. No shares were issued under the Plan during the first and thirdquarters of 2006 and 2005. During the second quarters of 2006 and 2005, underthe Plan, 72,604 shares were issued at $18.47 per share and 69,214 shares wereissued at $16.78 per share, respectively.

***Restricted Stock Units.*** Also under the aforementioned 2004 LTI Plan, APC’s Compensationand Stock Option Committee of the Board of Directors approved the award ofrestricted stock units (RSU’s). A summary of the status of RSU’s as ofSeptember 24, 2006 and changes during the first nine months then ended ispresented below:

|                                   | ** ** | **Number  of RSU’s**      | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|----------------------------------------------------|------------|
| ** **                        | ** ** | **(Shares in thousands)** | ** ** |
| Non-vested at  January 1, 2006    |       | 1,137                               |       | $                                                  | 19.82      |   |
| Granted                           |       | 504                                 |       | $                                                  | 19.01      |   |
| Vested                            |       | (336                                | )          | $                                                  | 19.27      |   |
| Terminated                        |       | (118                                | )          | $                                                  | 20.26      |   |
| Non-vested at September  24, 2006 |       | 1,187                               |       | $                                                  | 19.59      |   |

 

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

**10.****       Operating SegmentInformation**

***Basis for presentation. ***APC operates primarily within one industryconsisting of three reportable operating segments by which it manages itsbusiness and from which various offerings are commonly combined to develop atotal solution for the customer. These efforts primarily incorporate thedesign, manufacture, and marketing of power protection equipment and relatedsoftware and accessories for computer, communications, and related equipment.APC’s three segments are: Small Systems, Large Systems, and “Other.” Each ofthese segments address global markets.

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

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***Large Systems.***  TheLarge Systems segment provides systems, products and services that primarilyprovide back-up power, power distribution and cooling for data centers,facilities, and communications equipment for both commercial and industrialapplications. Product offerings include major components of InfraStruXure®systems, Silcon® UPSs, precision cooling equipment, DC and broadband powersystems, Gutor® industrial UPS systems and APC Global Services. Products aresold to commercial users through both a direct and indirect selling modelconsisting of value-added resellers and strategic partnerships. Additionally,APC utilizes manufacturer representatives to identify and secure projects.

***“Other” Segment.***  TheOther segment consists principally of mobile accessories and replacementbattery products. The distribution model of products in the Other segment isconsistent with that of the Small Systems segment.

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

Summary operating segment information is as follows:
| ** **                          | ** ** | **Nine months ended** | ** **    | **Three months ended** | ** ** |
|-------------------------------------|------------|---------------------------------|---------------|----------------------------------|------------|
| ** **                          | ** ** | **September 24,  2006**    | ** **    | **September 25,  2005**     | ** ** | **September 24,  2006** | ** ** | **September 25,  2005** | ** ** |
| ** **                          | ** ** | **(In thousands)**         | ** **    |
| **Segment net sales**               | ** ** | ** **                      | ** **    |                             | ** ** | ** ** |   |   |   |
| Small Systems                       | ** ** | **$**                           | **1,210,507** | ** **                       | $          | 1,053,959 | ** ** | **$** | **460,027** |   | $ | 390,267 |   |
| Large Systems                       | ** ** | **382,476**                     | ** **    | 285,956                          | ** ** | **135,886** |   | 100,407 |   |
| Other                               | ** ** | **52,486**                      | ** **    | 52,242                           | ** ** | **19,395** |   | 18,550 |   |
| Total segment net sales             | ** ** | **1,645,469**                   | ** **    | 1,392,157                        | ** ** | **615,308** |   | 509,224 |   |
| Shipping and handling  revenues     | ** ** | **14,627**                      | ** **    | 8,741                            | ** ** | **6,010** |   | 3,065 |   |
| Total net sales                     | ** ** | **$**                           | **1,660,096** | ** **                       | $          | 1,400,898 | ** ** | **$** | **621,318** |   | $ | 512,289 |   |
| ** **                          | ** ** | ** **                      | ** **    |                             | ** ** | ** ** |   |   |   |
| **Segment profits**                 | ** ** | ** **                      | ** **    |                             | ** ** | ** ** |   |   |   |
| Small Systems                       | ** ** | **$**                           | **508,235**   | ** **                       | $          | 482,281 | ** ** | **$** | **197,618** |   | $ | 174,785 |   |
| Large Systems                       | ** ** | **64,877**                      | ** **    | 53,088                           | ** ** | **21,667** |   | 16,453 |   |
| Other                               | ** ** | **27,913**                      | ** **    | 30,700                           | ** ** | **9,856** |   | 11,190 |   |
| Total segment profits               | ** ** | **601,025**                     | ** **    | 566,069                          | ** ** | **229,141** |   | 202,428 |   |
| Shipping and handling  net costs    | ** ** | **40,456**                      | ** **    | 34,696                           | ** ** | **14,985** |   | 13,772 |   |
| Workforce reductions  and severance | ** ** | **3,384**                       | ** **    | —                           | ** ** | **3,384** |   | — |   |
| Other indirect  operating expenses  | ** ** | **480,174**                     | ** **    | 379,650                          | ** ** | **173,991** |   | 130,476 |   |
| Other income, net                   | ** ** | **15,148**                      | ** **    | 14,431                           | ** ** | **4,796** |   | 5,448 |   |
| Earnings before income taxes        | ** ** | **$**                           | **92,159**    | ** **                       | $          | 166,154 | ** ** | **$** | **41,577** |   | $ | 63,628 |   |

 

**11.****       Litigation**

APC is involvedin various claims and legal actions arising in the ordinary course of business.While management currently believes that resolving all pending legal matters,individually or in aggregate, will not have a material adverse impact on APC’sfinancial position, litigation and claims 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.

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**12.****       Subsequent Event**

On October 28, 2006, APC and Schneider Electric SA,a leading provider of solutions for electrical distribution, industrial controland automation projects, executed a definitive merger agreement under whichSchneider Electric will acquire all outstanding shares of APC for $31.00 pershare in cash. The aggregate transaction value is approximately $6.1 billion.The transaction, which is expected to close in the first quarter of 2007, issubject to approval by APC shareholders. Approval from Schneider Electric’sshareholders is not required.

In addition, the merger is subject to clearanceunder the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the EuropeanCommission, and other customary closing conditions. Under the terms of themerger agreement, Schneider Electric has agreed to use its best efforts toavoid or eliminate each and every impediment under any antitrust, competitionor trade regulation law that may be asserted by the United States Federal TradeCommission, the United States Department of Justice, Antitrust Division, anyState Attorney General or any other governmental authority with respect to themerger so as to enable the closing of the merger to occur as soon as reasonablypossible.

The merger agreement contains certain terminationrights for both APC and Schneider Electric, and further provides that, upontermination of the merger agreement under certain circumstances, APC may beobligated to pay Schneider Electric a termination fee of $180 million.

**ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

We beginManagement’s Discussion and Analysis of Financial Condition and Results ofOperations (MD&A) with a discussion of our business outlook for theremainder of 2006. We also provide a discussion of our Results of Operationsfor the third quarter and first nine months of 2006 compared to the thirdquarter and first nine months of 2005. 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 Financial Resourcesdiscussion of the significant changes in our balance sheet during the thirdquarter and first nine months of 2006, and cash flows for the third quarter andfirst nine months of 2006 compared to the third quarter and first nine monthsof 2005, as well as our contractual obligations and foreign currency activity.This is followed by a discussion of the Critical Accounting Policies that webelieve are important to our business operations and understanding of ourresults of operations.

This MD&Ashould be read in conjunction with the other sections of this report, including“Item 1. Financial Statements” and also our Annual Report on Form 10-K for theyear ended December 31, 2005, including “Item 1. Business;” “Item 6. SelectedFinancial Data;” “Item 8. Financial Statements and Supplementary Data;” and “Item9A. 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.

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**BUSINESS OUTLOOK**

Our third quarterperformance again highlighted the strong demand for APC’s solutions andcontinued a trend we have been experiencing throughout 2006. We are pleasedwith APC’s top line performance during the third quarter and first nine monthsof 2006. Our performance continues to reflect strong demand across geographiesand major operating segments and extended our double digit year-over-yearrevenue growth streak to thirteen consecutive quarters. We believe that thestrong year-over-year revenue growth can be attributed to what we believe is ahealthy macro-economic environment for IT spending and is the result of ourcontinued investments in research and development, sales and marketingactivities and the growing adoption of APC’s network-critical physicalinfrastructure, or NCPI, architecture. APC has pioneered integrated systems forNCPI, which is the foundation upon which Information Technology (IT) andtelecommunication networks reside. It is the “backbone” of a business, as itselements provide the power, cooling, physical housing, cabling and otherelements which allow the IT systems to function. The investments we havecontinued to make to educate the market and drive adoption of the technology,we believe, are being well received as customers embrace the modular,standardized approach APC has pioneered.

We experienced animprovement in our operating results in the third quarter versus ourperformance in the first half of 2006. Through the streamlining of operations,supply chain initiatives and pricing actions, we are taking steps to improveour gross margin, while maintaining investments in innovation, sales andmarketing programs to drive awareness and adoption of APC’s NCPI solutionsglobally. Despite continued progress in our operations and supply chaininitiatives, the year-over-year trends remain unfavorable although less so thanprevious quarters. Additionally, year-over-year margins were also negativelyimpacted in the quarter by segment and product mix.

On September 21, 2006,APC’s management committed to a global plan of termination under which APC’sworkforce will be reduced by approximately 330 positions (the “Global Action”).The estimated range of costs to be incurred in connection with the GlobalAction is approximately $4 million to $5 million, consisting primarily of employeeseverance costs. APC had previously announced its plan on June 27, 2006 tostreamline Irish operations, including the commencement of discussions withemployees with the objective of reducing the number of positions in Ireland byapproximately 200 to 250 (the “Irish Action”). Based on the current status ofthese discussions and further identification of affected employees andassociated severance costs, the estimated range of costs to be incurred inconnection with the Irish Action is now expected to be approximately $6 millionto $7 million, consisting primarily of employee severance costs. The costs ofboth actions will be recognized predominantly in the third and fourth quartersof 2006 as required by generally accepted accounting principles. It iscurrently anticipated that both actions will be completed in the first quarterof 2007 and that all of the expected costs will result in future cashexpenditures.

In the combined GlobalAction and Irish Action, APC intends to reduce its workforce by an aggregate ofapproximately 580 positions and expects to incur aggregate costs ofapproximately $10 million to $12 million, consisting primarily of employeeseverance costs. In total, APC expects annual pre-tax savings of approximately$32 million from the combined actions, principally in 2007, with pre-taxsavings of approximately $5 million anticipated in the fourth quarter of 2006.

Developing and managingthe internal capabilities necessary to meet the supply and order fulfillmentrequirements of two distinct business models, that is, a transaction-orientedproducts business and a customer-focused systems solutions business, is acomplicated and difficult task. To support these two businesses, we are workingto lower manufacturing costs and improve product delivery to our globalcustomer base. This has included transitioning more Large Systems manufacturingoverseas and populating global distribution centers with a broader portfolio ofproducts. During the third quarter we continued to make strides to improve ourorder fulfillment process and continue to avoid our reliance on expeditedshipping methods, particularly related to air freight. We saw our gross marginstabilize and increase slightly from the first half of 2006, however ourfreight and logistics costs remain at levels higher than they were prior to therecent transitions of Large Systems product manufacturing overseas.

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As we look forward to theremainder of 2006, our high level objectives remain the same — drive adoptionand growth of our InfraStruXure architecture and continue leading the marketfor server and desktop UPSs. We will also put a greater focus on near termprofitable business growth. And while we are reducing costs it does not mean wewill cease investing in the business because we must remain significantlyinvested to be successful. We believe that the changes we are making byrealigning resources along key areas can improve productivity, reduce costs andallow for continued growth in the business. We will continue investing in vitalareas and functions, including those supporting our data center initiatives,but at a more managed pace with a greater focus on profitability. We have takenthese actions with the intent of preserving momentum in our business by helpingbetter align resources against key target areas. We believe we can driveimproved productivity and leverage from our teams. We will also need to: (1)optimize operational efficiency, (2) deploy and improve distributioncapabilities in all regions globally, (3) accelerate the responsiveness of thesupply chain to minimize availability issues for the more complex solutions,(4) improve demand to supply signaling capabilities to support both businessmodels, and (5) build a products and professional services business needed forsuccessfully pursuing datacenter opportunities. Some of these initiatives,during implementation, may result in our incurring incremental costs prior toachieving the desired outcomes. Additionally, these initiatives will take time,some more than others, to implement, but we are committed to makingsignificant, meaningful, and timely progress.

We believe that we arewell positioned competitively, financially and strategically. We will continueto be focused on empowering IT professionals with the knowledge, tools andsolutions they need to effectively design, build and manage network-criticalphysical infrastructure. Our objective is for APC to become a trusted, globalpartner for the long term, committed to solving our customers’ NCPI problems oftoday and helping them anticipate their challenges of tomorrow, therebyallowing our customers to focus on their core competencies. Experts now predictthat powering and cooling the data center will soon become more expensive thanpurchasing the IT equipment to populate it. The importance of properly managingand maximizing the performance of NCPI has never been higher. APC anticipatedthis market need and is helping customers prepare for this reality with anentirely new approach to design, build and operate data centers. Today, we arecommitted to arm data center professionals with a solution that enables them tomanage their complex power and cooling challenges. We believe that we canaccomplish these objectives by dramatically reducing our customers’ level ofcomplexity and their total cost of ownership involved in designing, building,and managing the network-critical physical infrastructure that is at the verycore of maintaining business continuity, application availability, and networkreliability.

Additionally, we continueto plan for revenue growth in all three of our reportable segments: SmallSystems, Large Systems and “Other.” As in recent quarters, we expect the rateof revenue growth of our Large Systems segment to be greater than the growthexpected for Small Systems due to the assumed continued success of our overallstrategy and the acceptance of our products in specific market segments.

Overall gross margins for2006 are currently expected to continue to be impacted on a year-over-yearbasis by increased operational costs and a shift in product mix toward thefaster-growing, lower-margin Large Systems products. Gross margins,particularly for Small Systems products, are expected to continue to beimpacted by our response to a competitive pricing environment, but we have madesingle-digit price increases on select Small Systems products to help offsetrising commodity price trends. While we expect to continue to strive forfavorable component pricing arrangements with our material suppliers, therecent rising trends of commodity prices, particularly for steel, copper andlead, are expected to put upward pressure on our product materials costs. Inaddition to price increases in the Small Systems segment, we also expectpartial offset from material cost reductions, particularly for Large Systemsproducts, typically seen after transitioning to low-cost factories.

Increased operationalcosts, including freight and warehousing, are associated with the management ofour supply chain. These costs are tied to fulfilling customer orders andreducing overall long-term costs through the stocking of global third-partydistribution centers, expediting of product to meet customer demand, and thetransition cost of shifting production to lower cost manufacturing locations.We expect this could continue in the near term, however ultimately it isexpected these transitions will allow for lower manufacturing costs. In theshort-term, each transition is the equivalent of a new product introduction toa facility and comes with a learning curve and initial supply chaininefficiencies. Operational cost improvement initiatives, including redesign ofour supply chain processes and elimination of redundant manufacturing costs,are expected to result in long-term gross margin improvement.

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Gross margin variabilitycould continue to result from changing revenue levels, which are dependent onunit volumes, prices and currency trends as well as the mix of products sold,unit costs and yield issues associated with production at our factories,transfers of production to our low cost facilities, excess manufacturingcapacity, costs to comply with new and existing environmental regulations(including, but not limited to, the European Union’s directive on wasteelectrical and electronic equipment (WEEE) and directives relating torestriction of hazardous substances (RoHS)), excess inventory, supply chaininefficiencies, inventory obsolescence (including potential exposure from WEEEand RoHS compliance) and variations in inventory valuation.

We have dedicated effortsto optimize our overall manufacturing capacity and locations over recent yearsand we will continue to plan for future capacity requirements based on theassumed continued acceptance and demand for our products in the specific marketsegments they were designed to address. We currently expect that capitalspending will be between $80 million and $100 million in 2006, compared to $49million in 2005. Most of our incremental capital spending for 2006 will gotoward acquiring and expanding a building for a customer Technology LearningCenter, to be based in St. Louis, Missouri, and maintaining, upgrading, andexpanding our current manufacturing capacity, as well as investments to upgradecurrent hardware and software office technologies. We acquired land and anoffice building in St. Louis for approximately $14 million during the secondquarter of 2006 from available cash on-hand. Construction began during thethird quarter of 2006 on the Technology Learning Center building which isexpected to be completed in 2007.

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

In February 2006, APC’sBoard of Directors approved a stock repurchase program which authorizes up to$200 million to repurchase outstanding shares of APC’s common stock. Thepurchases would be made on the open market based on market and businessfactors. APC commenced the repurchase of its common stock in February 2006 and,as of the end of the third quarter, had repurchased approximately 7.1 millionshares on the open market at an average price of approximately $20.01 pershare, totaling $142 million. The duration of the repurchase program is twoyears but may be suspended or discontinued at any time without prior notice.

We currently expect ourtax rate to be approximately 21 - 23% for the full year 2006, excluding theimpact of the net tax benefit recognized during the third quarter of 2006. Theestimated effective tax rate is based on current tax law and the currentexpected income. The tax rate may be affected by the jurisdictions in whichprofits are determined to be earned and taxed, our ability to successfullyimplement additional tax savings planning opportunities and our ability torealize deferred tax assets.

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

On October 28, 2006, APC and Schneider Electric SA,a leading provider of solutions for electrical distribution, industrial controland automation projects, executed a definitive merger agreement under whichSchneider Electric will acquire all outstanding shares of APC for $31.00 pershare in cash. The aggregate transaction value is approximately $6.1 billion.The transaction, which is expected to close in the first quarter of 2007, is subjectto approval by APC shareholders. Approval from Schneider Electric’sshareholders is not required.

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In addition, the merger is subject to clearanceunder the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the EuropeanCommission, and other customary closing conditions. Under the terms of themerger agreement, Schneider Electric has agreed to use its best efforts toavoid or eliminate each and every impediment under any antitrust, competitionor trade regulation law that may be asserted by the United States Federal TradeCommission, the United States Department of Justice, Antitrust Division, anyState Attorney General or any other governmental authority with respect to themerger so as to enable the closing of the merger to occur as soon as reasonablypossible.

The merger agreement contains certain terminationrights for both APC and Schneider Electric, and further provides that, upontermination of the merger agreement under certain circumstances, APC may beobligated to pay Schneider Electric a termination fee of $180 million.

**RESULTS OF OPERATIONS**

**COMPARISONOF THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 24, 2006 AND SEPTEMBER 25,2005**

**Revenues**

Net sales were$621.3 million for the third quarter of 2006, an increase of 21.3% compared to$512.3 million for the comparable period in 2005. Net sales for the first ninemonths of 2006 were $1.660 billion, an increase of 18.5% compared to $1.401billion for the same period in 2005. Our third quarter performance againhighlighted the strong demand for APC’s solutions. Top line growth during thethird quarter and first nine months of 2006 was again widespread across each ofour major geographies and principal operating segments. We are confident thatthe strong year-over-year growth can be attributed to what we believe continuesto be a healthy macro-economic environment for IT spending and is the result ofour continued investments in sales and marketing activities and the growingadoption of APC’s network-critical physical infrastructure, or NCPI,architecture.

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

***Revenues by Geography.**** *The following table summarizes our revenues on a geographic basis for thethird quarter and first nine months ended September 24, 2006 and September 25,2005.
| ** **                                  | ** ** | **Nine months ended** | ** **  | **Three months ended** | ** ** |
|---------------------------------------------|------------|---------------------------------|-------------|----------------------------------|------------|
| ** **                                  | ** ** | **Sept. 24,  2006**        | ** **  | **% of  Total**             | ** ** | **Sept. 25,  2005** | ** ** | **% of  Total** | ** ** | **Sept. 24,  2006** | ** ** | **% of  Total** | ** ** | **Sept. 25,  2005** | ** ** | **% of  Total** | ** ** |
| ** **                                  | ** ** | **(In millions)**          | ** **  |
| North and Latin  America (the Americas)     | ** ** | **$**                           | **895.1**   | ** **                       | **53.9**   | **%** | $ | 730.3 |   | 52.1 | % | **$** | **343.1** | ** ** | **55.2** | **%** | $ | 268.3 |   | 52.4 | % |
| Europe, the  Middle East, and Africa (EMEA) | ** ** | **466.3**                       | ** **  | **28.1**                         | **%**      | 405.8 |   | 29.0 | % | **167.0** | ** ** | **26.9** | **%** | 148.9 |   | 29.1 | % |
| Asia                                        | ** ** | **298.7**                       | ** **  | **18.0**                         | **%**      | 264.8 |   | 18.9 | % | **111.2** | ** ** | **17.9** | **%** | 95.1 |   | 18.5 | % |
| Total Net Sales                             | ** ** | **$**                           | **1,660.1** | ** **                       | **100.0**  | **%** | $ | 1,400.9 |   | 100.0 | % | **$** | **621.3** | ** ** | **100.0** | **%** | $ | 512.3 |   | 100.0 | % |

 

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TheAmericas’ net sales increased 27.9% in the third quarter of 2006 over the thirdquarter of 2005, and increased 22.6% in the first nine months of 2006 over thefirst nine months of 2005. EMEA’s net sales increased 12.2% in the thirdquarter of 2006 over the third quarter of 2005, and increased 14.9% in thefirst nine months of 2006 over the first nine months of 2005. Asia’s net salesincreased 16.9% in the third quarter of 2006 over the third quarter of 2005, andincreased 12.8% in the first nine months of 2006 over the first nine months of2005.

Inaddition, we believe that constant currency information is useful for anunderstanding of our operating results. Revenues on a constant currency basisdiffer from revenues presented in accordance with accounting principlesgenerally accepted in the United States.

**Constant Currency Revenues**($ in millions)
| ** **      | ** ** | **Three Months Ended  September 24, 2006** | ** ** | **Three Months Ended  September 25, 2005** | ** ** |
|-----------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **      | ** ** | **Constant $  Revenue**                                   | ** ** | **Constant $  Impact**                                    | ** ** | **Constant $  % Change** | ** ** | **Constant $  Revenue** | ** ** | **Constant $  Impact** | ** ** | **Constant $  % Change** | ** ** |
|            |       |                                                           | ** ** |                                                           |       |   |   |   |   |   |   |   |   |
| The Americas    | ** ** | **$**                                                          | **342.7**  |                                                           | **$**      | **0.4** | ** ** | **27.7** | **%** | $ | 267.1 |   | $ | 1.3 |   | 18.1 | % |
| EMEA            | ** ** | **163.5**                                                      |       | **3.5**                                                        | ** ** | **9.9** | **%** | 149.6 |   | (0.7 | ) | 8.7 | % |
| Asia            | ** ** | **114.4**                                                      |       | **(3.2**                                                       | **)**      | **20.3** | **%** | 94.1 |   | 0.9 |   | 20.8 | % |
| Total Net Sales | ** ** | **$**                                                          | **620.6**  |                                                           | **$**      | **0.7** | ** ** | **21.1** | **%** | $ | 510.8 |   | $ | 1.5 |   | 15.6 | % |

 
| ** **      | ** ** | **Nine Months Ended  September 24, 2006** | ** **  | **Nine Months Ended  September 25, 2005** | ** ** |
|-----------------|------------|---------------------------------------------------------------|-------------|---------------------------------------------------------------|------------|
| ** **      | ** ** | **Constant $  Revenue**                                  | ** **  | **Constant $  Impact**                                   | ** ** | **Constant $  % Change** | ** ** | **Constant $  Revenue** | ** ** | **Constant $  Impact** | ** ** | **Constant $  % Change** | ** ** |
|            |       |                                                          | ** **  |                                                          |       |   |   |   |   |   |   |   |   |
| The Americas    | ** ** | **$**                                                         | **892.9**   |                                                          | **$**      | **2.3** | ** ** | **22.2** | **%** | $ | 728.8 |   | $ | 1.6 |   | 21.2 | % |
| EMEA            | ** ** | **469.1**                                                     |        | **(2.8**                                                      | **)**      | **15.6** | **%** | 403.3 |   | 2.4 |   | 9.8 | % |
| Asia            | ** ** | **308.7**                                                     |        | **(10.1**                                                     | **)**      | **16.6** | **%** | 262.8 |   | 2.0 |   | 19.2 | % |
| Total Net Sales | ** ** | **$**                                                         | **1,670.7** |                                                          | **$**      | **(10.6** | **)** | **19.3** | **%** | $ | 1,394.9 |   | $ | 6.0 |   | 17.3 | % |

 

EMEA’srevenues on a constant currency basis principally reflect fluctuations in theEuro and British pound. Asia’s revenues on a constant currency basisprincipally reflect fluctuations in the Japanese yen and Australian dollar.

**Costof Goods Sold**

Costof goods sold was $410.5 million or 66.1% of net sales in the third quarter of2006 compared to $323.6 million or 63.2% of net sales in the third quarter of2005. Cost of goods sold was $1.103 billion or 66.4% of net sales in the firstnine months of 2006 compared to $869.5 million or 62.1% of net sales in thefirst nine months of 2005. Gross margins for the third quarter of 2006 were33.9% of net sales, approximately 290 basis points lower than in the thirdquarter of 2005. Gross margins for the first nine months of 2006 were 33.6% ofnet sales, approximately 430 basis points lower than in the first nine monthsof 2005. The lower third quarter and first nine months 2006 gross margins wereattributable to a segment mix shift toward our Large Systems segment, combinedwith higher factory and field service costs within our principal segments.

Additionally,gross margins for the third quarter and first nine months of 2006 includedcharges totaling $3.4 million related to the aforementioned workforce reductionactions and severance. These costs have not been allocated to our operatingsegments, but rather have been classified as indirect operating expenses forsegment reporting consistent with our classification for internal financialreporting; also refer to Note 10 of Notes to Consolidated Condensed FinancialStatements in Item 1 of this Report.

For further informationabout gross margins by segment, refer to the *SegmentResults* section below.

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***Inventory Reserves.***  Totalinventory reserves at September 24, 2006 were $58.2 million compared to $48.6million at December 31, 2005. The increase in total inventory reservesreflected routine provisioning that was necessary as a result of applying APC’sinventory reserve methodology throughout the quarter, 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 disposition.Inventories, once reserved, are not written back up as such reserve adjustmentsare considered to be a permanent decrease to the cost basis of the excess orobsolete inventory.

**Segment Results**(Alsorefer to Note 10 of Notes to Consolidated Financial Statements in Item 1 ofthis report for important information regarding APC’s reportable segments)

***Small Systems.***  Net sales for products in the Small Systemssegment, which provides power protection, UPS and management products for thePC, server and networking markets, increased in the third quarter of 2006 by17.9% over the third quarter of 2005, and increased in the first nine months of2006 by 14.9% over the first nine months of 2005. Continued strong adoption ofour online Smart-UPS, the Smart-UPS RT, healthy growth in Back-UPS desktop UPSsplus growth in InfraStruXure architecture related categories, including racksand power distribution, were the primary drivers of the strong quarterly gainsin this segment.

Third quarter and first nine months 2006 gross margins for the Small Systemssegment of 43.0% and 42.0%, respectively, declined 180 basis points and 380basis points, respectively, from the comparable periods in 2005. Higher factory and field service costscontributed to the third quarter 2006 year-over-year decline. In addition,higher freight and logistics costs, and pricing and mix shifts were factors inthe year-to-date decline.

***Large Systems.***  Net sales for products in theLarge Systems segment, consisting primarily of 3-phase UPS, services, precisioncooling and ancillary products for data centers, facilities and communicationapplications, increased in the third quarter of 2006 by 35.3% over the thirdquarter of 2005, and increased in the first nine months of 2006 by 33.8% overthe first nine months of 2005. Solid growth from products used in theInfraStruXure architecture, including Symmetra 3-Phase UPSs, Power Distributionand Cooling, and services, as well as our broadband products drove the strongtop line growth in this segment. Additionally, our new Smart UPS VT, whichreplaces lower-kVA legacy Silcon products and APC’s broadband products alsocontributed to the strong top line performance of this segment during the firstnine months of 2006.

Third quarter and firstnine months 2006 gross margins for the Large Systems segment of 15.9% and17.0%, respectively, declined 50 basis points and 160 basis points,respectively, from the comparable periods in 2005. The growth of favorablegross margin products within this segment only partially offset increasingcosts in our Services business year-over-year. In addition, higher freight andlogistics costs contributed to the downward pressure on margins in this segmenton a year-to-date basis. Continuing material cost savings partially offsetunfavorable factors during the first nine months of 2006.

***“Other” Segment.***  Netsales for products in the Other segment, consisting principally of mobileaccessories and replacement batteries, increased in the third quarter of 2006by 4.6% over the third quarter of 2005, and increased in the first nine monthsof 2006 by 0.5% over the first nine months of 2005. Third quarter 2006 sales ofmobile accessories and replacement batteries were up year-over-year. For thefirst nine months of 2006, top line growth for this segment was essentiallyflat as the third quarter increases were substantially offset by declinesduring the first half of 2006 vs. the same period last year.

Thirdquarter and first nine months 2006 gross margins for the Other segment of 50.8%and 53.2%, respectively, decreased 950 basis points and 560 basis points,respectively, from the comparable periods in 2005. Pricing and material costsnegatively impacted this segment’s gross margins.

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**Operating Expenses**

***Marketing, Selling, General, andAdministrative (SG&A) Expenses.*** SG&A expenses inthe third quarter of 2006 were $147.3 million or 23.7% of net sales compared to$108.3 million or 21.1% of netsales in the third quarter of 2005. SG&A expenses in the first nine monthsof 2006 were $405.1 million or 24.4% of net sales compared to $314.5 million or 22.4% of net salesin the first nine months of 2005. We continue to support our data centerinitiatives, with a focus on increasing the awareness of our existing andprospective customers, particularly in relation to our InfraStruXure architecture.Our investments remain concentrated on driving InfraStruXure and datacenter-related initiatives, including sales and service staffing, education,and sales generation. The investments we are making in these areas areessential to branding the data center, and establishing APC as a leader in thenetwork-critical physical infrastructure market. Additionally, SG&Aexpenses for the third quarter and first nine months of 2006 included chargestotaling $4.2 million related to the aforementioned workforce reduction actionsand severance. We also recorded approximately $3 million in incremental costsyear-over-year associated with the newly acquired Netbotz business, includingamortization of intangibles ($9 million during the first nine months). Additionally,pursuant to our adoption of SFAS 123R, we recorded approximately $1 million inincremental stock-based compensation during the quarter ($3 million during thefirst nine months) for a total equity compensation expense of $4 million ($12million during the first nine months) when combined with costs associated withrestricted stock units; the majority of these costs were classified inoperating expenses.

The allowance for bad debts was 3.5% of gross accounts receivable atSeptember 24, 2006, substantially unchanged from 3.8% at December 31, 2005.Accounts receivable balances outstanding over 60 days represented 11.2% oftotal receivables at September 24, 2006 compared to 12.7% at December 31, 2005.A majority of U.S. and international customer balances continue to be coveredby receivables insurance. We continue to experience strong collectionperformance. Write-offs of uncollectable accounts represent less than 1% of netsales for both periods.

***Research andDevelopment (R&D).***  R&D expenditures were $26.7million or 4.3% of net sales in the third quarter of 2006, up from $22.2million or 4.3% of net sales in the third quarter of 2005. R&D expenditureswere $75.1 million or 4.5% of net sales in the first nine months of 2006, upfrom $65.2 million or 4.7% of net sales in the first nine months of 2005. Weare committed to sustaining our R&D efforts to meet the future needs of ourcustomers across all segments and potentially expanding into emerging,high-growth areas. We continue to advance our NCPI systems in addition toensuring our end-to-end offering is the best in the industry. We believe thatcontinued product innovation through development is necessary for our existingproducts to remain competitive in our markets, as well as creatingopportunities from new product introductions. The increases in total R&Dspending primarily reflect increased numbers of software and hardware engineersand costs associated with new product development and engineering support.

**OtherIncome, Net and Income Taxes**

***Other Income, Net.***  Otherincome is comprised principally of interest income which decreased during thethird quarter of 2006 due principally to lower average cash balances availablefor investment during 2006. Interest income increased during the first ninemonths of 2006 as a result of the favorable impact of rising interest ratescompared to the first nine months of 2005.

At September 24,2006, APC had $511.1 million of total cash and investments, down from $774.2million at December 31, 2005. We manage APC’s cash and investment balances topreserve principal and liquidity while maximizing our return on the totalinvestment portfolio. We diversify our investment portfolio by investing inmultiple types of investment-grade securities with multiple investment brokers.Based on APC’s investment portfolio and interest rates, at September 24, 2006,a 100 basis point increase or decrease in interest rates would have resulted inan increase or decrease of approximately $5 million in our annual interestincome.

***Income Taxes.***  Our effective income tax rate wasapproximately -8.5% and 23.5% for the third quarters and 8.5% and 23.8% for thefirst nine months ended September 24, 2006 and September 25, 2005,respectively. The decrease in 2006 from 2005 was principally attributable to anet tax benefit of approximately $12.9 million or $0.07 per share associatedwith the adjustment of income tax provisioning resulting from recent taxaudits. We expect APC’s effective income tax rate to remain considerably lowerthan the U.S. statutory federal corporate tax 

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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 taxholidays in China and India which reduce or eliminate the income taxes paid inthose countries.

**LIQUIDITYAND CAPITAL RESOURCES**

**Working Capital**

Working capital at September 24, 2006 was$1.272 billion compared to $1.389 billion at December 31, 2005. Our total cash,cash equivalents, and short-term investments decreased to $510.7 million atSeptember 24, 2006 from $773.6 million at December 31, 2005.

***Stock Repurchase Program****.*  InFebruary 2006, APC’s Board of Directors approved a stock repurchase programwhich authorizes up to $200 million to repurchase outstanding shares of APC’scommon stock. The purchases would be made on the open market based on marketand business factors. The duration of the repurchase program is two years butmay be suspended or discontinued at any time without prior notice. APCcommenced the repurchase of its common stock in February 2006. The first nine months2006 decrease in our cash, cash equivalents, and short-term investmentsposition reflected APC’s first nine months repurchase on the open market ofapproximately 7.1 million shares of its common stock, at an average price of$20.01 per share, totaling $142 million.

In addition, APC’s continued positiveoperating results allowed us to pay a quarterly dividend and continue tointernally finance the capital investment, R&D, sales and marketingspending required to expand our operations.

**Cash Flows**

The table below summarizesour cash flows for the third quarters and first nine months ended September 24,2006 and September 25, 2005.
| ** **                                           | ** ** | **Nine months ended** | ** **  | **Three months ended** | ** ** |
|------------------------------------------------------|------------|---------------------------------|-------------|----------------------------------|------------|
| ** **                                           | ** ** | **September 24,  2006**    | ** **  | **September 25,  2005**     | ** ** | **September 24,  2006** | ** ** | **September 25,  2005** | ** ** |
| ** **                                           | ** ** | **(In thousands)**         | ** **  |
| Net cash (used  in) provided by operating activities | ** ** | **$**                           | **(14,230** | **)**                            | $          | 108,789 | ** ** | **$** | **17,254** |   | $ | 41,920 |   |
| Net cash  provided by (used in) investing activities | ** ** | **126,827**                     |        | (2,357                           | )          | **(360** | **)** | 4,000 |   |
| Net cash used in  financing activities               | ** ** | **(187,445**                    | **)**       | (17,652                          | )          | **(31,406** | **)** | (6,538 | ) |
| Net change in  cash and cash equivalents             | ** ** | **(74,848**                     | **)**       | 88,780                           | ** ** | **(14,512** | **)** | 39,382 |   |
| Cash and cash  equivalents at beginning of period    | ** ** | **262,414**                     |        | 72,721                           | ** ** | **202,078** |   | 122,119 |   |
| Cash and cash  equivalents at end of period          | ** ** | **$**                           | **187,566** |                             | $          | 161,501 | ** ** | **$** | **187,566** |   | $ | 161,501 |   |

 

***Cash Flows from OperatingActivities****.*  Ourcash flows from operations for the third quarter and first nine months of 2006funded increased inventory as discussed below. Our cash flows from operationsfor the third quarter of 2005 and first nine months of 2005 reflectedhigher profit levels. In addition, bothyears reflected increased accounts receivable balances as a result of higherthird quarter and first nine months sales.

***Cash Flows from InvestingActivities****.*  Ourinvesting activities cash flows in the third quarter and first nine months of2006 reflected the impact of the aforementioned share repurchase program. Bothperiods included the impact of capital spending, principally manufacturing andoffice equipment, purchased software applications, and building improvements.Our investment approach and the composition of our investment portfolioremained relatively constant overall with no investments having maturity datesgreater than one year, except for our auction rate securities and variable ratedemand obligations. Capital spending in thethird quarters and first nine months of 2006 and 2005 focused on fundingadditional equipment needs and improving existing factories, principally in theU.S., India, and the Philippines, as well as continuing investment ininformation technologies.

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***Cash Flows from FinancingActivities****.*  Our cash flows from financing activitiesincluded the afore-mentioned share repurchases in the third quarter and firstnine months of 2006, as well as the payment of common stock dividends ofapproximately $19.1 million and $19.5 million during the third quarters of 2006and 2005, respectively, and $57.7 million and $58.1 million during the firstnine months of 2006 and 2005, respectively. These outflows were partiallyoffset by proceeds from issuances of common stock relating to employee stockplans during each of the periods presented.

**Inventories**

Worldwide inventories were $636.5 million at September 24, 2006, up from$541.8 million at December 31, 2005. APC’s inventory continued to increaseduring the third quarter in anticipation of continued revenue growth in thefourth quarter of 2006. Our inventory increased in the first half due toseasonal anticipation of summer demand patterns as a result of power outagesand interruptions. Also, higher levels of on-hand finished goods wererequired to ensure product availability as we navigate our aforementionedsupply chain issues, and to meet increasing current and anticipated demand,particularly InfraStruXure demand, as well as to manage the requirementsassociated with continuing transfers of production of a wide range of Small andLarge Systems products to and among our low cost manufacturing regions. Inaddition, we increased our inventory levels strategically to support in-regionlead time initiatives, as well as to support continuing new productintroductions. Despite increasing inventory levels, our inventory days on handimproved to 138 days in the third quarter of 2006, down from 147 days in thesecond quarter of 2006, reflecting our strong third quarter 2006 net salesperformance, and approximated 135 days in the third quarter of 2005. There wereno inventory charges, other than APC’s standard provisioning, during the thirdquarters and first nine months of 2006 and 2005.

**Contractual Obligations**

Thefollowing table summarizes our significant contractual obligations at September24, 2006, and the effect such obligations are expected to have on our liquidityand cash flows in future periods. This table excludes amounts already recordedon our balance sheet as current liabilities at September 24, 2006.
| ** **                   | ** **   | **Payments Due By Period** | ** ** |
|------------------------------|--------------|-------------------------------------------|------------|
| ** **                   | ** **   | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                   | *** *** | **(In millions)**                         | ** ** |
| Operating Lease  Obligations |         | $                                         | 25.1       |   | $ | 2.4 |   | $ | 13.6 |   | $ | 6.4 |   | $ | 2.7 |   |
|                              |              |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

## APC’s non-cancelable operating leases, primarily for warehousing andoffice space, expire at various dates through 2011. These leases containrenewal options for periods ranging from one to seven years and require APC topay its proportionate share of utilities, taxes, and insurance. APC is not ableto determine the aggregate amount of purchase orders that represent contractualobligations for the purchase of goods and services, as such purchase orders mayrepresent authorizations to purchase rather than binding agreements. For thepurposes of this disclosure, contractual obligations for the purchase of goodsand services are defined as agreements that are enforceable and legally bindingon APC and that specify all significant terms, including: fixed or minimumquantities to be purchased; fixed, minimum, or variable price provisions; theapproximate timing of the transaction, and contain no provisions allowing forcancellation without significant penalty. Our purchase orders for raw materialsor purchased finished products are based on our current manufacturing needsand/or demand forecasts and are fulfilled by our vendors within short timehorizons. We do not have significant agreements for the purchase of rawmaterials or finished products specifying minimum quantities or set prices thatexceed our expected requirements for three months.

**Capital Expenditures and Capital Commitments**

During the third quarters of 2006 and 2005, our capital expenditures, netof capital grants, amounted to approximately $14.1 million and $12.0 million,respectively. During the first nine months of 2006 and 2005, our capitalexpenditures, net of capital grants, amounted to approximately $62.6 millionand $27.4 million, respectively. Our capital spending during the third quartersand first nine months of 2006 and 2005 consisted primarily of manufacturing andoffice equipment, purchased software applications, and building improvements,with spending focused on funding additional equipment needs and improvingexisting factories, principally in the U.S., India, and the Philippines,as well as continuing investment ininformation technologies. Substantially all of APC’s net capital expenditureswere financed from available operating cash.

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We have dedicated effortsto optimize our overall manufacturing capacity and locations over recent yearsand we will continue to plan for future capacity requirements based on theassumed continued acceptance and demand for our products in the specific marketsegments they were designed to address. We currently expect that capitalspending will be between $80 million and $100 million in 2006, compared to $49million in 2005. Most of our incremental capital spending for 2006 will gotoward acquiring and expanding a building for a customer Technology LearningCenter, to be based in St. Louis, Missouri, and maintaining, upgrading, andexpanding our current manufacturing capacity, as well as investments to upgradecurrent hardware and software office technologies. We acquired land and anoffice building in St. Louis for approximately $14 million during the secondquarter of 2006 from available cash on-hand. Construction began during thethird quarter of 2006 on the Technology Learning Center building which isexpected to be completed in 2007.

We had no material capital commitments during the third quarters andfirst nine months of 2006 and 2005, or at September 24, 2006 and December 31,2005.

APChas an agreement with the Industrial Development Authority of Ireland,otherwise known as the IDA. Under this agreement, we receive grant monies forcosts incurred for machinery, equipment, and building improvements for ourGalway facility. These grants are equal to 40% of such costs up to a maximum of$13.1 million. Such grant monies are subject to APC meeting certain employmentgoals and maintaining operations in Ireland until termination of the agreement.By an amendment agreement dated June 26, 2006, APC and the IDA agreed to (1)reduce the aggregate required employment goals for our Galway facility subjectto maintaining certain minimum target employment levels in our Galway andCastlebar facilties and the imposition of monetary penalties should aggregateemployment levels in the two facilities fall below 405 employees, (ii) reduceby 30% over two years APC’s contingent grant liability in the event that APCbreaches the agreement, and (iii) extend the term of the underlying agreementfrom 2008 to 2012. Under a separate agreement 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 Note15 of Notes to Consolidated Financial Statements in Item 8 of American PowerConversion Corporation’s Annual Report on Form 10-K for the year ended December31, 2005.

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 the progressof the project as well as meeting certain employment goals on the projectwithin the Galway facility. The amount of grant assistance available onsatisfaction of all conditions is 28% of the eligible expenditure to a maximumof €714,588. Also refer to Note 15 of Notes to Consolidated FinancialStatements in Item 8 of American Power Conversion Corporation’s Annual Reporton Form 10-K for the year ended December 31, 2005.

**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 2006 and 2005, or at September 24, 2006 and December 31,2005.

**Off-Balance-Sheet Arrangements**

APChad no significant off-balance sheet arrangements during the third quarters andfirst nine months of 2006 and 2005, or at September 24, 2006 and December 31,2005.

**Quarterly Cash Dividends**

Dividends of $0.10per share were declared and paid in each of the first, second, and thirdquarters of 2006 and 2005. It is the intention of the Board of Directors to paya comparable quarterly dividend on a going forward basis contingent uponcontinued capital availability and a determination that cash dividends continueto be in the best interests of APC and its shareholders.

APChas historically generated annual cash flows from operating activities as aresult of strong operating results and, at times, improvement in workingcapital. We believe that current internal cash flows together with availablecash, available credit facilities or, if needed, the proceeds from the sale ofadditional equity, will be sufficient to support anticipated capital spending,dividend payments, and other working capital requirements for the foreseeablefuture.

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**Foreign CurrencyActivity**

We invoice our customers in various currencies.Realized and unrealized transaction gains or losses are included in the resultsof operations and are measured based upon the effect of changes in exchangerates on the actual or expected amount of functional currency cash flows.Transaction gains and losses were not material to the results of operations inthe third quarters or first nine months of 2006 and 2005.

The table belowsummarizes information on balances that are sensitive to foreign currencyexchange rates and presents such amounts in U.S. dollar equivalents.
| ** **                       | ** ** | **September 24, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **Accounts  Receivable**         | ** ** | **Liabilities**                 | ** ** | **Accounts  Receivable** | ** ** | **Liabilities** | ** ** |
| ** **                       | ** ** | **(In millions)**           | ** ** |
| U.S. dollar  functional currency | ** ** | **$**                            | **88.6**   | ** **                      | **$**      | **142.7** |   | $ | 98.6 |   | $ | 93.8 |   |
| Swiss franc functional  currency | ** ** | **$**                            | **22.6**   | ** **                      | **$**      | **11.4** |   | $ | 14.4 |   | $ | 5.8 |   |

 

APC also had non-tradereceivables denominated in Euros of approximately U.S.$0.9 million and U.S.$1.4million at September 24, 2006 and December 31, 2005, respectively.

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

**CRITICALACCOUNTING POLICIES**

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

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

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Our criticalaccounting policies are as follows:

***RevenueRecognition. ***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. Thisrequires us to assess at the point of delivery whether these criteria have beenmet. When management determines that such criteria have been met, revenue isrecognized. Installation is not applicable for a majority of Small Systems andall “Other” segment products based on the nature of the products sold.Generally, revenue associated with Large Systems sales is also recognized atthe time of delivery and/or installation pursuant to the delivery and/orinstallation terms. Delivery terms vary, but often include origin-based terms(e.g., FOB Shipping Point and Ex-works) and destination-based terms (e.g.,DDU/DDP (delivered duty unpaid/delivered duty paid)). We record estimatedreductions to revenue for customer programs and incentive offerings, includingspecial pricing agreements, price protection, co-operative advertising andother volume based discounts at the time of sale.

Revenue from sales ofthird-party vendor products or services is recorded on a gross basis when APCis a principal to the transaction, and is recorded net of costs should APC actas an agent between the client and vendor. Generally, APC does not act asagent. Several factors are considered to determine whether APC is an agent orprincipal, most notably whether APC is the primary obligor to the client, hasinventory risk or adds meaningful value to the vendor’s products or service.Consideration is also given to whether APC was involved in the selection of thevendor’s product or service, has latitude in establishing the sales price, orhas credit risk.

Our arrangements do notgenerally include acceptance clauses. However, if an arrangement includes acustomer specified acceptance provision, acceptance can occur at our factoryprior to delivery or at the customers’ site. Revenue recognition will occurupon management’s determination of acceptance by the customer consistent withthe agreed-upon delivery terms for the sale. As we continue to introduce newproducts and enter into new product and service arrangements with customers, weanticipate that installation and customer acceptance provisions may become morecommon, and therefore increasingly significant for determining delivery andperformance and consequently our entitlement to recognize revenue.

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

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

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

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***EstimatingValuation Allowances and Accrued Liabilities — Allowances for Sales Returns,Doubtful Accounts, Inventory Obsolescence and Product Recall, and Assessment ofthe Probability of the Outcome of our Current Litigation. ***Significant managementjudgments that affect the application of our revenue policy also includeestimates of potential future product returns related to current period productrevenue. We analyze historical returns, current economic trends, and channelinventories 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 Accounting StandardsNo. 48, *Revenue Recognition When Right ofReturn Exists*, and U.S. Securities and Exchange Commission StaffAccounting Bulletin No. 104. Returns of Large Systems products generally do notoccur. Historically, returns have represented approximately 3% of gross salesand have not differed significantly from prior estimates.

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

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

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

***Valuation of Long-livedTangible and Intangible Assets including Goodwill. ***We assess theimpairment of long-lived tangible and intangible assets on an ongoing basis andwhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable. Should our assessment of long-lived and amortizableintangible assets suggest impairment, we would determine recoverability basedon an estimate of future undiscounted cash flows resulting from our use of theasset and its eventual disposition.

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Factors weconsider that could trigger an impairment review include the following:

·                  significantunderperformance relative to expected historical or projected future operatingresults;

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

·                  significantnegative industry or economic trends; and

·                  significanttechnological changes, which would render equipment or manufacturing processesobsolete.

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

***Accounting forIncome Taxes. ***Aspart of the process of preparing our consolidated financial statements, we arerequired to estimate our income taxes in each of the jurisdictions in which weoperate. This process involves estimating our actual current tax exposuretogether with assessing temporary differences resulting from differingtreatment of items, such as deferred revenue, for tax and accounting purposes.These differences result in deferred tax assets and liabilities, which areincluded within our consolidated balance sheet. We must then assess thelikelihood that our deferred tax assets will be recovered from future taxableincome. Expectations about future taxable income incorporate numerousassumptions about actions, elections and strategies to minimize income taxes infuture years. Our ability to take such actions, make preferred elections andimplement tax-planning strategies may be adversely impacted by enacted changesin tax laws and/or tax rates, as well as successful challenges by taxauthorities resulting from differing interpretations of tax laws andregulations.

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

To the extent webelieve that recovery of deferred tax assets is not likely, we must establish avaluation allowance. To the extent we establish a valuation allowance orincrease this allowance in a period, we must include an expense within the taxprovision in the consolidated statements of income. Significant managementjudgment is required in determining our provision for income taxes, ourdeferred tax assets and liabilities and any valuation allowance recordedagainst our net deferred tax assets. At September 24, 2006 and December 31,2005, we provided a valuation allowance on certain of our deferred tax assets,primarily consisting of net operating losses generated in 2001 through thethird quarter of 2006 for the start up and continuing operations of Brazilianoperations, because of uncertainty regarding their realizability. The valuationallowance is based on our estimates of taxable income by jurisdiction in whichwe operate and the period over which our deferred tax assets will berecoverable. In the event that actual results differ from these estimates or weadjust these estimates in future periods we may need to establish an additionalvaluation allowance which could materially impact our financial position andresults of operations.

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**RECENTLY ISSUEDACCOUNTING STANDARDS**

***Accountingfor Defined Benefit Pension and Other Postretirement Plans.* **In September 2006, the FinancialAccounting Standards Board issued Statement of Financial Accounting StandardsNo.158, *Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106,and 132R*. This Statement requires an employer to recognize theoverfunded or underfunded status of a defined benefit postretirement plan as anasset or liability in its statement of financial position and to recognizechanges in that funded status in the year in which the changes occur throughcomprehensive income. This Statement also requires an employer to measure thefunded status of a plan as of the date of its year-end statement of financialposition, with limited exceptions. This Statement is effective for APCbeginning with the fourth quarter of 2006. It is not expected to have amaterial impact on our consolidated financial position or results ofoperations.

***Accounting for Uncertainty in Income Taxes*.**  In June 2006, the Financial AccountingStandards Board issued Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109*.This Interpretation clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, *Accounting for IncomeTaxes*. This Interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. ThisInterpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. This Interpretation is effective for APC beginning with the firstquarter of 2007. We are currently reviewing this Interpretation to determineits impact on APC.

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT 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 related tosuch risks is included in the *ForeignCurrency Activity* section of Management’s Discussion and Analysis ofFinancial Condition and Results of Operations in Item 2 of this report and isincorporated herein by reference.

We, in the 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 such risksis 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.

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**ITEM 4.  CONTROLSAND PROCEDURES**

**(A)      Evaluationof disclosure controls and procedures**

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

**(B)      Changesin internal control over financial reporting**

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

***Limitations Inherent in all Controls*****.**APC’smanagement, including our Chief Executive Officer and our Chief FinancialOfficer, recognize that our disclosure controls and our internal controls(discussed above) cannot prevent all error or all attempts at fraud. Anycontrols system, no matter how well crafted and operated, can only providereasonable, and not absolute, assurance of achieving the desired control objectives,and management necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures. Because of theinherent limitations in any control system, no evaluation or implementation ofa control system can provide complete assurance that all control issues and allpossible instances of fraud have been or will be detected.

**PART II -OTHER INFORMATION**

**ITEM1.  LEGAL PROCEEDINGS**

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

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**ITEM1A.  RISK FACTORS**

**FACTORS THAT MAYAFFECT FUTURE RESULTS**

This document containsforward-looking statements that involve risks and uncertainties, particularlyin the *Business Outlook* sectionof Management’s Discussion and Analysis of Financial Condition and Results ofOperations in Item 2 of this report. You can identify forward-lookingstatements by the use of forward-looking terminology including “believes,” “expects,”“may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “proforma,” “estimates,” or “anticipates” or the negative of these words andphrases or other variations of these words and phrases or comparableterminology. Our actual results could differ materially from those anticipatedin these forward looking statements as a result of certain factors, includingthe risks faced by us described below and elsewhere in this document.

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

The factors that couldcause actual results to differ materially include the following: The ability ofAPC and Schneider to gain regulatory and shareholder approval for the proposedmerger; successful completion of the transaction; ability to achieve expectedgrowth, savings and benefits of merger; potential disruption in business orrelationships with customers, vendors, partners and employees as a result ofthe proposed merger; the pervasive and intensifying competition in all marketswhere we operate; prolonged adverse economic and employment conditions in themarkets we serve; changes in available technology that make our existingtechnology obsolete or expensive to upgrade; the availability and cost ofcapital; the impact of any industry consolidation; the outcome of pending orthreatened complaints and litigation; the Company’s ability to achieve thetargeted job reductions and savings; the Company’s ability to improve theexecution of its operations processes and eliminate operational waste andexcess expense; depending on market circumstances, the Company may not completeits previously approved stock repurchase program; the impact of foreigncurrency exchange rate fluctuations; the impact on demand, componentavailability and pricing, and logistics, and the disruption of manufacturingoperations that result from labor disputes, war, acts of terrorism or politicalinstability; ramp up, expansion, transfer and rationalization of globalmanufacturing capacity, including successfully consolidating its Irishmanufacturing operations in Castlebar, Ireland and redeploying certaincustomer-facing positions within the Europe, Middle East and Africa region; theCompany’s ability to effectively align operating expenses and productioncapacity with the current demand environment; the potential impact of complyingwith changing environmental regulations; the discovery of a latent defect inany of the Company’s products; growth rates in the power protection industryand related industries; product mix changes and the potential negative impacton gross margins from such changes; changes in the seasonality of demandpatterns; inventory risks due to shifts in market demand; componentconstraints, shortages, pricing and quality; risk of nonpayment of accountsreceivable; and the risks described from time to time in APC’s filings with theSecurities and Exchange Commission.

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

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**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

The following tablesummarizes information relating to purchases made by APC of shares of ourcommon stock during the first nine months ended September 24, 2006.

**ISSUER PURCHASES OF EQUITY SECURITIES**
| **Period**                             | ** ** | **Total  Number  of Shares  Purchased**                         | ** ** | **Average  Price  Paid per  Share** | ** ** | **Total Number  of Shares  Purchased as  Part of  Publicly  Announced  Plans or  Programs** | ** ** | **Approximate  Dollar Value  of Shares  that May Yet  Be Purchased  Under the  Plans or  Programs** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **(In thousands except per share amounts)** | ** ** |
| January 1, 2006 to January 22, 2006    |       | —                                                               |       | $                                        | —     |                                                                                                                 | —     |                                                                                                                                   | $          | — |   |
| January 23, 2006  to February 19, 2006 |       | 970                                                                  |       | $                                        | 20.20      |                                                                                                                 | 970        |                                                                                                                                   | $          | 180,389 |   |
| February 20, 2006  to March 26, 2006   |       | 2,474                                                                |       | $                                        | 20.46      |                                                                                                                 | 2,474      |                                                                                                                                   | $          | 129,723 |   |
| March 27, 2006  to April 23, 2006      |       | —                                                               |       | —                                   |       | —                                                                                                               |       | $                                                                                                                                      | 129,723    |   |
| April 24, 2006  to May 21, 2006        |       | 1,420                                                                |       | $                                        | 20.80      |                                                                                                                 | 1,420      |                                                                                                                                   | $          | 100,137 |   |
| May 22, 2006 to  June 25, 2006         |       | 1,507                                                                |       | $                                        | 19.64      |                                                                                                                 | 1,507      |                                                                                                                                   | $          | 70,507 |   |
| June 26, 2006 to  July 23, 2006        |       | —                                                               |       | —                                   |       | —                                                                                                               |       | $                                                                                                                                      | 70,507     |   |
| July 24, 2006 to  August 20, 2006      |       | —                                                               |       | —                                   |       | —                                                                                                               |       | $                                                                                                                                      | 70,507     |   |
| August 21, 2006  to September 24, 2006 |       | 736                                                                  |       | $                                        | 17.42      |                                                                                                                 | 736        |                                                                                                                                   | $          | 57,673 |   |
| Total                                  |       | 7,107                                                                |       | $                                        | 20.01      |                                                                                                                 | 7,107      |                                                                                                                                   |       |   |

 

In February 2006, APC’sBoard of Directors approved a stock repurchase program which authorizes up to$200 million to repurchase outstanding shares of APC’s common stock. Thepurchases would be made on the open market based on market and businessfactors. APC commenced the repurchase of its common stock in February 2006 andas of the end of the first nine months of 2006, had repurchased approximately7.1 million shares on the open market at an average price of approximately$20.01 per share (compared to a volume weighted average price of $20.01 pershare), totaling $142.3 million. The duration of the repurchase program is twoyears but may be suspended or discontinued at any time without prior notice.

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**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 as of October 29, 2004 and incorporated herein by  reference (File No. 1-12432)                                                                                                                                                                                                      |
|             |                                                                                                                                                                                                                                                                                                                                                                                                          |
| Exhibit No. 4.01 | Amendment to  Rights Agreement, dated as of October 28, 2006, by and between APC and  BankBoston, N.A. (as executed by its successor, Computershare Trust Company,  N.A.), previously filed as an exhibit to APC’s Current Report on Form 8-K  filed on October 30, 2006 and incorporated herein by reference (File No.  1-12432)                                                                        |
|             |                                                                                                                                                                                                                                                                                                                                                                                                          |
| Exhibit No. 10.1 | Employment  Agreement dated as of August 15, 2006, between APC and Robert J. Johnson,  previously filed as an exhibit to APC’s Current Report on Form 8-K filed on  August 21, 2006 and incorporated herein by reference (File No. 1-12432)                                                                                                                                                              |
|             |                                                                                                                                                                                                                                                                                                                                                                                                          |
| Exhibit No. 10.2 | Change-in-Control  Severance Agreement, dated as of July 11, 2005, between APC and Richard J.  Thompson, which is substantially the form of the Change-in-Control Severance  Agreement dated as of August 15, 2006 between APC and David R. Johnson,  previously filed as an exhibit to APC’s Current Report on Form 8-K filed on  July 12, 2005 and incorporated herein by reference (File No. 1-12432) |
|             |                                                                                                                                                                                                                                                                                                                                                                                                          |
| Exhibit No. 10.3 | Form of  Change-in-Control Severance Agreement, which is substantially the form of the  Change-in-Control Severance Agreement dated as of July 5, 2000 between APC  and Robert J. Johnson, previously filed as an exhibit to APC’s Quarterly  Report on Form 10-Q for the fiscal quarter ended September 30, 2000 and  incorporated herein by reference (File No. 1-12432)                               |
|             |                                                                                                                                                                                                                                                                                                                                                                                                          |
| Exhibit No. 10.4 | Form of  Amendment to Change-in-Control Severance Agreement, which is substantially  the form of the Amendment to Change-in-Control Severance Agreement dated as  of July 29, 2005 between APC and Robert J. Johnson, previously filed as an  exhibit to APC’s Current Report on Form 8-K filed on August 3, 2005 and  incorporated herein by reference (File No. 1-12432)                               |
|             |                                                                                                                                                                                                                                                                                                                                                                                                          |
| Exhibit No. 10.5 | Agreement, dated  as of August 24, 2006, between APC and Rodger B. Dowdell, Jr., previously  filed as an exhibit to APC’s Current Report on Form 8-K filed on August 30,  2006 and incorporated herein by reference (File No. 1-12432)                                                                                                                                                                   |
|             |                                                                                                                                                                                                                                                                                                                                                                                                          |
| Exhibit No. 10.6 | Agreement and  Plan of Merger, dated as of October 28, 2006, by and among APC, Schneider  Electric SA and Trianon Inc., previously filed as an exhibit to APC’s Current  Report on Form 8-K filed on October 30, 2006 and incorporated herein by  reference (File No. 1-12432)                                                                                                                           |
|             |                                                                                                                                                                                                                                                                                                                                                                                                          |
| Exhibit No. 31.1 | Certification of  Robert J. Johnson, 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  Robert J. Johnson, 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)                                                                                                                                                                     |

 

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SIGNATURES

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

**AMERICANPOWER CONVERSION CORPORATION**
|        | Date: November  3, 2006                         |   |
|--------|-------------------------------------------------|--------|
|   | /s/ Richard J.  Thompson                        |   |
|   | *Richard  J. Thompson*                          |   |
|   | *Chief  Financial Officer*                      |   |
|   | *(Principal  Accounting And Financial Officer)* |   |

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**AMERICAN POWERCONVERSION CORPORATION AND SUBSIDIARIESEXHIBIT INDEX**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **Page  No.** | ** ** |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |          |       |
| 3.01            |       | Articles of  Organization of APC, as amended, previously filed as an exhibit to APC’s  Quarterly Report on Form 10-Q for the fiscal quarter ended June 27, 1999 and  incorporated herein by reference (File No. 1-12432)                                                                                                                                                                       |       |          |       |
| 3.02            |       | By-Laws of APC,  as amended and restated, previously filed as an exhibit to APC’s Current  Report on Form 8-K dated as of October 29, 2004 and incorporated herein by  reference (File No. 1-12432)                                                                                                                                                                                                      |       |          |       |
| 4.01            |       | Amendment to  Rights Agreement, dated as of October 28, 2006, by and between APC and BankBoston,  N.A. (as executed by its successor, Computershare Trust Company, N.A.,  previously filed as an exhibit to APC’s Current Report on Form 8-K filed on  October 30, 2006 and incorporated herein by reference (File No. 1-12432)                                                                          |       |          |       |
| 10.1            |       | Employment Agreement  dated as of August 15, 2006, between APC and Robert J. Johnson, previously  filed as an exhibit to APC’s Current Report on Form 8-K filed on August 21,  2006 and incorporated herein by reference (File No. 1-12432)                                                                                                                                                              |       |          |       |
| 10.2            |       | Change-in-Control  Severance Agreement, dated as of July 11, 2005, between APC and Richard J.  Thompson, which is substantially the form of the Change-in-Control Severance  Agreement dated as of August 15, 2006 between APC and David R. Johnson,  previously filed as an exhibit to APC’s Current Report on Form 8-K filed on  July 12, 2005 and incorporated herein by reference (File No. 1-12432) |       |          |       |
| 10.3            |       | Form of  Change-in-Control Severance Agreement, which is substantially the form of the  Change-in-Control Severance Agreement dated as of July 5, 2000 between APC  and Robert J. Johnson, previously filed as an exhibit to APC’s Quarterly  Report on Form 10-Q for the fiscal quarter ended September 30, 2000 and  incorporated herein by reference (File No. 1-12432)                               |       |          |       |
| 10.4            |       | Form of  Amendment to Change-in-Control Severance Agreement, which is substantially  the form of the Amendment to Change-in-Control Severance Agreement dated as  of July 29, 2005 between APC and Robert J. Johnson, previously filed as an  exhibit to APC’s Current Report on Form 8-K filed on August 3, 2005 and  incorporated herein by reference (File No. 1-12432)                               |       |          |       |
| 10.5            |       | Agreement, dated  as of August 24, 2006, between APC and Rodger B. Dowdell, Jr., previously  filed as an exhibit to APC’s Current Report on Form 8-K filed on August 30,  2006 and incorporated herein by reference (File No. 1-12432)                                                                                                                                                                   |       |          |       |
| 10.6            |       | Agreement and  Plan of Merger, dated as of October 28, 2006, by and among APC, Schneider  Electric SA and Trianon Inc., previously filed as an exhibit to APC’s Current  Report on Form 8-K filed on October 30, 2006 and incorporated herein by  reference (File No. 1-12432)                                                                                                                           |       |          |       |
| 31.1            |       | Certification of  Robert J. Johnson, 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)                                                                                                                                                                       |       | 37            |       |
| 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)                                                                                                                                                                     |       | 38            |       |
| 32.1            |       | Certification of  Robert J. Johnson, 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)                                                                                                                                                                       |       | 39            |       |
| 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)                                                                                                                                                                     |       | 40            |       |

 

 

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