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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File Number 1-12432

AMERICAN POWER CONVERSION CORPORATION
(Exact name of registrant as specified in its charter)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES ý    NO o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES ý    NO o

        The aggregate market value of the outstanding common stock, other than shares held by persons who may be deemed affiliates of the registrant, as of the last business day of the registrant's most recently completed second fiscal quarter was approximately $3,500,000,000. The number of shares outstanding of the registrant's common stock, $0.01 par value, on March 1, 2005 was 192,543,000.

Documents Incorporated by Reference

        Portions of the registrant's definitive Proxy Statement in connection with the 2005 Annual Meeting of the Shareholders are incorporated by reference in Part III hereof.

Part I

Item 1. Business

American Power Conversion Corporation

        Founded in 1981, American Power Conversion (APC) is a leading provider of global, end-to-end infrastructure availability solutions. APC's comprehensive products and services offering, which is designed for both home and corporate environments, improves the availability, manageability and performance of sensitive electronic, network, communication and industrial equipment of all sizes.

        APC designs, develops, manufactures, and markets solutions for computer, communications, and electronic applications worldwide. Our products include:

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uninterruptible power supply products, commonly known as UPSs;



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electrical surge protection devices, also known as surge suppressors;



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power conditioning products;



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DC-power systems;



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management tools;



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racks and enclosures;



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cooling solutions;



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services; and



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network, desktop and notebook personal computer (PC) and mobile accessories.

        These products are primarily used with sensitive electronic devices which rely on electric utility power including, but not limited to, home electronics, PCs, high-performance computer workstations, servers, networking equipment, communications equipment, Internetworking equipment, storage systems, data centers, mainframe computers, and facilities.

        Our UPS products regulate the flow of utility power to ensure safe and clean power to the protected equipment, and provide seamless back-up power in the event of the loss of utility power. The back-up power lasts for a period of time sufficient to enable the user to continue computer operations, conduct an orderly shutdown of the protected equipment, preserve data, work through short power outages or continue operating for several hours or longer.

        Our surge protection devices and power conditioning products provide protection from electrical power surges and noise in the flow of utility power. APC's cooling equipment regulates temperature and humidity and provides air distribution. Our DC-power systems monitor and isolate equipment from utility voltage fluctuations, frequency variations, and electrical noise. In the event of a power failure, the DC products provide back-up power for communications networks. Our management tools enhance monitoring, management, and performance of our products; our racks and enclosures provide a high-availability environment for integrating and housing information technology equipment; our service offerings assist the end-user with the installation, configuration, and maintenance of our products; and our network, desktop and notebook PC and mobile accessories provide a range of power, connectivity and productivity enhancing products.

        Additionally, APC has pioneered integrated systems for network-critical physical infrastructure (NCPI). NCPI is the foundation upon which Information Technology (IT) and telecommunication networks reside. It is the "backbone" of the business, as its elements provide the power, cooling, physical housing, cabling and other elements which allow the IT to function. APC offers stand-alone products within several of the NCPI categories. Additionally, we offer the industry's first integrated NCPI system, sold under the InfraStruXure™ architecture.

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Segments

        APC operates primarily within one industry consisting of three reportable operating segments by which we manage our business and from which various offerings are commonly combined to develop a total solution for the customer. These efforts primarily incorporate the design, manufacture, and marketing of power protection equipment and related software and accessories for computer, communications, and related equipment. Our three segments are: Small Systems, Large Systems, and "Other." Each of these segments addresses global markets.

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

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

        "Other" Segment.    The Other segment principally consists of desktop and notebook computer accessories and replacement batteries. The distribution model of products in the Other segment is consistent with that of the Small Systems segment.

        Information on reportable operating segment net sales, profit from operations, and depreciation for each of the last three years is located in Note 12 of Notes to Consolidated Financial Statements in Item 8 of this Report.

        APC was incorporated under the laws of the Commonwealth of Massachusetts on March 11, 1981. Executive offices are located at 132 Fairgrounds Road, West Kingston, RI 02892, our telephone number is (401) 789-5735 and our Internet Web site is www.apc.com.

        APC is required to file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (SEC). Investors may read and copy any document that APC files, including this Annual Report on Form 10-K, at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet Web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, from which investors can electronically access APC's SEC filings.

        APC makes available free of charge on or through its Internet Web site (www.apc.com), its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after it electronically files such material with, or furnishes the material to, the SEC. The information on APC's Internet Web site is not, and shall not be deemed to be, a part of this Report or incorporated into any other filings APC makes with the SEC.

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Market Overview

        The growth of the power protection industry has been fueled by the demand for information systems to be accessible as much as 24 hours a day to support the proliferation of microprocessor-based equipment and related systems in the corporate marketplace and in the small office/home office environment. PCs and servers have become an integral part of the overall business strategy of companies worldwide. Businesses store, manipulate, and transfer data via local area and wide area networks as well as via corporate intranets and the Internet. Additionally, there is a growing need to support the high-availability power and cooling requirements of centralized data centers as well as networking and communications equipment.

        We believe that the increased awareness of the costs and lost productivity associated with downtime, caused by power problems and other environmental issues, has increased demand for power protection and related products. Complete failures, surges, or sags in the electrical power supplied by a utility can cause computers and electronic systems to malfunction, resulting in costly downtime, damaged or lost data files, and damaged hardware. A UPS protects against these power disturbances by providing continuous power automatically and virtually instantaneously after the electric power supply is interrupted. UPSs also provide line filtering and protection against surges or sags while the electric utility is available. The products also enhance productivity through the continued availability of networks, sensitive electronics, and even facilities during power outages. In international regions, power quality often results in varied levels of distortions and, as a result, these areas provide us with additional opportunities for our products.

        Additionally, the rapid deployment of information technology with smaller form factors, such as rack-optimized and blade servers, generate increasingly large amounts of heat. APC's precision cooling products regulate temperature and humidity to maintain temperatures within the equipments' tolerance to help prevent product degradation and failure.

Products

        APC's strategy is to design and manufacture products that incorporate high-performance and quality at competitive prices, while offering our customers appropriate technology for their applications. Our products are designed to fit seamlessly into the computer, networking, and communications environments of businesses, homes, small offices/home offices, and outdoor installations. APC engineers and tests these products for compatibility with leading information, communications and building management technology hardware and software.

        UPS.    We currently manufacture a broad range of standard domestic and international UPS products. Our UPSs are designed for multiple applications with the principal differences among the products being the amount of power which can be supplied during an outage, the length of time for which battery power can be supplied, the level of intelligent network interfacing capability, the number of brownout and over-voltage correction features and the design approach used (Standby, Line Interactive, Double Conversion On-Line and Delta Conversion On-line). UPSs range from 325 volt-amps (VA), suitable for a PC, to 1.6 megawatt, or MW, suitable for data centers, mainframe computers, industrial applications or facilities. Estimated resale prices to end-users range from $29.99 to approximately $250,000.

        Surge Suppressors.    We also offer a line of surge protection products to protect against power and data-line spikes and surges. The principal differences among the surge suppressor models are the level of protection available, feature sets of the products, and the applications for which they are designed. Estimated resale prices range from approximately $10 to approximately $2,850.

        Power Distribution Units (PDUs).    APC offers a wide variety of Power Distribution Units (PDUs) to distribute power within an IT rack or through an entire data center. Our single-phase PDUs are designed to occupy little or no space in a rack while distributing basic, metered or controllable power

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outlets for rack-mount equipment. 3-Phase or InfraStruXure PDUs are designed to increase flexibility and agility of data center power distribution through a design that does not require a raised floor. Estimated resale prices range from $89 to $25,000.

        Management Tools.    APC also offers software and hardware management tools for UPS management, network-critical physical infrastructure management, server access and environmental monitoring. These products provide power and environmental monitoring and management of information technology systems. Basic monitoring tools are included free of charge with the purchase of many APC solutions, while estimated resale prices for additional offerings range from approximately $100 to $10,000 to end-users.

        Racks and Enclosures.    APC offers a full line of rack enclosures and accessories sold under the NetShelter product family. These enclosures are designed to house a broad range of IT hardware manufacturers' equipment, as well as APC's InfraStruXure systems. Estimated resale prices for accessories and enclosures range from approximately $20 to $2,500.

        Cooling Solutions.    Additionally, APC offers a line of cooling solutions for environmental control and air distribution. Products include air distribution/fan systems, portable, floor and ceiling-mounted precision cooling systems used in a variety of applications including server rooms, data centers, and communication stations. Estimated resale prices range from approximately $500 to approximately $35,000.

Service Programs

        Warranties.    APC provides service programs and warranties to our customers for a wide range of our products. Typical programs include both in-warranty and out-of-warranty repair or replacement as well as product-based services and professional services. Product-based services include on-site services, installation services, remote monitoring services, preventive maintenance and extended warranty options. APC professional services include project management, needs assessment, and network integration services. Depending on the product, we principally offer standard warranties ranging from one to three years, for which extended warranty periods can generally be purchased, as well as programs to upgrade older and competitive units to new or refurbished condition.

        Equipment Protection Policy.    APC offers an Equipment Protection Policy in the U.S., Canada, Europe, and Australia. Depending on the model and country, the policy provides up to $150,000, £50,000, or €100,000 for repair or replacement of customers' hardware should a surge or lightning strike pass through an APC unit. Certain restrictions may apply. Customers can also register the ProtectNet® line of dataline surge suppressors for a "Double-Up" Supplemental Equipment Protection Policy, under which the total recoverable limit under the Equipment Protection Policy may be doubled (U.S. and Canada only).

        Except in relation to the 2003 product recall discussed below, APC has generally experienced satisfactory field operating results, and warranty and Equipment Protection Policy costs incurred to date have not had a significant impact on our consolidated results of operations.

        In early 2003, APC announced a product recall of Back-UPS CS 350 and 500 models, due to potential safety issues. Prior to announcing the recall, APC received eight reports worldwide of units overheating, resulting in the melting of the unit's outer casing, six of which occurred in the United States. Three of the reported incidents resulted in minor property damage; no injuries have been reported. The total number of affected devices recalled worldwide is approximately 2.1 million with approximately 900,000 devices recalled in the United States. The recall is limited to two specific models in APC's Back-UPS CS product line, the Back-UPS CS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt models. The affected units were manufactured between November 2000 and December 2002 and were sold primarily through computer and electrical distribution, catalog and retail outlets worldwide.

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Distribution Channels

        APC markets its products to businesses, small offices/home offices, and home users around the world through a variety of distribution channels. These channels include:

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information technology and electrical equipment distributors and dealers;



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value-added resellers;



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mass merchandisers;



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catalog merchandisers;



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E-commerce vendors;



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direct-to-customer including consumer, government, and business enterprise; and



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strategic partnerships.

        We also sell directly to some large value-added resellers, which typically integrate our products into specialized computer systems and then market turnkey systems to selected vertical markets. Certain select products are sold directly to manufacturers for incorporation into products manufactured or packaged by them. Additionally, APC utilizes manufacturer representatives to identify and secure projects.

        Two computer distributor customers, Tech Data Product Management and Ingram Micro, accounted for approximately 12.7% and 8.9%, respectively, of net sales in 2004, 14.1% and 10.0%, respectively, of net sales in 2003, and 14.4% and 13.2%, respectively, of net sales in 2002. The majority of our sales to Tech Data Product Management and Ingram Micro are included in the Small Systems segment.

Sales and Marketing

        APC's sales and marketing organizations are primarily responsible for four activities: sales, marketing, customer service, and technical support. Our sales force is responsible for relationships with our distribution channels and end-users as well as developing new distribution channels, particularly in geographic and product application areas into which we are expanding. Additionally, our sales force targets sales of the full range of APC products and services to specific customer groups.

        Our marketing activities include customer education and awareness programs, market research, product planning, trade shows, sales and pricing strategies, and product sales literature. At various times, we utilize direct marketing efforts domestically and internationally, including direct mailings and print, online/Internet, radio, and television advertising, as well as exhibiting at computer trade shows and hosting customer focused events. Customer service is responsible for technical product inquiries and customer support. APC has developed a number of programs and techniques to support the distribution channels. These include, but are not limited to, toll-free phone assistance, online product and technical information, formal product demonstrations, as well as live and online trainings and webinars.

Supply Chain Management—Manufacturing, Quality, Raw Materials, and Distribution

        Manufacturing.    APC's manufacturing operations are located in the United States, Brazil, China, Denmark, India, Ireland, the Philippines, and Switzerland. APC differentiates itself in the market by maintaining a low-cost, high-volume manufacturing footprint owned and operated by APC. We believe that our long-term success depends on, among other things, the ability to control our costs. We utilize lean "cell" based manufacturing processes, automated manufacturing techniques, and extensive quality control in order to minimize costs and maximize product reliability. In addition, the design of products and the commonality of parts allow for efficient circuit board component mounting or insertion, wave soldering, and in-process testing. Quality control procedures are performed at the component, sub-assembly, and finished product levels. We are committed to an ongoing effort to enhance the overall productivity of our manufacturing facilities.

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        Quality and Environmental.    APC has been ISO 14001 and ISO 9001-2000 certified by the International Organization for Standardization. Our systems have been audited to the stringent ISO 14001 and ISO 9001-2000 levels at our manufacturing facilities in the United States, China, India, Ireland, and the Philippines as well as at our Design Center in Denmark. The International Organization for Standardization has also certified our Research and Development Center in Massachusetts and our manufacturing facility in Brazil to the ISO 9001-2000 level.

        Raw Materials.    We generally purchase devices and components from more than one source where alternative sources are available; however, we do use sole source suppliers for certain components and certain finished products. We believe that alternative components for these sole source items could be incorporated into our products, if necessary. While we have been able to obtain adequate supplies of components from sole source suppliers, the future unavailability of components from these suppliers could disrupt production and delivery of products until an alternative source is identified.

        Order Management and Distribution.    APC continues to invest in a worldwide distribution network that delivers our products and services to our customers. We own or lease distribution centers and engage third party logistics service providers in numerous countries across the globe. All distribution centers are connected to our customer service operations via APC's Enterprise Resource Planning system, which enables orders received from any customer or country to be fulfilled from any distribution center throughout the world. To support the demands of our growing systems business, we are also adding light manufacturing and postponement capabilities to our distribution centers, enabling final configuration for each Customer order. As part of our continuing e-Commerce initiative, APC utilizes a variety of electronic methods to interact with our Customers, including the use of Electronic Data Interchange transactions between APC and our Distributors for receipt of orders, acknowledgement of orders, and confirmation of shipments. Additionally, we utilize a suite of Web tools that allows Consumers and Resellers to view product information, gain access to pricing information, and place their orders via the Web.

        Product Development.    APC's research and development (R&D) staff includes engineers and support persons who develop new products and provide engineering support for existing products. Our R&D efforts are also aimed at reducing cost and total cycle time and improving product and component quality. APC's R&D staff is located around the world with most of these employees in the United States and additional resources located in Denmark, India, Ireland, and Taiwan. Employees devoted to the improvement and development of software products are located in the United States and Ireland. We believe that the technical expertise of our R&D staff is very important to our growth as technological change is rapid in our markets.

        During 2004, APC actively supported its new InfraStruXure architecture with additional InfraStruXure compatible solutions. Additions to the InfraStruXure family included new cooling offerings, integrated power generation, and the InfraStruXure Express—a mobile data center solution built on APC's InfraStruXure architecture. At the same time, our Smart-UPS line continued to expand with new VA points and SKUs for server and networking applications. For the consumer, APC introduced new Back-UPS products as well as a line of mobile computing accessories, surge protection and power conditioning battery backup for the audio visual market.

        In early 2003, APC introduced InfraStruXure, an expansion of the PowerStruXure architecture introduced in 2002. InfraStruXure is a patent-pending, systematic approach to building network-critical physical infrastructure for data centers. This entirely new approach to data center support simplifies the design, building and management of data center infrastructure with an innovative, fully engineered and tested system. InfraStruXure incorporates standardized components including modular, scalable, N+1 redundant UPSs; zoned, intelligent power distribution; and precision cooling in a rack form factor.

        In 2003, new features and new products were added to our Smart-UPS and Back-UPS lines for corporate and home users; a new line of SurgeArrest surge suppressors was introduced; new power

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management software for new operating systems and management platforms, such as Microsoft Windows Server 2003, were made available; new precision cooling offerings were added; and additions to APC's growing line of mobile accessories were made. APC has continued to invest in research and development to drive innovation in the market with new products, new product categories and lower priced solutions.

        In 2002, we introduced PowerStruXure, the initial building block of APC's InfraStruXure architecture. Our Back-UPS and Smart-UPS lines were also enhanced with new models that highlight longer run time, smaller footprints and lower price points. New hardware and software management tools were also announced and we added new products for notebook and desktop PCs.

        R&D expenditures were $85.6 million or 5.0% of net sales in 2004, $67.6 million or 4.6% of net sales in 2003, and $60.1 million or 4.6% of net sales in 2002. We continue to commit resources to support our investment in research and development. We believe that continued product innovation through development is necessary for our existing products to remain competitive in our markets, as well as creating opportunities from new product introductions. The increases in total 2004 R&D spending primarily reflect increased numbers of software and hardware engineers and costs associated with new product development and engineering support.

Intellectual Property

        We seek patent protection for those inventions and improvements likely to be incorporated into our products, systems, solutions and services or where patent protection will improve our competitive position. APC's focus is to deliver innovation to the market place. As part of that commitment, we have made significant investments in building our intellectual property portfolio. United States patents generally have a term of twenty years from the filing date of the patent application. The remaining terms of our patents vary since our patent portfolio has been built over time. While our patents are important in maintaining the competitive differentiation of our products, systems, solutions and services, no single patent is in itself essential to our business as a whole. We also license from others intellectual property rights relating to UPS technology. With respect to protection of those areas of our technology for which patent protection has not been sought, we rely on the complexity of our technology, trade secrecy law, and employee confidentiality agreements.

        APC has numerous trademarks registered in the United States and in many foreign countries. We also have trademark applications pending domestically and internationally. The trademark "APC" is of principal importance to us. In addition, a number of other trademarks owned by us have significant importance.

Seasonality

        Our Small Systems and "Other" segments are favorably impacted by summer weather conditions in North America and Europe. The summer season typically brings more weather events, particularly thunderstorms and high temperatures that may disrupt utility power or result in high electricity usage that can cause brownouts and blackouts. These events in turn create more awareness and demand for our products.

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Competition

        We believe that we are one of less than ten global companies providing a full range of UPS products and services worldwide. Many of our competitors offer competitive products in both the Small and Large systems markets, while some focus on only one segment.

        Our principal competitors in the Small Systems segment include:

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Liebert Corporation, a unit of Emerson Electric Co.;



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Eaton Power Quality Corporation, a subsidiary of Eaton Corporation encompassing the former Powerware Corporation, which Eaton acquired in June 2004;



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MGE UPS Systems, a unit of Schneider Electric Group;



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Rittal, the largest company in the Friedhelm Loh Group, a privately-held German company;



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Trippe Manufacturing Company, a privately-held U.S. company;



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Phoenixtec Power Company Ltd., a publicly-held Taiwanese company; and



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Belkin Components, a privately-held U.S. company.

        Our principal competitors in the Large Systems segment include:

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Liebert Corporation;



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Eaton Power Quality Corporation;



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MGE UPS Systems;



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Rittal; and



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Chloride Power, a subsidiary of Chloride Group PLC.

        We also compete with a number of other U.S. and non-U.S. based companies that offer power protection and other products similar to ours in all of our segments. Some competitors have greater financial and other resources than APC. We compete in the sale of our products on the basis of several factors, including product innovation, performance and quality, marketing, access to distribution channels, customer service, product design, and price.

International Operations

        APC has established an extensive international presence consisting of manufacturing, service, engineering, sales, marketing and administrative operations. With a full line of internationally positioned products available, we continue to introduce products and staff personnel to serve geographical markets of interest. Our manufacturing operations outside of the United States are located in Brazil, Denmark, China, India, Ireland, the Philippines, and Switzerland. A significant portion of products in our Small Systems and Large Systems reportable operating segments are built internationally, particularly in the Philippines and India. We believe that the production of these products could be redeployed to other regions if necessary.

        Our primary sales offices outside of the United States are located in Europe and the Far East. These offices, together with offices in other locations worldwide, provide sales and technical support to our customers across the globe. APC also utilizes a combination of company run and sub-contracted distribution centers in numerous countries worldwide to distribute our products to our international customers.

Financial Information About Foreign and Domestic Operations

        The information required under this section is included in Note 12 of Notes to Consolidated Financial Statements in Item 8 of this Report and is incorporated herein by reference.

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Employees

        As of December 31, 2004, APC had approximately 6,455 full-time employees worldwide. APC also engages other personnel on a part-time basis.

APC's Executive Officers

        APC's executive officers are elected annually and hold office until the next Annual Meeting of the Board of Directors and until their successors are duly elected and qualified. As of March 1, 2005, APC's executive officers were:

        Rodger B. Dowdell, Jr. has been President and a Director of APC since 1985 and Chairman of APC's Board of Directors since 1988. During the first three quarters of 1985, Mr. Dowdell worked for APC as a consultant, developing a marketing and production strategy for UPS products. From 1978 to 1984 he was President of Independent Energy, Inc., a manufacturer of electronic temperature controls.

        Neil E. Rasmussen became Senior Vice President in 2001 and previously was Vice President since our inception. In 1997, he was appointed Chief Technical Officer of APC and has been a Director of APC since our inception. From 1979 to 1981, Mr. Rasmussen worked in the Energy Systems Engineering Group at Massachusetts Institute of Technology's Lincoln Laboratory.

        Edward W. Machala was named Senior Vice President, Operations, and Chief Operations Officer in 2001. Mr. Machala joined APC in 1989 as Vice President, Operations. From 1985 to 1989, Mr. Machala was Director of Manufacturing and Engineering Technology for GTECH, a manufacturer of electronic lottery and gaming terminals, where he was responsible for manufacturing and engineering functions.

        Donald M. Muir has been Senior Vice President, Finance & Administration since 2001 and Chief Financial Officer since joining APC in 1995. Mr. Muir served as Treasurer from 2001 to February 2004, and as Vice President, Finance and Administration and Chief Financial Officer from 1998 to 2001. From 1993 to 1995, Mr. Muir was the Treasurer of Stratus Computer, Inc. where he was responsible for managing investor relations, treasury services, corporate taxation, and risk management. Prior to his appointment as Treasurer at Stratus Computer, Inc., Mr. Muir held the position of Director of Finance and Administration from 1991 to 1993 and Controller, Worldwide Sales and Service from 1988 to 1991.

        Emanuel E. Landsman has been Vice President and a Director of APC since our inception and served as Clerk from our inception until 2001. From 1966 to 1981, Dr. Landsman worked at Massachusetts Institute of Technology's Lincoln Laboratory, where he was in the Space Communications Group from 1966 to 1977 and the Energy Systems Engineering Group from 1977 to 1981.

        Aaron L. Davis was named Vice President, Marketing Communications in June 2003. Mr. Davis served as Vice President, Marketing and Communications from 2001 to June 2003, Vice President, Small Systems Group from 1999 to 2001, Vice President, Marketing and Communications from 1997 to 1999, and Vice President of Marketing Communications from 1995 to 1997. Mr. Davis joined APC as Director of Marketing Communications in 1989. Mr. Dowdell is the uncle of Mr. Davis.

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        Edward D. Bednarcik was named Vice President, Global Sales in July 2003. Mr. Bednarcik joined APC in 1997 as General Manager of APC's Network Power Solutions Group and subsequently served as Vice President, General Manager of APC's Business Network Solutions Group from 2001 to July 2003. Prior to joining APC, Mr. Bednarcik was Senior Vice President and General Manager of CrossComm Inc.'s Internet Access Division from 1996 to 1997; Vice President and General Manager, Networks Products Division of Promptus Communications Inc., a subsidiary of GTI Inc., from 1994 to 1996; and Vice President, North American Sales and Marketing at Molecular Simulations Inc. (MSI), a privately held company based in Massachusetts, from 1991 to 1994.

Corporate Governance

        Corporate governance is typically defined as the system that allocates duties and authority among a company's stockholders, board of directors and management. The stockholders elect the board and vote on extraordinary matters; the board is the company's governing body, responsible for hiring, overseeing and evaluating management, particularly the chief executive officer; and management runs the company's day-to-day operations.

        The current Board members include five independent directors and three members of APC's senior management. The Board members include Rodger B. Dowdell, Jr., Chairman, President and Chief Executive Officer of APC; James D. Gerson, a private investor who is a retired Vice President of Fahnestock & Co.; John G. Kassakian, MIT Professor of Electrical Engineering and Director, MIT Laboratory for Electromagnetic and Electronic Systems; John F. Keane, Sr., Founder and Chairman of the Board of Directors, Keane, Inc.; Emanuel E. Landsman, Vice President of APC; Ervin F. Lyon, Retired, MIT Lincoln Labs; Neil E. Rasmussen, Senior Vice President and Chief Technical Officer of APC; and Ellen B. Richstone, Chief Financial Officer, Sonus Networks, Inc.

        "Independent" Directors.    Each of APC's directors, other than Messrs. Dowdell, Landsman and Rasmussen, qualify as "independent" in accordance with the published listing requirements of The Nasdaq Stock Market (Nasdaq). The Nasdaq independence definition includes a series of objective tests, such as that the director is not an employee of APC and has not engaged in various types of business dealings with APC. In addition, as further required by the Nasdaq rules, the Board of Directors has made a subjective determination as to each independent director that no relationships exist which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In making these determinations, the directors reviewed and discussed information provided by the directors and APC with regard to each director's business and personal activities as they may relate to APC and APC's management.

        The Audit Committee is comprised of the following directors: James D. Gerson, John F. Keane, Sr., Ervin F. Lyon, and Ellen B. Richstone. All of the members of the Audit Committee of the Board qualify as "independent" under special standards established by the U.S. Securities and Exchange Commission (SEC) for members of audit committees and the Audit Committee includes at least one member who is determined by the Board to meet the qualifications of an "audit committee financial expert" in accordance with SEC rules. Ellen B. Richstone is the independent director who has been determined to be an audit committee financial expert. Stockholders should understand that this designation is a disclosure requirement of the SEC related to Ms. Richstone's experience and understanding with respect to certain accounting and auditing matters. The designation does not impose on Ms. Richstone any duties, obligations or liability that are greater than are generally imposed on her as a member of the Audit Committee and Board of Directors, and her designation as an audit committee financial expert pursuant to this SEC requirement does not affect the duties, obligations or liability of any other member of the Audit Committee or Board of Directors.

        Board Committees and Charters.    The Board currently has, and appoints the members of, standing (i) Audit, (ii) Compensation and Stock Option and (iii) Corporate Governance and Nominating Committees. Each member of these Committees is an independent director in accordance with Nasdaq standards described above. Each of the Board committees has a written charter approved by the Board.

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Copies of each charter, and other corporate governance matters, are posted on APC's web site at www.apc.com under the "Corporate Governance" link contained in the "Investors" section.

        Corporate Governance Guidelines.    The Board has adopted a set of Corporate Governance Guidelines, and the Board's Corporate Governance and Nominating Committee is responsible for overseeing the Guidelines and reporting and making recommendations to the Board concerning corporate governance matters. The Guidelines are posted on APC's web site at www.apc.com under the "Corporate Governance" link contained in the "Investors" section.

Item 2. Properties

        APC's principal properties are located in the United States, Brazil, China, Denmark, England, India, Ireland, the Philippines, and Switzerland. In addition, we own or lease sales offices and other space at various locations throughout the United States and outside the United States. APC also owns or leases such machinery and equipment as are necessary in our operations. In general, our properties are in good condition, are considered to be adequate for the uses to which they are being put, and, except for one facility under lease in England, are substantially in regular use. The lease on the facility in England will expire in the second quarter of 2005. Also refer to Note 2 of Notes to Consolidated Financial Statements in Item 8 of this Report.

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Item 3. Legal Proceedings

        On January 10, 2003, Powerware Corporation filed in the United States District Court for the Eastern District of North Carolina (the "Court") a complaint alleging infringement of three United States patents. On May 7, 2003, Powerware Corporation filed with the Court an amended complaint modifying its allegations of infringement regarding the Powerware Patents. APC was served with the amended complaint on May 9, 2003. Powerware Corporation is seeking unspecified damages and injunctive relief. On May 28, 2003, APC filed its answer to the amended complaint and on June 17, 2003 APC filed its first amended answer and counterclaims alleging infringement by Powerware Corporation of three United States patents owned by APC. On July 3, 2003, Powerware Corporation filed its answer to counterclaims. On March 18, 2004, Powerware Corporation amended its complaint to add an additional patent to the litigation. On or about October 27, 2004, Powerware Corporation changed its corporate name to Eaton Power Quality Corporation. On January 31, 2005, the Court issued a Markman ruling construing the patent claims at issue in the case.

        On December 23, 2004, APC filed a patent infringement suit against Eaton Power Quality Corporation in the United States District Court for the District of Delaware charging Eaton Power Quality Corporation with infringement of one United States patent. On January 26, 2005, Eaton Power Quality Corporation filed a motion to dismiss APC's complaint on procedural grounds. On February 9, 2005, APC filed an answering brief in opposition to Eaton Power Quality Corporation's motion to dismiss.

        As previously reported in APC's Form 8-K dated March 2, 2005, on February 24, 2005, Eaton Power Quality Corporation and its parent corporation, Eaton Corporation (collectively "Eaton"), entered into a binding memorandum of understanding with APC to settle the two patent infringement suits pending in the United States District Court for the Eastern District of North Carolina and the United States District Court for the District of Delaware. In addition to settling all outstanding patent litigation, APC and Eaton agreed to cross-license multiple patents that were involved in the litigation. APC and Eaton also agreed to a ten-year covenant prohibiting the companies from filing against each other any additional patent infringement suits related to products of the other that are based on U.S. patent claims which are directed to electronic hardware that performs double conversion for power electronics. Eaton and APC are working toward finalizing a definitive agreement. Neither party will pay the other any monetary compensation in connection with the settlement.

        As previously reported in APC's Form 10-Q for the quarter ended September 26, 2004, on February 5, 2004, Liebert Corporation and Zonatherm Products, Inc., Liebert's sales representative firm in the Chicago area, filed a lawsuit in the Circuit Court of Cook County, Illinois, Chancery Division (the "Court") against APC, Aerico, LLC, a sales representative firm formed by former employees of Zonatherm Products, and the former employees of Zonatherm Products who formed Aerico, LLC. The lawsuit alleged willful violation of the Illinois Trade Secrets Act, tortious interference with contract, tortious interference with prospective economic advantage, civil conspiracy and conspiracy to breach fiduciary duties. Liebert and Zonatherm are seeking compensatory and punitive damages and injunctive relief. On February 18, 2004, the Court denied plaintiffs' motion for a temporary restraining order. On July 16, 2004, the Court dismissed without prejudice all claims except the Illinois Trade Secret Act claim. On August 6, 2004, plaintiffs filed a second amended complaint reasserting the claims dismissed by the Court on July 16, 2004. On August 20, 2004, the Court denied plaintiffs' motion for preliminary injunction as to violation of the Illinois Trade Secrets Act. On September 21, 2004, plaintiffs filed a Notice of Appeal of the August 20, 2004 ruling with the Illinois Appellate Court. On January 12, 2005, the Court dismissed without prejudice all claims against APC except the Illinois Trade Secret Act claim. On March 1, 2005 the Illinois Appellate Court issued an opinion on the appeal pursuant to which it affirmed the Court on the issue of non-trade secret nature of plaintiff's customer lists, and remanded the matter for the Court to enter an injunction against one of the individual former employees of Zonatherm from using certain pricing books. On March 16, 2005, plaintiffs filed a third amended

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complaint reasserting claims substantially similar to those dismissed by the Court in its January 12, 2005 ruling.

        In addition, APC is involved in various other 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's financial position, the litigation and other claims noted above are subject to inherent uncertainties, including the risk of an unfavorable outcome, and management's view of these matters may change in the future. An unfavorable outcome could include monetary damages or, in cases where injunctive relief is sought, an injunction prohibiting certain activities. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on APC's financial position, cash flows and results of operations for the period in which the effect becomes reasonably estimable.

Item 4. Submission of Matters to a Vote of Security-Holders

        We did not submit any matters to a vote of our security-holders during the three months ended December 31, 2004.

Part II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

        APC's Common Stock is traded over-the-counter on The Nasdaq Stock Market under the symbol APCC and on the Pacific Exchange, Inc. under the symbol ACC. The following table sets forth the range of high and low bid quotations on The Nasdaq Stock Market per share of Common Stock for the years 2004 and 2003. These quotations reflect inter-dealer prices, without retail mark up, mark down, or commission and may not necessarily represent actual transactions.

        On March 1, 2005, the closing sale price for APC's common stock was $22.15 per share. As of March 1, 2005, there were approximately 1,793 holders of record of APC's common stock.

        In June 2003, APC's Board of Directors approved initiation of a quarterly cash dividend of $0.08 per share of common stock. Dividends of $0.08 per share were declared and paid in each subsequent quarter through the second quarter of 2004. In June 2004, APC's Board of Directors approved a 25% increase in its quarterly cash dividend raising the payout to $0.10 per share. Dividends of $0.10 per share were declared and paid in the third and fourth quarters of 2004. On February 15, 2005, a quarterly dividend of $0.10 per share was declared, payable on March 16, 2005 to shareholders of record as of February 28, 2005. It is the intention of the Board of Directors to pay a comparable quarterly dividend on a going forward basis contingent upon continued capital availability and a determination that cash dividends continue to be in the best interests of APC and its shareholders.

        The information required under this section related to APC's stock-based compensation plans is included in Note 10 of Notes to Consolidated Financial Statements in Item 8 of this Report and is incorporated herein by reference.

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Item 6. Selected Financial Data

        All amounts are in dollars except for outstanding shares. Dollars are in thousands except for basic and diluted earnings per share. Shares are in thousands.

        In June 2003, APC's Board of Directors approved initiation of a quarterly cash dividend of $0.08 per share of common stock. Dividends of $0.08 per share were declared and paid in each subsequent quarter through the second quarter of 2004. In June 2004, APC's Board of Directors approved a 25% increase in its quarterly cash dividend raising the payout to $0.10 per share. Dividends of $0.10 per share were declared and paid in the third and fourth quarters of 2004. On February 15, 2005, a quarterly dividend of $0.10 per share was declared, payable on March 16, 2005 to shareholders of record as of February 28, 2005. APC did not declare any cash dividends for the three year period 2000 to 2002.

        APC invests its excess cash principally in certificates of deposit, corporate bonds and notes, and U.S. government agency securities. APC also invests in auction rate securities. Auction rate securities have long-term underlying maturities, however the market is highly liquid and the interest rates reset every seven, 28 or 35 days. In prior years, APC classified a portion of its auction rate securities as cash equivalents, however such amounts have been reclassified as short term available-for-sale securities for all periods presented in this Report—$80.1 million, $110.9 million, and $83.4 million at December 31, 2004, 2003 and 2002, respectively.

        APC adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. In connection with its adoption of Statement 142, APC recorded a non-cash charge equal to the goodwill balance associated with its Large Systems segment of approximately $50 million (approximately $35 million on an after-tax basis). This charge was recognized as the cumulative effect of a change in accounting principle net of income taxes, included in APC's results as of January 1, 2002, and had no effect on APC's liquidity.

        The results of operations of companies acquired in 2000 are included from their respective dates of acquisition. In the fourth quarter of 2000, APC acquired privately-held Airflow Company, a Maryland-based manufacturer of precision cooling equipment primarily used in data center, Internet, and telecommunications applications, for approximately $21.6 million in cash plus expenses, of which $3.1 million remains to be paid following the resolution of an indemnity claim brought by APC in 2003 against the surviving selling company as well as the former shareholders of Airflow Company's parent corporation as a result of a claim brought against APC by a former sales representative of Airflow. Early in the second quarter of 2000, APC acquired privately-held Advance Power Ltd., a U.K.-based manufacturer of DC-based power solutions used in communications and Internet applications, for $75.0 million in cash plus expenses. Also early in the second quarter of 2000, APC acquired privately-held ABL Electronics Corporation (ABL), a North American provider of computer and network cables, switches, and other connectivity products, for $8.0 million paid in a combination of cash and stock, plus expenses. APC's cash outlays associated with these acquisitions were financed from operating cash.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

        We begin Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with a discussion of our business outlook for 2005. We also provide a discussion of our Results of Operations for 2004 compared to 2003, and for 2003 compared to 2002. This discussion includes an overview of our operating results and the directions in which our markets, segments, and geographies are moving. We then provide a Liquidity and Financial Resources discussion of the significant changes in our balance sheet during 2004, and cash flows for 2004 compared to 2003, and for 2003 compared to 2002, as well as our contractual obligations and foreign currency activity. This is followed by a discussion of the Critical Accounting Policies that we believe are important to our business operations and understanding of our results of operations. We conclude with information about factors that may affect our future results.

        This MD&A should be read in conjunction with the other sections of this Annual Report on Form 10-K, including "Item 1: Business;" "Item 6: Selected Financial Data;" "Item 8: Financial Statements and Supplementary Data;" and "Item 9A: Controls and Procedures."

        In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-K.

BUSINESS OUTLOOK

        While there continues to be uncertainty around interest rate levels, energy costs and, in general, macroeconomic conditions and their potential impact on corporate investment and consumer spending, we enter 2005 with a cautious but optimistic outlook for our business. We are also pleased with the progress we made and momentum we created during our 2004 fiscal year. We had strong performance across all segments of the business and we are particularly proud of the progress we have made in the data center space, as sales of InfraStruXure nearly doubled in 2004 from 2003. The commitment we have made to educate the market and drive adoption of the technology we believe is paying off as customers are embracing the modular, standardized approach APC has pioneered in network-critical physical infrastructure, or NCPI, and they are excited about it.

        The statements below do not include any impact related to the expensing of stock options according to Statement of Financial Accounting Standards No. 123R, Share-Based Payment, which will be effective for APC for the third and fourth fiscal quarters of 2005. The pro forma earnings impact of expensing of stock options on our results of operations for 2004 is described in Note 1 of Notes to Consolidated Financial Statements in Item 8 of this Report.

        Against this background, we are planning for continued growth in annual revenue and increasing gross profit and operating profit dollars in 2005. We believe that we are very well positioned competitively, financially and strategically going into 2005. We will continue to be focused on empowering IT professionals with the knowledge, tools and solutions they need to effectively design, build and manage network-critical physical infrastructure. Our objective is for APC to become a trusted, global partner for the long term, committed to solving our customers' network-critical physical infrastructure problems of today, and helping them anticipate their challenges of tomorrow, thereby allowing them to focus on their core competencies. We believe that we can accomplish this by dramatically reducing our customers' level of complexity involved in designing, building, and managing the network-critical physical infrastructure that is at the very core of maintaining business continuity, application availability, and network reliability.

        As we look ahead to 2005, we are currently planning for growth in annual revenue in all three of our reportable segments: Small Systems, Large Systems and "Other." Similar to 2004, we expect the

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rate of growth of our Large Systems segment to be greater than the growth expected for Small Systems due to the assumed continued success of our overall strategy and the acceptance of our products in specific market segments.

        Overall gross margins for 2005 are currently expected to be impacted by a shift in product mix toward the faster-growing, lower-margin Large Systems products. Gross margins, particularly for Small Systems products, are expected to be impacted by planned price reductions which we anticipate will be partially offset by the favorable impact of the expected reduction of the unit costs of our products, particularly material costs, as a result of assumed unit volume growth and our continued efforts to improve manufacturing cost efficiencies. We also expect, albeit to a lesser degree than in 2004, favorable pricing arrangements with our suppliers. Gross margin variability could result from changing revenue levels, which are dependent on unit volumes, prices and currency trends as well as the mix of products sold, unit costs and yield issues associated with production at our factories, excess manufacturing capacity, excess inventory, inventory obsolescence and variations in inventory valuation.

        We have dedicated significant efforts to optimize our overall manufacturing capacity and locations over recent years and we will continue to plan for future capacity requirements based on the assumed continued acceptance and demand for our products in the specific market segments they were designed to address. We currently expect that capital spending will be between $30 million and $40 million in 2005, compared to $29.3 million in 2004. We expect that most of the capital spending for 2005 will go toward the maintaining, upgrading and expansion of current manufacturing capacity, as well as investments to upgrade current hardware and software office technologies.

        We spent nearly 30% more on research and development in 2004 vs. 2003, investing $86 million in advancing our NCPI systems in addition to ensuring our end-to-end offering is the best in the industry. We are committed to sustaining our R&D efforts to meet the future needs of our customers across all segments and potentially expanding into emerging, high-growth areas. We will remain focused on aggressively driving our growth of our network-critical physical infrastructure solutions, which will require sustaining and increasing our operating expense investments in sales and marketing, as well as making incremental investments in global customer education initiatives.

        In 2004 alone we trained nearly one hundred thousand customers and partners on InfraStruXure, significantly more than we trained in 2003 and our goals for 2005 are even higher. Our investment posture remains intact and we are firmly committed to supporting the level of sales and marketing spending necessary to educate customers and channel partners on the inherent performance and total cost of ownership benefits of a modular, standardized solution such as InfraStruXure.

        We currently expect our tax rate to be approximately 24% for 2005, excluding the potential tax impact of the repatriation of offshore earnings discussed below. The estimated effective tax rate is based on current tax law and the current expected income. The tax rate may be affected by the jurisdictions in which profits are determined to be earned and taxed, our ability to successfully implement additional tax savings planning opportunities and our ability to realize deferred tax assets. In October 2004, the American Jobs Creation Act of 2004 was enacted. This Act repealed the tax code's extraterritorial income (ETI) exclusion in response to the World Trade Organization's challenge that the ETI exclusion was a prohibited tax subsidy. The repeal will be phased in through 2006. The Act replaced the ETI exclusion with a 3% domestic deduction for domestic production activities effective for APC's 2005 tax year. The Act also provides for an elective tax-favored repatriation of offshore earnings, provided that the dividends are invested in the United States under a properly approved domestic reinvestment plan. The election to apply an 85% dividends-received deduction against cash dividends made by APC's offshore subsidiaries can be made in either 2004 or 2005. We are currently reviewing the Act to determine its impact on APC. APC expects to determine the amounts and sources of foreign earnings to be repatriated, if any, during the third quarter of fiscal 2005.

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        We are currently a party to various legal proceedings and claims. The expected costs to litigate such matters were significant in 2004 and we expect such costs in 2005 to be less than the levels incurred during the prior year, as a result of the our entering into a binding memorandum of understanding to settle two patent infringement suits. We currently do not believe that the ultimate outcome of these legal proceedings and claims will have a material adverse effect on our financial position or overall trends in results of operations. However, litigation is subject to inherent uncertainties, including the risk of an unfavorable outcome, and management's view of these matters may change in the future. An unfavorable outcome could include monetary damages or, in cases where injunctive relief is sought, an injunction prohibiting certain activities. If an unfavorable outcome were to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations of that period or future periods. We believe that, given our current liquidity and cash and investment balances, even an adverse judgment would not have a material impact on cash and investments or liquidity.

RESULTS OF OPERATIONS

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

        The following table sets forth key data, expressed as a percentage of net sales, for the years ended December 31, 2004, 2003 and 2002.

Revenues

        Net sales in fiscal year 2004 of $1.700 billion increased by 16.0% over 2003; net sales in fiscal year 2003 of $1.465 billion increased by 12.7% over 2002. These increases were attributable to strength in our major product segments, the Small and Large System segments, as well as growth across our major geographies. Demand for information technology hardware continued to be healthy in 2004. Our product segment growth reflected ongoing advancement of our data center initiatives. Management believes that our investments in technology and demand generation continue to drive the adoption of APC's network-critical physical infrastructure solution, InfraStruXure™. Our core uninterruptible power supply (UPS) offerings also contributed solid growth during each of 2004 and 2003. For further information about revenues by segment, refer to the Segment Results section below.

        Sales of new products contributed to overall net sales in 2004, 2003 and 2002. Sales of products introduced during 2004, 2003 and 2002 represented approximately 7%, 11%, and 9%, respectively, of net sales in those years.

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        Revenues by Geography.    The following table summarizes our revenues on a geographic basis for the years ended December 31, 2004, 2003 and 2002.

        The Americas (North and Latin America) increased 14.3% in 2004 over 2003, and also increased 3.8% in 2003 over 2002. EMEA increased 17.1% in 2004 over 2003, and also increased 25.4% in 2003 over 2002. Finally, Asia increased 19.0% in 2004 over 2003, and also increased 19.9% in 2003 over 2002.

        In fiscal year 2004, on a constant currency basis, EMEA increased 10.6% and Asia increased 14.3% from 2003. In fiscal year 2003, on a constant currency basis, EMEA increased 13.5% and Asia increased 13.2% over 2002. In 2004, 2003 and 2002, on a constant currency basis, EMEA's revenues would have been lower by $30.6 million, $44.3 million, and $13.3 million respectively, principally due to strengthening of the Euro and British pound. In 2004 and 2003, on a constant currency basis, Asia's revenues would have been lower by $12.4 million and $14.5 million, respectively, principally due to strengthening of the Japanese yen and Australian dollar. In 2002, Asia's revenues would have been higher by $2.9 million, principally due to weakening of the Japanese yen. In total, the impact of currency exchange rate changes worldwide added $43.7 million, $59.5 million, and $10.4 million to net sales in fiscal year 2004, 2003 and 2002, respectively. We believe constant currency information is useful for an understanding of our operating results. Revenues on a constant currency basis differ from revenues presented in accordance with United States generally accepted accounting principles. Also refer to Note 12 of Notes to Consolidated Financial Statements in Item 8 of this Report.

Cost of Goods Sold

        Cost of goods sold was $1.018 billion or 59.9% of net sales in fiscal year 2004 compared to $852.6 million or 58.2% of net sales in fiscal year 2003 and $816.3 million or 62.8% of net sales in fiscal year 2002. Gross margins for fiscal year 2004 were 40.1% of net sales, approximately 170 basis points lower than in fiscal year 2003. Gross margins for fiscal year 2003 were 41.8% of net sales, approximately 460 basis points higher than in fiscal year 2002. Gross margins in 2004 and 2003 were negatively impacted by pricing actions and, to a lesser extent, product mix shifts, notably within our Small Systems segment toward lower-margin products combined with strong sales growth in our lower-margin Large Systems segment. The downward pressure of these factors was substantially offset by cost reductions, particularly in the Small Systems segment, from declining material costs and select product transitions to low cost manufacturing locations, but not to the extent of prior periods, as well as the favorable pricing impact of a weakening U.S. dollar, particularly in Europe. For further information about gross margins by segment, refer to the Segment Results section below.

        Provision for Excess Inventory.    Additionally, third quarter 2004 gross margins included the effects of a $11.5 million incremental charge for excess inventory related to specifically-identified finished goods and raw materials inventories deemed obsolete as the result of recently commenced efforts to reduce the number of unique product offerings in several of our product lines, as well as the result of

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new product introductions. There were no additional inventory charges, other than APC's standard provisioning, during the fourth quarter of 2004 or during fiscal years 2003 and 2002.

        Product Recall.    Gross margins in 2003 and 2002 included the effects of a fourth quarter 2002 provision for and third quarter 2003 update of estimated costs associated with the product recall of Back-UPS CS 350 and 500 models. In early 2003, APC announced a product recall of Back-UPS CS 350 and 500 models, due to potential safety issues. Prior to announcing the recall, APC received eight reports worldwide of units overheating, resulting in the melting of the unit's outer casing, six of which occurred in the United States. Three of the reported incidents resulted in minor property damage; no injuries have been reported. The total number of affected devices recalled worldwide is approximately 2.1 million with approximately 900,000 devices recalled in the United States. The recall is limited to two specific models in APC's Back-UPS CS product line, the Back-UPS CS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt models. The affected units were manufactured between November 2000 and December 2002 and were sold primarily through computer and electrical distribution, catalog and retail outlets worldwide. In the fourth quarter of 2002, APC accrued a current liability and recognized additional warranty expense, classified in cost of goods sold, of $19.6 million. Based upon repair cost and return rate experience to-date as well as then-current estimates of remaining costs to be incurred, APC projected that aggregate costs for the recall would be less than originally estimated. To reflect this change, cost of goods sold was reduced by $5.5 million in the third quarter of 2003. The original charge and subsequent credit to warranty expense have not been allocated to our operating segments, but rather have been classified in indirect operating expenses for segment reporting consistent with our classification for our internal financial reporting; also refer to Note 12 of Notes to Consolidated Financial Statements in Item 8 of this Report. As of December 31, 2004, APC had incurred approximately 82% of currently estimated total recall costs. Our estimation of remaining recall costs of $2.4 million, comprised of $0.9 million for the U.S. and $1.5 million for international geographies, continues to be subject to actual return rates and per unit repair costs (which can vary by country) as well as estimates for other recall-related costs expected to be incurred. We expect that future amounts will not differ materially from our current estimates. Also refer to Note 8 of Notes to Consolidated Financial Statements in Item 8 of this Report.

        Intellectual Property Settlement.    Fiscal year 2003 gross margins also included the effects of a fourth quarter charge associated with the settlement of a claim for the infringement of intellectual property of $4.0 million. This charge has not been allocated to our operating segments, but rather has been classified as an indirect operating expense for segment reporting consistent with our classification for our internal financial reporting; also refer to Note 12 of Notes to Consolidated Financial Statements in Item 8 of this Report. This charge was the result of events or assessments that occurred during the fourth quarter of 2003.

        2002 Restructuring and Impairment of Assets.    Fiscal year 2002 gross margins also included the effects of a fourth quarter charge for impairment of assets held for sale of approximately $3.2 million, and first quarter charges for restructuring costs of approximately $4.8 million associated with our first quarter 2002 global headcount reductions. These actions impacted personnel worldwide, principally in the U.S., U.K., Ireland, and the Philippines, throughout a broad range of functions within the organization. The majority of these terminations were the result of our decision to consolidate our Philippines-based manufacturing operations. These restructuring costs were the result of events or assessments that occurred during the first quarter of 2002 and included the effects of approximately 941 employee terminations, principally 54% in manufacturing, 14% in sales and 13% in R&D, based on severance agreements, as well as facilities closures, and the related impairment of tangible assets, principally buildings and manufacturing equipment, based on management's assessment of market data. These charges have not been allocated to our operating segments, but rather have been classified as indirect operating expenses for segment reporting consistent with our classification for our internal financial reporting; also refer to Note 12 of Notes to Consolidated Financial Statements in Item 8 of

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this Report. These charges were the result of events or assessments that occurred during the respective quarters of 2002. Our 2002 restructuring actions were announced and substantially completed during 2002. APC's executive management approved these actions for immediate implementation; substantially all related restructuring costs were incurred in the first quarter of 2002, the period in which the restructuring actions were first approved and implemented. In connection with APC's decision to consolidate its Philippines-based manufacturing operations, APC closed manufacturing facilities located in the Philippines province of Laguna, in Maryland, and also in the U.K. APC marketed its Philippines property with an intent to sell these assets in 2003. However, APC was unable to complete this sale as a result of an unfavorable real estate market. In accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in the second quarter of 2003 the Philippines building and equipment were reclassified at their fair values, which aggregated $3.0 million, to held-for-use property, plant, and equipment and depreciation re-commenced. APC sold a building in Maryland to a third party in October 2002. Also, in connection with the closure of a leased facility in the U.K., APC recognized a lease liability during the first quarter of 2002; this lease will expire in 2005. Due to the timing of the facilities closures and contractual or regulatory obligations to certain workers, the financial benefits of these actions did not commence until the second quarter of 2002 with most of the full benefit being realized by the close of 2002. Ongoing operating expenses of the closed facilities were approximately $20 million annually, substantially all of which we expect will result in future annual savings. Also refer to Note 2 of Notes to Consolidated Financial Statements in Item 8 of this Report.

        Inventory Reserves.    Total inventory reserves at December 31, 2004 were $39.4 million compared to $38.8 million at December 31, 2003. This increase was due primarily to the aforementioned charge for excess inventory as well as routine provisioning that was necessary as a result of applying APC's inventory reserve methodology throughout the year, partially offset by the physical disposition of inventories covered by APC's inventory reserves. APC's reserve estimate methodology involves quantifying the total inventory position having potential loss exposure. Loss exposure generally results from several business factors, including product or component discontinuance, unplanned changes in demand, product design changes, and factory transitions. Quantifying such loss exposure is the result of combining the cost of inventories specifically identified as having little or no opportunity for sale or use (thus available for physical disposition) plus the cost of inventories having a high risk of no future sale or use based upon an analysis of on-hand quantities compared to historical and anticipated future sale or use. APC maintains an on-going business process for the physical disposition of inventories previously identified. Inventory write-offs occur at the time of physical disposition. Inventories, once reserved, are not written back up as such reserve adjustments are considered to be a permanent decrease to the cost basis of the excess or obsolete inventory.

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Segment Results (Also refer to Note 12 of Notes to Consolidated Financial Statements in Item 8 of this Report for important information regarding APC's reportable segments)

        Small Systems.    Net sales for products in the Small Systems segment, which provides power protection, UPS and management products for the PC, server and networking markets, increased in fiscal year 2004 by 13.3% over 2003, and also increased in fiscal year 2003 by 8.6% over 2002. Strength in NCPI and InfraStruXure related products drove solid 2004 performance in this segment, which also benefited from strong sales of APC's core UPSs, the Back-UPS and Smart-UPS lines. The 2003 improvement over the prior year also reflected increased demand for Back-UPS and Smart-UPS worldwide, combined with increased sales of rack enclosures and management solutions.

        Gross margins for the Small Systems segment improved in each of 2004 and 2003 over the respective prior year levels. The factors favorably influencing the gross margins of this segment included product cost reductions and favorable currency trends. Our Small Systems cost reductions were achieved through a combination of product transitions to low cost manufacturing locations and material cost reductions from our supplier base. Our product cost reductions were driven principally by material cost improvements and favorably impacted gross margins in the Small Systems segment by approximately 240 basis points and 320 basis points in the fiscal years 2004 and 2003, respectively. Partially offsetting the favorable product cost and currency trends were the impact of pricing actions and product mix shifts within the segment.

        Large Systems.    Net sales for products in the Large Systems segment, consisting primarily of 3-phase UPS, services, precision cooling and ancillary products for data centers, facilities and communication applications, increased 34.2% in fiscal year 2004 over 2003, and also increased 31.8% in

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fiscal year 2003 over 2002. With approximately 72% of InfraStruXure revenue included in the Large Systems segment, InfraStruXure sales were a major contributor to the year-over-year growth of this segment. On a product level, Symmetra 3-phase, the primary power component of an InfraStruXure system, our industrial products, and services were leading growth drivers. The improvement in 2003 over the prior year also reflected growing sales of our cooling products.

        Gross margins for the Large Systems segment declined in 2004 from the prior year as a result of increased costs within our service business, particularly in the U.S. and Europe, as well as increasing material costs on select product lines, including cooling and Silcon products. These increases were partially offset by volume-driven cost improvements on Symmetra 3-phase products. Symmetra's increasing share of Large Systems revenue further enhanced the favorable impact of these cost improvements. Gross margins for the Large Systems segment improved in 2003 over the prior year principally due to a lowering of product costs, particularly lower manufacturing costs resulting from volume efficiencies achieved through factory consolidations, and capacity rationalization efforts that commenced in late 2001 as well as through material cost reductions from APC's supplier base. Our 2003 product cost reductions accounted for approximately 400 basis points of the gross margin improvements in 2003 in the segment and were driven by material cost improvements and, to a lesser extent, manufacturing cost efficiencies.

        "Other" Segment.    Net sales for products in the Other segment, consisting principally of mobile accessories and replacement batteries, decreased 4.4% in fiscal year 2004 from 2003 due to a decrease in sales volumes of mobile accessories, partially offset by an increase in sales of replacement batteries. Net sales for this segment increased 26.2% in 2003 over 2002 due mainly to organic growth of existing products, particularly replacement batteries, as well as growth from new mobile accessory products.

        Gross margins for the Other segment improved in 2004 over the prior year. Strength in replacement battery sales and product cost reductions drove the year-over-year improvement. These cost reductions favorably impacted gross margins in the Other segment by approximately 199 basis points in fiscal year 2004. Gross margins for this segment also improved in 2003 over the prior year as a result of volume related efficiencies in cost, including improved efficiencies of recently introduced products, as well as a mix shift within the segment.

        In addition, revenue and gross margin improvements in 2004 and 2003 over the respective prior years were enhanced in each of the operating segments by the favorable pricing impact of a weakening U.S. dollar, particularly in Europe.

Operating Expenses

        Marketing, Selling, General, and Administrative (SG&A) Expenses.    SG&A expenses in fiscal year 2004 were $391.8 million or 23.1% of net sales in fiscal year 2004 compared to $315.4 million or 21.6% of net sales in fiscal year 2003 and $272.7 million or 21.0% of net sales in fiscal year 2002. We continue to support our data center initiatives, with a primary focus on increasing the awareness of our existing and prospective customers, particularly in relation to our InfraStruXure architecture. The increases in total spending in 2004 and 2003 reflected ongoing sales and promotional efforts which involve expanding our sales and support teams, developing new channels such as manufacturer representatives and engineering contractors, and increasing sales and marketing support of our core reseller channels, as well as funding our educational efforts through high-level customer and partner events. Also contributing to the increases in total spending were higher professional service costs in support of ongoing litigation and Sarbanes-Oxley compliance.

        The allowance for bad debts was 4.7% of gross accounts receivable at December 31, 2004 compared to 6.7% at December 31, 2003. Accounts receivable balances outstanding over 60 days represented 11.7% of total receivables at December 31, 2004 compared to 13.5% at December 31, 2003. We continue to experience strong collection performance. Write-offs of uncollectable accounts

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represent less than 1% of net sales. Commencing in August 2004, we expanded APC's receivables insurance coverage to include U.S.-based sales. As a result of this increased coverage, in the third quarter of 2004 we were able to reduce our allowance for doubtful accounts by approximately $1.5 million. A majority of international customer balances continue to be covered by receivables insurance.

        Research and Development (R&D).    R&D expenditures were $85.6 million or 5.0% of net sales in fiscal year 2004, $67.6 million or 4.6% of net sales in fiscal year 2003, and $60.1 million or 4.6% of net sales in fiscal year 2002. We continue to commit resources to support our investment in research and development with a primary focus on driving product innovation through increasing engineering efforts. We believe that continued product innovation through development is necessary for our existing products to remain competitive in our markets, as well as creating opportunities from new product introductions. The increases in total R&D spending primarily reflect increased numbers of software and hardware engineers and costs associated with new product development and engineering support.

Other Income, Net and Income Taxes

        Other Income, Net.    Other income is comprised principally of interest income. Although global interest income for fiscal year 2004 was lower than for 2003, such income increased in the fourth quarter of 2004 over the fourth quarter of 2003 as a result of increasing interest rates and investments in foreign-sourced commercial paper. On a full year basis, the decrease reflected our strategic purchase of additional tax-exempt securities as well as an overall decline in the bond market. Although average cash balances available for investment rose during fiscal year 2003, interest income decreased from 2002 to 2003 due to lower short term interest rates throughout 2003.

        At December 31, 2004, APC had $721.1 million of total cash and investments, down from $806.8 million at December 31, 2003, all of which are stated at fair value. This decrease reflected APC's third quarter repurchase on the open market of approximately 9.3 million shares of its common stock, at an average price of $16.09 per share totaling $150 million, completing a program approved by APC's Board of Directors in June 2004. We manage APC's cash and investment balances to preserve principal and liquidity while maximizing our return on the total investment portfolio. We diversify our investment portfolio by investing in multiple types of investment-grade securities with multiple investment brokers. Based on APC's investment portfolio and interest rates, at December 31, 2004, a 100 basis point increase or decrease in interest rates would have resulted in an increase or decrease of approximately $7 million in our annual interest income.

        Income Taxes.    Our effective income tax rates were approximately 15.3%, 26.0%, and 28.0% in 2004, 2003 and 2002, respectively. The substantial decrease in fiscal year 2004 from 2003 was principally attributable to a net tax credit of approximately $20.8 million associated with the reversal of income tax provisioning resulting from the favorable outcome of recent tax audits by U.S. federal and state taxing authorities. In connection with the completion of the examination of its 2000-2002 U.S. federal tax returns, APC adjusted certain income tax related reserves established in prior years due to the expiration of the statute of limitations primarily related to transfer pricing reserves established for the Philippine operations, offset by the additional tax due agreed to as a result of the examination, as well as an upward revision of reserves for years remaining open under the statute of limitations. This revision relates primarily to transfer pricing matters concerning our manufacturing subsidiaries in India and China and our sales subsidiaries in Europe. In addition, APC recorded an additional tax credit to the third quarter tax rate with respect to the reversal of a tax reserve established for potential state taxes. APC prevailed on a 1996-1997 state tax appeal concerning a sales apportionment matter and this, along with the expiration of the statue of limitations for all years through 2000, resulted in this tax credit.

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        The decrease from 2002 to 2004 also reflected tax savings from an increasing portion of taxable earnings anticipated to be generated from APC's operations in jurisdictions currently having lower income tax rates than the present U.S. statutory income tax rate. This shift resulted partially from our product transitions to lower cost, lower tax, manufacturing locations. APC has tax holidays in China, India, and the Philippines, which reduce or eliminate the income taxes paid in those countries. A substantial portion of APC's tax holiday in the Philippines expired in the third quarter of 2003. Although this will have the effect of increasing APC's foreign taxes, APC's effective income tax rate will remain considerably lower than the U.S. statutory federal corporate tax rate of 35%.

        American Jobs Creation Act of 2004—Repatriation of Foreign Earnings.    In October 2004, the American Jobs Creation Act of 2004 was enacted. This Act repealed the tax code's extraterritorial income (ETI) exclusion in response to the World Trade Organization's challenge that the ETI exclusion was a prohibited tax subsidy. The repeal will be phased in through 2006. The Act replaced the ETI exclusion with a 3% domestic deduction for domestic production activities effective for APC's 2005 tax year. The Act also provides for a temporary 85% dividends received deduction on certain foreign earnings repatriated during a one-year period. The deduction would result in an approximate 5.25% federal tax rate on the repatriated earnings. To qualify for the deduction, the earnings must be reinvested in the United States pursuant to a domestic reinvestment plan established by a company's chief executive officer and approved by its board of directors. Certain other criteria in the Jobs Act must be satisfied as well. The maximum amount of APC's foreign earnings that qualify for the temporary deduction is $500 million. For APC, the one-year period during which the qualifying distributions can be made is 2004 or 2005. No qualifying distributions were made during 2004.

        APC is in the process of evaluating whether it will repatriate any foreign earnings under the repatriation provisions of the Jobs Act and, if so, the amount that it will repatriate. The range of reasonably possible amounts that APC is considering for repatriation, which would be eligible for the temporary deduction, is zero to $500 million. APC is awaiting the issuance of further regulatory guidance and passage of statutory technical corrections with respect to certain provisions in the Jobs Act prior to determining the amounts it will repatriate. If such regulatory guidance or technical corrections are favorable, APC is likely to repatriate amounts in the high end of our range. APC expects to determine the amounts and sources of foreign earnings to be repatriated, if any, during the third quarter of fiscal 2005. Use of the funds will be governed by a domestic reinvestment plan, as required by the Jobs Act.

        Repatriation of the maximum amount eligible for the temporary deduction, which is $500 million, could result in additional United States federal income tax expense, which APC currently estimates to be between zero and $38.2 million, in fiscal 2005. Repatriation also would substantially increase liquidity in the United States, although use of the additional liquidity would be restricted by the domestic reinvestment plan. There would be a corresponding reduction in liquidity at APC's foreign subsidiaries. Some foreign subsidiaries may be required to borrow in order to repatriate their earnings to the U.S.

Effects of Inflation

        Management believes that inflation has not had a material effect on APC's operations.

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LIQUIDITY AND FINANCIAL RESOURCES

Working Capital

        Working capital at December 31, 2004 was $1.279 billion compared to $1.217 billion at December 31, 2003. Our cash, cash equivalents, and short-term investments position decreased to $715.6 million at December 31, 2004 from $748.3 million at December 31, 2003. APC's continued positive operating results allowed us to repurchase on the open market approximately 9.3 million shares of our common stock, at an average price of $16.09 per share totaling $150 million, in the third quarter of 2004, as well as pay quarterly dividends and continue to internally finance the capital investment, R&D, sales and marketing spending required to expand our operations.

Cash Flows

        The table below summarizes our cash flows for the years ended December 31, 2004, 2003 and 2002.

        APC invests its excess cash principally in certificates of deposit, corporate bonds and notes, and U.S. government agency securities. APC also invests in auction rate securities. Auction rate securities have long-term underlying maturities, however the market is highly liquid and the interest rates reset every seven, 28 or 35 days. In prior years, APC classified a portion of its auction rate securities as cash equivalents, however such amounts have been reclassified as short term available-for-sale securities for all periods presented in this Report—$80.1 million, $110.9 million, and $83.4 million at December 31, 2004, 2003 and 2002, respectively.

        Cash Flows from Operating Activities.    Our cash flows from operations for fiscal years 2004 and 2003 reflected higher profit levels as well as the favorable impact of increasing accounts payable and other liabilities, partially offset by increased inventory and higher accounts receivable balances consistent with our strong sales growth.

        Cash Flows from Investing Activities.    Our investing activities cash flows were used mainly for the purchase of available-for-sale and held-to-maturity securities and for capital spending, principally manufacturing and office equipment, purchased software applications, and building improvements. Cash available from operations resulted in net purchases of investments in fiscal years 2003 and 2002, including the purchase of additional tax-exempt securities. Our investment approach and the composition of our investment portfolio remained relatively constant overall with no investments having maturity dates greater than two years, except for the aforementioned auction rate securities.

        Cash Flows from Financing Activities.    Our cash flows from financing activities included the aforementioned $150 million stock repurchase during the third quarter of 2004 as well as the payment of common stock dividends of approximately $70.5 million and $31.8 million during fiscal years 2004 and 2003, respectively. These outflows were partially offset in 2004, and more than offset in 2003 and 2002, by proceeds from issuances of common stock relating to employee stock plans during each of the periods presented.

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Inventories

        Worldwide inventories were $465.9 million at December 31, 2004, up from $402.2 million at December 31, 2003. Higher levels of on-hand raw materials and finished goods were required during 2004 and 2003 to meet increasing current and anticipated demand, particularly InfraStruXure demand, as well as to manage the supply chain requirements associated with continuing transfers of production of a wide range of Small and Large Systems products to and among our low cost manufacturing regions. In addition, we increased our inventory levels of price-sensitive materials to hedge against the risk of current and anticipated commodity cost trends, as well as to support continuing new product introductions. Despite increasing inventory levels, inventory levels as a percentage of quarterly sales were 91% in the fourth quarter of 2004, down from 105% in the third quarter of 2004 and 93% in the fourth quarter of 2003.

        Provision for Excess Inventory.    Additionally, third quarter 2004 gross margins included the effects of a $11.5 million incremental charge for excess inventory related to specifically-identified finished goods and raw materials inventories deemed obsolete as the result of recently commenced efforts to reduce the number of unique product offerings in several of our product lines, as well as the result of new product introductions. There were no additional inventory charges, other than APC's standard provisioning, during the fourth quarter of 2004 or during fiscal years 2003 and 2002.

        Product Recall.    In early 2003, we announced a product recall of Back-UPS CS 350 and 500 models, due to potential safety issues. Prior to announcing the recall, APC received eight reports worldwide of units overheating, resulting in the melting of the unit's outer casing, six of which occurred in the United States. Three of the reported incidents resulted in minor property damage; no injuries have been reported. The total number of affected devices recalled worldwide is approximately 2.1 million with approximately 900,000 devices recalled in the United States. The recall is limited to two specific models in APC's Back-UPS CS product line, the Back-UPS CS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt models. The affected units were manufactured between November 2000 and December 2002 and were sold primarily through computer and electrical distribution, catalog and retail outlets worldwide. In the fourth quarter of 2002, APC accrued a current liability and recognized additional warranty expense, classified in cost of goods sold, of $19.6 million. Based upon repair cost and return rate experience to-date as well as then-current estimates of remaining costs to be incurred, APC projected that aggregate costs for the recall would be less than originally estimated. To reflect this change, cost of goods sold was reduced by $5.5 million in the third quarter of 2003. As of December 31, 2004, APC had incurred approximately 82% of currently estimated total recall costs. Our estimation of remaining recall costs of $2.4 million, comprised of $0.9 million for the U.S. and $1.5 million for international geographies, continues to be subject to actual return rates and per unit repair costs (which can vary by country) as well as estimates for other recall-related costs expected to be incurred. We expect that future amounts will not differ materially from our current estimates.

Contractual Obligations

        The following table summarizes our significant contractual obligations at December 31, 2004, and the effect such obligations are expected to have on our liquidity and cash flows in future periods. This table excludes amounts already recorded on our balance sheet as current liabilities at December 31, 2004.

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        APC's non-cancelable operating leases, primarily for warehousing and office space, expire at various dates through 2011. These leases contain renewal options for periods ranging from one to seven years and require APC to pay its proportionate share of utilities, taxes, and insurance. APC is not able to determine the aggregate amount of purchase orders that represent contractual obligations for the purchase of goods and services, as such purchase orders may represent authorizations to purchase rather than binding agreements. For the purposes of this disclosure, contractual obligations for the purchase of goods and services are defined as agreements that are enforceable and legally binding on APC and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; the approximate timing of the transaction, and contain no provisions allowing for cancellation without significant penalty. Our purchase orders for raw materials or purchased finished products are based on our current manufacturing needs and/or demand forecasts and are fulfilled by our vendors within short time horizons. We do not have significant agreements for the purchase of raw materials or finished products specifying minimum quantities or set prices that exceed our expected requirements for three months.

Capital Expenditures and Capital Commitments

        During 2004 and 2003, our capital expenditures, net of capital grants, amounted to approximately $29.3 million and $21.6 million, respectively, consisting primarily of manufacturing and office equipment, purchased software applications, and building improvements. Capital spending in 2004 and 2003 focused on funding additional equipment needs and improving existing factories, principally in the U.S., India, Ireland, the Philippines, Denmark, and China, as well as continuing investment in information technologies. Capital spending in 2002 decreased from prior year levels, reflecting our focused efforts to control and reduce capital spending and rationalize our overall production capacity which included our first quarter 2002 decision to consolidate our Philippines based manufacturing operations in the province of Cavite. Substantially all of APC's net capital expenditures were financed from available operating cash. Also refer to Note 12 of Notes to Consolidated Financial Statements in Item 8 of this Report.

        We have dedicated significant efforts to rationalize our overall manufacturing capacity over the past three years and we will continue to plan for future capacity requirements based on the assumed continued acceptance and demand for our products in the specific market segments they were designed to address. We currently expect that capital spending will be between $30 million and $40 million in 2005, compared to $29.3 million in 2004. We expect that most of the capital spending for 2005 will go toward maintaining, upgrading, and expanding current manufacturing capacity, as well as investing to upgrade current hardware and software office technologies.

        We had no material capital commitments during fiscal years 2004, 2003 and 2002, or at December 31, 2004 and 2003.

        APC has agreements with the Industrial Development Authority of Ireland, otherwise known as the IDA. Under these agreements, we receive grant monies for costs incurred for machinery, equipment, and building improvements for our Galway and Castlebar facilities. These grants are equal to 40% and 60%, respectively, of such costs up to a maximum of $13.1 million for Galway and $1.3 million for Castlebar. Such grant monies are subject to APC meeting certain employment goals and maintaining operations in Ireland until termination of the respective agreements. Under separate agreements with the IDA, we receive direct reimbursement of training costs at our Galway and Castlebar facilities for up to $3,000 and $12,500, respectively, per new employee hired. Also refer to Note 16 of Notes to Consolidated Financial Statements in Item 8 of this Report.

        APC also has an agreement with the IDA for a research and development grant towards the costs of a project for the development of software products. The availability of the grant is contingent on meeting certain milestones in the progress of the project as well as meeting certain employment goals on the project within the Galway facility. The amount of grant assistance available on satisfaction of all

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conditions is 28% of the eligible expenditure to a maximum of €714,588. At December 31, 2004, no grant claims had been claimed or received.

Borrowing Facilities and Financial Commitments

        At December 31, 2004 and 2003, APC had available for future borrowings $65.0 million under an unsecured, non-committed line of credit agreement at a floating interest rate equal to the bank's cost of funds rate plus 0.625%. No borrowings were outstanding under this facility during fiscal years 2004, 2003 and 2002, or at December 31, 2004 and 2003.

        APC had no significant financial commitments, other than those required in the normal course of business, during fiscal years 2004, 2003 and 2002, or at December 31, 2004 and 2003.

Off-Balance-Sheet Arrangements

        APC had no significant off-balance sheet arrangements during fiscal years 2004, 2003 and 2002, or at December 31, 2004 and 2003.

        American Jobs Creation Act of 2004—Repatriation of Foreign Earnings.    In October 2004, the American Jobs Creation Act of 2004 was enacted. This Act repealed the tax code's extraterritorial income (ETI) exclusion in response to the World Trade Organization's challenge that the ETI exclusion was a prohibited tax subsidy. The repeal will be phased in through 2006. The Act replaced the ETI exclusion with a 3% domestic deduction for domestic production activities effective for APC's 2005 tax year. The Act also provides for a temporary 85% dividends received deduction on certain foreign earnings repatriated during a one-year period. The deduction would result in an approximate 5.25% federal tax rate on the repatriated earnings. To qualify for the deduction, the earnings must be reinvested in the United States pursuant to a domestic reinvestment plan established by a company's chief executive officer and approved by its board of directors. Certain other criteria in the Jobs Act must be satisfied as well. The maximum amount of APC's foreign earnings that qualify for the temporary deduction is $500 million. For APC, the one-year period during which the qualifying distributions can be made is 2004 or 2005. No qualifying distributions were made during 2004.

        APC is in the process of evaluating whether it will repatriate any foreign earnings under the repatriation provisions of the Jobs Act and, if so, the amount that it will repatriate. The range of reasonably possible amounts that APC is considering for repatriation, which would be eligible for the temporary deduction, is zero to $500 million. APC is awaiting the issuance of further regulatory guidance and passage of statutory technical corrections with respect to certain provisions in the Jobs Act prior to determining the amounts it will repatriate. If such regulatory guidance or technical corrections are favorable, APC is likely to repatriate amounts in the high end of our range. APC expects to determine the amounts and sources of foreign earnings to be repatriated, if any, during the third quarter of fiscal 2005. Use of the funds will be governed by a domestic reinvestment plan, as required by the Jobs Act.

        Repatriation of the maximum amount eligible for the temporary deduction, which is $500 million, could result in additional United States federal income tax expense, which APC currently estimates to be between zero and $38.2 million, in fiscal 2005. Repatriation also would substantially increase liquidity in the United States, although use of the additional liquidity would be restricted by the domestic reinvestment plan. There would be a corresponding reduction in liquidity at APC's foreign subsidiaries. Some foreign subsidiaries may be required to borrow in order to repatriate their earnings to the U.S.

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Quarterly Cash Dividends

        In June 2003, APC's Board of Directors approved initiation of a quarterly cash dividend of $0.08 per share of common stock. Dividends of $0.08 per share were declared and paid in each subsequent quarter through the second quarter of 2004. In June 2004, APC's Board of Directors approved a 25% increase in its quarterly cash dividend raising the payout to $0.10 per share. Dividends of $0.10 per share were declared and paid in the third and fourth quarters of 2004. On February 15, 2005, a quarterly dividend of $0.10 per share was declared, payable on March 16, 2005 to shareholders of record as of February 28, 2005. It is the intention of the Board of Directors to pay a comparable quarterly dividend on a going forward basis contingent upon continued capital availability and a determination that cash dividends continue to be in the best interests of APC and its shareholders.

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

Stock Repurchase Program

        During the third quarter of 2004, APC repurchased on the open market approximately 9.3 million shares of its common stock, at an average price of $16.09 per share totaling $150 million, completing a program approved by APC's Board of Directors in June 2004. No further repurchases will be made under this program. The repurchased shares have been deemed authorized but unissued shares. In March 2004, APC also returned its 250,000 treasury shares to an authorized but not issued status.

Foreign Currency Activity

        We invoice our customers in various currencies. Realized and unrealized transaction gains or losses are included in the results of operations and are measured based upon the effect of changes in exchange rates on the actual or expected amount of functional currency cash flows. Transaction gains and losses were not material to the results of operations in 2004, 2003 and 2002.

        The table below summarizes information on balances that are sensitive to foreign currency exchange rates and presents such amounts in U.S. dollar equivalents.

        APC also had non-trade receivables denominated in Euros of approximately U.S.$0.8 million and U.S.$0.9 million at December 31, 2004 and 2003, respectively.

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

CRITICAL ACCOUNTING POLICIES

        The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to

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make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The U.S. Securities and Exchange Commission has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results and which require our most difficult, complex or subjective judgments or estimates. Based on this definition, we have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies. For a detailed discussion on the application of these and other accounting policies, also refer to Note 1 of Notes to Consolidated Financial Statements in Item 8 of this Report.

        On an on-going basis, we evaluate 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 valuation allowances, restructuring reserves and contingencies, and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Materially different results in the amount and timing of our actual results for any period could occur if we made different judgments or utilized different estimates. Actual results may differ from those estimates.

        Our critical accounting policies are as follows:

        Revenue Recognition.    We follow very specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter. In general, revenue is recognized when title has passed at the time of delivery of product for all of our operating segments as stipulated by the delivery terms for the sales transactions. In addition, prior to revenue recognition, we require persuasive evidence of the arrangement, that the price is fixed or determinable, and that collectibility is reasonably assured. Installation is not applicable for Small Systems and "Other" segment products based on the nature of the products sold. Generally, revenue associated with Large Systems sales is also recognized at the time of delivery and/or installation pursuant to the delivery and/or installation 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)).

        Certain Large Systems product lines and, at times, one product line included in the Small Systems segment, require electrical hardwire installation or duct installation which is performed by the customer or their contracted licensed contractor/electrician. Where we do not perform such installation, revenue recognition at the time of delivery is proper as customer acceptance of the unit is not required. Also, payment by the customer is not contingent upon installation of the product.

        We offer additional services to customers depending on the type of product the customer has purchased, including on-site services, installation consulting services, remote monitoring services, power audit services, and network integration services. Revenue is recognized at the time services are provided or is deferred and recognized over the service period (where applicable). The fair value of these services are based upon the rates that we charge customers in separately negotiated transactions and such services are not essential to the functionality of the delivered product.

        For all sales, except those completed over the Internet, we use a binding purchase order as evidence of an arrangement. For sales over the Internet, we use a credit card authorization as evidence

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of an arrangement. Sales through certain customers are evidenced by a master agreement governing the relationship together with binding purchase orders on a transaction by transaction basis.

        Our arrangements do not generally include acceptance clauses. However, if an arrangement includes a customer specified acceptance provision, acceptance generally occurs at our factory prior to delivery. As we continue to introduce new products in 2005, we anticipate that installation and customer acceptance provisions may become more common, and therefore increasingly significant for determining delivery and performance and consequently our entitlement to recognize revenue.

        Estimating Valuation Allowances and Accrued Liabilities—Allowances for Sales Returns, Doubtful Accounts, Inventory Obsolescence and Product Recall, and Assessment of the Probability of the Outcome of our Current Litigation.    Significant management judgments that affect the application of our revenue policy also include estimates of potential future product returns related to current period product revenue. We analyze historical returns, current economic trends, and channel inventories when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates.

        We provide limited rights of return to distributors and retailers for our Small Systems product lines. We provide appropriate reserves for returns at the time that related revenue is recognized, based on historical patterns of returns and contractual provisions in accordance with the provisions of Statement of Financial Accounting Standards No. 48, Revenue Recognition When Right of Return Exists, and U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 104. Returns of Large Systems products generally do not occur. Historically, returns have represented approximately 3% of gross sales and have not differed significantly from prior estimates.

        Similarly, we must make estimates of the uncollectability of our accounts receivable. Management specifically analyzes accounts receivable balances in view of customer credit-worthiness, customer concentrations, historical bad debts, current economic trends, and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Commencing in August 2004, we expanded APC's receivables insurance coverage to include U.S.-based sales. A majority of international customer balances continue to be covered by receivables insurance. Historically, bad debts have been less than 1% of net sales.

        Our inventory reserve estimate methodology involves quantifying the total inventory position having potential loss exposure. Loss exposure generally results from several business factors, including product or component discontinuance, unplanned changes in demand, product design changes, and factory transitions. Quantifying such loss exposure is the result of combining the cost of inventories specifically identified as having little or no opportunity for sale or use (thus available for physical disposition) plus the cost of inventories having a high risk of no future sale or use based upon an analysis of on-hand quantities compared to historical and anticipated future sale or use. We maintain an on-going business process for the physical disposition of inventories previously identified. Inventory write-offs occur at the time of physical disposition. Inventories, once reserved, are not written back up as such reserve adjustments are considered to be a permanent decrease to the cost basis of the excess or obsolete inventory. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

        In early 2003, we announced a product recall of Back-UPS CS 350 and 500 models, due to potential safety issues. Prior to announcing the recall, APC received eight reports worldwide of units overheating, resulting in the melting of the unit's outer casing, six of which occurred in the United States. Three of the reported incidents resulted in minor property damage; no injuries have been reported. The total number of affected devices recalled worldwide is approximately 2.1 million with approximately 900,000 devices recalled in the United States. The recall is limited to two specific models

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in APC's Back-UPS CS product line, the Back-UPS CS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt models. The affected units were manufactured between November 2000 and December 2002 and were sold primarily through computer and electrical distribution, catalog and retail outlets worldwide. In the fourth quarter of 2002, APC accrued a current liability and recognized additional warranty expense, classified in cost of goods sold, of $19.6 million. Based upon repair cost and return rate experience to-date as well as then-current estimates of remaining costs to be incurred, APC projected that aggregate costs for the recall would be less than originally estimated. To reflect this change, cost of goods sold was reduced by $5.5 million in the third quarter of 2003. As of December 31, 2004, APC had incurred approximately 82% of currently estimated total recall costs. Our estimation of remaining recall costs of $2.4 million, comprised of $0.9 million for the U.S. and $1.5 million for international geographies, continues to be subject to actual return rates and per unit repair costs (which can vary by country) as well as estimates for other recall-related costs expected to be incurred. The most significant risks associated with our return rate assumptions include varying degrees of product recall regulation by geography as well as varying consumer awareness levels and access to timely recall information. Actual per unit repair cost includes principally transportation costs which will be influenced by the proximity of customer locations to the service center location as well as the priority level of delivery requirements. We expect that actual future amounts will not differ materially from our current estimates.

        We are, and may in the future become, involved in litigation involving our business, products or operations. For pending claims for which there is an estimatable range of loss greater 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 the minimum estimated liability. Because of uncertainties related to the identifiable range of loss on any pending claims, we may be unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, we assess the potential liability related to our pending claims and revise our estimates. Such revisions in our estimates of the potential liability could materially impact our results of operation and financial position. The litigation process is inherently uncertain and includes the risk of an unexpected, unfavorable result. We may be materially adversely impacted by any such litigation.

        Valuation of Long-lived Tangible and Intangible Assets including Goodwill.    We assess the impairment of long-lived tangible and intangible assets on an ongoing basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Should our assessment of long-lived and amortizable intangible assets suggest impairment, we would determine recoverability based on an estimate of future undiscounted cash flows resulting from our use of the asset and its eventual disposition. Factors we consider that could trigger an impairment review include the following:

•

significant underperformance relative to expected historical or projected future operating results;



•

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



•

significant negative industry or economic trends; and



•

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

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

        Accounting for Income Taxes.    As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and

33

accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Expectations about future taxable income incorporate numerous assumptions about actions, elections and strategies to minimize income taxes in future years. Our ability to take such actions, make preferred elections and implement tax-planning strategies may be adversely impacted by enacted changes in tax laws and/or tax rates, as well as successful challenges by tax authorities resulting from differing interpretations of tax laws and regulations.

        American Jobs Creation Act of 2004—Repatriation of Foreign Earnings.    In October 2004, the American Jobs Creation Act of 2004 was enacted. This Act repealed the tax code's extraterritorial income (ETI) exclusion in response to the World Trade Organization's challenge that the ETI exclusion was a prohibited tax subsidy. The repeal will be phased in through 2006. The Act replaced the ETI exclusion with a 3% domestic deduction for domestic production activities effective for APC's 2005 tax year. The Act also provides for a temporary 85% dividends received deduction on certain foreign earnings repatriated during a one-year period. The deduction would result in an approximate 5.25% federal tax rate on the repatriated earnings. To qualify for the deduction, the earnings must be reinvested in the United States pursuant to a domestic reinvestment plan established by a company's chief executive officer and approved by its board of directors. Certain other criteria in the Jobs Act must be satisfied as well. The maximum amount of APC's foreign earnings that qualify for the temporary deduction is $500 million. For APC, the one-year period during which the qualifying distributions can be made is 2004 or 2005. No qualifying distributions were made during 2004.

        APC is in the process of evaluating whether it will repatriate any foreign earnings under the repatriation provisions of the Jobs Act and, if so, the amount that it will repatriate. The range of reasonably possible amounts that APC is considering for repatriation, which would be eligible for the temporary deduction, is zero to $500 million. APC is awaiting the issuance of further regulatory guidance and passage of statutory technical corrections with respect to certain provisions in the Jobs Act prior to determining the amounts it will repatriate. If such regulatory guidance or technical corrections are favorable, APC is likely to repatriate amounts in the high end of our range. APC expects to determine the amounts and sources of foreign earnings to be repatriated, if any, during the third quarter of fiscal 2005. Use of the funds will be governed by a domestic reinvestment plan, as required by the Jobs Act.

        Repatriation of the maximum amount eligible for the temporary deduction, which is $500 million, could result in additional United States federal income tax expense, which APC currently estimates to be between zero and $38.2 million, in fiscal 2005. Repatriation also would substantially increase liquidity in the United States, although use of the additional liquidity would be restricted by the domestic reinvestment plan. There would be a corresponding reduction in liquidity at APC's foreign subsidiaries. Some foreign subsidiaries may be required to borrow in order to repatriate their earnings to the U.S.

        APC is routinely under audit by federal, foreign, state, or local authorities in the areas of income taxes and the remittance of sales and use taxes. These audits include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal, foreign, state, and local tax laws. In evaluating the exposure associated with various tax filing positions, we often accrue for probable exposures. To the extent APC were to prevail in matters for which accruals have been established or were to be required to pay amounts in excess of reserves, APC's effective tax rate in a given financial statement period could be materially affected.

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        To the extent we believe that recovery of deferred tax assets is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statements of income. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. At December 31, 2004 and 2003, we provided a valuation allowance on certain of our deferred tax assets, primarily consisting of net operating losses generated in 2001 through 2004 for the start up and continuing operations of Brazilian operations, because of uncertainty regarding their realizability. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance which could materially impact our financial position and results of operations.

RECENTLY ISSUED ACCOUNTING STANDARDS

        Share-Based Payment.    In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, which is a revision of Statement No. 123 as amended by No. 148, Accounting for Stock-Based Compensation. Statement No. 123(R) supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant. Pro forma disclosure is no longer an alternative. This Statement is effective for fiscal periods beginning after June 15, 2005 and will be effective for APC for the third and fourth fiscal quarters of 2005.

        Statement 123(R) permits public companies to adopt its requirements using one of two methods. The "modified prospective" method requires compensation cost to be recognized beginning with the Statement's effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. The "modified retrospective" method includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

        APC has yet to determine which method to use in adopting Statement 123(R). As permitted by Statement 123, APC currently accounts for share-based payments to employees using APB Opinion No. 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)'s fair value method will have a significant impact on APC's results of operations, although it will have no impact on APC's overall financial position. APC is evaluating Statement 123(R) and has not yet determined the amount of stock option expense which will be incurred in future periods.

        Inventory Costs.    In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, Inventory Costs. Statement 151 requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs always be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement is effective for fiscal years beginning after June 15, 2005; we will adopt this Statement on January 1, 2006. The adoption of this Statement is not expected to have a material impact on our consolidated financial position or results of operations.

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        American Jobs Creation Act of 2004—Repatriation of Foreign Earnings.    FASB Staff Position (FSP) No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004, provides guidance under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the Jobs Act) on enterprises' income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying Statement No. 109. APC has not yet completed evaluating the impact of the repatriation provisions. Accordingly, as provided for in FSP 109-2, APC has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.

FACTORS THAT MAY AFFECT FUTURE RESULTS

        This document contains forward-looking statements that involve risks and uncertainties, particularly in the Business Outlook section of this MD&A. You can identify forward-looking statements by the use of forward-looking terminology including "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "pro forma," "estimates," or "anticipates" or the negative of these words and phrases or other variations of these words and phrases or comparable terminology. Our actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this document.

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

        Our annual and quarterly results are likely to be volatile.    Our annual and quarterly operating results may fluctuate as a result of a number of factors, including:

•

costs to comply with the provisions of the Sarbanes-Oxley Act of 2002 are greater than currently anticipated;



•

ramp up, expansion and rationalization of global manufacturing capacity;



•

our ability to effectively align operating expenses and production capacity with the current demand environment;



•

volatility in general world economic conditions, and, in particular, the possibility that the PC and related markets decline more dramatically than currently anticipated;



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the growth rates in the power protection industry and related industries, including but not limited to the PC, server, networking, telecommunications and enterprise hardware industries;



•

competitive factors and pricing pressures;



•

product mix changes and the potential negative impact on gross margins from such changes;



•

changes in the seasonality of demand patterns;



•

inventory risks due to shifts in market demand;



•

component cost trends, as well as supply constraints, shortages, and quality;



•

risks of nonpayment of accounts receivable;

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•

timing of orders from, and shipments to, customers;



•

timing of new product introductions and the market acceptance of those products;



•

changes in manufacturing costs;



•

factors associated with international operations;



•

the potential impact of complying with changing environmental regulations;



•

natural disasters; and



•

labor disputes, acts of terrorism, war and political instability.

        We currently compete with several firms providing power protection and related products and services and expect competition to increase in the future, which could affect our revenue and profitability.    We believe that we are one of less than ten global companies providing a full range of UPS products and services worldwide. The UPS, power protection and related industries, however, are highly competitive on both a worldwide basis and a regional geographic basis. We compete, and will continue to compete, with several U.S. and foreign firms, both on a worldwide basis and in various geographical regions, and within individual product and application niches. We expect competition to increase in the future from existing competitors and a number of companies that may enter our existing or future markets. Increased competition could adversely affect our revenue and profitability through price reductions and loss of market share.

        The principal competitive factors in our products include:

•

product performance and quality;



•

marketing and access to distribution channels;



•

customer services; and



•

product design and price.

        Some of our current and potential competitors may have substantially greater financial, technical, sales and marketing resources than we have. We may not be able to continue to compete successfully with our existing competitors or with new competitors.

        Technological innovation, or failure to alter our products to meet the demands of technological innovation, could seriously harm our business.    The market for our products is characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. Current competitors or new market entrants may develop new products with features that could adversely affect the competitive position of our products. We may not be successful in selecting, developing, manufacturing and marketing new products or enhancing our existing products or in responding effectively to technological changes, new standards or product announcements by competitors. The timely availability of new products and enhancements, and their acceptance by customers are important to our future success. Delays in such availability or a lack of market acceptance could have an adverse effect on our business. Additionally, there may be technological innovation that eliminates or reduces the need for our products.

        Defects in our products could seriously harm our business.    Our products may have defects despite testing internally or by current or potential customers. These defects could result in product returns or recalls and loss or delay in market acceptance, which could have a material adverse effect upon our business, operating results, or financial condition.

        In early 2003, APC announced a product recall of Back-UPS CS 350 and 500 models, due to potential safety issues. Prior to announcing the recall, APC received eight reports worldwide of units

37

overheating, resulting in the melting of the unit's outer casing, six of which occurred in the United States. Three of the reported incidents resulted in minor property damage; no injuries have been reported. The total number of affected devices recalled worldwide is approximately 2.1 million with approximately 900,000 devices recalled in the United States. The recall is limited to two specific models in APC's Back-UPS CS product line, the Back-UPS CS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt models. The affected units were manufactured between November 2000 and December 2002 and were sold primarily through computer and electrical distribution, catalog and retail outlets worldwide. In the fourth quarter of 2002, APC accrued a current liability and recognized additional warranty expense, classified in cost of goods sold, of $19.6 million. Based upon repair cost and return rate experience to-date as well as then-current estimates of remaining costs to be incurred, APC projected that aggregate costs for the recall would be less than originally estimated. To reflect this change, cost of goods sold was reduced by $5.5 million in the third quarter of 2003. As of December 31, 2004, APC had incurred approximately 82% of currently estimated total recall costs. Our estimation of remaining recall costs of $2.4 million, comprised of $0.9 million for the U.S. and $1.5 million for international geographies, continues to be subject to actual return rates and per unit repair costs (which can vary by country) as well as estimates for other recall-related costs expected to be incurred. We expect that future amounts will not differ materially from our current estimates.

        Loss of any of our key personnel could seriously harm our business.    Our success depends to a significant degree upon the continuing contributions of key management, sales, marketing, research and development and manufacturing personnel, many of whom we would have difficulty replacing. We believe that our future success will depend in large part upon our ability to attract and retain highly-skilled hardware and software engineers, and management, sales, and marketing personnel. Competition for such personnel is intense, and we may not be successful in attracting and retaining such personnel. Failure to attract and retain key personnel could have a material adverse effect on our business, operating results, or financial condition.

        Because we depend on foreign operations and revenues, we are exposed to currency fluctuations, import barriers and other risks related to conducting foreign operations.    We manufacture and market our products worldwide through several foreign subsidiaries, distributors, and resellers. Our worldwide operations are subject to the risks normally associated with foreign operations including, but not limited to:

•

customer and vendor financial instability;



•

volatility in general world economic conditions;



•

the disruption of markets;



•

changes in export or import laws;



•

restrictions on currency exchanges;



•

potentially negative tax consequences;



•

longer payment terms;



•

acts of labor disputes, war, terrorism, or political instability;



•

natural disasters; and



•

the modification or introduction of government policies with potentially adverse effects.

        International sales, which are both direct and indirect sales to customers outside the U.S., accounted for approximately 55.8%, 55.0%, and 51.9%, of our net sales in 2004, 2003 and 2002, respectively. We anticipate that international sales will continue to account for a significant portion of our revenue. We invoice our customers in various currencies. To date, we do not use any rate

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protection agreements or derivative agreements to hedge any foreign exchange exposure. Accordingly, we may be exposed to exchange losses based upon currency exchange rate fluctuations, which losses could have a materially adverse effect on our operating results.

        A significant portion of products in our Small Systems and Large Systems reportable operating segments are manufactured in foreign locations, particularly developing countries such as Brazil, China, India, and the Philippines, which subject APC to a number of economic and other risks. The Small Systems have particular exposure to the Philippines, a country which is experiencing political and financial instability. Disruption of manufacturing efforts in these international facilities could materially adversely impact our ability to fulfill customer orders and potentially result in the loss of business.

        Because our business relies upon a variety of computer systems to operate effectively, the failure or disruption of, or latent defects in these systems could have a material adverse effect on our business.    APC is a highly automated company whose efficient and effective operation relies on a variety of information systems, including e-mail, enterprise resource planning, electronic data interchange, customer resource management and e-commerce systems. Disruption in the operation of these systems, or difficulties in maintaining or upgrading these systems, could have an adverse effect on our business. Difficulties that we have encountered, or may encounter, in connection with our implementation and use of our computer systems, including human error or our reliance on, or a failure or disruption of, or latent defects in, such systems, could adversely affect our order management and fulfillment, financial reporting and supply chain management processes, and any such difficulties could have a material adverse effect on our business.

        Our reliance on sole source suppliers may result in product delays or price increases.    We currently obtain certain components of our products and certain finished products from sole sources. In the future, our suppliers may not be able to meet our demand for components and products in a timely and cost-effective manner. Our inability to secure and qualify alternative sources of supply in a timely manner may disrupt our ability to fulfill customer orders. We generally purchase these sole source components and products using purchase orders and have no guaranteed supply arrangements with the suppliers. In addition, the availability of many of these components and products is dependent in part on our ability to provide the suppliers with accurate forecasts of our future requirements. However, our operating results and customer relationships could be materially adversely affected by either an increase in prices for, or an interruption or reduction in supply of, any key components and products.

        We have a limited ability to protect our intellectual property rights; others could infringe on or misappropriate our propriety rights and information.    Our success will depend, to a large extent, on our ability to protect our proprietary technology. We rely on a combination of contractual rights, trade secrets, patents, trademarks, and copyrights to protect our proprietary rights. Although we own certain patents, and we have applied, and in the future we may apply, for patents, our intellectual property protection may not be sufficient to prevent competitors from developing similar technology. Moreover, in the absence of patent protection, our business may be adversely affected by competitors which independently develop functionally equivalent technology.

        Our products may infringe on the intellectual property rights of others.    We attempt to ensure that our products and processes do not infringe upon third party patents and other proprietary rights, but from time to time third parties have alleged, and in the future may allege, such infringement. If third parties allege or determine infringement, we may not prevail in such a challenge. Furthermore, if infringement is determined, we may not be able to obtain the necessary licenses on acceptable terms, if at all.

        If we are unable to identify and successfully integrate acquisitions, our ability to expand and our financial results could suffer.    We have limited experience in integrating acquired companies or technologies into our operations. We may from time to time pursue the acquisition of other companies, assets, products or technologies. We may not be able to integrate successfully products, technologies,

39

distribution channels, key personnel and businesses of acquired companies into our business or product offerings. In addition, the integration of acquired companies may adversely affect our business, operating results, or financial condition. Further, these acquired companies, assets, products or technologies may not contribute significantly to our sales or earnings, and the sales and earnings from acquired businesses may be adversely affected by the integration process or other factors. If we are not successful in the integration of such acquired businesses, our financial results could be adversely impacted. In addition, we may not be able to identify and consummate suitable acquisition transactions in the future.

        Our stock price could be volatile, which could cause you to lose part or all of your investment.    The market price of our common stock has been, and may continue to be, extremely volatile. The trading price of our common stock could be subject to wide fluctuations in response to:

•

quarter-to-quarter variations in operating results;



•

changes in earnings estimates by analysts;



•

announcements of technological innovations or new products developed by us or our competitors; and



•

labor disputes, acts of war, terrorism and political instability and other events or factors.

        In addition, the stock market has from time to time experienced extreme price and volume fluctuations which have particularly affected the market price for many high-technology companies and which often have been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock.

        Our tax rate depends on earnings derived from certain foreign manufacturing operations.    Our tax rate is heavily dependent upon the proportion of earnings that we derive from our Ireland and Philippines manufacturing operations and our ability to reinvest those earnings permanently outside the United States. If the earnings of these operations as a percentage of our total earnings were to decline significantly from anticipated levels, or should our ability to reinvest these earnings be reduced, our effective tax rate would exceed the currently estimated rate for 2005. We have tax holidays in China, India, and the Philippines, which reduce or eliminate the income taxes paid in those countries. A substantial portion of our tax holiday in the Philippines expired in the third quarter of 2003. Although this will have the effect of increasing our foreign taxes, our effective income tax rate will remain considerably lower than the U.S. statutory federal corporate tax rate of 35%. In addition, we believe that further tax savings can be achieved by implementing further tax planning strategies. If we are unable to successfully implement such strategies, our overall effective tax rate could increase. In addition, should our intercompany transfer pricing with respect to our Ireland or Philippines manufacturing operations require significant adjustment due to audits or regulatory changes, our overall effective tax rate could increase.

        Failure to maintain effective internal control over financial reporting may materially adversely impact our business.    Effective internal controls are necessary for APC to provide reasonable assurance with respect to its financial reports and to effectively prevent fraud. If APC cannot provide reasonable assurance with respect to its financial reports and effectively prevent fraud, our brand and operating results could be harmed. Pursuant to the Sarbanes-Oxley Act of 2002, we are required to furnish a report by management on internal control over financial reporting, including management's assessment of the effectiveness of such control. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal control over financial

40

reporting to future periods are subject to the risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. If APC fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, or if APC experiences difficulties in their implementation, APC's business and operating results could be harmed, APC could fail to meet its reporting obligations, and there could be a material adverse effect on APC's stock price.

        We cannot provide any assurance that current laws, or any laws enacted in the future, will not have a material adverse effect on our business.    Our operations are subject to laws, rules, regulations, including environmental regulations, government policies and other requirements in each of the jurisdictions in which we conducts business. Changes in such laws, rules, regulations, policies or requirements could result in the need to modify our products and could affect the demand for our products, which may have an adverse impact on our future operating results. In addition, we must comply with new regulations restricting APC's ability to include lead and certain other substances in its products. If APC does not comply with applicable laws, rules and regulations, APC could be subject to costs and liabilities and its business may be adversely impacted.

        We are, and may become, involved in litigation, which could materially harm our business.    We are, and may in the future become, involved in litigation involving our business, products or operations. The litigation process is inherently uncertain and includes the risk of an unexpected, unfavorable result. Were an unfavorable result to occur, it is possible that we could be materially adversely impacted by any such litigation.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

        APC, in the normal course of business, is exposed to market risks relating to fluctuations in foreign currency exchange rates. The information required under this section related to such risks is included in the Foreign Currency Activity section of Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Report and is incorporated herein by reference.

        APC, in the normal course of business, is also exposed to market risks relating to fluctuations in interest rates and the resulting rates of return on investments in marketable securities. The information required under this section related to such risks is included in the Other Income, Net section of Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Report and is incorporated herein by reference.

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Item 8. Financial Statements and Supplementary Data

AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2004 and 2003

In thousands except per share amount

See accompanying notes to consolidated financial statements.

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AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2004, 2003 and 2002

In thousands except per share amounts

See accompanying notes to consolidated financial statements.

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AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Years ended December 31, 2004, 2003 and 2002

In thousands