**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM10-K**

**(Mark One)**

| **x**      |   | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                    |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |   | ** **                                                                                                                                                                                                                                   |
| ** ** |   | **FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006.**                                                                                                                                                                                             |
| ** ** |   | ** **                                                                                                                                                                                                                                   |
| **o**      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF****1934**                                                                                                                                             |
| ** ** |   | ** **                                                                                                                                                                                                                                   |
| ** ** |   | **FOR THE TRANSITION PERIOD  FROM                TO                 .** |

 

**Commissionfile number: 000-30575**

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**AVOCENTCORPORATION**

(Exact name ofregistrant as specified in its charter)

| **Delaware**                                                    |   | **91-2032368**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **4991  Corporate Drive**                                       |   | ** **                            |
| **Huntsville,  Alabama**                                        |   | **35805**                             |
| (Address of  Principal Executive Offices)                       |   | (Zip Code)                            |

 

| **256-430-4000**                                                              |
|-------------------------------------------------------------------------------|
| (Registrant’s  telephone number, including area code)                    |
|                                                                          |
| Securities  registered under Section 12(b) of the Exchange Act                |
| **Common  Stock, $0.001 par value per share**                                 |
|                                                                          |
| Securities registered  under Section 12(g) of the Exchange Act: **None** |

 

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

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

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  x    No  o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and disclosure will not becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K.  x

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theAct). Yes  o    No  x

The aggregatemarket value of the voting and non-voting common stock held by non-affiliatesof the registrant as of the last business day of the registrant’s most recentlycompleted second fiscal quarter was approximately $1,172,764,399.

The number ofshares outstanding of the registrant’s common stock as of February 22, 2007 was50,796,732.

**DOCUMENTSINCORPORATED BY REFERENCE**

Information withrespect to items 10 to 14 of Part III of this Form 10-K may be foundin the definitive proxy statement to be delivered to stockholders in connectionwith the 2007 Annual Meeting of Stockholders. Such information is incorporatedherein by reference.

 

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**PART I**

 

**Item 1. Business.**

 

*THIS ANNUAL REPORT CONTAINSFORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTSCONTAINED IN THIS ANNUAL REPORT THAT ARE NOT PURELY HISTORICAL AREFORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIESACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF1934, AS AMENDED.  THESE FORWARD-LOOKINGSTATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS RELATING TO FUTURE ECONOMICCONDITIONS IN GENERAL AND STATEMENTS ABOUT:*

·                                          *OUR FUTURE STRATEGY,STRUCTURE, AND BUSINESS PROSPECTS;*

·                                          *PLANNED ENGINEERING ANDDESIGN ACTIVITIES, DEVELOPMENT AND ENHANCEMENT OF CURRENT PRODUCTS, ANDINTRODUCTION OR ACQUISITION OF NEW PRODUCTS AND TECHNOLOGIES;*

·                                          *THE SIZE, GROWTH, AND LEADERSHIP OF THE POTENTIALMARKETS FOR OUR PRODUCTS AND TECHNOLOGIES;*

·                                          *THE ADEQUACY OF CURRENT, AND THE DEVELOPMENT OF NEW, OEM, DISTRIBUTOR, RESELLER, AND SUPPLIERRELATIONSHIPS;*

·                                          *OUR FUTURE SALES,EARNINGS, INCOME, EXPENSES, OPERATING RESULTS, TAX RATES, OPERATING AND GROSSPROFIT AND MARGINS, INVENTORY LEVELS AND VALUATIONS, RECEIVABLES, RESERVES AND INVESTMENTINCOME;*

·                                          *OUR FUTURE LIQUIDITY, THE IMPACT OF CURRENCY RATES,AND OUR PLANS REGARDING EQUITY-BASED COMPENSATION, CAPITAL RESOURCE NEEDS,SHARE REPURCHASES, BORROWINGS AND REPAYMENTS;*

·                                          *OUR CUSTOMERS, SEASONALITY AND COMPETITIVEENVIRONMENT;*

·                                          *OUR EFFORTS TO EXPAND RELATIONSHIPS WITH DISTRIBUTORS AND RESELLERS;*

·                                             *OUR ABILITY TO OBTAIN AND PROTECT OUR INTELLECTUALPROPERTY AND PROPRIETARY RIGHTS;*

·                                             *ANTICIPATED EXPANSION OF INTERNATIONAL SALES ANDOPERATIONS; AND*

·                                          *POTENTIAL ACQUISITIONS,CONTINGENT PURCHASE CONSIDERATION RELATED TO OUR ACQUISITION OF LANDESK,INTEGRATION COSTS, AND TRANSACTION COSTS AND ADJUSTMENTS.*

*ALL OF THESE FORWARD-LOOKING STATEMENTSARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE OF THIS ANNUALREPORT.  OUR ACTUAL RESULTS COULD DIFFERMATERIALLY FROM THOSE DISCUSSED IN THIS ANNUAL REPORT.  THE FORWARD-LOOKING STATEMENTS CONTAINED INTHIS ANNUAL REPORT, AND OTHER WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS MADEBY US FROM TIME TO TIME, ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THATCOULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THEFORWARD-LOOKING STATEMENTS.  FACTORS THATMIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSEDIN ITEM 1A “RISK FACTORS.”*

**Overview**

AvocentCorporation designs, manufactures, licenses, and sells software and hardware productsand technologies that provide connectivity and centralized management ofinformation technology (IT) infrastructure. We (meaning Avocent and its wholly-owned subsidiaries) provide connectivityand systems management products and technologies that centralize control ofservers, desktop computers, serial devices, wireless devices, mobile devices,and network appliances, thus increasing the efficiency of IT personnel.  Server manufacturers resell private-labeledAvocent KVM (keyboard, video, and mouse) switches and embedded software andhardware technology in their systems, and companies large and small depend onour software and hardware products and technologies for managing their growingIT infrastructure.

 

Our technologicalinnovations include Internet protocol (IP) based switching, centralizedmanagement, and intuitive software interfaces. With more than two decades of experience, we have grown through productinnovations, global expansion, and strategic acquisitions.  Formed as a result of the merger in 2000between Apex Inc. and Cybex Computer Products Corporation, we 

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subsequently acquired Equinox Systems Inc. in 2001, 2C Computing, Inc.in 2002, Soronti, Inc. in 2003, Crystal Link Technologies, OSA Technologies,Inc., and Sonic Mobility, Inc. in 2004, and Cyclades Corporation and LANDeskGroup Limited in 2006.

 

We market our productsaround the world to a diversified group of original equipment manufacturers(OEMs), dealers, distributors, resellers, and end users, primarily through oursales and customer support staff, advertisements in trade publications, on-linesponsorships, and participation in major industry trade shows.  A substantial portion of our sales is tomajor server OEMs that purchase our switching systems on a private-labelor branded basis.

 

Our corporate Internetaddress is *www.avocent.com*.  At this website, we make available free ofcharge our annual report on Form 10-K, our annual proxy statement, ourquarterly reports on Form 10-Q, any current reports on Form 8-K, and anyamendments to these reports, as soon as reasonably practicable after we electronicallyfile them with, or furnish them to, the Securities and ExchangeCommission.  Also available at thiswebsite are our Code of Business Conduct and Ethics, our Corporate GovernanceGuidelines, our Whistleblower Policy, the Nominating and Governance Committee’sPolicies and Procedures for Director Candidates, and the Charters for ourAcquisition and Strategy Committee, Audit Committee, Compensation Committee,and Nominating and Governance Committee. If any amendment to our Code of Business Conduct and Ethics or anywaiver granted under it is applicable to our principal executive officer, ourprincipal financial officer, our principal accounting officer or controller (orany persons performing similar functions) and relates to the code of ethicsdefinition enumerated in the SEC’s regulations, we will disclose such amendmentor waiver at this website within five business days after the date of suchamendment or waiver.  The informationfound on our website is not part of this Form 10-K.  In addition to our website, the SEC maintainsan Internet site at *www.sec.gov*that contains reports, proxy and information statements, and other informationregarding us and other issuers that file electronically with the SEC.

 

ACS, Apex, AMX, AMWorks,Avocent, the Avocent logo, AutoView, Cybex, Cyclades, DSR, DSView, Emerge, Equinox,LANDesk, the LANDesk logo, LongView, PM, The Power of Being There, and SwitchVieware trademarks or registered trademarks owned by us. ** **This annual report also includestrademarks of other companies.

 

**Industry Background**

 

Information technology iscritical to most business operations as computers perform multiple and diversefunctions throughout many different types of organizations.  Many corporations have decentralizedcomputing power while sharing technology resources and providing broad accessto enterprise data.  This has resulted inthe widespread adoption of distributed network computing environments using anetwork-based architecture of interconnected computers that span from the datacenter to the corporate office. Businesses are increasingly faced with a growing number ofchallenges.  These challenges include:

 

*Data Center Growth. *The typical data centerinstallation consists of a local area network (LAN), with a large number ofcomputers operating as servers dedicated to performing specific functions forthe many client computers connected to the LAN and, in many cases, a wide-areanetwork (WAN).  With the shift ofsoftware applications to a web services model, the demand for servers andstorage is growing.  Users are accessingmore data and resources using intranets and the Internet.  This growth causes a proliferation of serversand increases the administration, environmental, power, and space challenges ofmanaging data centers containing growing networks of servers, consoles,peripherals, and cables, and other network devices.

 

*Corporate Office Growth. *The corporate officeenvironment is made up of both central office and distributed or branchlocations.  These environments typically consistof a large number of connected devices that include servers, desktop computers,laptops, handheld devices, printers, and other networked devices.  The explosion in the number of these devicesin the office environment and the distributed nature of them pose manysignificant challenges in system, security, service, and processmanagement.    

 

*Increasingly Mobile Workforce. *As the workforce continuesto become more mobile, handheld devices and laptop computers are increasinglyused outside of the corporate LAN.  Thisproliferation of networked devices and the difficulty in controlling thesedevices outside of the corporate LAN pose many significant management andsecurity challenges.

 

*Heterogeneous Environment. *Corporate IT departments maymanage hundreds or thousands of servers, clients, and other networked devices,must identify and access relevant devices, add or delete users, add, change, orupgrade applications, tune systems for better performance, and diagnose andcorrect network failures.  These networkdevices are generally purchased from multiple vendors and are designed tooperate as stand-alone systems, each with its own console.  IT professionals must therefore deal with alarge number of consoles and workflow processes, whether centrally located ordispersed throughout the organization, when performing administration andmanagement tasks.  

 

*Always-On Infrastructure. *Information technologyresources are critical to organizations. Accordingly, constant availability is crucial to the operation of manybusinesses.  The time that an Internetservice provider (ISP), an application service provider (ASP), a data center, aserver farm, a corporate network, or a desktop computer, a laptop, or a mobiledevice is down or degraded can cause significant inconvenience, loss ofproductivity, and financial loss.  Quickand efficient diagnosis and the correction of problems can be difficult, andthe ability of a facilities manager or network administrator to quickly andefficiently diagnose and correct the problem may be hampered by the inabilityto access the software.

 

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**Products and Technologies**

 

As of the first quarterof 2007, our four divisions provide the following software and hardware productsand technologies.  The products andtechnologies we provide solve many of the network administration, systems,security, device management, and storage problems faced by facilities managers,network administrators, and IT managers.

 

·                                          The Management Systems Divisionconsists of our branded and OEM IT infrastructure management products, whichinclude KVM, serial console, power control, management appliances, managementsoftware, and our embedded manageability technologies, such as intelligentplatform management infrastructure (IPMI) and embedded KVM systems.

 

This division focuses on ITinfrastructure management solutions and technologies for (i) data centers, (ii)remote access and distributed branch office environments, (iii) mid-size serverrooms for the small and medium business (SMB) market, and (iv) desktopswitching and universal serial bus (USB) hubs for simplified control ofdesktops, small offices, and home-based businesses. This division also providesthe technology that links our embedded technologies and our DSView managementsoftware. 

 

The products andtechnologies offered by our Management Systems Division include:

 

·                                          Our*DS Series*TM products, which allow usersto control servers from remote locations using an Internet or networkconnection without the necessity of remote access hardware or software on thecomputers or servers being accessed.  The*DS Series*KVM products digitize keyboard,video, and mouse information and compress and transport that information inpackets over traditional network connections optimizing performance for busydata centers.  Our *DSR*® switching systemsfeature a digital console connection that allows facilities managers andnetwork administrators access to servers utilizing standard networkinginfrastructure and our *KVM over IP*TMtechnology.  Our *DS Series*appliances are managed with *DSView*® centralized management software,**providing accessand control of servers and serial devices in the network operations center orfrom almost any location in the world using TCP/IP connectivity.  IT administrators can securely manage allconnected data center devices and gain “point-and-click” access and controlover these devices using a browser interface.

·                                          Our *AutoView*®* *switch family, which offers users a variety of analog and digital KVM switches.  Our AutoView switches provide small to mediumsize businesses with a 1U-high design saving valuable rack space in the serverroom.  Our *AutoView1415, 1515, and 2015* switches provide KVM support for USB, PS/2,Sun, and serial target devices.  Our *AutoView 2020 and 2030* switches have a virtual media featurethat allows sharing of a directly-connected USB storage device to all serversconnected to the switch.  Our *AutoView 3100 and 3200* switches are 16-port switches thatprovide server access for up to two remote digital users and one local analoguser.  All our *AutoViewswitches* offer an on-screen display and a web-based interface, whichmeans that no additional software is required for remote server access.  

 

·                                          Our*SwitchView*® switching products includes our*SwitchView**SC* family ofsecure switches, built for the secure environment and designed to make itimpossible to transfer data between connected computers.  Our *SwitchView* 1000rack mounted KVM switches are available in 4, 8 and 16 port models with anon-screen display that supports 2048 x 1536 video resolutions and can becascaded to support up to 256 target devices. Our compact, space-saving*SwitchView*desktop KVM switches support multiple computers and allow users to controlmultiple PCs and share access to a digital camera, CD-ROM, PDA, scanner,printer, speakers, and a microphone.

 

·                                          Our*AMX*TM analog matrix switchingsystems, which provide simpler access and easier manageability of servers inmulti-rack, multi-platform environments. Our *AMX*switches increasethe number of users with simultaneous access and offer efficient scalabilitywith an architecture that makes it easy to add and support additionalservers.  Our advanced *AMWorks*® softwareis also included with our *AMX*switchesfor central administration.

 

·                                          OurKVM extension product lines, including our CAT 5 extension products, fiberoptic and copper extension products, and wireless extension products.  The *LongView*® extender allows users to extend a keyboard,monitor, mouse, speakers, microphone, and serial port up to 500 feet away fromthe computer or KVM switch with one CAT 5 UTP cable.  Our *LongView Wireless*product**is a KVM extender, which can wirelessly connect monitors(VGA, SVGA, and XGA), keyboards, mice, and audio devices to a computer up to1,000 feet away.

 

·                                          OurACS appliances, which deliver secure, serial over IP access to console ports ofcommand line driven operating systems such as LINUX or UNIX servers and other serially-manageddevices such as power management systems, storage elements, firewalls, andnetwork switches and routers.  Theseserial appliances and attached devices can be centrally managed using our *DSView 3*management software.

 

·                                          Our*PM* series of intelligent power controland distribution devices, which provide control over any connected device’s ACpower source.  These devices are criticalin certain situations when the connected devices require a full hardware levelreset to restore operational service. Our *PM* devices are connected to DSR or ACSappliances and 

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can be managed by theuser interface of these appliances or centrally managed using our DSView 3management software.

 

·                                          Ourembedded products, which are provided as a combination of hardware products andlicensed technologies.  Thesetechnologies consist of IPMI firmware, drivers, and utilities, KVM switchingand compression technologies, virtual media firmware and utilities, softwarefor graphical user interfaces (GUI), and desktop management applications.  These technologies are licensed to our OEM customersfor inclusion in their servers, desktops, notebooks, and other devices.  Our hardware products consist of remoteaccess and management cards, chassis management cards, and KVM designs that arealso sold to our OEMs for integration with their systems.

 

·                                          **The LANDesk Divisionconsists of our systems, security, and service management software fordesktops, servers, and mobile devices across an enterprise.**

 

This division delivers systems, security, and servicemanagement  software solutions that simplify howcorporate enterprises manage desktops, servers, mobile devices, and IT servicesand processes.  These LANDesk solutions allowan IT staff to increase productivity and protect corporate assets from asingle, easy-to-use console while leveraging prior investments in database,application, and directory service technologies and across heterogeneous ITenvironments (Windows, Mac OS, Unix, Linux, and handheld and embedded deviceoperating systems).  

 

The products andtechnologies offered by our LANDesk Division include:

 

*Systems Management Software*

 

·                                          Our*LANDesk® Management Suite* (LDMS) software, which allowsenterprise IT departments to easily and efficiently automate systems managementtasks and see, manage, and update desktops, servers and mobile devices from asingle console. LDMS provides intelligent and efficient distributioncapabilities, such as functional load balancing, fault tolerance, bandwidthminimizing technologies, and local access to packages previously delivered to asubnet, to minimize the impact to corporate systems.  With just an Internet connection, corporate ITteams can identify and securely manage computer assets (including assetsoutside the firewall and at geographically distributed sites), scan, define,track, and audit applications, and provide compliance and usage reports.

 

·                                          Our*LANDesk Server Manager* software, whichprovides enterprises with the tools to improve server performance, reliability,and availability through operating system (OS) and application provisioning,real-time hardware health monitoring, automated patching, imaging, and updating,historical data collection, predictive failure analysis and prevention, andremote problem resolution, all through a single console.

 

·                                          Our*LANDesk System Manager* software, whichprovides active system monitoring and maintenance (through an intuitive,easy-to-use, browser-independent console), gathering health and statusinformation directly from each computer’s hardware, software, and operatingsystem in real-time and giving IT staff customizable e-mail, pager, fax, orconsole alerts.  

 

·                                          Our*LANDesk Handheld and Embedded Device Manager*software, which is designed and optimized for managing across the low-speed,intermittent connections characteristic of handheld, embedded, and wirelessdevices, and allows an IT staff the ability to secure moving resources and theinformation on them, including the option to clear a device’s memory card,delete contacts, address book data, and e-mail, and perform a reset of themobile device.  

 

·                                          Our*LANDesk Asset Manager* software, whichallows enterprises to track computer and non-computer resources (and associatedusers, contracts, maintenance agreements and more) through a single console toensure full system availability, security, and configuration management. 

 

·                                          Our*LANDesk Inventory Manager* software,which enables IT staff to discover networked computing devices, automaticallymaintain detailed hardware and software inventories, and gather and trackdetailed hardware, software, and OS configuration data for license compliance,plan upgrades, identification of security issues, and determination of purchaseneeds.

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*Security Management Software*

 

·                                          Our*LANDesk Security Suite,*which includessoftware and subscription content that allows enterprises to easily perform andautomate patch, anti-spyware, and security threat management from a singleconsole with quarantine, antivirus enforcement, vulnerability detection, threatremediation, computer access restriction tools, and a variety of reporting capabilities(including trend graphs, spyware reports, and an executive dashboard with agraphical view of critical enterprise concerns).

 

·                                          Our*LANDesk Patch Manager* software, whichallows corporate IT departments to actively scan managed computers across heterogeneousIT environments to identify application and operating system vulnerabilitiesand quickly download patches with e-mail or pager alerts when a vulnerabilityor a specific severity level is detected. 

 

·                                          Our*LANDesk Antivirus* software, which providesenterprises with affordable, real-time virus protection and root kit detectionto user endpoints with little or no new infrastructure.  *LANDesk Antivirus*can automatically encrypt and quarantine suspicious files and known infections,and allows IT staffs to customize and control alerts, queries, and reports forfull security.

 

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*Service Management Software*

 

·                                          Our*LANDesk Process Manager,*which integrates,optimizes, and automates IT and business processes, workflow, changemanagement, configuration management, with a graphical process builder,full-featured auditing, customizable reporting capabilities, and support forthird-party electronic forms.

 

·                                          Our*LANDesk Service Desk* software, whichprovides help desk and IT staff with an Internet-based consolidated servicedesk solution with process-driven incident management, role-based privilegesets, knowledge base, call logging, assignment, form design, and service levelescalation for delivering support services. *LANDesk Service Desk* includes an Internet-basedinterface that allows service providers and end users or customers to easilyand proactively report problems, log incidents, communicate and track servicestatus, and research the intelligent knowledge base for solutions to facilitatefaster resolution.

 

·                                          **The Connectivity andControl Division consists of our serial connectivity products and ourprofessional audio-visual products.**

This division'sswitching, extension, and control products allow industry professionals todeliver leading-edge connectivity and control solutions to a range of marketsincluding: retail, medical, digital signage, hospitality, AV, and broadcasting. This division offers wired and wirelessextension products to simplify connectivity and control of displays, projectors,and AV equipment, LAN-based serial hubs to provide cost-effective deviceconnectivity at the point of need, and matrix switches to help broadcastengineers back-rack and control studio production equipment.

The products andtechnologies offered by our Connectivity and Control Division include:

·                                          Our*Emerge*TM family of products,which provide both wired and wireless switching and extension of video,audio, and control data for use in a range of markets.  Our *Emerge*multipoint high-definition wired/wireless extender (MPX) allows AV consultantsto design managed audio-video extension networks for commercial signage andpresentation markets.  Our *Emerge Wireless Media Streamer (EWMS)* is ideal for use inboardrooms, classrooms, and commercial digital signage applications, and our *Emerge Media Streamer (EMS)* offers CAT 5 wired videoextension for use in similar markets.  Ourdigital *ECMS* product allows responsive extensionand switching of digital workstations across IP networks where a high degreeof quality is required in markets such as broadcast and digital signage.

·                                          Our*SST* and *ESP*serial products, which offer high-performance, reliable, and managed deviceconnectivity for serial and dial access applications.  These product lines include network-basedappliances and bus-based adapters for use within security, commercialpoint-of-sale, process control, industrial automation, data collection, remoteaccess, fax servers, and custom applications.

 

·                                          **The Desktop SolutionsDivision consists of newly-developed technologies targeted at desktop users.**

 

Thisdivision’s technology allows a personal computer (PC) or blade computer (a selfcontained personal computer or server reduced in size and designed for highdensity installations, which is often referred to as a blade) to be centralizedwhile providing remote access to the user of that computer via TCP/IP networkinfrastructure.  This technology is incorporated into Avocent brandedextender products.  The technology isalso licensed as a building block to OEMs to allow large institutions tointroduce blades as workstations and take advantage of a centralized computingmodel and the efficiencies this brings in management and security.  Thistechnology is targeted at our channel and our OEM partners as an embeddedsolution, and has been successfully deployed in hazardous computingenvironments, manufacturing companies, digital signage applications, andcommand and control centers.

 

The products andtechnologies offered by our Desktop Solutions Division include our digitalextension product lines, which feature technology that extends keyboard, video,mouse, audio, and USB over any TCP/IP network and allows administrators tocentralize all computers for ease of maintenance while providing users withfull “Rich-Media” PC functionality at the desktop.  This extension technology enables adistributed computing environment with access to centralized computer assetsfrom anywhere within the reaches of a corporate network.

 

**Sales and Marketing**

 

We market, sell, andlicense our hardware and software products through our own sales force andvarious distribution channels, including OEMs, distributors, and resellerarrangements.  We market our productsprimarily through direct customer sales calls, advertisements in tradepublications, online sponsorships, participation in major industry trade shows,promotions with distributors and resellers, direct marketing, telemarketing,publicity programs, and through our website. We also devote a substantial portion of our marketing efforts todeveloping, monitoring, and enhancing our relationships with our network ofOEMs, independent dealers, distributors, resellers, and end users.  Our sales personnel are supported by ourengineers and our customer service 

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representatives who provide technical support and advice tocustomers.  As of December 31, 2006,we employed 646 people in sales, marketing, and customer support.

 

We currently sell orlicense various hardware and software products and technologies to Dell,Hewlett-Packard, IBM, Intel, Lenovo, Fujitsu Siemens, and other OEMs pursuantto private-label, branded, and licensing arrangements.  These OEM customers integrate and sell ourproducts and technologies with or within their own products, includingnetworked servers and clients.  We devotesignificant sales, engineering, operations, and customer service resources toour OEM accounts.  We have significantexperience in working with our OEM and other system manufacturers, and weintend to use that experience to enter into new relationships with othercomputer manufacturers in the United States, Europe, and Asia.  We believe that the architecture, quality,and reliability of our products and technologies, together with our commitmentto customer service, are attractive to computer manufacturers worldwide.

 

We have relationshipswith a variety of distributors and resellers, value added resellers (VARs), andsystems integrators, for the distribution and sale of Avocent, Cybex, Cyclades,Equinox, and LANDesk branded software and hardware products in the UnitedStates, Canada, Europe, South America, Asia, and elsewhere.  We devote resources to educating ourdistributors and resellers about the benefits of our products and training themin the proper installation and support of our products.  We will continue to devote additionalresources to increase these branded sales, and we will pursue additionalrelationships with distributors and resellers, both domestically andinternationally, who have the technical capability and market presence toassist end-user customers in developing network space management, access, andcontrol products and technologies to meet their particular needs.  Our future success will depend in part on ourability to attract, train, and motivate additional distributors and resellers.

 

We provide discounts,other special pricing arrangements, and certain return privileges to ourOEMs and our distributors and resellers. Our agreements with our distributors and resellers are generallynonexclusive and may be terminated on short notice by either party withoutcause.  Our distributors and resellersare not within our control, are not obligated to purchase products from us, andfrequently offer products from several different manufacturers, including productsthat compete with our products.

 

International salesaccounted for approximately 43% of net sales in 2006, 43% of net sales in 2005,and 41% of net sales in 2004, and were made primarily to OEMs, distributors,and resellers located in Europe, Canada, Asia, and other foreigncountries.  No foreign country accountedfor more than 10% of 2006 or 2005 sales. Sales to customers in the Netherlands, including the Europeandistribution facility for one of our OEM customers, accounted for 10% of salesin 2004.  No other foreign countryaccounted for more than 10% of 2004 sales. We are expanding our international sales efforts within Europe, LatinAmerica, Asia, and the Pacific Rim through the utilization of our sales officesin Sydney, Australia; São Paulo, Brazil; Beijing, Guangzhou, and Shanghai, China;London, England; Paris, France; Munich, Germany; Rotterdam, Holland; Hong Kong;Shannon, Ireland; Tokyo, Japan; Mexico City, Mexico; Taipei, Taiwan; andSingapore.

 

**Customers**

 

To date, a substantialportion of our net sales has been generated from sales of our switchingproducts and technologies to OEMs for integration with their productofferings.  Sales to OEM customers represented40% of net sales in 2006, 48% of net sales in 2005, and 45% of net sales in2004.  While we have contracts with some ofour OEM customers, none of them is obligated to purchase products from usexcept pursuant to binding purchase orders. Consequently, any OEM customer could cease doing business with us at anytime.  The loss of, or material declinein orders from, certain of our current OEM customers would have a materialadverse effect on our business, financial condition, results of operations, andcash flow.

 

In addition to ourOEM customers, our principal customers include a diversified group of dealers,major distributors, value added resellers (VARs), and direct end users whopurchase our branded products (60% of net sales in 2006, 52% of net sales in2005, and 55% of net sales in 2004).  Webelieve that our broad range of products sold at different price points offersus the opportunity to market our products to customers of all sizes, indifferent industries, and with varying degrees of technical sophistication.

Sales toHewlett-Packard, Dell, and Tech Data represented approximately 14%, 14%, and12%, respectively, of net sales in 2006. Sales to Hewlett-Packard and Dell represented approximately 20% and 15%,respectively, of net sales in 2005. Sales to Tech Data and Ingram Micro represented approximately 11% and10%, respectively, of net sales in 2005. Sales to Hewlett-Packard and Dell represented approximately 23% and 12%,respectively, of net sales in 2004. Sales to each of Tech Data and Ingram Micro represented approximately11% of net sales in 2004.  No othercustomer accounted for more than 10% of our net sales in 2006, 2005, or 2004.

**Seasonality**

Our operatingresults are affected by seasonal trends and by general conditions in the servermarket.  We have experienced, and expectto continue to experience, some degree of seasonality due to customer buyingcycles.  We believe that the third andfourth quarters will generally have higher net sales levels due to customerbudgeting and procurement cycles, which may depress net sales in otherquarters.  In the past, revenue in our fourth quarter of each year has typicallybeen higher than revenue in prior quarters for the year.  In addition, we typically see a sequentialdecline in revenue from the fourth quarter of a year to the first quarter ofthe following year.  While it isdifficult to predict revenue in any quarter, we expect that this pattern willcontinue in the future.

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**Customer Service**

We emphasize customerservice by developing high quality products, encouraging customer feedbackthrough contact with our key customers, providing technical support and informationon our website, and providing a customer hotline that offers technical supportfor the life of our hardware products.  Wealso offer annual software upgrade protection and maintenance agreements forlicensees of our software products.  Westrive to respond quickly to our customers’ requests for technical support andservice, and our engineering department often works with individual customersto troubleshoot problems and develop custom solutions.  We offer warranties for parts and service onall of our hardware products, ranging from one to three years (and, in the caseof some of our Equinox branded products, five years).  We also offer a 30-day money-back guaranteefor all of our appliance products sold in North America.  To date, we have not experienced anysignificant hardware product returns.  Forour software products, we generally provide a 90-day warranty on the media usedto deliver the software, which is not applicable to electronic downloads, andwe often provide a limited warranty (usually no more than 90 days) that oursoftware products will function in accordance with the user documentation.  We may, as a result of competitive pressures,change our warranty policies in the future to provide coverage that is greaterin scope and duration than the coverage we currently offer.  If we were to increase our warranty coverage,our risk of warranty claims, and therefore our warranty expense and reserves,would likely increase.

 

**Development of New Products and Technologies**

 

We believe that the timelydevelopment of enhancements to our existing hardware and software products andtechnologies and of new products and technologies is essential to building ourcompetitive position.  The market for ourproducts has experienced rapid technological advances, frequent new product introductions and enhancements, andsignificant price competition.  Theintroduction of products incorporating superior or alternative technologies(such as switching software), the creation or adoption of new technologies(such as the creation of virtual servers using a combination of hardware andsoftware, which is known as virtualization), the emergence of new industrystandards, or changes in the market’s pricing structure could render ourexisting products and technologies and the products and technologies we haveunder development obsolete or unmarketable. Our hardware products generally combine components, such as printedcircuit boards, semiconductors, memory, connectors, cable assemblies, powersupplies, and enclosures, that are manufactured by other companies and aregenerally available to our competitors and potential competitors.  Our software products combine software orcontent from third parties, such as open source software or technology,drivers, security, service desk, or anti-virus information, which may also begenerally available to our competitors and potential competitors.  Ourfuture success will depend in large part upon continued innovative applicationof commercially available components and third-party software or technologies,together with continued enhancements to our proprietary hardware, software,firmware, and other technologies, the expansion and enhancement of our existingproducts, and the development and introduction of new technologies and productsthat address changing customer needs on a cost-effective and timely basis.  By emphasizing customer-driven research anddevelopment, we have been able to develop innovative, practical, and marketableproducts that have had immediate application and acceptance.  Our failure to respond on a timely basis totechnological changes or customer requirements could have a material adverseeffect on our business, financial condition, results of operations, and cashflow.

 

Due to our significantreliance on OEM relationships, some of our product development efforts arefocused on developing new hardware and software products or enhancements forOEM customers.  At times, these newproducts or enhancements may not be available to, or readily marketable to,other customers without significant modifications or delay.

 

Our engineering andproduct development efforts focus on anticipating the needs of our customers byproviding innovative, practical, and marketable products and technologies thathave immediate applications in their markets. By maintaining contact with customers throughout the installation andtechnical support process, we are able to identify and test potential designmodifications and improvements as well as new applications and extensions forexisting products and technologies.  Weexpect this process will enable us to develop new product categories andapplications based on existing technology developed to meet specific customerneeds.  Many of our products andtechnologies are designed to accommodate future modifications and additionalfeatures, which we believe facilitates the development and integration offuture modifications and features if we see a market need.

 

As of December 31,2006, we employed 613 people in our engineering department.  In addition, we use independent contractorsfrom time to time.  As ofDecember 31, 2006, we were working with approximately 45 independentcontractors on various development projects.

 

To meet the challenges ofthe rapidly changing technology in the computer industry, we expect to makesubstantial investments in product development in the future.  There can be no assurance that these new orenhanced versions or any other of our product development efforts will lead tocommercially viable products or technologies, will be completed on a timelybasis, or will include the features required to achieve market acceptance.

 

A key component of ourengineering and product development strategy is the acquisition of newtechnologies and companies.  We intend tocontinue to evaluate opportunities to acquire technologies and companies, andit is likely that we will complete additional acquisitions in the future.  There can be no assurance that theseacquisitions will result in the timely development of commercially viableproducts or technologies that achieve market acceptance.

 

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**Manufacturing**

 

We do not manufacture anyof our hardware products in their entirety. Instead, we manage product planning, purchasing, and shipping, and weperform final assembly, quality assurance, and testing on some of our hardware productswhile we outsource some or all of these functions on other products.  In order to avoid the capital investmentrequired to establish and maintain in-house manufacturing capabilities, we relyon subcontractors throughout the world for the assembly of printed circuitboard assemblies, subassemblies, chassis, and equipment enclosures.  We believe that our chosen subcontractors cantypically perform these functions at a lower cost than we can, whilemaintaining our high standards for quality and delivery.  Outsourcing our manufacturing functionsallows us to concentrate our resources on research and development, productdesign, quality assurance, sales and marketing, and customer service.  We (or our subcontractors) subject our mostcritical components and products to automated testing, equipment burn-inprocedures, comprehensive quality audits, functional testing, and regulatoryscreening to assure quality and reliability. As of December 31, 2006, we employed 242 people in ourmanufacturing, supply chain management, and logistics department.

 

We currently rely onseveral third party manufacturers, including Elcoteq Network Corporation,Plexus Corp., Kontron AG, and Likom Computer Products, for subassembly of our hardwareproducts.  These outsourcingarrangements, and any future outsourcing arrangements, involve numerous risks,including reduced control over product quality, delivery schedules,manufacturing yields, and costs.  Inaddition, while these third-party manufacturers have arrangements for warrantyobligations, we remain primarily responsible to our customers for warrantyobligations.  We attempt to diversify ouroutsourced manufacturing operations and believe we have an adequate supply ofalternative subcontractors.

 

We generally purchaseindustry-standard parts and components, including power supplies,semiconductors, memory, cable assemblies, line filters, enclosures, and printedcircuit boards, for the assembly of our products from multiple vendors andsuppliers through a worldwide sourcing program. Custom molded cables and certain turn-key products procured from outsidesources have significant delivery times (10 to 12 weeks), and failure to obtainadequate supplies could adversely affect our product deliveries.  We buy components under purchase orders andgenerally do not have long-term agreements with our suppliers.  Circuit board assemblies are currentlyobtained from a number of sources, including Elcoteq Network Corporation,Plexus Corp., Kontron AG, and Likom Computer Products.  We believe that there are adequatealternative sources for our product components. Any termination of, or significant disruption in, the business oraffairs of our suppliers or our third-party manufacturers or in ourrelationship with them may prevent us from filling customer orders in a timelymanner since we generally do not maintain large inventories of our components.

 

In the past, wehave experienced delays in the receipt of certain components, which haveresulted in delays in related product deliveries.  We attempt to manage these risks throughdeveloping alternative sources, committing internal resources to supply chainmanagement, and maintaining relationships and close personal contact with eachof our contract manufacturers and suppliers. There can be no assurance, however, that delays in component and productdeliveries will not occur in the future, and the inability to obtain sufficientcomponents or to develop alternative sources, if and as required in the future,could result in delays or reductions in product shipments, which, in turn,could have a material adverse effect on our business, financial condition,results of operations, or cash flow. Some of the components for our products are available from a singlesupplier or a limited number of suppliers. We attempt to maintain quality relationships and close contact with eachof our suppliers.

**Competition**

 

The market for our hardwareand software products is highly fragmented and competitive, and we expectcompetition to increase in the future. In the market for hardware switching systems, we compete with companiessuch as Raritan Computer, Rose Electronics, Minicom Advanced Systems, AtenInternational, Belkin, Lantronix, and Digital V6, and in the market for oursystems management products we compete with companies such as Microsoft,Computer Associates, BMC Software, Novell, Tivoli, and Altiris, some of whichmay have substantially greater financial, marketing, and technical resourcesthan we have.  In addition, certain ofour OEM customers, such as Dell, Hewlett-Packard, and IBM, offer technologiesand products that are competitive with our products, and we expect thesetechnologies and products to remain competitive in the features they offer.  Our products and technologies are also incompetition with the products and technologies offered by hardwaremanufacturers and network management companies such as Intel, Microsoft, Cisco,and EMC.

 

In the market for ourproducts, we compete primarily on the basis of technological capabilities,performance in relation to price, product features, quality, reliability,development capabilities, product availability, and customer service andsupport.  Our future success will behighly dependent upon timely completion, introduction, and distribution of newproducts, technologies, and features at competitive price and performancelevels that address the evolving needs of our customers.  We continually experience price competitionand expect that pricing pressures could increase in the future.

 

**Proprietary Technology**

 

Our future success isdependent in part upon our ability to protect our intellectual property and ourproprietary rights in our products and technologies.  We seek to protect our intellectual propertyrights by invoking the benefits of the patent, trademark, copyright, tradesecret, and unfair competition laws of the United States and certain foreigncountries, which provide only limited protection.  We have been issued over 50 U.S. patents andhave over 50 U.S. patent applications pending. We have 

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various correspondingpatent applications pending under the provisions of the Patent CooperationTreaty, which permits the filing of corresponding foreign patent applicationsin numerous foreign countries within a limited time period.  We also have other foreign patentapplications pending.  There can be noassurance that any additional patents will be issued from any of our pendingapplications, that any patents will be issued in any additional countries whereour products or technologies can be sold or licensed, or that any claimsallowed in our patents or in any pending patent applications will be ofsufficient scope or strength for, or provide any meaningful protection or anycommercial advantage to, us.  Moreover,our competitors may challenge the validity of, or be able to design around,these patents or any other patents that may be issued to us.  The laws of certain foreign countries inwhich our products are or may be developed, manufactured, or sold (particularlycountries in Asia) may not protect our products or intellectual property rightsto the same extent as do the laws of the United States and thus increase thelikelihood of piracy of our products and technologies.

 

In the future, we mayfile additional lawsuits against other companies regarding the allegedinfringement.  Patent litigation, and anyother litigation relating to our intellectual property to which we become aparty, is expensive and subject to numerous risks and uncertainties, and therecan be no assurance that we will be successful in any such litigation.  There can be no assurance that the steps wetake to protect our intellectual property rights will be adequate to preventmisappropriation of our technologies or that we can use our intellectualproperty rights to successfully prevent competitors from commercializingtechnologies that are substantially equivalent or superior to our products andtechnologies.  Additionally, current orfuture competitors could develop their own proprietary technologies or obtainpatents that may prevent us from developing or selling our products andtechnologies.

 

**Employees**

 

As of December 31,2006, we had 997 full-time employees working in the United States.  Of our domestic full-time employees, 346 werein marketing, sales, and customer support, 346 were in engineering, research,and development, 170 were in manufacturing and logistical operations, and 135were in administration.  As ofDecember 31, 2006, we had 710 full-time employees working at ourfacilities outside of the United States. Of our international full-time employees, 300 were in marketing, sales,and customer support, 267 were in engineering, research, and development, 72were in manufacturing and logistical operations, and 71 were inadministration.  Our employees inBrazil  (approximately 50) are covered bya collective bargaining agreement.  Noother employees are covered by collective bargaining agreements relating totheir employment by us.  We believe thatwe have good relations with our employees.

 

**Backlog**

 

Backlog consists ofpurchase orders with delivery dates scheduled within the next six months.  None of our customers is obligated topurchase products from us except pursuant to binding purchase orders.  Because of the timing of orders and thepossibility of customer changes to delivery schedules, our backlog as of anyparticular date is not representative of actual sales for any succeedingperiod.  Moreover, with recentindustry-wide initiatives by OEMs, distributors, and resellers to reduceinventories and shorten lead times, we do not view backlog as an importantindicator of our future results, and we do not believe it is a meaningfulindicator of actual sales for any succeeding period.

** **

**Item 1A. Risk Factors.**

 

*THISANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS ANDUNCERTAINTIES THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROMTHOSE DISCUSSED IN THIS ANNUAL REPORT.  THESE RISKS AND UNCERTAINTIESINCLUDING THE FOLLOWING:*

* *

**Our acquisition of LANDesk coulddisrupt our business, expose us to new risks, and adversely affect the resultsof our operations.**

 

We acquired LANDesk GroupLimited in the third quarter of 2006. This acquisition represents a departure from our core products andtechnologies and our entry into a new market (systems management softwareproducts and services) in which we have very limited experience.  The market for systems management products ishighly competitive, and we expect competition in this market to continue andintensify.  Many of LANDesk’s competitorshave substantially greater financial, customer support, technical and marketingresources, larger customer bases, longer operating histories, greater namerecognition, and more established relationships in the industry than LANDeskhas, and we may not have the resources or expertise to compete successfullywith them in the future.

 

The LANDesk acquisitionmay divert the attention of management and other personnel from our corebusiness operations, which may adversely affect our financial performance inone or more quarters.  LANDesk presentsus with new and different issues regarding revenue recognition, channelmanagement, and collection of existing or new receivables, any of which couldhave a material adverse effect on our business, financial condition, andresults of operations.  We will need toexpand and improve our internal systems, including our management informationsystems, to monitor these items.  Inparticular, we have not yet completed our review and assessment of the internalsystems and controls over the LANDesk financial reporting and informationsystems, and we will also 

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need to expand our operating, administrative, and financial systems andcontrols to include the LANDesk operations. The acquisition and integration of LANDesk and its software products andservices will require significant time, expense, and resources and subject usto the acquisition risks detailed below as we move into this new market.  Any failure to successfully integrate andoperate LANDesk could thus materially and adversely affect our result ofoperations, cash flows, and financial position.

 

**We have acquired, and expect tocontinue to acquire, technologies, and companies and these acquisitions coulddisrupt our business or expose us to other risks.**

 

A key component ofour engineering and product development strategy and our future growth is theinvestment in or the acquisition of technologies and companies.  We acquired Equinox Systems Inc. in2001, 2C Computing, Inc. in 2002, Soronti, Inc. in 2003, and Crystal LinkTechnologies, OSA Technologies, Inc., Sonic Mobility, Inc. in 2004, andCyclades Corporation  and LANDesk in2006.  We intend to continue to executeour strategy through the acquisition of technologies or companies or throughinvestments in complementary companies, products, personnel, or technologies,and it is likely we will complete such acquisitions or investments in thefuture.  These acquisitions andinvestments involve many risks, including the following:

·                                          Difficultyintegrating the acquired company’s personnel, products, product roadmaps,technologies, systems, processes, and operations, including product delivery,order management, and information systems;

·                                          Difficultyin conforming the acquired company’s financial policies and practices to ourpolicies and practices and in implementing and maintaining adequate internalsystems and controls over the financial reporting and information systems ofthe acquired company;

·                                          Diversionof management’s attention and disruption of ongoing business;

·                                          Difficultyin combining product and technology offerings and entering into new markets(such as software) or geographical areas in which we have no or limited directexperience and where our competitors may have stronger market positions;

·                                          Lossof management, sales, technical, or other key personnel;

·                                          Revenuefrom the acquired companies not meeting our expectation, and the potential lossof the acquired companies’ customers, distributors, resellers, suppliers, orother partners;

·                                          Delaysor difficulties and the attendant expense in evaluating, coordinating, andcombining administrative, manufacturing, research and development and otheroperations, facilities, and relationships with third parties in accordance withlocal laws and other obligations  whilemaintaining adequate standards, controls and procedures, including financialcontrols and controls over information systems;

·                                          Difficultyin completing projects associated with acquired in-process research anddevelopment;

·                                          Incurringamortization expense related to certain intangible assets and recordinggoodwill and non-amortizable assets that will be subject to impairment testingand possible impairment charges;

·                                          Dilutionof existing stockholders as a result of issuing equity securities, includingthe assumption of any stock options issued by the acquired company;

·                                          Overpaymentfor any acquisition or investment or unanticipated costs or liabilities;

·                                          Assumptionof liabilities of the acquired company, including any potential intellectualproperty infringement claims or other litigation; and

·                                          Incurringsubstantial write-offs, restructuring charges, and transactional expenses.

 

**Ourfailure to manage these risks and challenges could materially harm ourbusiness, financial condition, and results of operations.  Further, if we do not successfully addressthese challenges in a timely manner, we may not fully realize all of theanticipated benefits or synergies on which the value of a transaction wasbased.  Future transactions could causeour financial results to differ from expectations of market analysts orinvestors for any given quarter.**

** **

**Intense competition from new andexisting competitors or consolidation in the server and systems managementsectors could impair our ability to grow our business, to sustain ourprofitability, and to sell our products and technologies.**

 

The markets for ourproducts and technologies are highly fragmented, rapidly evolving, andintensely competitive, and we expect this competition to continue andincrease.  Aggressive competition from both hardware and software productsand technologies could lengthen the customer evaluation process and result inprice reductions and loss of sales, which would materially harm ourbusiness.  Our business is becoming increasingly sensitive to theintroduction of new products and technologies (such as virtualization), pricechanges, and marketing efforts by numerous and varied competitors. Accordingly, our future success will be 

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highly dependent upon our timely completion and introduction of newproducts and technologies and features at competitive prices and performancelevels that address the evolving needs of our customers.  We continue toexperience aggressive price competition and increased customer sensitivity toproduct prices, and pricing and margin pressures are likely to increase in thefuture.  Because of this competition, we may have to continue to lower theprices of many of our products and technologies or offer greater functionalitywithin our products to deliver greater value to customers to stay competitive,while at the same time trying to maintain or improve our revenue and grossmargin.  Because our business model is based on providing innovative andhigh quality products, we may spend a proportionately greater amount on researchand development than some of our competitors.  If we cannotproportionately decrease our cost structure on a timely basis in response tocompetitive price pressures, our gross margin and profitability could beadversely affected.  In addition, if our pricing, functionality, and otherfactors are not sufficiently competitive, or if there is an adverse reaction toour product decisions, we may lose market share in certain areas, which couldadversely affect our revenue and prospects.

 

We compete for sales ofswitching systems and extension products with companies such as RaritanComputer, Rose Electronics, Minicom Advanced Systems, Aten International,Belkin, Lantronix, and Digital V6.  These products also face competitionfrom software providers (such as Microsoft, Computer Associates, Tivoli,Altiris, Novell, and BMC Software), who may be able to offer software productscompetitive with our hardware products at a much lower cost or even bundled forfree, and from server manufacturers (including our OEM customers), who are ableto offer their competitive technologies or products at the time of the serversale.  These competitive software and hardware products address many ofthe problems our switching systems and technologies, extension products, andremote access products are designed to address.

 

We compete for sales ofour systems management products with companies such as Microsoft, ComputerAssociates, BMC Software, Novell, and Altiris, many of whom have greaterfinancial, technical, and marketing resources, a larger customer base, a longeroperating history, greater name recognition, and more established relationshipsin the industry than we do, and may offer their own or third-party competitivesoftware products at a lower cost or bundled for free with their otherproducts.  Microsoft, in particular, has delivered competitive systemsmanagement products and announced its intention to continue to developcompetitive software.  If Microsoft is successfulin delivering systems management software that is competitive with ourproducts, our ability to grow our systems management business may be limited.

 

These current andpotential competitors may be able to respond more quickly to new or emergingtechnologies or products and to changes in customer requirements or to devotegreater resources to the research, development, promotion, sale, and support oftheir products and technologies than we do.  In addition, current andpotential competitors have established or may establish cooperativerelationships among themselves or with third parties that expand or enhance theability of their products and technologies to address the needs of our currentand prospective customers.  Some of these competitors can also bundlehardware, software, and services together, and offer a more complete set ofhardware products and services than we are able to offer. We may not be able tocompete successfully against current and future competitors and competitivepressure may materially harm our business, financial condition, operatingresults, and cash flows, or impair our ability to achieve our desired results. 

 

Certain of our customers,such as Dell, Hewlett-Packard, IBM, Symantec, and Microsoft, presently offercompetitive hardware and/or software products and technologies that addressmany of the problems our products and technologies address.  Thesecustomers could decide to manufacture or enhance their own switching, IPMI orother embedded technologies, or systems management or security products, oroffer products or technologies supplied by competitors.  Companies withhardware manufacturing experience or network management products, many of whichare substantially larger than we are and have significantly more financialresources than we do, also offer products or technologies that compete withus.  Established companies with hardware manufacturing or networkmanagement experience (such as Intel, Cisco, or EMC) could also offer newproducts, new technologies (such as virtualization), or new solutions thatcompete with, or reduce the demand for, our products and technologies.  

 

There has beenconsolidation in the markets in which we compete, which we believe willcontinue and could lead to increased price competition and other forms ofcompetition as companies attempt to maintain or extend their market positionsin the rapidly changing IT industry.  Inaddition, we may face competition in the future from large establishedcompanies or from emerging companies that have not previously entered themarket or that do not currently have products that directly compete with ourproducts.  This could lead to morevariability in our operating results due to lengthening of the customerevaluation process and/or the loss of business to these competitors, which mayadversely affect our business, financial condition, and results of operations.

 

**Our failure to respond to rapidtechnological change or to introduce successful new products and technologiesmay result in reduced revenue or revenue growth.**

 

The process of developingor acquiring new products and technologies and enhancing existing products andtechnologies is complex, costly, and uncertain, and any failure by us toanticipate customers’ changing needs and emerging technological trendsaccurately could significantly harm our market share and results ofoperations.  We must make long-term investments, develop or obtainappropriate intellectual property, and commit significant resources beforeknowing whether our predictions will accurately reflect customer demand for ourproducts and services.  After we develop a product, we must thenaccurately forecast volumes and 

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configurations that meet customer requirements, manufacture appropriatehardware volumes quickly and at low cost and develop cost-effective softwaresolutions, and train our sales force and resellers.  Any delay in thedevelopment, production, marketing of, or training for new products ortechnologies could result in our not being among the first to market, whichcould further harm our competitive position.

 

Sales of switching, extension,and remote access products and technologies are characterized by rapidtechnological advances, frequent new product and technological introductionsand enhancements, and significant price competition.  If we do not keeppace with these changes, we will lose customers, and our business will beadversely affected.  The introduction of products or technologiesincorporating superior alternatives such as switching software, the emergenceof new industry standards, or changes in pricing structure could render ourexisting products and technologies and those under development obsolete orunmarketable.  New technologies offered by us or our competitors couldcompete with our existing products at a lower price, which could reduce ourrevenue.

 

Our hardware productscombine components, such as printed circuit boards, connectors, semiconductors,memory, cable assemblies, power supplies and enclosures that are manufacturedby other companies and are generally available to competitors and potentialcompetitors.  Our software products combine software or content from thirdparties, such as open source software or technology, drivers, security, oranti-virus information, which may also be generally available to ourcompetitors and potential competitors.  Our future success will depend inlarge part upon continued innovative application of commercially availablecomponents and third party software or technology, and continued enhancementsto our proprietary hardware, software, firmware, and other technologies, the expansionand enhancement of existing products and technologies, and our development andintroduction of new products and technologies that address changing customerneeds on a cost-effective and timely basis.  If we fail to respond on atimely basis to technological developments, changes in industry standards,customer requirements, competitive products, product localization, or softwareinnovations, we will lose customers, and our business will be greatlyharmed.  Similar results could occur if we experience significant delaysin the development or introduction of new products or technologies.

 

Due to our significantreliance on OEM relationships, our hardware development efforts may often befocused on developing new products, technologies, or enhancements for OEMcustomers.  As a result, our OEM relationships may negatively affect ourability to develop new and enhanced products and technologies for our non-OEMcustomers.  Moreover, these new products, technologies, or enhancementsfor OEM customers may not be available to, or readily marketable to, othercustomers without significant modification and delay.  The expansion,termination, or significant disruption of our relationship with certainOEMs or other customers for whom we devote significant product developmentresources is likely to result in lost opportunities with respect to thedevelopment of products, technologies, or enhancements for our other customers.

** **

**We have limited protection ofproprietary rights and face risks of third party infringements.**

** **

Our future successdepends in part upon our ability to protect proprietary rights in our productsand technologies.  We seek to protect our intellectual property rights byinvoking the benefits of the patent, trademark, copyright, trade secret, and unfaircompetition laws of the United States and other countries and  protections provided by confidentiality andnondisclosure agreements and other legal agreements.  These laws andpractices, however, afford only limited protection.  There can be noassurance that the steps we have taken to protect our intellectual propertyrights, or that the steps we take in the future, will be adequate to prevent ordetect misappropriation of our intellectual property or technologies or thatour competitors will not independently develop proprietary or othertechnologies that are substantially equivalent or superior to our products ortechnologies.  In addition, ourproprietary information may be misused or improperly disclosed by third partiesentrusted with this information. 

 

The U.S. Patent andTrademark Office has issued several patents to us for various aspects of ourproducts.  We have various corresponding patent applications pending underthe provisions of the Patent Cooperation Treaty, which permits the filing ofcorresponding foreign patent applications in numerous foreign countries withina limited time period.  We also have other United States and foreignpatent applications pending.  There can be no assurance that anyadditional patents will be issued from any of those pending applications orthat any patents will be issued in any additional countries where our productscan be sold.  Claims allowed in our patents or in any pending patentapplications may not be of sufficient scope or strength for, or provide meaningfulprotection or any commercial advantage to us or such claims may not be upheldif challenged.  Also, competitors may develop their own intellectualproperty or technologies, obtain their own patents, or challenge the validityof, or be able to design around, our patents.  The laws of certain foreigncountries in which our products are or may be developed, manufactured, or sold(particularly certain countries in Asia) may not protect our products orintellectual property rights to the same extent as do the laws of the UnitedStates and thus increase the likelihood of piracy of our technologies andproducts.

 

InJanuary 2007, we filed a complaint for patent infringement in the United StatesDistrict Court for the Western District of Washington against Aten Technology,Inc., Aten International Co., Ltd, Belkin Corporation, Rose Electronics and itsgeneral partners, and Trippe Manufacturing Company.  Some of the defendants have not yet respondedto our complaint.

 

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We may initiate claims orlitigation against other third parties for infringement of proprietary rightsor to establish the validity of proprietary rights.  Similarly, ourcompetitors or other third parties may initiate claims or litigation against usalleging infringement of their proprietary rights or improper use of theirintellectual property, and from time to time, third parties notify us that ourproducts may infringe their intellectual property rights, which regardless ofmerit, requires our time and resources to evaluate and respond.   Existing litigation, and any otherlitigation relating to intellectual property to which we become a party, issubject to numerous risks and uncertainties, including the risk ofcounterclaims or other litigation against us, and we may not be successful in anysuch litigation.  Litigation is expensive, and the existing litigation orany other litigation by or against us could result in significant additionalexpense, divert the efforts of technical and management personnel, whether ornot such litigation results in a favorable determination, harm ourrelationships with existing customers, and deter future customers frompurchasing or licensing our products.  In the event of an adverse resultin any such litigation, we could be required to pay substantial damages,suspend or cease the development, manufacture, use, marketing, and sale of anyinfringing products, expend significant resources to redesign products ordevelop non-infringing technology, discontinue the use of certain processes, orobtain licenses to the infringing technology.  There can be no assurancethat we would be successful in such development or that such licenses would beavailable on reasonable terms, or at all, and any such development or licensecould require us to expend substantial time and other resources.  In theevent that any third party makes a successful claim against us, or ourcustomers, and a license is not made available on commercially reasonableterms, our business, financial condition, and results of operations could be adverselyaffected.  In addition, any disputeinvolving our intellectual property could result in our customers,distributors, or resellers becoming involved in the litigation, which couldtrigger indemnification obligations in certain of our sales, license, or serviceagreements.  

 

The IT industry ischaracterized by vigorous pursuit and protection of intellectual propertyrights or positions, which has resulted in significant and often protracted andexpensive litigation.  We have in the past been, and we may from time totime in the future be, a party in proceedings alleging infringement ofintellectual property rights owned by third parties.  If necessary ordesirable, we may seek licenses under such intellectual property rights. However, licenses may not be offered on terms acceptable to us, or atall.  The failure to obtain a license from a third party for technologyused by us could cause us to incur substantial liabilities and to suspend orcease the manufacture of products requiring such technology.  Additionally,current or future competitors could obtain patents that may prevent us fromdeveloping or selling our products.

** **

**We are likely to experiencefluctuations in operating results.**

 

We have in thepast experienced substantial fluctuations in revenue, bookings, and operatingresults, on a quarterly and an annual basis, and we expect these fluctuationswill continue in the future.  Our operating results will be affected by anumber of factors, including, but not limited to:

·                                          Thevolume, timing, pricing, and contractual terms of orders, particularly fromOEMs, resellers, and other large customers, a significant portion of which tendto occur late in each quarter;

·                                          Thetiming of shipments;

·                                          Thetiming of new product introductions, new technologies, and enhancements by usand by our competitors, and the possibility that customers may defer purchasesof our products in anticipation of these new products, new technologies, andenhancements;

·                                          Changesin or our failure to accurately predict product or distribution and resellerchannel mixes, including changes in the mix of software licenses in whichrevenue is recognized upfront as opposed to deferred over time and changes inthe mix of revenue attributable to higher-margin products as opposed tolower-margin sales or services;

·                                          Changesin demand for our products;

·                                          Changesin pricing policies or price reductions;

·                                          Changesin renewal rates for software upgrade protection or maintenance; 

·                                          Competitionfrom new products and technologies and price reductions by competitors;

·                                          Theavailability and cost of supplies, components, or third-party code or contenton commercially reasonable terms;

·                                          Compatibilityor interoperability of our products with third-party systems and applications;

·                                          Salesand marketing expenses related to entering into new markets, introducing newproducts, new technologies, and retaining current OEM and other largecustomers; 

·                                          Fluctuationsin sales of servers due to changes in technology (such as virtualization),economic conditions, or capital spending levels;

·                                          Theamount and timing of operating expenses and capital expenditures relating tothe expansion of our business and operations; and

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·                                          Costsassociated with legal proceedings, including legal fees and any adversejudgments or settlements.

 

Our operating resultswill continue to be affected by seasonal trends, by general conditions in theIT market, and by general economic conditions.  We have experienced, andwe expect to continue to experience, some degree of seasonality due to customerbuying cycles.  We believe that the third and fourth quarters willgenerally have higher net sales levels due to customer budgeting and procurementcycles, which may depress net sales in other quarters.  In addition,European sales are often weaker during the summer months.  In the past,revenue in our fourth quarter of each year has typically been higher thanrevenue in prior quarters for the year, and we typically see a sequentialdecline in revenue from the fourth quarter of a year to the first quarter ofthe following year.  While it is difficult to predict revenue in anyquarter, we expect that this pattern will continue in the future.  Many ofthe factors that create and affect seasonal trends are beyond our control.

 

Our quarterly sales havealso reflected a pattern in which a disproportionate percentage of eachquarter’s total sales occur toward the end of the quarter, and this trend hasbecome more pronounced in recent periods. Our acquisition of LANDesk continues this trend with a greaterproportion of our software revenue coming from software license andsubscriptions booked in the last weeks or days of each quarter.  Thisuneven sales pattern makes prediction of revenue, earnings, and working capitalfor each financial period difficult, increases the risk of unanticipatedvariations in quarterly results and financial condition, and places pressure onour hardware inventory management and logistics systems.  If predicteddemand for hardware is substantially greater than orders, there will be excessinventory.  Alternatively, if hardware orders substantially exceedpredicted demand, we may not be able to fulfill all of the orders received inthe last few weeks of each quarter.  Other developments late in a quarter,such as a systems failure, component pricing movements, actions orannouncements from our competitors, global logistics disruptions, or largesales opportunities not being completed when predicted, could adversely impactinventory levels and results of operations in a manner that is disproportionateto the number of days in the quarter affected. In addition, accounting requirements associated with satisfying thevarious elements necessary to recognize software revenue may result insignificant fluctuations in our quarterly results.

 

In order to remaincompetitive and provide our increasingly sophisticated customers with moreoptions, we have made and expect to continue to make new software purchasingand licensing options available to our customers.  These options may result in an increase incontracts where software revenue is deferred or cash is received over time asopposed to recognition of revenue or payment at or about the time of thepurchase or license.  

 

We believe thatquarter-to-quarter comparisons of our historical financial results are notmeaningful indicators of our future operating results, and you should not relyon them as an indication of our future performance.  If our quarterlyoperating results fail to meet the expectations of equity research analysts,the price of our common stock could be negatively affected.

 

**Our gross margins are expected tovary and may decline.**

 

Gross margins mayvary or decline from period-to-period depending on a number of factors,including:

·                                          Theratio of OEM sales to branded sales, since OEM sales typically have lower grossmargins than branded sales;

·                                          Theratio of sales through indirect channels to direct sales, since indirect salestypically have lower gross margins than direct sales;

·                                          Productmix, because sales of some of our products and technologies will have lowergross margins than sales of other products or technologies (e.g. our softwareproducts tend to have higher gross margins);

·                                          Rawmaterials, freight, and labor costs;

·                                          Introductionof new products, services, and technologies by us and by our competitors; and

·                                          Thelevel of outsourcing of our manufacturing and assembly services for ourhardware products.

We expect that our grossmargins may vary and may decline in the future primarily due to the factorslisted above and to increased competition and theintroduction of new products and technologies that may affect product pricesand demand for our products.

 

**A substantial portion of our businessconsists of sales to a limited number of OEM customers that are not obligatedto continue doing business with us, and these sales vary considerably fromquarter to quarter.**

 

A substantial portion ofour sales is concentrated among a limited number of OEM customers.  Salesto these OEMs represented approximately 40% of net sales in 2006, 48% ofnet sales in 2005, and 45% of net sales in 2004.  Sales to Hewlett-Packardrepresented approximately 14% of our net sales in 2006, 20% of our net sales in2005, and 23% of our net sales in 2004.  Sales to Dell representapproximately 14% of net sales in 2006, 15% of our net sales in 2005, and 12%of our net sales in 2004.

 

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We have experienced, andwe expect to continue to experience, period-to-period variability in sales tothese OEM customers.  Any cancellation, rescheduling, or reduction oforders by OEM customers in the future could materially adversely affect ouroperating results.  Although our OEM customers typically place orders forproducts up to several months prior to scheduled shipment dates, these ordersare subject to cancellation.

 

Our OEM businessis subject to many risks, including:

·                                          Contracttermination or reduced or delayed orders;

·                                          Shortorder cycles and difficulty in predicting sales because our OEM customers donot have long-term commitments to purchase from us;

·                                          Changesin the OEMs’ internal product life cycles including the delay of planned newproduct introductions and uncertainty over product end-of-life decisions;

·                                          Adoptionof competing products or technologies developed by third parties for the OEMs,acquisition or internal development of competing products or technologies bythe OEMs, or changes in the OEMs’ marketing of competing products or reducedmarketing of our products; 

·                                          Changes incorporate ownership, financial condition, business direction, salescompensation related to our products, or product mix by the OEMs.

 

Any of these risks couldhave a material adverse effect on our business, financial condition, andresults of operations.  We have experienced, and expect to continue toexperience, pricing pressures and significant variability in orders from ourOEM customers, which may in the future have a material adverse effect on ourquarterly sales and operating results.

 

The loss of one or morelarge OEM customers would materially harm our business.  While we havecontracts with some of our existing OEM customers, none of our OEM customers isobligated to purchase products from us except pursuant to binding purchaseorders.  Consequently, any OEM customer could cease doing business with usat any time.  Our dependence upon a few OEMs also results in asignificant concentration of credit risk, thus a substantial portion of ourtrade receivables outstanding from time to time may be concentrated among alimited number of customers.  In addition, OEM customers have longerpayment cycles that increase the likelihood of aged or problem accountsreceivable.

 

We use multiplewarehouses for many of our OEM customers to fulfill their hardware orders undera just-in-time inventory management system, which requires us to maintainsufficient inventory levels of our hardware products at each of thesewarehouses to satisfy our OEMs anticipated customer demand, and we generallyrecognize revenue only when these OEM customers take possession of our hardwareproducts.  We are required to plan production, order components, and undertakeour manufacturing activities prior to the time that these orders become firm orthe products are accepted.  In addition, our OEM customers have requested,and are likely to continue to request from time to time, that we delay shipmentdates or cancel orders for hardware products that are subject to firmorders.  As a result, at any time we may be holding a significant amountof OEM-branded hardware products in inventory, and our sales to OEMs forfuture quarters are difficult to predict.  The inability to accuratelypredict the timing and volume of hardware orders for our OEM customers duringany given quarter could adversely affect operating results for that quarterand, potentially, for future quarters.  If we underestimate sales, we maynot be able to fill orders on a timely basis.  This could cause customerdissatisfaction and loss of future business.  If we overestimate sales, wemay experience increased costs from inventory storage, waste, and obsolescence.

** **

**A substantial portion of our businessconsists of sales to a limited number of resellers and distributors that arenot obligated to continue doing business with us, and these sales varyconsiderably from quarter to quarter.**

 

A substantial portion ofour sales consists of sales of our branded products to a limited number ofresellers and distributors.  Sales to resellers and distributors representedapproximately 56% of net sales in 2006,48% of net sales in 2005, and 52% of netsales in 2004.  The loss of significant revenue opportunities with theseresellers and distributors could negatively impact our results ofoperations.  In addition, many of thesecustomers also have or distribute competing products.  If resellers and distributors elect toincrease the marketing of competing products or reduced marketing of ourproducts, our ability to grow our business will be negatively impacted and willimpair one of our substantial revenue sources.

 

Our reseller anddistributor business is subject to many risks, including:

·                                          Concentrationof business in a limited number of resellers and distributors could result insignificant damage to our business upon the termination of our resellerrelationship;

·                                          Terminationof our reseller and distributor agreements or reduced or delayed orders;

·                                          Difficultyin predicting sales to reseller and distributors who do not have long-termcommitments to purchase from us, which requires us to maintain sufficientinventory levels to satisfy anticipated demand;

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·                                          Lackof visibility of end user customers and revenue recognition and channelinventory issues related to sales by resellers and distributors;

·                                          Resellersand distributors electing to resale or increase their marketing of competingproducts or technologies or reduced marketing of our products; and

·                                          Changesin corporate ownership, financial condition, business direction, salescompensation related to our products, or product mix by the resellers anddistributors.

Any of these risks couldhave a material adverse effect on our business, financial condition, andresults of operations.  We have experienced, and expect to continue toexperience, pricing pressures and significant variability in orders from ourresellers and distributors, which may in the future have a material adverseeffect on our quarterly sales and operating results.

 

The loss of one or morelarge reseller and distributors would materially harm our business.  Whilewe have reseller and distributor agreements, none of our resellers ordistributors are obligated to purchase products from us.  Consequently,any reseller or distributor could cease doing business with us at anytime.  Our dependence upon a few resellers and  distributors could result in a significantconcentration of credit risk, thus a substantial portion of our tradereceivables outstanding from time to time may be concentrated among a limitednumber of customers.  In addition, the inability to accurately forecastthe timing and volume of orders for sales of branded products to resellers anddistributors during any given quarter could adversely affect operating resultsfor such quarter and, potentially, for future periods.  If weunderestimate sales, we will not be able to fill orders on a timelybasis.  This could cause customer dissatisfaction and loss of futurebusiness.  If we overestimate sales, we will experience increased costsfrom inventory storage, waste, and obsolescence.

 

**We will need to expand sales throughdistributors and resellers in order to develop our business and increaserevenue.**

 

We expect to relyincreasingly on distributors and resellers, VARs (including LANDesk VARs whoare also referred to as “Expert Service Providers” or “ESPs”), and systemsintegrators for the distribution and sale of our branded hardware and softwareproducts.  Our strategy contemplates the expansion of our distributor andreseller network both domestically and internationally, particularly in Asia,and an increase in the number of customers licensing our products through theseexpanded channels.  Our future success will depend in part on our abilityto attract, train, and motivate new distributors and resellers and expand ourrelationships with current distributors and resellers.  We may not besuccessful in expanding our distributor and reseller relationships.  Wewill be required to invest significant additional resources in order to expandthese relationships, and the cost of this investment may exceed the marginsgenerated from this investment. Conducting business through indirect sales channels presents a number ofrisks, including:

·                                          Difficultiesin replacing any lost or terminated distributors or resellers;

·                                          Existingor new distributors and resellers may not be able to effectively sell ourcurrent or future products or services;

·                                          Potentialdistributors and resellers deciding not to enter into relationships with usbecause of our existing relationships with other distributors and resellerswith which they compete;

·                                          Ourability to provide proper training and technical support to our distributorsand resellers;

·                                          Distributorsand resellers electing to place greater emphasis on products or servicesoffered by our competitors; and 

·                                          Thelack of direct control over the business practices, marketing, sales andservices offered by distributors and resellers;

As we expand ourdistribution and reseller channels, we will also need to expand our salesorganization and invest substantial resources toward this expansion.  We may experience difficulty recruiting,training, and retaining qualified sales personnel, and any failure to obtain,train, and keep qualified personnel could limit our ability to sellproducts.  

 

In addition, distributorsand resellers of our hardware products often have rights of return, and in thefuture, these returns from our existing or any new distributors and resellersmay have a material adverse effect on our business, financial condition, andresults of operations.  Our agreements with our current distributors andresellers are generally nonexclusive and may be terminated on short notice byeither party without cause, and any new distributor or reseller agreements arelikely to contain similar provisions.  Distributors and resellers are notobligated to purchase products from us and frequently offer products fromseveral different companies, including competitors’ products, and distributorsand resellers may give higher priority to the sale of our competitors’products.  A reduction in sales efforts or efficiency by our distributorsor resellers could lead to a reduction in our sales and could materiallyadversely affect our business, financial condition, and results of operations.

 

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**We are dependent upon third-partysuppliers and outsourced manufacturing for our hardware products. Disruption of our access to these supplies and services, or problems with thequality of supplies or services, could prevent us from filling customer ordersand harm our business.**

 

The principal componentsof our hardware products are electronic components, power supplies,semiconductors, memory, cable assemblies, line filters, enclosures, and printedcircuit boards, all of which are purchased from outside vendors.  Wegenerally buy components under purchase orders and generally do not havelong-term agreements with our suppliers.  Also, we generally do notmaintain large inventories of components.  Any termination of, orsignificant disruption of, our relationships with the suppliers of our productcomponents may prevent us from filling customer orders in a timely manner whichcould result in customer dissatisfaction and lost sales.

 

We have occasionallyexperienced, and we may in the future experience, shortages or delays indelivery of components.  Although alternate suppliers are available formost of the components and services needed to produce our products, the numberof suppliers of some components is limited, and qualifying a replacementsupplier and receiving components from alternate suppliers could take severalmonths.

 

We have limited abilityto control quality issues (particularly with respect to faulty componentsmanufactured by third parties), and we depend upon suppliers to delivercomponents that are free from defects, competitive in functionality and cost,and in compliance with specifications and delivery schedules.  Disruptionin supply, a significant increase in the cost of one or more components,failure of a third party supplier to remain competitive in functionality orprice, or the failure of a supplier to comply with any of our procurement needscould delay or interrupt our ability to manufacture and deliver our products tocustomers on a timely basis, thereby delaying our revenue recognition andadversely affecting our business, financial condition, and results ofoperations.

 

We rely on third partymanufacturers for subassembly of products and for final assembly, qualityassurance, and testing of some of our products.  These outsourcingarrangements and any future outsourcing arrangements involve numerous risks,including the economic and financial viability of these manufacturers, reducedcontrol over product quality, delivery schedules, manufacturing yields, andcosts.  Moreover, although arrangements with such manufacturers maycontain provisions for warranty obligations on the part of such manufacturers,we are primarily responsible to our customers for warranty obligations.

 

**Our hardware products are subject towarranty claims and returns.  Increased warranty claims or returns couldharm our business.**

 

We typically offer a30-day unconditional money-back guarantee on our appliance products sold inNorth America.  We also offer warranties for parts and service on all ourhardware products, ranging from one to three years (and, in the case of some ofour Equinox branded products, five years).  Although our historical returnexperience has not been significant, our returns may increase in thefuture.  An increase in returns would have an adverse effect on our salesand could negatively affect our financial results.  

 

For our softwareproducts, sales are final and we do not generally allow any returns.  We provide a ninety day warranty on the mediaused to deliver the software, which is not applicable to electronic downloads,and we often provide a limited warranty (usually no more than ninety days) thatour products will function in accordance with the user documentation.  

 

In the future, we may, asa result of competitive pressures or customer demands, change our warrantypolicies or our warranty terms to provide coverage that is greater in scope andduration than the coverage we currently offer.  If we were to increase ourwarranty coverage, our risk of warranty claims, and therefore our warrantyexpense and reserves, would likely increase.

** **

**We must meet the increased demands oncustomer service operations or customer satisfaction and sales could suffer.**

 

Continued growth of oursales is likely to be accompanied by increasing demands on customer serviceoperations.  As a result of our commitment to a high level of customerservice, we will need to invest significant resources in the maintenance andimprovement of our customer service resources.  Any failure to maintainadequate customer service could cause customer dissatisfaction, result inreduced sales of products and, accordingly, materially adversely affect ourbusiness, financial condition, and results of operations.

 

**If we are unable to successfullydevelop our international distribution and reseller networks and internationalsales efforts, results of operations may suffer.**

 

We are working todevelop, integrate, and expand our international distribution and reseller networksin an effort to increase international sales of switching, extension, remoteaccess, systems management and security software, and other products.  Wemay not be successful in developing or expanding the international distributionand reseller network or in marketing and selling products in foreign markets,particularly Asia.  If the revenue generated by our international sales isnot adequate to recover the expense of 

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establishing, expanding,and maintaining an international distribution and reseller network, ourbusiness, financial condition, and results of operations could be materiallyadversely affected.  If international sales become a more significantcomponent of net sales, our business could become more vulnerable to the risksinherent in doing business on an international level, including:

·                                          Difficultiesin managing foreign distributors and resellers;

·                                          Longerpayment cycles and problems in collecting accounts receivable;

·                                          The effectsof seasonal customer demand;

·                                          Changes inregulatory requirements;

·                                          Difficultiesin meeting the requirements of different international product regulations,including import and export requirements;

·                                          Risksrelating to the protection of our intellectual property rights;

·                                          The impact onour marketing expenses and our research and development resources as welocalize our product offerings to meet local user requirements such as languagetranslations and hardware compatibility issues;

·                                          Exportrestrictions, tariffs, and other trade barriers;

·                                          Fluctuationsin currency exchange rates; and

·                                          Potentiallyadverse tax consequences and political instability.

The existence or occurrence of any one of these factors could have amaterial adverse effect on our business, financial condition, and results ofoperations.

 

**Due to the international nature ofour business, political or economic changes or other factors could harm ourfuture revenue, increase our costs and expenses, and impair our financialcondition.**

 

We are a globalcompany with sales, manufacturing, and research and development efforts aroundthe world.  Sales outside the UnitedStates generate approximately half of our revenue, over half of ourmanufacturing takes place outside the United States, and we have research and developmentcenters in several locations outside the United States.  Accordingly, ourbusiness, operating results, future revenue, gross margin, expenses, andfinancial condition could suffer due to a variety of international factors,including:

·                                          Ongoinginstability or changes in a country’s or region’s economic or politicalconditions, including inflation, recession, interest rate fluctuations, andactual or anticipated military or political conflicts, particularly in areaswhere we have offices or other facilities;

·                                          Currencyfluctuations, which could contribute to variations in sales of products andtechnologies and could also affect our reported results expressed in U.S.dollars;

·                                          Longeraccounts receivable cycles and financial instability among customers;

·                                          Taxor trade regulations, tariffs, duties, and procedures and actions affectingproduction, pricing, and marketing of or payments for products;

·                                          Locallabor conditions and other regulations;

·                                          Differingtechnology standards or customer requirements;

·                                          Limitedor unfavorable intellectual property protection in certain foreign countriesincluding the loss of proprietary information due to piracy ormisappropriation;

·                                          Fluctuationsin freight costs and disruptions at important geographic points of exit andentry;

·                                          Naturalor manmade disasters, such as earthquakes, tsunamis, hurricanes, typhoons,fires, power shortages, blackouts, or telecommunications failures; 

·                                          Medicalepidemics, such as avian flu or Severe Acute Respiratory Syndrome (SARS);

·                                          Seasonalreductions in business activity in certain foreign countries, such as thesummer months in Europe;

·                                          Compliancewith a wide variety of complex laws, treaties, and regulations that increasethe risks of doing business in certain foreign countries;

·                                          Restrictionsagainst repatriation of earnings from our international operations; 

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·                                          Difficultiesin staffing and managing international operations, including the difficulty inmanaging a geographically dispersed workforce;

·                                          Possiblenon-compliance with our Code  of Conductor other corporate policies due to inconsistent laws, interpretations, and/orapplication of corporate standards in foreign countries;

·                                          Increasedfinancial accounting and reporting burdens and complexities; and

·                                          Theneed to localize our products.

The factors describedabove also could disrupt our product development and manufacturing, keysuppliers, and OEMs and resellers located outside of the United States. For example, we rely on manufacturers in Asia and Europe for the assemblyand manufacture of many of our hardware products, and we conduct substantialsoftware development and testing operations in China.  Accordingly, we are directly affected byeconomic, political, and military conditions in China.  Any interruption or curtailment of tradebetween China and its present trading partners could materially adverselyaffect our product development, product releases, support, business, operatingresults, and financial condition.  

 

Continued or increasedinternational political instability, evidenced by the threat or occurrence ofterrorist attacks, enhanced national security measures in the United States,sustained military action or other conflicts, or strained internationalrelations may impair our ability to do business, increase our costs andadversely affect our stock price. Increased international instability may negatively impact our ability toobtain adequate insurance at reasonable rates or require us to take extrasecurity precautions for our domestic and international operations.  

 

**Fluctuations in the value of foreigncurrencies could result in currency exchange losses.**

 

Currently, a majority ofour international business is conducted in U.S. dollars.  However, as weexpand our international operations, it is likely that international businesswill increasingly be conducted in foreign currencies.  In particular, theintroduction of the euro has led many of our European customers to request orinsist that our sales to them be denominated in euros instead of U.S. dollarsand sales from our software operations are frequently conducted in foreigncurrencies.  Fluctuations in the value offoreign currencies relative to the U.S. dollar have caused, and are expected toincreasingly cause, currency transaction gains and losses.  In addition,currency fluctuations could also affect our reported results expressed in U.S.dollars.  While we attempt to hedge ourforeign currency exposure, we cannot predict the effect of exchange ratefluctuations upon future quarterly and annual operating results, and we mayexperience currency losses in the future.

** **

**The sales cycle for our software productsis unpredictable, making it difficult to forecast operating results for anygiven period.**

** **

The sales cyclefor our software products is typically ninety to one hundred eighty days orlonger.  This sales cycle is subject to anumber of significant risks over which we have little or no control, including:

·                                          Customers’budgetary constraints, internal acceptance requirements, and procurementprocedures;

·                                          Concernsabout the actions or announcements of our competitors and their products;

·                                          Concernsabout the future or performance of our company; and

·                                          Changesin economic conditions generally and in the technology market specifically.

For large opportunities,especially for enterprise-wide sales, the sales cycle is often significantlylonger than our average sales cycle.  Inaddition, these large opportunities are more difficult to forecast, and if wedo not correctly forecast the timing in a given period, the amount of revenuewe recognize in a period could be lower than we expect, which could negativelyaffect our operating results for the then current period and future periodsover which revenue would have been recognized. In addition, the terms and conditions of the legal agreements for theselarge opportunities are often based on our customers’ purchase agreements andmay contain terms that are generally less favorable to us than our standardterms and conditions. As a result, revenue recognition may be delayed.

 

**Our software revenue is dependent onsales to existing customers or the renewal of annual software upgradeprotection or maintenance services by existing customers.**

 

Our LANDesk Division has historicallyderived, and plans to continue to derive, a significant portion of our totalsoftware revenue from existing customers who purchase additional products orannual maintenance or upgrade protection. We depend on our installed base of software customers for future revenuefrom the purchase of annual software upgrade protection or maintenance services.  As we introduce new software products, ourcurrent customers may not require or desire the functionality of our new 

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products and may choose not to license these products or renew theiragreements for maintenance or upgrade protection.  If our customers do not purchase additionalproducts or increased numbers of products already in use, or renew annualsoftware upgrade protection or maintenance services, our ability to increase ormaintain revenue levels could be limited to only new customers.  

 

Maintenance revenuerelated to the licensing of our software products is a significant part of ourcurrent and future operating revenue.  Ingeneral, maintenance fees increase with the increase in the use of oursoftware.  Accordingly, we receive highermaintenance fees with new license agreements and as existing customers installmore of our software products on additional systems.  Due to increased discounting for larger salesopportunities, maintenance fees on a per unit basis for such large deals can belower than average.  In addition,customers are generally provided reduced annual maintenance percentages forentering into long-term maintenance agreements. Declines in our license bookings, increases in long-term maintenanceagreements, customers electing to migrate to competitive products of findalternatives to our products, and/or increased discounting could lead toreduced software maintenance revenue and reduced gross margins. 

 

**Our software products are designedwith interoperability or compatibility with many third-party platforms,systems, and applications, the absence of which may harm our business.**

 

Our software products aredesigned for use with specific third-party platforms, systems, andapplications.  We believe the breadth ofour integration with such platforms, systems and applications is a significantcompetitive advantage.  Any significantchange in these third party products could result in the loss ofinteroperability or compatibility with our products, making our products lessattractive, increasing our research and development costs in order to modifyour products, license new solutions, or develop new products, and potentiallyharming our future revenue.  Our failureto anticipate, manage and adapt to these risks could result in significantdelays in our product releases, changes in our product roadmaps, loss ofcurrent customers for whom the lost compatibility is an issue, and damage toour operating results. 

 

**Our software products includethird-party content or code upon which we rely for the interoperability,integration, development, or updates of our products, and disruption of ouraccess to such code or content could delay product releases, inhibit ourcompatibility with third party products, and harm our business.**

 

The principal componentsof our software products are proprietary code and content.  We do, however, rely on some third-party codeor content, and we expect to use such third-party code or content in futureproducts. Although we believe that there are adequate alternative sources forthe technology licensed to us, any significant interruption in the availabilityof these third-party software products on commercially acceptable terms or anydefects in these products could delay development of future products orenhancement of our future products and harm our revenue.  Use of such third party code or contentpresents risks such as:

 

·                                          Ownersor licensees of third-party systems could adopt more restrictive policies orimpose unfavorable terms and conditions for access to their products making itmore difficult for us to make our products compatible with their products andresulting in higher research and development costs for us for the enhancementor modification of our existing products and the development of new products;

·                                          Functionalityprovided by third-party code or content in our products may become obsolete,defective, or incompatible with future versions of our products, may not beadequately maintained or updated, and we may be unable to find viablealternatives or develop our own proprietary solution; 

·                                          Quality,warranty, and support terms vary dramatically when licensing third party codeand content, and we have limited ability to control quality issues withthird-party code and content and must we depend on our own research anddevelopment personnel to evaluate and select third-party code that we believeis of the most value to our customers; and 

·                                          Technicaldifficulties in integrating our products and third party code or content tocreate a combined solution, and the risk that customers will not perceive theneed for such integrated solutions. 

 

Any significanttermination of a third-party license, change in third-party license provisions,increase in the cost of such third-party code or content, failure of a code orcontent provider to remain competitive in functionality, or defect in orquality issue with third-party code could delay or interrupt our ability todevelop and deliver software products to customers on a timely basis.  This could delay our revenue recognition andadversely affect our business, financial condition, and results of operationsand possibly expose us to claims under license agreements with ourcustomers.  Our failure to anticipate,manage, and adapt to these risks could result in significant delays in ourproducts releases, changes in our product roadmaps, and damage to our operatingresults.

** **

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**Softwareerrors or bugs, and possible product liability claims related to such errors orbugs, could result in increased costs, damage to our reputation, and loss ofmarket share.**

Our software products aregenerally large and intricate programs. As a result, our current software products, updates, upgrades or futureproducts may contain errors, failures, or “bugs,” some of which may not becomeknown until after the product has been released by us for use bycustomers.  While we routinely test ourproducts for such errors and identify and correct bugs through our customersupport group, these problems are inevitable. Any significant errors may result in, among other things, loss of, ordelay in, the market acceptance or our products, lost revenue and sales of ourproducts, reallocation of, or increases in, development and customer supportresources, impairment to our reputation, loss of future renewal or maintenancerevenue, and increased service and warranty costs.  Errors could also result in significantdelays in the release of updates, upgrades, or new products while such errorsare corrected.  Moreover, because ourproducts primarily support other systems and applications, any software errorsor bugs in these other systems or applications may affect the performance ofour software, and it may be difficult or impossible to determine where theerrors reside.  As a result, producterrors, failures, or bugs could result in significant harm to our business andhave a material adverse effect on our results of operations.

 

We may be subject tolegal actions or claims for damages related to product errors which could,whether or not successful, increase costs and distract our management and ourdevelopment and support teams and could harm our business, result in unexpectedexpenses and damage our reputation.  Ourlicense agreements with our customers typically contain provisions designed tolimit exposure to potential product liability claims, and our standardagreements in many jurisdictions also provide that we will not be liable forindirect or consequential damages caused by the failure of our products.  In certain jurisdictions, however, warrantyand limitation of liability provisions are not effective.   

 

**Use of open source software ortechnology in our products may reduce our ability to control the quality andsupport for products and may result in damage to our operating results. **

 

“Open source”software is software that is made widely available by its authors or otherthird parties and is often licensed on an “as is” for a nominal fee or, in somecases, at no charge.  We haveincorporated some open source software into our products, allowing us to enhancecertain solutions without incurring substantial additional research anddevelopment costs. While we have not experienced any material problems as aresult of our use of open source software, use of open source software entailssignificant risks including:   

·                                          Opensource software or technology becoming competitive with our proprietarytechnology, which could cause sales of our products to decline or force us toreduce the fees we charge for our products, which could have a material adverseimpact on our revenue and operating margins;

·                                          Requiringthat we make available the sourcecode for any modifications or derivative works we make to or from the opensource software, and that we license or contribute such modifications orderivative works under the terms of a particular open source license or otherlicense granting third parties certain rights of further use;

·                                          Ourproprietary software could becombined with open source software in such a way that we would be required torelease the source code of our proprietary software; and

·                                          The lack of any warranty, maintenance, orsupport for most open source software or technology.

 

We haveestablished processes to help minimize these risks to the extent within ourcontrol, including a review process for screening requests from our developmentorganizations for the use of open source, but we cannot be sure that all opensource software or technology is submitted for approval prior to use in ourproducts or that all use is in compliance with our corporate policies. Theserisks, if not eliminated, could negatively affect our business.

*** ***

**Executive officers and other keypersonnel may depart, which could adversely affect our results of operationsand harm our ability to grow the business.**

 

We are greatly dependenton the ability to retain key management, sales, and technical personnel, andour future success is highly dependent upon the personal efforts of ourmanagement, sales, and technical personnel and other key employees.  Theloss of services of key personnel, including those who recently joined us aresult of the Cyclades and LANDesk acquisitions, could have a material adverseeffect on our business, financial condition, and results of operations. We have attempted to mitigate these risks by offering key Cyclades and LANDeskemployees retention bonuses (payable only if they continue employment with usfor specified periods) and equity awards, but there is the risk that we couldnevertheless lose key management, sales, and technical employees.

 

We have historically usedstock options and are currently using restricted stock units as a key componentin our executive and employee compensation programs in order to alignemployees’ interests with the interests of our stockholders, encourage employeeretention, and provide competitive compensation packages.  Many of ouremployee stock options are fully vested.  This could affect our ability toretain present employees.  In addition, we are now required to record acharge to earnings for employee stock option grants and other equityincentives.  Moreover, applicable stock exchange listing standardsrelating to obtaining stockholder approval of equity compensation plans couldmake it more difficult or expensive for us to grant options to employees in 

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the future.  As a result, we may incur increased compensationcosts, change our equity compensation strategy, or find it difficult toattract, retain, and motivate employees, any of which could materiallyadversely affect our business. 

 

As we expand ourinternational operations, we will be required to recruit and retain experiencedmanagement, sales and technical personnel in our international offices, and weexpect that the identification, recruitment, training and retention of suchpersonnel will require significant management time and effort andresources.  Competition for employeeswith the skills required, particularly engineering and other technicalpersonnel, is intense, and there can be no assurance that we will be able toattract and retain highly skilled employees in sufficient numbers to sustainour current business or to support future growth.  We may need to payrecruiting or agency fees and offer additional compensation or incentives toattract and retain these and other employees, resulting in an increase to ouroperating expenses.    

 

**Difficulties encountered duringchanging economic conditions could adversely affect our results of operations.**

 

For the last severalyears, we have experienced rapid revenue and customer growth and expansion inthe number of employees, product offerings, customers, operating locations, andsuppliers.  In addition, we have acquired a number of companies in thesame time period.  This growth and these acquisitions have resulted inincreased responsibilities and placed significant strain on our managerial,operational, and financial resources and resulted in new and increasedresponsibilities for management personnel.  There can be no assurance thatour management, personnel, systems, procedures, and controls are, or will be,adequate to support our existing and future operations or that we will continueto grow.  If we fail to recruit andretain sufficient and qualified managerial, operational, or financial personnelor to implement or maintain internal systems that enable us to effectivelymanage our growing business and operations worldwide, our financial results inany given period may be adversely affected and our business and financialcondition could be materially harmed. 

 

Our ability toeffectively manage during changing economic conditions will require us tocontinue to implement and improve our operational, financial, and informationsystems and internal controls and will likely require additional managementpersonnel.  In addition, we believe that we must continue to developgreater engineering, financial, marketing, sales, and customer servicecapabilities in order to develop new products and technologies, secure newcustomers, and effectively serve the evolving needs of present and futurecustomers.  We may not be successful in strengthening thesecapabilities.  Without adequate management, engineering, financial,product development, marketing, sales, and customer service capabilities, ourability to effectively manage during changing economic conditions, expand andenhance our product lines, further penetrate existing markets, and develop newmarkets will be significantly limited.  If we are unable to effectivelymanage during changing economic conditions, our business, financial condition,and results of operations could be materially adversely affected.

 

Because our business andoperating results depend to a significant extent on the general conditions inthe server market, any adverse change in the server market due to adverseeconomic conditions, declining capital spending levels, or other factors couldhave a material adverse effect on our business, financial condition, andresults of operations.  In addition, we continue to see industry-wideinitiatives by OEMs and by distributors and resellers of our hardware products toreduce their inventories and to shorten their lead times, thereby reducingearly commitments to firm orders by our major OEM and our distributor andreseller customers.

*** ***

**Our reorganization efforts maydisrupt our business or affect our profitability.**

 

In the first quarter of2006 we reorganized into five business divisions in an effort to streamline ouroperations and put vital decisions closer to our customers.  With the acquisition of LANDesk, we havemerged our Mobile Solutions Division into the LANDesk operations, and we aremaking other management changes within the LANDesk Division.  These reorganization efforts could confuseand distract our customers, suppliers, and employees.  In addition, thesereorganization efforts could adversely affect or delay our development andintroduction of new products and technologies, result in the loss ofmanagement, technical, or other key personnel, disrupt our supplier or customerrelationships, jeopardize our supplier or sales channels and our branding andmarketing efforts, and increase our administrative expense, all of which couldaffect our profitability.  

 

**Ourline of credit could adversely affect us and our operations.**

** **

In the secondquarter of 2006, we obtained a $250,000,000 unsecured, five-year, revolving,bank line of credit, and we used borrowings under this line of credit to fund aportion of the LANDesk acquisition and the purchase of our shares under ourrecently-expanded stock repurchase program. Interest expense on borrowings and additional future borrowings underthe line of credit could adversely affect our future net income, margins,expenses, and financial conditions by:

·                                          Requiringus to dedicate a substantial portion of our cash flow from operations topayments on our indebtedness, which would reduce the availability of our cashflow to fund internal growth through working capital and capital expendituresand for other general corporate purposes;

·              Increasing our vulnerability toeconomic downturns in our industry;

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·                                          Increasingour vulnerability to interest rate increases to the extent any of our variablerate debt is not hedged;

·                                          Placingus at a competitive disadvantage compared to our competitors that have lessdebt in relation to cash flow;

·                                          Limitingour flexibility in planning for or reacting to changes in our business and ourindustry;

·                                          Limiting,among other things, our ability to borrow additional funds, refinance the lineof credit, or obtain other financing capacity; and

·                                          Subjectingus to a risk of noncompliance with financial and other restrictive covenants inour indebtedness.

**The line of credit contains affirmative and negativecovenants, including limitations on our ability to (i) make distributions,investments, and other payments unless we satisfy certain financial tests orother criteria, (ii) incur additional indebtedness, and (iii) makeacquisitions and capital expenditures. All of these restrictions could affect our ability to operate ourbusiness and may limit our ability to take advantage of potential businessopportunities as they arise.  The failureto comply with these covenants could result in an event of default which, ifnot cured or waived, could have a material adverse effect on us.**

** **

Our ability to complywith these provisions of our line of credit may be affected by changes in theeconomic or business conditions or other events beyond our control.  If we do not comply with these covenants andrestrictions, we could be in default under our line of credit, and our debt,together with accrued interest, could then be declared immediately due andpayable.  There can be no assurance thatwe will be able to obtain sufficient funds to enable us to repay or refinanceour debt obligations on commercially reasonable terms or at all.  We also face interest rate risk on our bankline of credit which currently bears interest at a variable rate of LIBOR plus 87.5basis points.  We have partially hedgedthis exposure to interest rate risk with an interest rate swap, which has anotional amount of $125 million, through a well established financialinstitution.

 

**Unanticipated changes in our taxrates or exposure to additional income tax liabilities could affect ourprofitability.**

 

We are subject to incometaxes in both the United States and various foreign jurisdictions, and ourdomestic and international tax liabilities are subject to the allocation ofexpenses in different jurisdictions.  Our effective tax rates could beadversely affected by changes in the mix of earnings in countries withdiffering statutory tax rates, in the valuation of deferred tax assets andliabilities, in tax laws, or by material audit assessments, which could affectour profitability.  In addition, the amount of income taxes we pay issubject to audit in various jurisdictions, and a material assessment by agoverning tax authority could affect our profitability. 

 

**Failure to maintain adequate internalsystems and effective internal controls over our financial reporting andinformation systems could result in our management and auditors being unable tocertify the effectiveness of our internal controls over financial reporting andinformation systems, which could harm our business reputation and cause ourstock price to decline.**

 

Section 404 of theSarbanes-Oxley Act of 2002 requires that we implement and maintain adequateinternal systems and effective internal controls over financial reporting andinformation systems.  We have not yetcompleted our review and assessment of the internal systems and controls overthe LANDesk financial reporting and information systems, and we have untilDecember 31, 2007 to do so.  The absenceof such controls could have a material adverse effect on our business,financial condition, and results of operations. In addition, correction of any “significant deficiencies” or “materialweaknesses” (as defined under PCAOB guidelines) could require additionalremedial measures including hiring additional personnel which could be costlyand time-consuming.  If a significantdeficiency or material weakness exists as of a future period year-end (includinga material weakness identified prior to year-end for which there is aninsufficient period of time to evaluate and confirm the effectiveness of thecorrections or related new procedures), our management and our auditors will beunable to report favorably as to the effectiveness of our control overfinancial reporting or information systems. This could result in a loss of investor confidence in the accuracy andcompleteness of our financial reports and our management, which could result ina decline of our stock price, damage to our business reputation, and potentiallitigation. 

** **

**Changes in accounting standards orthe interpretation of accounting standards, especially changes related torevenue recognition, could cause significant impact on our revenue or earnings.**

 

Based on ourinterpretation of current accounting standards, we believe we have properlyreported our current sales and license revenue. New accounting standards or regulations, changes to current accountingstandards, or different interpretations of existing accounting standards in thefuture could result in corresponding changes in our revenue recognition orother accounting policies that could have a material adverse effect on ourfinancial condition and operating results.

 

**Unforeseen environmental costs couldnegatively affect our future earnings.**

 

Some of our operationsuse substances regulated under various federal, state, and international lawsgoverning the environment, including those governing the discharge ofpollutants into the air and water, the management and disposal of hazardous 

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substances and wastes, and the cleanup of contaminated sites. Many of our products are subject to various federal, state, and internationallaws governing chemical substances in products, including those regulating themanufacture and distribution of chemical substances and those restricting thepresence of certain substances in electronics products.  We could incursubstantial costs, including cleanup costs, fines, civil or criminal sanctions,third-party property damage, or personal injury claims if we were to violate orbecome liable under environmental laws or if our products become non-compliantwith environmental laws.  We also face increasing complexity in ourproduct design and procurement operations as we adjust to new and futurerequirements relating to the materials composition of our products, includingthe restrictions on lead and certain other substances that will apply tospecified electronics products put on the market in the European Union as ofJuly 1, 2006 (Restriction of Hazardous Substances Directive) and similarlegislation currently proposed in China and other countries.  The ultimatecosts under environmental laws and the timing of these costs are difficult topredict, and liability under some environmental laws relating to contaminatedsites can be imposed retroactively and on a joint and several basis.

 

We could also facesignificant costs and liabilities in connection with product take-backlegislation.  The European Union has finalized the Waste Electrical andElectronic Equipment Directive (WEEE), which makes producers of electricalgoods, including computers and peripherals, financially responsible forspecified collection, recycling, treatment, and disposal of past and futurecovered products.  This deadline to enact and implement the directive by individualEuropean Union governments generally was August 13, 2004, althoughextensions were granted to some countries (such legislation, together with thedirective, the “WEEE Legislation”), and producers are financially responsibleunder the WEEE Legislation beginning in August 2005.  Similarlegislation has been or may be enacted in other geographies, including in theUnited States and Japan, the cumulative impact of which could be significantfor us.  We have incurred some costs and will continue to incur costsunder the WEEE legislation but the amount and timing of these costsare difficult to predict.

 

**Provisions in our charter documentsand in Delaware law may discourage potential acquisition bids for us and mayprevent changes in management that stockholders may favor.**

 

Provisions in our charterdocuments could discourage potential acquisition proposals and could delay orprevent a change in control transaction that stockholders may favor. These provisions could have the effect of discouraging others from makingtender offers for shares, and as a result, these provisions may prevent themarket price of our common stock from reflecting the effects of actual orrumored takeover attempts and may prevent stockholders from reselling theirshares at or above the price at which they purchased their shares.  Theseprovisions may also prevent changes in management that stockholders mayfavor.  Our charter documents do not permit stockholders to act by writtenconsent, limit the ability of stockholders to call a stockholders meeting, andprovide for a classified board of directors, which means stockholders can onlyelect, or remove, a limited number of directors in any given year. Furthermore, the board of directors has the authority to issue up to fivemillion shares of preferred stock in one or more series.  The board ofdirectors can fix the price, rights, preferences, privileges, and restrictionsof such preferred stock without any further vote or action by ourstockholders.  The issuance of shares of preferred stock may delay orprevent a change in control transaction without further action by ourstockholders.

 

In addition, Delaware lawmay inhibit potential acquisition bids for us.  Delaware law preventscertain Delaware corporations, including Avocent, from engaging, under certaincircumstances, in a business combination with any interested stockholder forthree years following the date that such stockholder became an interestedstockholder.

 

**Item 1B.Unresolved Staff Comments.**

 

None

 

**Item2.  Properties. **

 

Our world-wideheadquarters, occupying approximately 181,000 square feet and containingadministrative, sales, marketing, research and development, manufacturing, anddistribution facilities, is located in Huntsville, Alabama, on a 24-acre tractof land owned by us in Cummings Research Park.

 

Our Redmond, Washingtonfacility, which consists of approximately 82,000 square feet of leased space inan industrial office building, contains administrative, sales, marketing,research and development, and distribution operations and is leased throughMarch 2009.  The base rent under thelease is approximately $740,000 per year, plus taxes, insurance, andmaintenance of approximately $200,000 per year.

 

Our LANDesk facility in Salt Lake City, Utah, consistsof approximately 56,500 square feet in an office building, and containsadministrative, sales, marketing, and research and development operations.  The current base rent under the lease isapproximately $653,000 per year, plus taxes, insurance, and maintenance ofapproximately $327,000 per year and is leased through July 2008.

 

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Our primary international administrative, sales,marketing, research and development, manufacturing, and distribution operationsare located in a 129,000 square foot building owned by us in the free tradezone in Shannon, Ireland.

 

We also own a 45,000square foot building on 6.5 acres of land in Sunrise, Florida.  Our Sunrise facility contains sales,marketing, research and development operations. In addition, we lease office space in Fremont, California(administrative, sales, marketing, and research and development), Austin, Texas(sales, marketing, and technical), Taipei, Taiwan (administrative, sales,marketing, and research and development  operations),São Paulo, Brazil (administrative, sales, marketing, and research anddevelopment operations) and Beijing and Shanghai, China (sales, marketing, andresearch and development operations).

 

We also leasesales offices in various United States and international locations, none ofwhich is material to our operations.

 

We believe thatthese facilities are sufficient to support our current operations.

 

**Item 3.  Legal Proceedings.**

 

In January 2007, we filed a complaint for patent infringement in theUnited States District Court for the Western District of Washington againstAten Technology, Inc., Aten International Co., Ltd, Belkin Corporation, RoseElectronics and its general partners, and Trippe Manufacturing Company.  Some of the defendants have not yet respondedto our complaint.

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**PART II**

**Item 5.  Market For Registrant’s Common Equity andRelated Stockholder Matters and Issuer Purchases of Equity Securities.**

**Price Range of Common Stock;Holders of Record**

Our common stock isquoted on The NASDAQ National Market System under the symbol “AVCT.” Thefollowing table shows the high and low sales prices of our common stock foreach quarterly period within the last two fiscal years as reported by theNASDAQ National Market System.   

 
| ** **                        | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------|------------|----------|------------|---------|------------|
| Quarter ended December  31, 2006  |       | $        | 38.50      |    | $          | 29.37 |   |
| Quarter ended September  29, 2006 |       | $        | 31.71      |    | $          | 23.82 |   |
| Quarter ended June 30,  2006      |       | $        | 34.40      |    | $          | 21.98 |   |
| Quarter ended March 31,  2006     |       | $        | 34.86      |    | $          | 27.15 |   |
|                              |       |     |       |    |       |
| Quarter ended December  31, 2005  |       | $        | 33.88      |    | $          | 26.84 |   |
| Quarter ended September  30, 2005 |       | $        | 35.38      |    | $          | 26.48 |   |
| Quarter ended July 1,  2005       |       | $        | 29.09      |    | $          | 23.05 |   |
| Quarter ended April 1, 2005       |       | $        | 40.70      |    | $          | 22.99 |   |

 

As of February 22, 2007,Avocent had approximately 17,100 stockholders including 300 shareholders ofrecord and 16,800 shareholders in nominee name.

**Stock Performance Graph**

 

The followinggraph compares the cumulative total stockholder return data for our commonstock to the cumulative return of (i) the NASDAQ US Index and(ii) the NASDAQ Computer Index for the period beginning January 1, 2002,and ending on December 30, 2006.  Thegraph assumes that $100 was invested at a per share price of $24.25 onJanuary 1, 2002, the closing price on December 31, 2001, and thereinvestment of any dividends.  The stockprice performance on the following graph is not necessarily indicative offuture stock price performance.

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----

*  $100 invested on 12/31/01 in stock orindex-including reinvestment of dividends. Fiscal year ending December 31.

 
| ** **                  | ** ** | **12/01** | ** ** | **12/02** | ** ** | **12/03** | ** ** | **12/04** | ** ** | **12/05** | ** ** | **12/06** | ** ** |
|-----------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
|                        |       |      |       |      |       |      |       |      |       |      |       |      |       |
| AVOCENT CORPORATION         |       | 100.00    |       | 91.63     |       | 150.60    |       | 167.46    |       | 112.12    |       | 139.59    |       |
| NASDAQ STOCK  MARKET (U.S.) |       | 100.00    |       | 69.66     |       | 99.71     |       | 113.79    |       | 114.47    |       | 124.20    |       |
| NASDAQ COMPUTER MFG’S  |       | 100.00    |       | 67.48     |       | 109.37    |       | 115.04    |       | 107.28    |       | 134.84    |       |

 

The informationcontained above under the caption “Stock Performance Graph” is being “furnished”to the Securities and Exchange Commission and shall not be deemed to be“soliciting material” or to be “filed” with the Securities and ExchangeCommission, nor shall such information be incorporated by reference into anyfuture filing under the Securities Act of 1933, as amended, or the SecuritiesExchange Act of 1934, as amended, except to the extent that we specificallyincorporate it by reference into such filing.

**Dividend Policy**   

We have notdeclared or paid any cash dividends in the past and, for the foreseeablefuture, we expect to retain earnings to finance the expansion and developmentof our business.  The payment ofdividends is within the discretion of our Board of Directors and will depend onour earnings, capital requirements and operating and financial condition, amongother factors.   

**Equity Compensation Plan Information**   

 

Please see Item 12 ofthis Annual Report on form 10-K for disclosures relating to our equitycompensation plans.  Such information isincorporated by reference from our 2007 proxy statement.

 

**Recent Purchases of TreasuryStock**   

In the fourthquarter of 2004 our Board of Directors approved a stock repurchase programwhereby we may, from time to time, purchase up to 2 million shares of ourcommon stock in the open market, in privately negotiated transactions orotherwise, at 

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prices that we deem appropriate. Since the programs initial approval, our Board has added 10 millionshares to this program and now a total of 12 million shares is authorized to berepurchased, including 2 million additional shares approved by our Board inFebruary 2007.  The plan has noexpiration date.  Details of purchasesunder the plan during 2006 are as follows:   

 
| **Period:**                                 | ** ** | **Total Number of  Shares Purchased  During the Period** | ** ** | **Average Price Paid  Per Share for Period  Presented** | ** ** | **Total Cumulative  Number of  Shares Purchased as  Part of Publicly  Announced Plan** | ** ** | **Maximum  Number of  Shares  Remaining to  Purchase Under  the  Plan (1)** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
|                                        |       |                                                                              |       |                                                                             |       |                                                                                                                      |       |                                                                                            |       |
| January 1, 2006  — January 27, 2006    |       | 50,000                                                                            |       | $                                                                                | 29.35      |                                                                                                                      | 2,825,000  |                                                                                            | 1,175,000  |   |
| January 28, 2006  — February 24, 2006  |       | 250,000                                                                           |       | $                                                                                | 33.59      |                                                                                                                      | 3,075,000  |                                                                                            | 925,000    |   |
| February 25,  2006 — March 31, 2006    |       | 525,000                                                                           |       | $                                                                                | 32.55      |                                                                                                                      | 3,600,000  |                                                                                            | 400,000    |   |
| Quarter ended  March 31, 2006               |       | 825,000                                                                           |       | $                                                                                | 32.67      |                                                                                                                      |       |                                                                                            |       |   |
|                                        |       |                                                                              |       |                                                                             |       |                                                                                                                      |       |                                                                                            |       |
| April 1, 2006 —  April 28, 2006        |       | —                                                                            |       | $                                                                                | —     |                                                                                                                      | 3,600,000  |                                                                                            | 400,000    |   |
| April 29, 2006 —  May 26, 2006         |       | 1,169,488                                                                         |       | $                                                                                | 23.64      |                                                                                                                      | 4,769,488  |                                                                                            | 2,230,512  |   |
| May 27, 2006 —  June 30, 2006          |       | 2,793,887                                                                         |       | $                                                                                | 24.22      |                                                                                                                      | 7,563,375  |                                                                                            | 2,436,625  |   |
| Quarter ended  June 30, 2006                |       | 3,963,375                                                                         |       | $                                                                                | 24.05      |                                                                                                                      |       |                                                                                            |       |   |
|                                        |       |                                                                              |       |                                                                             |       |                                                                                                                      |       |                                                                                            |       |
| July 1, 2006 –  July 28, 2006          |       | 948,600                                                                           |       | $                                                                                | 25.11      |                                                                                                                      | 8,511,975  |                                                                                            | 1,488,025  |   |
| July 29, 2006 —  August 25, 2006       |       | 451,758                                                                           |       | $                                                                                | 25.54      |                                                                                                                      | 8,963,733  |                                                                                            | 1,036,267  |   |
| August 26, 2006  — September 29, 2006  |       | —                                                                            |       | $                                                                                | —     |                                                                                                                      | 8,963,733  |                                                                                            | 1,036,267  |   |
| Quarter ended  September 29, 2006           |       | 1,400,358                                                                         |       | $                                                                                | 25.23      |                                                                                                                      |       |                                                                                            |       |   |
|                                        |       |                                                                              |       |                                                                             |       |                                                                                                                      |       |                                                                                            |       |
| September 30,  2006 — October 27, 2006 |       | 200,000                                                                           |       | $                                                                                | 35.85      |                                                                                                                      | 9,163,733  |                                                                                            | 836,267    |   |
| October 28, 2006  — November 24, 2006  |       | 410,000                                                                           |       | $                                                                                | 36.83      |                                                                                                                      | 9,573,733  |                                                                                            | 426,267    |   |
| November 25,  2006 — December 31, 2006 |       | 240,000                                                                           |       | $                                                                                | 35.13      |                                                                                                                      | 9,813,733  |                                                                                            | 186,267    |   |
| Quarter ended  December 31, 2006            |       | 850,000                                                                           |       | $                                                                                | 36.12      |                                                                                                                      |       |                                                                                            |       |   |
| Totals for 2006                             |       | 7,038,733                                                                         |       | $                                                                                | 26.75      |                                                                                                                      |       |                                                                                            |       |   |

 

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(1)                                  Thetotal shares available for repurchase of 186,267 as of December 31, 2006 does not reflect the additional 2million shares approved in February 2007.

In August 2006, were-issued approximately 7,073,000 shares of the repurchased stock above inconjunction with the LANDesk acquisition. 

**Item 6. Selected Financial Data.**   

(Amounts in thousands, except per share data and amounts in note (1)below.)   

 
| ** **                     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                      |       | $        | 519,195    |     | $          | 369,888  |       | $        | 365,255    |     | $          | 304,238 |   | $ | 260,600 |   |
| Net income (1)                 |       | $        | 45,532     |     | $          | 48,349   |       | $        | 18,040     |     | $          | 38,547 |   | $ | 10,738 |   |
| Basic net income  per share    |       | $        | 0.94       |     | $          | 0.98     |       | $        | 0.37       |     | $          | 0.83 |   | $ | 0.24 |   |
| Diluted net  income per share  |       | $        | 0.92       |     | $          | 0.96     |       | $        | 0.36       |     | $          | 0.81 |   | $ | 0.24 |   |
| Total assets                   |       | $        | 1,158,854  |     | $          | 773,751  |       | $        | 770,781    |     | $          | 660,763 |   | $ | 568,607 |   |
| Unsecured bank line of  credit |       | $        | 150,000    |     | $          | —   |       | $        | —     |     | $          | — |   | $ | — |   |

 

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(1)                                  For the periods presented, we recognizedcharges for acquired in-process research and development expenses for thefollowing acquisitions: $6.0 million for 2C Computing, Inc. in 2002, $3.9million for Soronti, Inc. in 2003, and $6.5 million for Crystal LinkTechnologies, $21.7 million for OSA Technologies, Inc. and $1.1 million forSonic Mobility Inc. in 2004, $2.1 million for Cyclades Corporation and $18.6million for LANDesk Group Limited in 2006 (*see Note 3 to the consolidatedfinancial statements*).

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**Item 7.****           Management’s Discussionand Analysis of Financial Condition and Results of Operations.**   

**Overview**

Avocent Corporation designs, manufactures, licenses, and sells softwareand hardware products and technologies that provide connectivity and centralizedmanagement of information technology (IT) infrastructure.  We (meaning Avocent and its wholly-ownedsubsidiaries) provide connectivity and systems management products andtechnologies that centralize control of servers, desktop computers, serialdevices, wireless devices, mobile devices, and network appliances, thusincreasing the efficiency of IT personnel. Server manufacturers resell private-labeled Avocent KVM (keyboard,video, and mouse) switches and embedded software and hardware technology intheir systems, and companies large and small depend on our software andhardware products and technologies for managing their growing ITinfrastructure.   

Our technologicalinnovations include Internet protocol (IP) based switching, centralizedmanagement, and intuitive software interfaces. With more than two decades of experience, we have grown through productinnovations, global expansion, and strategic acquisitions.  Formed as a result of the merger in 2000between Apex Inc. and Cybex Computer Products Corporation, we subsequentlyacquired Equinox Systems Inc. in 2001, 2C Computing, Inc. in 2002, Soronti,Inc. in 2003, Crystal Link Technologies, OSA Technologies, Inc., and SonicMobility, Inc. in 2004, and Cyclades Corporation and LANDesk Group Limited in2006.   

Most of ourrevenue is derived from sales to a limited number of OEMs (who purchase ourswitching systems on a private-label or branded basis for integration and salewith their own products), sales through our reseller and distributor network,and sales to a limited number of direct customers.  Sales to our OEM customers accounted for 40%of sales in 2006, 48% of sales in 2005, and 45% in 2004.  Sales to our branded customers accounted for 60%of sales in 2006, 52% of sales in 2005, and 55% of sales in 2004.  We do not have contracts with many of ourbranded customers, and in general, our OEM and branded business customers areobligated to purchase products from us only pursuant to binding purchaseorders.  The loss of, or material declinein orders from, these customers would have a material adverse effect on ourbusiness, financial condition, results of operations, and cash flows.  Our top five customers include both OEM andbranded customers and accounted for 56% of sales in 2006 and 64% of sales in  2005 and 2004.   

We sell productsto resellers, distributors, end-users, and OEMs in the United States, Canada,Europe, and Asia as well as in other foreign markets.  Sales within the United States accounted forapproximately 57% of both  2006 and 2005 salesand 59% of 2004 sales.  Sales outside ofthe United States accounted for 43% of both 2006 and 2005 sales and 41% of 2004sales. Sales to customers in the Netherlands, including the Europeandistribution facility for one of our OEM customers, accounted for 10% of salesin 2004.  No country outside the UnitedStates accounted for more than 10% of 2006 or 2005 sales.   

With continuedindustry-wide initiatives to reduce all channel inventories and to shorten leadtimes, trends with our major customers are, generally, to reduce the number ofweeks of forward-committed firm orders. This trend continues to affect our business with certain distributors,OEMs, and other server manufacturers, and we believe that it will continueto make our future sales more difficult to predict and inventory levels moredifficult to manage.   

Wecontinue to experience significant price competition in the market for all ofour products, and we expect that pricing pressures will continue in thefuture.  In addition, general economicconditions are not predictable and we expect our revenue growth rate tofluctuate in relation to economic conditions and IT related spending trends.   

Manyof our executive officers and directors are vested in significant amounts ofoptions to purchase shares of our common stock and continue to vest inadditional shares on a regular basis. These officers and directors have informed us that they have sold, andmay sell additional, shares of our common stock to provide liquidity anddiversify their portfolios. Additionally, many of the stock options previously granted to employeesare now fully vested.  During 2006 ourboard of directors granted both time-based and performance-based restrictedstock units (RSUs) with two and three year vestings as our Board moved ourequity award program away from traditional stock options.   

In the firstquarter of 2006, we reorganized our business into five divisions and in thethird quarter of 2006, we acquired our sixth division, LANDesk.  As of December 31, 2006, we had the followingdivisions:   

 

·                                          ManagementSystems Division, which includes our branded and OEM KVM, serial console, powercontrol, and management appliance businesses;

·                                          EmbeddedSoftware and Solutions Division, focused on developing and marketing embeddedsystems and software, including IPMI and embedded KVM technologies, primarilyfor our OEM customers;

·                                          Connectivityand Control Division, focused on expanding the markets for our serial,extension, and wireless broadcast, point of sale, and audio-visual products;

·                                          DesktopSolutions Division, which is developing new technologies to enable desktop overIP solutions, including blade computers; 

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·                                          MobileTechnologies Division, which includes mobile device management and securewireless systems administration; and

·                                          LANDeskDivision, which includes****systems, security, and servicemanagement solutions for desktops, servers, and mobile devices across theenterprise.

**Ourlargest division on a revenue basis, Management Systems Division, comprised 82%of our consolidated net revenue in 2006 and 89% in 2005,  LANDesk, our newest division acquired inAugust, 2006, contributed 7% of net revenue to 2006 despite only being part ofAvocent for four months.  Our EmbeddedSoftware and Solutions Division, contributed 7% of net revenue in 2006 and 6%in 2005.  The other three divisions andunallocated revenues comprised the remaining 4% of our consolidated netrevenues in 2006 and 5% in 2005. See Note 16 in the notes to the c**onsolidated financial statements contained in Item 8 of this document.

** **

**Inthe first quarter of 2007, we merged the Mobile Technologies Division into theLANDesk Division and the Embedded Software and Solutions Division into theManagement Systems Division to better focus on the respective customer needsand sales channels.**  We believe our new divisions allow us to focus onnew technology and growth opportunities to add product and shareholder value inthe future.  We believe this structureenhances customer service, speeds delivery of products to market and betterfocuses Avocent’s research, development and marketing expenditures.   

** **

**Results of Operations**

Our consolidatedstatements of income, stockholders’ equity, and cash flows reflect the resultsof acquired companies from the respective dates of acquisition.  The following table sets forth, for theperiods indicated, selected statement of income data expressed as a percentageof net sales:   

 
| ** **                                            | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                             |       | 100.0                                       | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                         |       | 38.0                                        |       | 40.8 |   | 41.7 |   |
| Gross profit                                          |       | 62.0                                        |       | 59.2 |   | 58.3 |   |
| Operating  expenses:                                  |       |                                        |       |   |   |   |   |
| Research and  development expenses                    |       | 12.3                                        |       | 15.4 |   | 12.4 |   |
| Acquired  in-process research and development expense |       | 4.0                                         |       | — |   | 8.0 |   |
| Selling, general  and administrative expenses         |       | 28.6                                        |       | 24.4 |   | 23.2 |   |
| Acquisition  integration expenses                     |       | 0.8                                         |       | — |   | — |   |
| Amortization of  intangible assets                    |       | 4.4                                         |       | 5.0 |   | 6.7 |   |
| Total operating expenses                              |       | 50.1                                        |       | 44.8 |   | 50.3 |   |
| Income from operations                                |       | 11.9                                        |       | 14.4 |   | 8.0 |   |
| Income from  settlement of lawsuit                    |       | —                                      |       | 1.4 |   | — |   |
| Net investment  income                                |       | 1.6                                         |       | 2.5 |   | 1.4 |   |
| Net realized  investment losses                       |       | (0.1                                        | )          | (0.1 | ) | (1.1 | ) |
| Interest expense                                      |       | (0.6                                        | )          | — |   | — |   |
| Other income  (expense), net                          |       | (0.1                                        | )          | (0.1 | ) | — |   |
| Income before provision for income taxes              |       | 12.7                                        |       | 18.1 |   | 8.3 |   |
| Provision for  income taxes                           |       | 3.9                                         |       | 5.0 |   | 3.4 |   |
| Net income                                            |       | 8.8                                         | %          | 13.1 | % | 4.9 | % |

 

***Revisedto Earnings Release***

On January 25, 2007, weannounced our fourth quarter and year ended December 31, 2006 financialresults.  In connection with theannouncement, we reported net sales for the fourth quarter 2006 increased 57.0%from the fourth quarter 2005 to $167.7 million, and net sales for the yearincreased to $522.0 million in 2006 from $369.9 million in 2005.  In the earnings release, we noted that one ofthe contributing factors to our increase in net sales was the LANDeskacquisition.  As announced, LANDeskcomprised $28.5 million of total revenues reported for the fourth quarter.  Subsequent to the earnings release, weidentified certain transactions that did not meet the necessary revenuerecognition criteria and determined that revenues from LANDesk should belowered by $2.8 million.  As a result,fourth quarter net sales were revised to $164.9 million and our net sales forthe year ended December 31, 2006 were $519.2 million.  This revision of revenue, combined with arelated approximate $272,000 reduction in sales, general and administrativeexpense as well as the identification of a $1.2 million tax benefit related tocertain 2006 employee stock option exercises not previously recorded, netted toa reduction in net income by approximately $677,000, or approximately $0.01pershare.  All necessary corrections to ourconsolidated financial statements are reflected in the consolidated financialstatements included in this Annual Report on Form 10-K.

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*YearsEnded December 31, 2006 and 2005*   

*Netsales.*  Our net salesconsist of sales of keyboard, video, and mouse console switching systems,digital connectivity products and technologies, software licenses andsubscriptions, support and maintenance agreements, serial connectivity devices,wireless extension products, IPMI, extension, and remote access and managementproducts and technologies, and royalties from licensing our intellectualproperty.  In 2006, net sales increasedto $519.2 million from $369.9 million in 2005. The increase in sales resulted directly from the contribution of revenuefrom our Cyclades acquisition, completed March 31, 2006, our LANDeskacquisition, completed August 31, 2006, and increased revenue from ourtraditional products. Branded sales increased 63% from $191.9 million in 2005to $311.9 million in 2006.  As apercentage of sales, branded revenue accounted for 60% of sales in 2006 and 52%of revenue in 2005.  OEM sales grew 16%from $178.0 million in 2005 to $207.3 million in 2006.  OEM saleswere 40% of sales in 2006, compared to 48% of sales in  2005.  The Cyclades and LANDesk businesses have asignificantly smaller portion of their sales to OEM customers than Avocent hashistorically had, which explains the change in the  percentage mix of our sales.  The continued growth of our digitalproduct line contributed to our sales growth for 2006.  Sales of our digital products andtechnologies accounted for $280.4 million or 54% of sales in 2006 compared with$196.7 million or 53% of sales in 2005.

From a divisional perspective, revenue from our Management SystemsDivision, which is comprised primarily of our traditional KVM business as wellas revenue from acquired Cyclades’ serial management products, increased to$426.4 million in 2006 from $330.2 million in 2005 and accounted for 82% of ourrevenue in 2006 and 89% of our revenue in 2005. Within our Management Systems Division, revenue from ourtraditional KVM products increased to $351.3 million in 2006 from $311.7million 2005.  Additionally, revenue fromour serial management products, consisting mostly of our Cyclades products,increased to $46.5 million in 2006 from $4.1 million in 2005.  Sales by product line for our ManagementSystems Division for the years ended December 31,  2006 and 2005 are as follows:
|                                                 | ** ** | **For the years ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **December 31,  2006**            | ** ** | **December 31,  2005** | ** ** |
| Management  Systems Division (MSD) net revenue: |       |                                   |       |   |   |
| KVM                                             |       | $                                      | 351,298    |   | $ | 311,734 |   |
| Serial Management                               |       | 46,533                                 |       | 4,124 |   |
| Other                                           |       | 28,581                                 |       | 14,355 |   |
| Total MSD net revenue                           |       | $                                      | 426,412    |   | $ | 330,213 |   |

 

The LANDesk Division, resulting from our most recent acquisition onAugust 31, 2006, contributed $38.7 million of net revenue during 2006 or 7% ofour net revenue.  LANDesk’s revenue andbookings are comprised of both license based revenue, primarily LANDeskManagement Suite, and subscription based revenue, primarily LANDesk SecuritySuite, with the growth in bookings from the subscription based revenueoutpacing the license based  revenue.  This change in mix has an impact on revenuerecognized as subscription revenue is deferred and amortized over thesubscription term.  Sales byproduct line for our LANDesk Division for the years ended December 31,  2006 and 2005 are as follows:
|                                | ** ** | **For years ended** | ** ** |
|--------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **December 31,  2006**   | ** ** | **December 31,  2005** | ** ** |
| LANDesk Division  net revenue: |       |                          |       |   |   |
| Licenses and royalties         |       | $                             | 26,596     |   | $ | — |   |
| Maintenance and services       |       | 12,086                        |       | — |   |
| Total LANDesk net  revenue     |       | $                             | 38,682     |   | $ | — |   |

 

Revenue from our Embedded Software and SolutionsDivision, which includes our embedded KVM and IPMI solutions and the Agilentproduct line acquired in the first quarter of 2006, increased to $33.8 millionin  2006 from $21.9 million in 2005 andaccounted for 6% of our revenue in both 2006 and  2005.  The increase in revenue can be attributed primarily to the increased contributionof the embedded KVM solutions as adoption of these platforms by our OEMcustomers increases and to the Agilent product line, which we acquired late in thefirst quarter of 2006. Our other business units, which are more entrepreneurialin nature, continue to work on product development and creating markets forthose products already developed. Combined, these business units grew from $14.5 million in revenue duringto 2005 to $16.7 million in revenue during 2006.

Internationalsales accounted for 43% of sales in 2006 and 43% of sales in 2005, while saleswithin the United States were 57% of sales in 2006 and 57% of sales in 2005.  Both International and U.S. sales increased 40%from 2005 to 2006.  International salesgrew to $223.4 million in 2006 from $159.0 million in 2005.  Sales in the U.S. grew to $295.8 million in2006 from $210.8 million in 2005.  TheCyclades and LANDesk acquisitions and increased sales of our digital productswere again the primary drivers for our revenue growth in both the U.S. andinternationally. 

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We traditionallyexperience a sequential decline in revenue from the fourth quarter to the firstquarter of the following year, and we expect the trend to continue from the fourthquarter of 2006 to the first quarter of 2007. From our experience, many enterprises tend to increase spending forpurchases of servers and IT infrastructure equipment and software as a resultof year-end capital budget spending, and they tend not to spend as much in thefollowing quarter.  

*Grossprofit.*  Gross profitis affected by a variety of factors, including the ratio of sales among ourdistribution channels, as OEM sales typically have lower gross margins than ourbranded sales; absorption of fixed costs as sales levels fluctuate; productmix, raw materials; labor costs; new product introductions by us and by ourcompetitors; increasing sales of our software products which tend to havehigher gross margins; and our outsourcing of manufacturing and assemblyservices.  Gross margin improved to 62.0%in 2006 from 59.2% in 2005.  This increase in gross margins resulted from thefollowing factors:

·                 Higher revenue from our digital and serialproducts as our digital KVM solutions typically carry higher margins than ouranalog solutions (sold through our Management Systems Division);

·                 Added sales from our LANDesk acquisition, whoseproducts are primarily software with related service and maintenance revenueand the gross  margins typically exceed90%;

·                 Added sales from our Cyclades branded products,which are sold primarily through our branded channel and, as a result, have ahigher gross margin; and

·                  Increased revenue from our embedded solutions inwhich have higher margins than our traditional KVM products (sold through ourEmbedded Software and Solutions Division). 

These increases togross margins were somewhat offset by these factors:

·                 Additionalcosts included in cost of sales from amortization of other intangible assets recorded as a result of the LANDesk acquisitionrelated to developed technology and internally developed software for resale;

·                 Additionalcosts incurred to transition the manufacturing of Cyclades products to Avocentcontract manufacturers and transition order fulfillment of Cyclades products toAvocent facilities, which will result in cost savings; and

·                 Additionalproduct costs from implementing recent environmental regulations, particularlyin Europe.  

We expect that thecontributions from our LANDesk division and continuedstrong sales of our digital KVM and serial products, along with costsavings realized through our integration efforts of the Cyclades acquisitionwill continue to offset price declines and the additional costs we expect fromour environmental regulation compliance efforts in the first quarter of 2007.

*Researchand development expenses.* Research and development expenses include compensation for engineers,support personnel, outside contracted services and materials costs, and areexpensed as incurred.  Research anddevelopment expenses were $63.9 million, or 12.3% of net sales, in 2006,compared to $56.9 million, or 15.4% of net sales, in 2005.  The increase in the amount spent on researchand development is due to the additional costs from the Cyclades and LANDeskacquisitions, including costs related to the Cyclades product integrationefforts and the inclusion of equity-based compensation in 2006, following ouradoption of SFAS 123R on January 1, 2006. The additional costs from the acquisitions were partially offset byreduced headcount and certain research and development site closings undertakenduring the second half of 2005. As previously stated, we continue to believethat the timely development of innovative products and enhancements to existingproducts is essential to maintaining our competitive position.

*Acquiredin-process research and development expense.*  Acquisition related expenses in 2006 werecomprised solely of the write-off of in-process research and developmentexpenses related to our acquisitions, including $2.1 million for Cyclades and$18.6 million for LANDesk.  There were noacquired in-process research and development expenses during 2005.

*Selling,general and administrative expenses.*  Selling, general and administrative expensesinclude personnel costs for administration, finance, information systems, humanresources, sales and marketing and general management, certain merger andacquisition related expenses, rent, utilities, legal and accounting expenses,bad debts, advertising, promotional material, trade show expenses and relatedtravel costs.  Selling, general andadministrative expenses were $148.6 million, or 28.6% of net sales, in 2006compared to $90.4 million, or 24.4% of net sales, in 2005.  The increase in selling, general andadministrative expenses is primarily related to increased headcount as a resultof the acquisitions we completed during 2006. We also experienced higher costs as a result of expensing equity-basedcompensation awards in 2006 and adding Cyclades and LANDesk’s selling, generaland administrative expenses.  However,these higher costs were somewhat offset by the savings resulting from ourCyclades integration efforts later in 2006. In 2007, we expect selling, general and administrative expenses tobenefit from cost savings related to our integration efforts.

***Acquisition integration expenses***.  We recorded$3.9 million of expenses, or 0.8% of net sales, in 2006 related to costsassociated with the integration of Cyclades people, processes, and productsinto Avocent.  These costs also includeseverance accruals resulting from the headcount reductions associated withduplicate positions eliminated during the year. We expect integration costs and severance accruals will be immaterial inthe first quarter of 2007.  There were nosuch charges incurred during 2005.

*Amortizationof intangible assets.* Amortization of $23.0 million in 2006 includes primarily the amortizationof the identifiable intangible assets created as a result of the acquisitionsof Equinox, 2C, Soronti, Crystal Link, OSA, Sonic Mobility, 

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Cyclades, andLANDesk.  Amortization of $18.5 million in2005 was primarily comprised of the amortization of the identifiable intangibleassets created as a result of the acquisitions of Equinox, 2C, Soronti, CrystalLink, OSA, and Sonic Mobility.  Theincrease in amortization expense relates primarily to additional amortizationexpense related to the intangible assets recorded in the acquisitions of Cycladesand LANDesk.  Amortization expense isexpected to be approximately $9.0 million in the first quarter of 2007.

*Stock Compensation.  *We adopted SFAS 123 (revised 2004), *Share-BasedPayments,* on January 1, 2006 and as a result recordedstock compensation expense for allshare-based payment awards made to employees and directors, including grants ofemployee stock options, restricted stock units, and performance-basedrestricted stock units, based on estimated fair values. The compensationexpense is recorded in each line of our consolidated financial statements basedon the department in which an employee works. In 2006, we expensed $14.6 million of stock based compensation; approximately$1.0 million was recorded in cost of sales, $4.3 million was recorded inresearch and development expense and $9.3 million was recorded in selling,general and administrative expense. For the years ended  December 31, 2005 and 2004, we recorded stockcompensation expense of $2.0 million and $5.7 million, respectively, related tothe amortization of deferred compensation recorded as a result of assumedoptions from acquisitions.  For 2005, $1.1million was recorded in research and development expense and $876,000 wasrecorded in selling, general and administrative expense.

For options andrestricted stock units outstanding as of December 31, 2006, we expect to record stock-based compensationexpense in the first quarter of 2007 in the range of $6.0 million to $7.0million.  We believe equity basedcompensation is an important part of our total compensation package and isneeded to attract and retain key employees.

*Income fromsettlement of lawsuit**.** *The $5.0 million of incomefrom the settlement of a lawsuit in 2005 is comprised entirely of the paymentreceived in the second quarter of 2005 as a result of the settled patentinfringement lawsuit brought by Avocent against Raritan Computer Inc.  The terms of the settlement provided for aninitial payment of $5.0 million related to past product sales by Raritan, withquarterly revenue payments over five years based on Raritan’s sales of coveredproducts.

*Netinvestment income. *Net******investment income declined from $9.2million in 2005 to $7.8 million in 2006. The decrease in investment income in2006 was the result of lower cash and investments as a result of funding thepurchase of Cyclades in the first quarter of 2006 and the investment of theremaining funds in shorter term investments in order to have cash on hand tofund the cash component of the LANDesk acquisition as well as fund the purchaseof treasury shares under our stock buyback program.  

*Netrealized investment gains (losses). *Netrealized investment gains (losses) changed from a loss of $83,000 in 2005 to aloss of $254,000 in 2006.     

*Interest expense. *Interest expense was $3.6 million in 2006.  There were no such expenses in 2005.  Interest expense results from our borrowingsunder our $250 million unsecured line of credit obtained in 2006, which we usedto finance a portion of the LANDesk acquisition.

*Otherincome (expense), net.* Net other income (expense) improved slightly from an expense of $174,000in 2005 to an expense of $166,000 in 2006.   

*Provisionfor income taxes.*  Theprovision for income taxes was $20.2 million in 2006 compared to $18.7 millionin 2005.  The effective tax rate in 2006 was approximately 30.7%, compared to aneffective tax rate of approximately 27.9% in 2005.  The increase in oureffective tax rate over that of 2005 is primarily due to $20.7 million ofin-process research and development for the LANDesk and Cyclades acquisitionswhich was immediately expensed upon purchase. These items are not currently expected to be deductible for tax purposesand therefore increased the effective tax rate. The increase in provision for income taxes was also partly the result ofthe change in mix of our pre-tax profit among our U.S. and internationalcompanies and the Company recognized $1.2 million in Valuation allowances oncertain deferred tax assets.  Additionally,the Irish statutory tax rate on manufactured goods increased from 10% to 12.5%on January 1, 2006.  The increases werepartially offset by decreases in the effective tax rate attributable toemployee stock option exercises, tax exempt income from investment securities,and the U.S. research credit.

*Netincome.*  Net income in2006 was $45.5 million compared to $48.3 million in 2005, as a resultof the above factors.  Net income as apercentage of sales for 2006 was 8.8%, compared to 13.1% for 2005.   

*YearsEnded December 31, 2005 and 2004*

*Netsales.*  In 2005, netsales increased to $369.9 million from $365.3 million in 2004.  Despite this year-over-year increase, weexperienced a revenue shortfall in the first quarter of 2005, which wasprimarily due to problems related to the launch of a significant upgrade to thesoftware component of our digital switching systems and lower than expectedsales to one of our OEM customers.  Theeffects of the problems surrounding the product launch continued into thesecond quarter of 2005.  The increaseddemand in subsequent quarters is attributed to our OEM customers across allgeographic regions and our international branded customers.  OEM sales increased 9% in 2005 over2004.  Branded sales, however, declinedapproximately 5% in 2005 from 2004, primarily as a result of the softwareupgrade launch issues mentioned previously, which reduced our sales in thefirst and second quarter of 2005. Branded sales accounted for 52% of sales in 2005 and 55% of sales in2004.  OEM sales were 48% of sales in2005 

35

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and 45% of sales in2004.  The continued growth of our digitalproduct line contributed to our sales growth for 2005, as the digital productline contributed over 50% of revenue for all of 2005.  Contributions from IPMI and embedded KVMroyalty revenue also increased our net sales. Sales of our digital products and technologies accounted for $196.7million or 53% of sales in 2005 compared with $175.0 million or 48% of sales in2004.  Our IPMI and embedded KVM royalty revenuetotaled $22.0 million in 2005, compared to $6.8 million in 2004, the first yearwe recognized revenue from these technologies.

Internationalsales accounted for 43% of sales in 2005 and 41% of sales in 2004, while saleswithin the United States were 57% of sales in 2005 and 59% of sales in2004.  International sales increased 7%from $148.6 million in 2004 to $159.0 million in 2005.  Sales in the U.S. decreased 3% from $216.7million in 2004, to $210.8 million in 2005. This decrease in sales in the U.S. was due to the branded softwarelaunch problem in the U.S. in the first quarter of 2005 as describedabove.  We experienced a rebound inbranded U.S. sales that began during the second quarter of 2005 and carriedover into the remainder of the year, but the rebound was not strong enough toentirely offset the decline in sales we experienced early in 2005.  The strength in our international sales wasmost evident in the European and Asia Pacific regions, where both branded andOEM sales were strong.  We believe theoverall strength in these regions is the result of our continued investments ininternational sales and marketing programs over recent years.

*Grossprofit.*  Gross marginsimproved to 59.2% in 2005 from 58.3% in 2004. Gross margin in 2005 benefited from higher sales of our digital productsand technologies, which typically have a higher margin than our analogproducts, and accounted for over 53% of sales in 2005 compared to 48% of salesin 2004.  Gross margins also benefitedfrom our IPMI and KVM embedded royalty revenue, which has higher than ouraverage gross margins.  Gross margin wasalso positively affected by $3.3 million of Raritan royalty revenue recordedduring 2005.  These positive influenceson gross margin were partially offset by additional product costs fromimplementing new environmental regulations, costs related to transitioning to anew contract manufacturer during 2005 and the lower gross margin experienced inthe first quarter of 2005, as a result of the revenue shortfall in thatquarter.   

*Researchand development expenses.* Research and development expenses were $56.9 million, or 15.4% of netsales, in 2005, compared to $45.4 million, or 12.4% of net sales, in2004.  The increased research anddevelopment expense resulted from an increase in the number of engineers, andan increase in materials, certification, and testing of products indevelopment.  The increase in headcountwas the result of the addition of engineers from the acquisitions we completedin 2004 and the hiring of software engineers to support the software developmentefforts for our Embedded Software and Solutions group.  In addition, research and developmentexpenses include over $800,000 of severance accruals recorded during the secondquarter of 2005 related to the closing of three satellite research anddevelopment sites.  We continue tobelieve that the timely development of innovative products and enhancements toexisting products is essential to maintaining our competitive position.  

*Acquiredin-process research and development expense.*  Acquisition related expenses in 2004 werecomprised solely of the write-off of in-process research and developmentexpenses related to our acquisitions, including $6.5 million for Crystal Link,$21.7 million for OSA and $1.1 million for Sonic Mobility.  There were no acquired in-process researchand development expenses during 2005.

*Selling,general and administrative expenses.*  Selling, general and administrative expenseswere $90.4 million, or 24.4% of net sales, in 2005 compared to$84.8 million, or 23.2% of net sales, in 2004.  The increase in selling, general andadministrative expenses is primarily related to increased headcount as a resultof the acquisitions we completed during 2004. Other factors contributing to higher selling, general and administrativeexpenses were higher legal fees associated with protecting our intellectualproperty rights including the Raritan case that settled in the second quarterof 2005 and increased activity in the ClearCube case in late 2005.  We also recorded $500,000 in severanceaccruals during the second quarter of 2005 related to certain headcountreductions and experienced increased costs related to the localization oftechnical manuals and publications for certain products shippedinternationally.

*Amortizationof intangible assets.* Amortization of $18.5 million in 2005 and $24.2 million in 2004 primarilyincludes the amortization of the identifiable intangible assets created as aresult of the merger transaction between Apex and Cybex and the acquisitions ofEquinox, 2C, Soronti, Crystal Link, OSA, and Sonic Mobility.  The decrease in amortization expense during2005 relates primarily to recording no amortization expense for developedtechnology or patents and trademarks recorded in connection with the merger ofApex and Cybex, as these assets had an estimated life of five years and werefully amortized at the end of the second quarter of 2005.

*Incomefrom settlement of lawsuit**.** *The $5 million of incomefrom the settlement of a lawsuit in 2005 is comprised entirely of the paymentreceived in the second quarter of 2005 as a result of the settled patentinfringement lawsuit brought by Avocent against Raritan Computer Inc.  The terms of the settlement provided for ainitial payment of $5 million related to past product sales by Raritan.

*Netinvestment income. *Net******investment income increased from$5.1 million in 2004 to $9.2 million in 2005. The improved results were due tohigher interest rates on investments and higher amounts invested from cashgenerated from operations.

*Netrealized investment gains (losses). *Netrealized investment gains (losses) improved from a loss of  $3.8 million in 2004 to a loss of $83,000 in2005.  The primary reason for the largechange was the result of recording other-than-temporary declines in our 

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investments in VIEO andRymic, two privately held entities, of $3.5 million in 2004.** **Our investments inVIEO and Rymic now have a carrying value of nil.

*Otherincome (expense), net.* Net other income (expense) declined from income of $23,000 in 2004 toexpense of $174,000, primarily as a result of fluctuating foreign currencyexchange rates.

*Provisionfor income taxes.*  Theprovision for income taxes was $18.7 million in 2005 compared to $12.5 millionin 2004.  The effective tax rate decreaseis primarily attributable to the impact of $21.7 million of acquired in-processresearch and development expense recorded in second quarter of 2004 related tothe acquisition of OSA, which was not deductible for tax purposes.  These amounts were also affected by the taximpact of a higher mix of pre-tax income contributed by our Shannon, Ireland,operations in 2005 which is taxed at a lower rate and an increase in tax exemptincome from investment securities. However, these effects are partially offset by $3.8 million in taxes recordedrelated to the repatriation of $90 million of earnings from our overseassubsidiaries pursuant to the American Jobs Creation Act of 2004 in the fourthquarter of 2005.

*Netincome.*  Net income in2005 was $48.3 million compared to $18.0 million in 2004, as a resultof the above factors.  Net income as apercentage of sales for 2005 was 13.1%, compared to 4.9% for 2004.   

**Liquidity and Capital Resources**

As ofDecember 31, 2006 our principal sources of liquidity consisted ofapproximately $108 million in cash, cash equivalents, and investments.  We also have a $250 million unsecured fiveyear revolving bank line of credit that is available for general corporatepurposes.  We may use borrowings underthe line of credit to fund the purchase of shares in 2007 under our stockrepurchase program.  The line of credit currentlybears an interest rate of LIBOR plus 87.5 basis points.  There was approximately $150 millionoutstanding under the line of credit as of December 31, 2006.  We classify the entire obligation as longterm as it carries a five year term and has no payment schedule.  We expect to repay the borrowings from futurecash flows from operations or potential future capital raising activities.

Ouroperating activities generated cash of approximately $65.7 million in 2006,$71.0 million in 2005, and $76.5 million in 2004.  The moderate reduction in positive cash flowin 2006 is primarily the result of severalfactors.  Inventories increased $13.8 million from December 31, 2005 to December31, 2006, which excludes the impact of $6.6 million of inventory received inthe acquisition of Cyclades during the first quarter of 2006.  The increase in inventory was primarily theresult of adding inventory related to the transition of Cyclades manufacturingto our contract manufacturers and in anticipation of expected highersales.  Accordingly, as a result of theincreased inventories, our inventory turns decreased to 5.5 in 2006 from 7.9 in2005.  Our sales volume increasedsubstantially, and as a result, our receivables balance increased by $29.7million from December 31, 2005 to December 31, 2006, excluding the impact of $9.3million of receivables recorded at the acquisition of Cyclades and $17.5million of receivables recorded at the acquisition of LANDesk.  Excluding LANDesk, our DSO improved slightly toapproximately 57 days at the end of 2006 compared to 59 days at the end of2005, and was slightly lower than our goal of 60 days.  The taxbenefit from stock-based compensationwas reported in cash flow from operations in 2005, but as a result of SFAS123R, is now reported in financing activities, and accordingly reduced cashflow from operations for 2006.  We alsopaid certain operating liabilities assumed in the acquisitions of Cyclades andLANDesk.

In theordinary course of our business, we may at any point in time have a significantamount of contractual commitments not yet recognized in our financialstatements.  These commitments relateprimarily to our need to schedule the purchase of inventories in advance of therelated forecasted sales to customers. We have longer lead times for the products we purchase from suppliersbased in Asia than those from suppliers based in the U.S. and Europe. Ouractual contractual commitments are typically limited to products needed for oneto three months of forecasted sales.  Theliabilities for these inventory purchases along with the related inventoryassets are typically recognized upon our receipt of the products.  We also have, at any point in time, a varietyof short-term contractual commitments for services such as advertising,marketing, accounting, legal, and research and development activities.  The liabilities for these services and therelated expenses are typically recognized upon our receipt of the relatedservices.  None of our purchase commitmentsrequires payment beyond the next year.

The following table sets forth the annual payments weare required to make under contractual obligations and other commercialcommitments for operating leases and for purchases of inventory and services,in thousands, at December 31, 2006.

|            | ** ** | **Operating Leases** | ** ** | **Purchase Commitments** | ** ** |
|------------|------------|---------------------------|------------|-------------------------------|------------|
|       |       |                      |       |                          |       |
| 2007       |       | $                         | 4,528      |                          | $          | 31,112 |   |
| 2008       |       | 3,081                     |       | —                        |       |
| 2009       |       | 1,001                     |       | —                        |       |
| 2010       |       | 286                       |       | —                        |       |
| 2011       |       | 214                       |       | —                        |       |
| Thereafter |       | 405                       |       | —                        |       |
|       |       |                      |       |                          |       |
| Total      |       | $                         | 9,515      |                          | $          | 31,112 |   |

 

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We repurchased 7.0million shares of our common stock during the year ended December 31, 2006 at acost totaling $188.3 million.  Thesetreasury shares were purchased on the open market through various brokers underthe stock repurchase program approved by our Board of Directors.  As of December 31, 2006 we had repurchased 9.8million shares under the program since the initial approval of the program in2004. In August 2006, we re-issued approximately 7,073,000 shares of therepurchased stock above in conjunction with the LANDesk acquisition.  Following our Board’s approval of anadditional 2 million shares for this program in February 2007, we mayrepurchase an additional 2.2 million shares under this program and expect torepurchase shares from time to time, particularly to offset dilution fromequity compensation awards.

We may also use a portion of our cash and investmentsfor strategic acquisitions of technologies and companies that will enhance and/orcomplement our existing products and technologies and help increase our sales.   

***Acquisition of CycladesCorporation***

On March 30, 2006, we acquired Cyclades Corporation, aprivately-held company based in Fremont, California, for approximately $92.7million in cash plus an additional $1.7 million in transaction costs.  Cyclades also has operations in Sao Paulo,Brazil and Munich, Germany, and at the time of acquisition employedapproximately 325 people in 19 locations around the world.  The Cyclades product lines include serial, KVMand power management products.  Theacquisition of Cyclades enhances our position in the Linux server andnetworking infrastructure management market and provides complementary productsto our product lines allowing us to provide our customers a more integratedplatform for managing their IT infrastructure.  Cyclades had unaudited revenue ofapproximately $60 million in 2005 and unaudited operating profit ofapproximately $2 million in 2005.  Theresults of Cyclades’ operations have been included in the consolidatedfinancial statements since the date of acquisition.  

**Theacquisition was recorded under the purchase method of accounting, and thepurchase price was allocated based on the fair value of the assets acquired andliabilities assumed.  In accordance withgenerally accepted accounting principles,**purchased research and development costs allocatedto patent-pending technology were capitalized and will be amortized over therespective estimated useful lives.  Theremaining amounts of purchased research and development were expensed upon theclosing of the transaction.  The goodwillrecorded as result of the acquisition will not be amortized but will beincluded in our annual review of goodwill for impairment.  The goodwill recorded is not taxdeductible.  

***Acquisition of LANDesk GroupLimited***

**On August 31, 2006, we acquiredLANDesk Group Limited, a privately-held company based in Salt Lake City,Utah.  LANDesk employs approximately 600people, located primarily in the United States, Europe, and Asia.  The LANDesk product lines include softwarefor the centralized management and protection of information technologyassets.  The acquisition agreementprovided for initial total consideration of approximately $407 million,including $200 million in stock, $202 million in cash, and approximately $5million in estimated fair value of assumed unvested stock options.  As specified within the acquisitionagreement, the potential of an earn-out payment to prior shareholders existsshould LANDesk achieve certain full year 2006 revenue targets.  As of the date of the Company’s 2006 year endearnings release on January 25, 2007, we estimated the amount of earnout to beapproximately $27 million.  Subsequent tothe earnings release of January 25, 2007, we became aware of certain itemsrecorded within LANDesk’s revenue that did not meet the revenue recognitioncriteria under Generally Accepted Accounting Principles. As a result, we do notbelieve that LANDesk achieved the revenue targets that would cause an earnoutpayment and we do not believe any earnout payment was earned or payable.**

The acquisition was recorded under the purchase methodof accounting, and the purchase price was allocated based on the fair value ofthe assets acquired and liabilities assumed. In accordance with generally accepted accounting principles, purchasedresearch and development costs allocated to patented and patent-pendingtechnology was capitalized and will be amortized over the respective estimateduseful lives.  The remaining amounts ofpurchased research and development costs were expensed upon the closing of thetransaction.  The goodwill recorded as aresult of the acquisition will not be amortized but will be included in ourannual review of goodwill for impairment. Additionally, amortization of the other intangible assets acquired andthe goodwill recorded may be tax deductible if we make certain tax elections.  We are currently evaluating the impact ofthese elections which must be made within certain prescribed time periodsfollowing the date of acquisition.  

 **CriticalAccounting Policies**   

We believe the following critical accounting policiesaffect the more significant judgments and estimates used in the preparation ofour consolidated financial statements:   

·                                          Wereview customer contracts to determine if all of the requirements for revenuerecognition have been met prior to recording revenue from sales transactions.  We generally record sales revenue forhardware products upon shipment 

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of our products, net of any discounts, since wegenerally do not have significant post delivery obligations, the product priceis fixed or determinable, collection of the resulting receivable is probable,and product returns are reasonably estimable. We generally ship products upon receipt of a purchase order from acustomer.  We record revenue inaccordance with the applicable terms of each respective customer contract.  Accordingly, revenue on products shipped FOBdestination is recorded when the customer takes possession of the goods, andrevenue on products shipped FOB shipping point is recorded when the goods leaveour facilities.  Shipping and handlingfees are included in net sales, and the related costs are included in cost ofsales in the accompanying consolidated statements of income.   

We generally record royalty revenue from OEMs upon shipment of therelated products in which our software or firmware is embedded by the OEMs,based upon shipment data provided by the OEMs. We generally defer revenue from the sale of extended warranty agreementsand software support and maintenance agreements.  The deferred revenue is amortized into incomeon a pro rata basis over the applicable contract lives.   

We accrue for sales returns as a reduction of sales and cost of salesbased on our experience from historical customer returns, which we believeprovides a reasonable estimate of future returns.  Our sales agreements generally include aone-month unconditional return policy. We also allow additional rights of return to certain distributors, whichgenerally extend the return period to 90 days. If actual future customer returns are less favorable than thoseprojected by management, additional sales return costs may be incurred.  Our allowance for sales returns totaled $6.0million and $2.9 million at December 31, 2006 and 2005, respectively.  The reserve is included as a reduction in thecarrying value of accounts receivable and sales in the accompanyingconsolidated balance sheets and statements of income, respectively.

We recognize software revenue inaccordance with Statement of Position 97-2, *“Software RevenueRecognition”* (SOP 97-2), and Statement of Position 98-9, *“Modification of SOP 97-2, Software Revenue Recognition, with Respectto Certain Transactions” (*SOP 98-9).  We derive revenue from the license of softwareproducts under software license agreements and from the delivery ofprofessional services and maintenance services. When contracts contain multipleelements, and vendor-specific objective evidence (VSOE) of fair value existsfor all undelivered elements, we account for the delivered elements inaccordance with the “Residual Method” prescribed by SOP 98-9 when VSOE does notexist for the delivered element.  Multiple element arrangements generallyinclude post-contract customer support (or maintenance), and in some cases, subscriptionsand other services. Vendor-specific objective evidence of fair value is generallydetermined by sales of the same element or service sold separately to othercustomers, or with respect to maintenance and subscriptions, through a renewalrate specified in the related arrangement. 

Software license revenue is recognizedwhen persuasive evidence of an arrangement exists, the fee is fixed ordeterminable, collectibility is probable, and delivery and customer acceptance(including the expiration of an acceptance period), if required under the termsof the contract, of the software products have occurred.  In instances where vendor obligations remain, revenueis deferred until the obligation has been satisfied. 

Revenue from professional services consistsof non-recurring engineering services, training and implementation services.Non-recurring engineering and implementation service revenue is recognized asthe services are performed for time and materials contracts or upon acceptanceon fixed price contracts. Training revenue is recognized as the services areperformed. 

Maintenance and subscription revenue isrecognized ratably over the term of the contract, which is generally twelve tothirty six months. Maintenance contracts include the right to unspecifiedupgrades on a when-and-if available basis, and ongoing support.  

Prior to extending credit to a new customer, weperform a detailed credit review of the customer and establish credit limitsbased on the results of our credit review. We review collection experience periodically to determine if thecustomer’s payment terms and credit limits need to be revised.  We maintain allowances for doubtful accountsfor estimated losses resulting from the inability of our customers to makerequired payments.  If the financialcondition of our customers were to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances may be required.  If circumstances change with regard toindividual receivable balances that had previously been determined to beuncollectible (and for which a specific reserve had been established), areduction in our allowance for doubtful accounts may be required.  Our allowance for doubtful accounts was $2.4million and $1.1 million at December 31, 2006 and 2005, respectively.   

We participate in cooperative advertising and marketdevelopment programs with certain resellers, distributors and OEMs.  We use these programs to reimburse resellers,distributors and OEMs for the actual costs of certain forms of advertising, andin general, allow resellers, distributors and OEMs reimbursement up to aspecified percentage of net 

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purchases.  Becauseour costs associated with these programs are estimated and accrued at the timeof sale, we include these costs in sales and marketing expenses in theaccompanying consolidated statements of income.   

·                                          Wecarry our inventory at the lower of cost or market, with cost being determinedusing the first-in, first-out method.  Weuse standard costs for material, labor, and manufacturing overhead to value ourinventory.  We review and revise ourstandard costs on a quarterly basis. Therefore, our inventory costs approximate actual costs at the end ofeach reporting period.  We write down our inventory forestimated obsolescence or unmarketable inventory to the estimated market valuebased upon assumptions about future demand and market conditions.  If actual future demand or market conditionsare less favorable than those projected by management, additional inventorywrite-downs may be required.  Our reservefor excess and obsolete inventory was $5.6 million and $4.6 million at December31, 2006 and 2005, respectively.   

·                                          Weprovide for the estimated cost of product warranties at the time revenue isrecognized.  While we engage in extensiveproduct quality programs and processes, including actively monitoring andevaluating the quality of our component suppliers and contract manufacturers,our warranty obligation is affected by product failure rates, failure rates ofpurchased components integrated into our products, material usage, and otherrework costs incurred in correcting a product failure.  Should actual product failure rates, materialusage, or other rework costs differ from our estimates, revisions to ourestimated warranty liability may be required. Our warranty reserve was $2.5 million at both December 31, 2006 and 2005.   

·                                          Wehold investments in various publicly traded debt securities, includingmortgaged-backed and other asset-backed securities.  We record an investment impairment chargewhen we believe an investment has experienced a decline in value that is otherthan temporary.  Future adverse changesin market conditions or poor operating results of underlying investments couldresult in losses or an inability to recover the carrying value of the investmentsthat may not be reflected in an investments current carrying value, therebypossibly requiring an impairment charge in the future.  There were no other-than-temporary impairmentcharges recorded against these investments in 2006, 2005 or 2004.   

We also invest in privately held entities and generally record ourinvestments in these entities at cost or we use the equity method if we havethe ability to exercise significant influence over the entity.  We review our investments in these entitiesperiodically to determine if circumstances (both financial and non-financial)exist that indicate that we will not recover our initial investment.  We record impairment charges on investmentshaving a carrying value that is greater than the value that we would reasonablyexpect to receive in an arm’s length sale of the investment.  We recorded $3.5 million of write-downsagainst such investments for the year ended December 31, 2004.  We did not record any such write-downsagainst these investments in 2006 or in 2005. As of December 31, 2006 our net carrying value of such investments isnil as we do not expect to recover these investments.

·                                          Weenter into interest rate swap agreements in accordance with our risk managementpolicy to partially reduce risks related to our floating rate line of credit whichis subject to changes in the market rate of interest.  We do not use derivative instruments fortrading purposes.  We record the fairvalue of interest rate swap agreements in other assets or liabilities on theconsolidated balance sheet.  Changes inthe fair value of interest rate swap agreements that are designated andeffective as cash flow hedges are recorded in accumulated other comprehensiveincome (loss) (“OCI”).  Those changes arereleased from OCI to the consolidated statement of income as interest expensecontemporaneously with the earnings effects of the hedged item (the underlyingdebt agreement).  The settled amount of aswap that has been terminated prior to its original term continues to bedeferred in OCI and is recognized in the consolidated statement of income overthe term of the underlying debt agreement designated as the hedged item.  Changes in the fair value of interest rate swapagreements that are not effective as hedges are recorded immediately in the consolidatedstatement of income as interest expense. We have designated our interest rate swap agreement as a cash flow hedge.  Cash flows from hedging activities arereported in the consolidated statement of cash flows in the same classificationas the hedged item, generally as a component of cash flows from operations.    

**·**                                          Our annual tests for goodwill impairment, performed in the fourthquarters of 2006, 2005 and 2004, determined that no adjustment for impairmentwas required.  As a result of ourdivisional reorganization, as of January 1, 2006 we re-allocated our existinggoodwill to each of our reporting units based on the relative fair value ofeach reporting unit in accordance with SFAS No. 142, *“Goodwilland Other Intangible Assets.”* Our testing indicated that the implied fair value of our goodwillexceeded its carrying value; accordingly, in accordance with SFAS 142, nofurther impairment analysis was required. If economic conditions deteriorate and indicators of impairment becomepresent, an adjustment to the carrying value of goodwill and other intangibleassets may be required.   

**·**                                          We review long-lived assets for impairment under the guidance prescribedby SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*.  Werecognize impairment losses on long-lived assets used in operations whenindicators of impairment are present and the undiscounted cash flows estimatedto be generated by 

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those assets are less than the assets’ carryingvalues.  An impairment loss would berecognized in the amount by which the recorded value of the asset exceeds thefair value of the asset, measured by the quoted market price of an asset or anestimate based on the best information available in the circumstances.  There were no such losses recognized during2006, 2005, or 2004.

·                                          Weaccount for income taxes using the asset and liability method.  We providefor income taxes currently payable and, in addition, provide deferred incometaxes for temporary differences between the tax basis of assets and liabilitiesand their reported amounts in the consolidated financial statements and forknown contingencies.  Temporary differences relate principally to theallowance for doubtful accounts, allowance for sales returns, liability forwarranty claims, unrealized gain (loss) on investments, accumulateddepreciation, loss on write-down of investments, inventory reserves, acquiredintangible assets, operating losses and credit carryforwards. We intend topermanently reinvest earnings from our foreign subsidiaries in ourinternational operations and, accordingly, no provision for any incremental netU.S. federal or state income taxes has been made for these un-remitted earnings. Valuation allowances are established when necessary to reduce deferred taxassets to the amount expected to be realized.  We have approximately $4.2million and $554,000 of valuation allowances recorded against deferred taxassets arising from certain foreign subsidiaries operating losses and certainstate research credits at December 31, 2006 and 2005, respectively.  Tax contingencies are recorded to addresspotential exposures involving tax positions we have taken that could bechallenged by tax authorities.  Thesepotential exposures result from the varying applications of statutes, rules,regulations, and interpretations.  Ourtax contingencies contain assumptions based on past experiences and judgmentsabout potential actions taken by taxing jurisdictions.  The ultimate resolution of these matters maybe greater or less than the amount that we have provided.

**Recently Issued Accounting Standards**

InJuly 2006, the FASB released FASB Interpretation No. 48, “*Accountingfor Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”*(FIN 48).  FIN 48 clarifies the accounting and reporting for uncertaintiesin income tax law.  This Interpretation prescribes a comprehensive modelfor the financial statement recognition, measurement, presentation anddisclosure of uncertain tax positions taken or expected to be taken in incometax returns.  We will adopt this Interpretation in the first quarter of2007.  The cumulative effects, if any, of applying this Interpretationwill be recorded as an adjustment to retained earnings as of the beginning ofthe period of adoption.  We have commenced the process of evaluating theexpected effect of FIN 48 on our consolidated financial statements andcurrently expect its adoption will not have a material impact on ourconsolidated results of operations or financial condition.

In September 2006, theSEC issued Staff Accounting Bulletin No. 108, *Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements*(“SAB 108”). SAB108 provides interpretive guidance on how the effects of the carryover orreversal of prior year misstatements should be considered in quantifying acurrent year misstatement. The SEC staff believes that registrants shouldquantify errors using both a balance sheet and an income statement approach andevaluate whether either approach results in quantifying a misstatement that,when all relevant quantitative and qualitative factors are considered, ismaterial. SAB 108 is effective for fiscal years ending on or afterNovember 15, 2006 and we adopted it in the fourth quarter of 2006. Theimplementation of SAB 108 did not have a material impact on our consolidatedresults of operation or financial condition. 

**In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements* (“SFAS 157”), which clarifies thatfair value estimates should be based on the assumptions market participantswould use when pricing an asset or liability and establishes a fair valuehierarchy that prioritizes the information used to develop thoseassumptions.  Under SFAS 157, fair valuemeasurements would be separately disclosed by level within the fair valuehierarchy.  SFAS 157 is effective forfiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS 157 to have a material impact onour consolidated results of operations or financial condition. **

**Item 7A. Quantitative and Qualitative Disclosures about Market Risks.**

Our primary market riskis the potential loss arising from increases in interest rates, which couldhave an adverse impact on the fair value of our investment securities.  Our investment policy is to manage ourinvestment portfolio to preserve principal and liquidity while maximizing thereturn on our investment portfolio through the investment of available funds.  We diversify our investment portfolio by investingin a variety of highly-rated investment-grade securities and through the use ofdifferent investment managers.  Ourinvestment securities portfolio is primarily invested in securities withmaturities (or interest rate resets) of two years or less with at least aninvestment grade rating to minimize interest rate and credit risk as well as toprovide for an immediate source of funds. Market risk, calculated as the potential change in fair value in ourinvestment portfolio resulting from a hypothetical 10% change in interestrates, was not material at December 31, 2006. 

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We also faceinterest rate risk on our bank line of credit which currently bears interest ata variable rate of LIBOR plus 87.5 basis points.  We have partially hedged this exposure tointerest rate risk with an interest rate swap, which has a notional amount of$125 million, through a well established financial institution.

In addition, weface foreign currency exchange rate risk to the extent that the value ofcertain foreign currencies relative to the U.S. dollar affects our financialresults.  Our international operationstransact a portion of our business in currencies other than the U.S. dollar,predominantly the euro, and changes in exchange rates may positively ornegatively affect our revenue, gross margins, operating expenses, and retainedearnings since these transactions are reported by us in U.S. dollars.  We occasionally purchase foreign currencyforwards aimed at limiting the impact of currency fluctuations.  These instruments provide only limitedprotection against currency exchange risks, and there can be no assurance thatsuch an approach will be successful, especially if a significant and suddendecline occurs in the value of local currencies.  As of December 31, 2006, we had one openforward contract with a fair value of zero.

**Item 8.  FinancialStatements.**

**Index toConsolidated Financial Statements**
|                                                                                                                 | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------|
|                                                                                                            |       |       |
| Management’s  Report on Internal Control over Financial Reporting                                          |       |       |
| Report  of Independent Registered Public Accounting Firm                                                        |       |       |
|                                                                                                            |       |       |
| Consolidated  Financial Statements:                                                                             |       |       |
|                                                                                                            |       |       |
| Consolidated Balance Sheets as of December 31,  2006 and 2005                                              |       |       |
| Consolidated Statements of Income for the years ended  December 31, 2006, 2005 and 2004                    |       |       |
| Consolidated Statements of Stockholders’ Equity for  the years ended December 31, 2006, 2005 and 2004 |       |       |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2006, 2005 and 2004                |       |       |
| Notes to Consolidated Financial Statements                                                                      |       |       |
| Schedule II - Valuation and Qualifying Accounts                                                                 |       |       |

** **

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

 

Management of AvocentCorporation is responsible for establishing and maintaining adequate internalcontrol over financial reporting.  TheCompany’s internal control over financial reporting is a process designed underthe supervision of Avocent’s principal executive and principal financialofficers to provide reasonable assurance regarding the reliability of financialreporting and the preparation of the Company’s consolidated financialstatements for external purposes in accordance with U.S. generally acceptedaccounting principles.

As of the end of theCompany’s 2006 fiscal year, management conducted an assessment of the Company’sinternal control over financial reporting based on the framework established inInternal Control - Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Based on this assessment,management has determined that the Company’s internal control over financialreporting as of December 31, 2006 was effective.  As allowed under Section 404 of theSarbanes-Oxley Act of 2002, management has excluded LANDesk Group Limited fromthis assessment.   The Act allows theexclusion of entities acquired during a company’s fiscal year from itsassessment.  As LANDesk was acquired latein 2006, the Company has elected to exclude LANDesk and its subsidiaries fromthis assessment.  LANDesk revenueincluded in the Company’s consolidated financial statements totaled $38.7million in 2006, and total assets, including acquired intangible assets, were $500.0million at December 31, 2006.

The Company’s internalcontrol over financial reporting includes policies and procedures that pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect transactions and dispositions of assets; provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with U.S. generally accepted accounting principles,and that receipts and expenditures are being made only in accordance withauthorizations of management and the directors of the Company; and providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the Company’s assets that could have amaterial effect on the financial statements.

Management’s assessmentof the effectiveness of the Company’s internal control over financial reportingas of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, anindependent registered public accounting firm, as stated in their reportappearing on pages 44 and 45, which expresses unqualified opinions onmanagement’s assessment of the effectiveness of internal control over financialreporting and on the effectiveness of the Company’s internal control over financialreporting as of December 31, 2006.

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**Report of Independent Registered Public AccountingFirm**

To the Board of Directorsand Stockholders of Avocent Corporation:

We have completedintegrated audits of Avocent Corporation’s (the “Company’s”) consolidatedfinancial statements and of its internal control over financial reporting as ofDecember 31, 2006, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statementschedule

 

In our opinion, the consolidated financial statements listed inthe accompanying index presentfairly, in all material respects, the financial position of Avocent Corporationand its subsidiaries at December 31, 2006 and 2005, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2006 in conformity with accounting principles generally acceptedin the United States of America.  In addition, in our opinion, the financialstatement schedule listed in the accompanying indexpresents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements.  Theseconsolidated financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements and financial statement schedule based on our audits.  We conducted our audits of these statementsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit of financial statements includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used and significantestimates made by management, and evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion. 

 

As discussed in Note 2 to the consolidated financialstatements, the Company changed the manner in which it accounts for share-basedcompensation in fiscal 2006. 

 

Internal controlover financial reporting

 

Also, in ouropinion, management’s assessment, included in Management’s Report on InternalControl over Financial Reporting appearing on page 43 that the Companymaintained effective internal control over financial reporting as of December31, 2006 based on criteria established in *Internal Control -Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), is fairly stated, in allmaterial respects, based on those criteria. Furthermore, in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2006, based on criteria established in *Internal Control - Integrated Framework* issued by theCOSO.  The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting.  Our responsibility is toexpress opinions on management’s assessment and on the effectiveness ofthe Company’s internal control over financial reporting based on our audit. Weconducted our audit of internal control over financial reporting in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects.  An audit of internalcontrol over financial reporting includes obtaining an understanding ofinternal control over financial reporting, evaluating management’s assessment,testing and evaluating the design and operating effectiveness of internalcontrol, and performing such other procedures as we consider necessary in thecircumstances.  We believe that our auditprovides a reasonable basis for our opinions. 

 

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.  A company’s internal control over financialreporting includes those policies and procedures that (i) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company;(ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (iii) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on thefinancial statements. 

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

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As described in Management’s Report on Internal Control over FinancialReporting on page 43, management has excluded LANDesk Group Limited (“LANDesk”)from its assessment of internal control over financial reporting as of December31, 2006 because it was acquired by the Company in a purchase businesscombination during August 2006.  We havealso excluded LANDesk from our audit of internal control over financialreporting.  LANDesk is a wholly-ownedsubsidiary whose total assets and total revenues represent approximately $500,022,000and $38,682,000 respectively, of the related consolidated financial statementamounts as of and for the year ended December 31, 2006.

 
| /s/ PricewaterhouseCoopers LLP |   |
|--------------------------------|--------|
| Birmingham, Alabama            |   |
| March 1, 2007                  |   |

** **

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**AvocentCorporation**

**ConsolidatedBalance Sheets**

**December 31, 2006 and 2005**

**(Inthousands, except per share data)**

 
| ** **                                                                                                                                                                              | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **ASSETS**                                                                                                                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                                         |       |       |       |       |       |
| Cash and cash equivalents                                                                                                                                                               |       | $          | 81,301     |       | $          | 66,425 |   |
| Investments maturing within one year                                                                                                                                                    |       | 25,864     |       | 227,478    |       |
| Accounts receivable, less allowance for doubtful  accounts of $2,449 and $1,129 at December 31, 2006 and 2005, respectively                                                             |       | 126,471    |       | 68,712     |       |
| Other receivables                                                                                                                                                                       |       | 13,365     |       | 8,328      |       |
| Inventories, net                                                                                                                                                                        |       | 41,765     |       | 21,178     |       |
| Other current assets                                                                                                                                                                    |       | 3,904      |       | 2,196      |       |
| Deferred tax assets, net                                                                                                                                                                |       | 7,355      |       | 4,054      |       |
| Total current assets                                                                                                                                                                    |       | 300,025    |       | 398,371    |       |
|                                                                                                                                                                                    |       |       |       |       |       |
| Investments                                                                                                                                                                             |       | 987        |       | 51,939     |       |
| Property and equipment, net                                                                                                                                                             |       | 38,004     |       | 36,801     |       |
| Goodwill                                                                                                                                                                                |       | 607,488    |       | 269,992    |       |
| Other intangible assets, net                                                                                                                                                            |       | 209,674    |       | 15,763     |       |
| Other assets                                                                                                                                                                            |       | 2,676      |       | 885        |       |
| Total assets                                                                                                                                                                            |       | $          | 1,158,854  |       | $          | 773,751 |   |
|                                                                                                                                                                                    |       |       |       |       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current  liabilities:                                                                                                                                                                   |       |       |       |       |       |
| Accounts payable                                                                                                                                                                        |       | $          | 16,260     |       | $          | 13,069 |   |
| Accrued wages and commissions                                                                                                                                                           |       | 25,511     |       | 10,500     |       |
| Accrued liabilities                                                                                                                                                                     |       | 29,754     |       | 17,206     |       |
| Income taxes payable                                                                                                                                                                    |       | 17,364     |       | 11,270     |       |
| Deferred revenue, current                                                                                                                                                               |       | 44,453     |       | 1,702      |       |
| Total current liabilities                                                                                                                                                               |       | 133,342    |       | 53,747     |       |
|                                                                                                                                                                                    |       |       |       |       |       |
| Unsecured bank line of credit                                                                                                                                                           |       | 150,000    |       | —     |       |
| Deferred tax liabilities, net                                                                                                                                                           |       | 30,377     |       | 2,564      |       |
| Deferred revenue, non-current                                                                                                                                                           |       | 10,070     |       | 1,065      |       |
| Other non-current liabilities                                                                                                                                                           |       | 1,222      |       | 1,053      |       |
| Total liabilities                                                                                                                                                                       |       | 325,011    |       | 58,429     |       |
|                                                                                                                                                                                    |       |       |       |       |       |
| Commitments and  contingencies*(Note 13)*                                                                                                                                               |       |       |       |       |       |
|                                                                                                                                                                                    |       |       |       |       |       |
| Stockholders’  equity:                                                                                                                                                             |       |       |       |       |       |
| Preferred stock, par value $0.001 per share; 5,000  shares authorized; no shares issued and outstanding                                                                                 |       | —     |       | —     |       |
| Common stock, par value $0.001 per share; 200,000  shares authorized; 2006 — 53,382 shares issued and 50,642 outstanding; 2005 —  51,612 shares issued and 48,837 outstanding |       | 53         |       | 52         |       |
| Additional paid-in capital                                                                                                                                                              |       | 1,185,114  |       | 1,104,899  |       |
| Accumulated other comprehensive income (loss)                                                                                                                                           |       | 65         |       | (497       | )          |
| Accumulated deficit                                                                                                                                                                     |       | (261,971   | )          | (307,503   | )          |
| Treasury stock, at cost; 2006 — 2,741 shares; 2005 —  2,775 shares;                                                                                                           |       | (89,418    | )          | (81,629    | )          |
| Total stockholders’ equity                                                                                                                                                         |       | 833,843    |       | 715,322    |       |
|                                                                                                                                                                                    |       |       |       |       |       |
| Total  liabilities and stockholders’ equity                                                                                                                                        |       | $          | 1,158,854  |       | $          | 773,751 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

46

----

**AvocentCorporation**

**ConsolidatedStatements of Income**

**For the YearsEnded December 31, 2006, 2005 and 2004**

**(Inthousands, except per share data)**

 
| ** **                                                                                                             | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Net sales:                                                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Products and services                                                                                                  |       | $          | 464,079    |       | $          | 347,858    |       | $ | 360,533 |   |
| Licenses and royalties                                                                                                 |       | 55,116     |       | 22,030     |       | 4,722      |       |
| Total net sales                                                                                                        |       | 519,195    |       | 369,888    |       | 365,255    |       |
|                                                                                                                   |       |       |       |       |       |       |       |
| Cost of sales:                                                                                                         |       |       |       |       |       |       |       |
| Products and services                                                                                                  |       | 193,352    |       | 151,043    |       | 152,400    |       |
| Licenses and royalties                                                                                                 |       | 4,071      |       | —     |       | —     |       |
| Total cost of sales (includes $978 of stock  compensation expense and $3,577 of intangible asset amortization in 2006) |       | 197,423    |       | 151,043    |       | 152,400    |       |
|                                                                                                                   |       |       |       |       |       |       |       |
| Gross profit                                                                                                           |       | 321,772    |       | 218,845    |       | 212,855    |       |
|                                                                                                                   |       |       |       |       |       |       |       |
| Research and  development expenses (includes $4,302 of stock compensation expense in 2006)                             |       | 63,866     |       | 56,885     |       | 45,353     |       |
| Acquired  in-process research and development expense*(Note 3)*                                                        |       | 20,700     |       | —     |       | 29,260     |       |
| Selling, general  and administrative expenses (includes $9,307 of stock compensation expense in  2006)                 |       | 148,345    |       | 90,354     |       | 84,823     |       |
| Acquisition  integration expenses                                                                                      |       | 3,904      |       | —     |       | —     |       |
| Amortization of  intangible assets                                                                                     |       | 23,049     |       | 18,509     |       | 24,279     |       |
|                                                                                                                   |       |       |       |       |       |       |       |
| Total operating expenses                                                                                               |       | 259,864    |       | 165,748    |       | 183,715    |       |
|                                                                                                                   |       |       |       |       |       |       |       |
| Income from operations                                                                                                 |       | 61,908     |       | 53,097     |       | 29,140     |       |
|                                                                                                                   |       |       |       |       |       |       |       |
| Income from  settlement of lawsuit                                                                                     |       | —     |       | 5,000      |       | —     |       |
| Net investment  income                                                                                                 |       | 7,825      |       | 9,246      |       | 5,133      |       |
| Net realized  investment losses                                                                                        |       | (254       | )          | (83        | )          | (3,804     | )          |
| Interest expense                                                                                                       |       | (3,621     | )          | —     |       | —     |       |
| Other income  (expense), net                                                                                           |       | (166       | )          | (174       | )          | 23         |       |
|                                                                                                                   |       |       |       |       |       |       |       |
| Income before provision for income taxes                                                                               |       | 65,692     |       | 67,086     |       | 30,492     |       |
|                                                                                                                   |       |       |       |       |       |       |       |
| Provision for  income taxes                                                                                            |       | 20,160     |       | 18,737     |       | 12,452     |       |
|                                                                                                                   |       |       |       |       |       |       |       |
| Net income                                                                                                             |       | $          | 45,532     |       | $          | 48,349     |       | $ | 18,040 |   |
|                                                                                                                   |       |       |       |       |       |       |       |
| Net income per  common share:                                                                                          |       |       |       |       |       |       |       |
| Basic                                                                                                                  |       | $          | 0.94       |       | $          | 0.98       |       | $ | 0.37 |   |
|                                                                                                                   |       |       |       |       |       |       |       |
| Diluted                                                                                                                |       | $          | 0.92       |       | $          | 0.96       |       | $ | 0.36 |   |
|                                                                                                                   |       |       |       |       |       |       |       |
| Weighted average  common shares outstanding:                                                                           |       |       |       |       |       |       |       |
| Basic                                                                                                                  |       | 48,548     |       | 49,318     |       | 48,964     |       |
|                                                                                                                   |       |       |       |       |       |       |       |
| Diluted                                                                                                                |       | 49,475     |       | 50,254     |       | 50,530     |       |

 

The accompanying notesare an integral part of these consolidated financial statements.

47

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**Avocent Corporation**

**ConsolidatedStatements of Stockholders’ Equity**

**For theYears Ended December 31, 2006, 2005 and 2004**

**(Inthousands)**
| ** **                                                                                        | ** ** | ** **            | ** ** | ** **                        | ** ** | ** **  | ** ** | **Unrealized   Gain (Loss)** | ** ** | **Unrealized Gain ** | ** ** | **Foreign Currency** | ** ** | **Retained  Earnings ** | ** ** | ** **       | ** ** | ** **              | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------------------|------------|-------------|------------|----------------------------------------|------------|--------------------------------|------------|---------------------------|------------|------------------------------|------------|------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                                                        | ** ** | **Common Stock** | ** ** | **Additional Paid-In ** | ** ** | **on**      | ** ** | **(Loss) on Cash**           | ** ** | **Translation **          | ** ** | **(Accumulated **    | ** ** | **Deferred**                 | ** ** | ** **       | ** ** | ** **              | ** ** |
| ** **                                                                                        | ** ** | **Shares**            | ** ** | **Amount**                        | ** ** | **Capital** | ** ** | **Investments**                        | ** ** | **Flow Hedge**            | ** ** | **Adjustment**            | ** ** | **Deficit)**                 | ** ** | **Compensation** | ** ** | **Treasury Stock** | ** ** | **Total**  | ** ** |
| Balance, December 31,  2003                                                                       |       | 47,350                |       | $                                 | 47         |        | $          | 982,218                                |       | $                              | 163        |                      | $          | —                       |       | $                | 64         |                    | $          | (373,892   | )          | $ | (1,443 | ) | $ | — |   | $ | 607,157 |   |
| Acquisition  of Crystal Link Technologies                                                         |       | 107                   |       | —                            |       | 3,500       |       | —                                 |       | —                         |       | —                    |       | —                       |       | —           |       | —                  |       | 3,500      |       |
| Acquisition of OSA  Technologies                                                                  |       | 1,229                 |       | 1                                 |       | 54,707      |       | —                                 |       | —                         |       | —                    |       | —                       |       | (6,351           | )          | —                  |       | 48,357     |       |
| Net income                                                                                        |       | —                |       | —                            |       | —      |       | —                                 |       | —                         |       | —                    |       | 18,040                       |       | —           |       | —                  |       | 18,040     |       |
| Change  in foreign currency translation adjustment                                                |       | —                |       | —                            |       | —      |       | —                                 |       | —                         |       | 167                       |       | —                       |       | —           |       | —                  |       | 167        |       |
| Change  in net unrealized gain (loss) on investments, net of deferred income tax  benefit of $207 |       | —                |       | —                            |       | —      |       | (450                                   | )          | —                         |       | —                    |       | —                       |       | —           |       | —                  |       | (450       | )          |
| Issuances of common  stock                                                                        |       | 1,646                 |       | 2                                 |       | 29,085      |       | —                                 |       | —                         |       | —                    |       | —                       |       | —           |       | —                  |       | 29,087     |       |
| Income  tax benefit from exercise of stock options                                                |       | —                |       | —                            |       | 5,748       |       | —                                 |       | —                         |       | —                    |       | —                       |       | —           |       | —                  |       | 5,748      |       |
| Stock-based compensation                                                                          |       | —                |       | —                            |       | (87         | )          | —                                 |       | —                         |       | —                    |       | —                       |       | 5,756            |       | —                  |       | 5,669      |       |
| Purchase  of 100 shares of treasury stock                                                         |       | —                |       | —                            |       | —      |       | —                                 |       | —                         |       | —                    |       | —                       |       | —           |       | (3,978                  | )          | (3,978     | )          |
| Balance, December 31,  2004                                                                       |       | 50,332                |       | 50                                |       | 1,075,171   |       | (287                                   | )          | —                         |       | 231                       |       | (355,852                     | )          | (2,038           | )          | (3,978                  | )          | 713,297    |       |
| Net income                                                                                        |       | —                |       | —                            |       | —      |       | —                                 |       | —                         |       | —                    |       | 48,349                       |       | —           |       | —                  |       | 48,349     |       |
| Change  in foreign currency translation adjustment                                                |       | —                |       | —                            |       | —      |       | —                                 |       | —                         |       | (226                      | )          | —                       |       | —           |       | —                  |       | (226       | )          |
| Change  in net unrealized gain (loss) on investments, net of deferred income tax  benefit of $138 |       | —                |       | —                            |       | —      |       | (215                                   | )          | —                         |       | —                    |       | —                       |       | —           |       | —                  |       | (215       | )          |
| Issuances of common  stock                                                                        |       | 1,280                 |       | 2                                 |       | 25,089      |       | —                                 |       | —                         |       | —                    |       | —                       |       | —           |       | —                  |       | 25,091     |       |
| Income  tax benefit from exercise of stock options                                                |       | —                |       | —                            |       | 4,663       |       | —                                 |       | —                         |       | —                    |       | —                       |       | —           |       | —                  |       | 4,663      |       |
| Stock-based compensation                                                                          |       | —                |       | —                            |       | (24         | )          | —                                 |       | —                         |       | —                    |       | —                       |       | 2,038            |       | —                  |       | 2,014      |       |
| Purchase  of 2,675 shares of treasury stock                                                       |       | —                |       | —                            |       | —      |       | —                                 |       | —                         |       | —                    |       | —                       |       | —           |       | (77,651                 | )          | (77,651    | )          |
| Balance, December 31,  2005                                                                       |       | 51,612                |       | 52                                |       | 1,104,899   |       | (502                                   | )          | —                         |       | 5                         |       | (307,503                     | )          | —           |       | (81,629                 | )          | 715,322    |       |
| Acquisition of LANDesk  Group Limited                                                             |       | —                |       | —                            |       | 23,408      |       | —                                 |       |                           |       | —                    |       | —                       |       | —           |       | 180,529                 |       | 203,937    |       |
| Net income                                                                                        |       | —                |       | —                            |       | —      |       | —                                 |       |                           |       | —                    |       | 45,532                       |       | —           |       | —                  |       | 45,532     |       |
| Change  in foreign currency translation adjustment                                                |       | —                |       | —                            |       | —      |       | —                                 |       |                           |       | 606                       |       | —                       |       | —           |       | —                  |       | 606        |       |
| Change  in net unrealized gain on investments, net of deferred income tax of $165                 |       | —                |       | —                            |       | —      |       | 412                                    |       | —                         |       | —                    |       | —                       |       | —           |       | —                  |       | 412        |       |
| Change  in net unrealized gain (loss) on cash flow hedge, net of deferred income tax  of $152     |       |                  |       |                              |       |        |       |                                   |       | (456                           | )          |                      |       |                         |       |             |       |                    |       | (456       | )          |
| Issuances of common  stock                                                                        |       | 1,770                 |       | 1                                 |       | 37,645      |       | —                                 |       | —                         |       | —                    |       | —                       |       | —           |       | —                  |       | 37,646     |       |
| Income  tax benefit from exercise of stock options                                                |       | —                |       | —                            |       | 4,575       |       | —                                 |       | —                         |       | —                    |       | —                       |       | —           |       | —                  |       | 4,575      |       |
| Stock-based compensation                                                                          |       | —                |       | —                            |       | 14,587      |       | —                                 |       | —                         |       | —                    |       | —                       |       | —           |       | —                  |       | 14,587     |       |
| Purchase  of 7,038 shares of treasury stock                                                       |       | —                |       | —                            |       | —      |       | —                                 |       | —                         |       | —                    |       | —                       |       | —           |       | (188,318                | )          | (188,318   | )          |
| Balance, December 31, 2006                                                                        |       | 53,382                |       | $                                 | 53         |        | $          | 1,185,114                              |       | $                              | (90        | )                         | $          | (456                         | )          | $                | 611        |                    | $          | (261,971   | )          | $ | — |   | $ | (89,418 | ) | $ | 833,843 |   |

 

Comprehensive income in2006 of $46,094 consists of $45,532 of net income, $412 of unrealized gain oninvestments (net of deferred income taxes), $456 of unrealized loss on aninterest rate swap (net of deferred income taxes), and $606 of foreign currencytranslation adjustment.  The unrealizedloss on investments is net of $165, net of $89 tax benefit, of realized lossesthat are included in net realized investment gains (losses) in the accompanyingconsolidated statement of income.

 

Comprehensive income in2005 of $47,908 consists of $48,349 of net income, $215 of unrealized loss oninvestments (net of deferred income taxes) and $226 of foreign currencytranslation adjustment.  The unrealizedloss on investments is net of $526, net of $284 tax benefit, of realized lossesthat are included in net realized investment gains (losses) in the accompanyingconsolidated statement of income.

 

Comprehensive income in2004 of $17,757 consists of $18,040 of net income, $450 of unrealized loss oninvestments (net of deferred income taxes) and $167 of foreign currencytranslation adjustment.  The unrealizedloss on investments is net of $230, net of $124 tax benefit, of realized lossesthat are included in net realized investment gains (losses) in the accompanyingconsolidated statement of income.

 

The accompanying notes arean integral part of these consolidated financial statements.

48

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**AvocentCorporation**

**ConsolidatedStatements of Cash Flows**

**For theYears Ended December 31, 2006, 2005 and 2004**

**(Inthousands)**

 
| ** **                                                                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                                             |       |     |       |     |       |     |       |
| Net income                                                                         |       | $        | 45,532     |     | $          | 48,349   |       | $ | 18,040 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |     |       |     |       |     |       |
| Depreciation                                                                       |       | 8,689    |       | 7,037    |       | 6,222    |       |
| Amortization of intangible assets                                                  |       | 26,626   |       | 18,509   |       | 24,279   |       |
| Stock-based compensation                                                           |       | 14,587   |       | 2,014    |       | 5,669    |       |
| Acquired in-process research and development  expenses                             |       | 20,700   |       | —   |       | 29,260   |       |
| Other-than-temporary decline in fair value of  investments                         |       | —   |       | —   |       | 3,450    |       |
| Amortization of premium (discount) on investments                                  |       | (213     | )          | 934      |       | 3,236    |       |
| Net (gain) loss on sales of investments                                            |       | 254      |       | 810      |       | 354      |       |
| Net gain on sale of property held for lease                                        |       | —   |       | (727     | )          | —   |       |
| Deferred income taxes                                                              |       | (8,261   | )          | (3,973   | )          | (7,548   | )          |
| Income tax benefit from exercise of stock options                                  |       | —   |       | 4,663    |       | 5,748    |       |
| Excess tax benefit from stock-based compensation                                   |       | (4,575   | )          | —   |       | —   |       |
| Changes in operating assets and liabilities (net of  effects of acquisitions):     |       |     |       |     |       |     |       |
| Accounts receivable, net                                                           |       | (29,696  | )          | (7,763   | )          | (15,668  | )          |
| Inventories, net                                                                   |       | (13,758  | )          | 54       |       | 238      |       |
| Other assets                                                                       |       | (1,339   | )          | (5,146   | )          | 162      |       |
| Accounts payable                                                                   |       | (12,387) |       | 3,905    |       | (1,447   | )          |
| Accrued liabilities, wages and commissions                                         |       | 8,347    |       | (1,697   | )          | 2,080    |       |
| Income taxes, receivable and payable                                               |       | (4,527   | )          | 2,776    |       | 1,831    |       |
| Other liabilities                                                                  |       | 15,722   |       | 1,241    |       | 615      |       |
| Net cash provided by operating activities                                          |       | 65,701   |       | 70,986   |       | 76,521   |       |
| Cash flows from  investing activities:                                             |       |     |       |     |       |     |       |
| Purchase of LANDesk, net of cash acquired                                          |       | (202,194 | )          | —   |       | —   |       |
| Purchase of Cyclades, net of cash acquired                                         |       | (91,982  | )          | —   |       | —   |       |
| Purchase of other intangibles                                                      |       | (5,329   | )          | —   |       | —   |       |
| Purchase of Sonic Mobility, OSA and Crystal Link,  net of cash acquired            |       | —   |       | —   |       | (61,631  | )          |
| Purchases of property and equipment                                                |       | (4,750   | )          | (3,798   | )          | (7,137   | )          |
| Proceeds from sale of property held for lease                                      |       | —   |       | 1,912    |       | —   |       |
| Purchases of available-for-sale investments                                        |       | (159,799 | )          | (360,839 | )          | (306,634 | )          |
| Proceeds from maturities and sales of  available-for-sale investments              |       | 412,922  |       | 364,758  |       | 243,634  |       |
| Net cash provided by (used in) investing activities                                |       | (51,132  | )          | 2,033    |       | (131,768 | )          |
| Cash flows from  financing activities:                                             |       |     |       |     |       |     |       |
| Repayment of short-term debt assumed in acquisitions                               |       | (1,965   | )          | —   |       | (1,797   | )          |
| Borrowings under unsecured line of credit, net                                     |       | 150,000  |       | —   |       | —   |       |
| Payment of debt financing costs                                                    |       | (2,005   | )          | —   |       | —   |       |
| Excess tax benefit from stock-based compensation                                   |       | 4,575    |       | —   |       | —   |       |
| Proceeds from employee stock option exercises                                      |       | 37,646   |       | 19,059   |       | 25,876   |       |
| Proceeds from employee stock purchase plan                                         |       | —   |       | 6,032    |       | 3,211    |       |
| Purchases of treasury stock                                                        |       | (188,318 | )          | (76,279  | )          | (3,978   | )          |
| Net cash (used in) provided by financing activities                                |       | (67      | )          | (51,188  | )          | 23,312   |       |
|                                                                               |       |     |       |     |       |     |       |
| Effect of  exchange rate changes on cash and cash equivalents                      |       | 374      |       | (130     | )          | 167      |       |
|                                                                               |       |     |       |     |       |     |       |
| Net increase (decrease) in cash and cash equivalents                               |       | 14,876   |       | 21,701   |       | (31,768  | )          |
| Cash and cash  equivalents, beginning of year                                      |       | 66,425   |       | 44,724   |       | 76,492   |       |
|                                                                               |       |     |       |     |       |     |       |
| Cash and cash  equivalents, end of year                                            |       | $        | 81,301     |     | $          | 66,425   |       | $ | 44,724 |   |
|                                                                               |       |     |       |     |       |     |       |
| Supplemental  disclosures of cash flow information:                                |       |     |       |     |       |     |       |
| Cash paid during the year for income taxes                                         |       | $        | 26,788     |     | $          | 14,487   |       | $ | 12,496 |   |
|                                                                               |       |     |       |     |       |     |       |
| Cash paid during  the year for interest                                            |       | $        | 2,986      |     | $          | —   |       | $ | — |   |

 

----

(1)Supplemental disclosure — In addition to the cashpaid at the respective closings, the Company issued 7,073 shares of its commonstock valued at $199,528 to LANDesk shareholders in 2006, 107 shares of itscommon stock valued at $3,500 to Crystal Link shareholders, and 1,229 shares ofits common stock valued at $45,831 to OSA shareholders in 2004. The issuance ofcommon stock was recorded as non-cash consideration for the acquisitions.

(2) Supplementaldisclosure — The Company recorded the purchase of 50 treasury shares at the endof 2005 for $1,372 and recorded a liability in the same amount as thetransaction settled after year-end.  Thecash-flow has been adjusted for this non-cash transaction.

(3) Supplementaldisclosure — The Company recorded an unrealized loss on cash flow hedge of$456, net of deferred income tax.

The accompanyingnotes are an integral part of these consolidated financial statements.

49

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**AvocentCorporation**

**Notes toConsolidated Financial Statements**

**For theYears Ended December 31, 2006, 2005 and 2004**

**(InThousands, except per share data)**

**1.**                                      Nature of Business and Basis of Presentation

Avocent Corporation (theCompany or Avocent) designs,manufactures, licenses, and sells software and hardware products andtechnologies that provide connectivity and centralized management ofinformation technology (IT) infrastructure. The Company (meaning Avocent and its wholly-owned subsidiaries) provide connectivityand systems management products and technologies that centralize control ofservers, desktop computers, serial devices, wireless devices, mobile devices,and network appliances, thus increasing the efficiency of IT personnel.  Server manufacturers resell private-labeledAvocent KVM (keyboard, video, and mouse) switches and embedded software andhardware technology in their systems, and companies large and small depend on Avocent’ssoftware and hardware products and technologies for managing their growing ITinfrastructure.

 

The results of acquiredcompanies are included in the consolidated results from the respective dates ofacquisition, including Crystal Link Technologies (“Crystal Link”), which wasacquired on January 6, 2004, OSA Technologies, Inc. (“OSA”), which was acquiredon April 6, 2004, Sonic Mobility Inc. (“Sonic Mobility”), which was acquired onAugust 31, 2004, Cyclades Corporation (“Cyclades”), which was acquired on March30, 2006 and LANDesk Group Ltd. (“LANDesk”), which was acquired on August 31,2006.

 

**2.**                                      Summary of Significant Accounting Policies

The principal accounting policies of the Company areas follows:

**Principles of Consolidation** — The Company’s consolidated financialstatements include the Company and its wholly-owned subsidiaries. Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.

**Cash and Cash Equivalents** — The Company considers all highlyliquid instruments with an original maturity of three months or less whenpurchased to be cash equivalents, except that certain investments with originalmaturities of less than 90 days are classified as short term investments whensuch investments are a part of our investment portfolio.

**Inventories** — Raw materials, work in process and finished goodsinventories are recorded using the lower of cost or market, with cost beingdetermined using the first-in first-out (FIFO) method.  The Company uses standard costs for material,labor and overhead to value its inventory and reviews and revises its standardson a quarterly basis. Therefore, inventory costs approximate actual costs atthe end of each reporting period.  The Company writes down inventory forestimated obsolescence or unmarketable inventory to the estimated market valuebased upon assumptions about future demand and market conditions.

**FinancialInstruments**— The carrying amounts reported in the balancesheets for cash and cash equivalents, short-term investments, accounts receivableand accounts payable approximate fair value because of the immediate orshort-term maturity of these financial instruments.  The Company’s unsecured bank line of creditbears a variable interest rate; therefore, the carrying value of the debtobligation approximates fair value.  TheCompany’s interest rate swap and short term forward contracts are reported atfair value in the consolidated financial statements.

** **

**Unsecured Bank Line of Credit**— The Company classifies the entireobligation under its unsecured line of credit as long term as it carries a fiveyear term and has no payment schedule.

**Investments**—****The Company’sinvestments consist primarily of bank deposits, corporate bonds, commercialpaper, asset-backed securities, municipal bonds, U.S. government agencysecurities, and mortgage-backed securities guaranteed by U.S. governmentagencies.  Debt securities that theCompany has the positive intent and ability to hold to maturity are classifiedas held-to-maturity securities and are reported at amortized cost.  Debt and equity securities not classified aseither held-to-maturity securities or trading securities and that have readilydeterminable fair values are classified as available-for-sale securities and arereported at fair value, with unrealized gains and losses excluded from earningsand reported as a separate component of stockholders’ equity, net of deferredincome taxes. All investments are classified as available-for-sale securitiesat December 31, 2006 and 2005.  Unrealizedlosses are charged against earnings when a decline in fair value is determinedto be other than temporary.  Certaininvestments with original maturities of less than 90 days are classified asshort term investments when such are a part of our investment portfolio.  Realized gains and losses are accounted foron the specific identification method.

The Company alsoinvests in privately-held companies and generally records its investments inthese entities at cost or using the equity method if the Company has theability to exercise significant influence over the entity.  The Company’s carrying value for suchinvestments was nil as of December 31, 2006 and 2005.  These investments are included in totallong-term investments in the accompanying consolidated balance sheets.  The Company reviews its investments in theseentities

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periodically to determine if circumstances (bothfinancial and non-financial) exist that indicate that the investment will notbe recovered.  Impairment charges arerecorded on investments having a basis that is greater than the value that theCompany would reasonably expect to receive in an arm’s length sale of theinvestment.  The Company recognized noimpairment losses on these investments in 2006 and 2005, and $3,450 in 2004 (*see Note 5*).

**Property Held for Lease**—****Property heldfor lease, which was sold in the fourth quarter of 2005,  was carried at cost, less accumulateddepreciation, which was computed using the straight-line method over theestimated useful lives of the assets. Rental income from this property wasrecorded on a monthly basis in accordance with the lease terms. Initial directcosts were deferred and matched against rental income over the initial term ofthe lease *(see Note 6).*  Netrental income was reported within net investment income.

**Property and Equipment** — Property and equipment are carried atcost, less accumulated depreciation, and include expenditures thatsubstantially increase the useful lives of existing assets. Maintenance andrepairs are charged to current operations as incurred. Upon sale, retirement,or other disposition of these assets, the cost and related accumulateddepreciation are removed from the respective accounts, and any gain or loss onthe disposition is included in income from operations.

Depreciation expense is computed using thestraight-line method over the following estimated useful lives:
| Description                      | ** ** | **Useful Life**                      |
|----------------------------------|------------|--------------------------------------|
| Land  improvements               |       | 30 years                             |
| Buildings                        |       | 39 years                             |
| Leasehold  improvements          |       | Lesser of lease  term or useful life |
| Computer  software and equipment |       | 3 — 5 years                     |
| Other equipment                  |       | 3 — 5 years                     |

 

**Other Intangible Assets** — Other intangible assets includeacquired intangible assets and capitalized costs directly incurred in obtainingan intangible.  Other intangible assetsare amortized on a straight-line basis over the following estimated usefullives:
| Description                      | ** ** | **Useful Life**            |
|----------------------------------|------------|----------------------------|
| Developed  technology            |       | 3 — 5 years           |
| Core technology                  |       | 6 years                    |
| Patents and  trademarks          |       | 5 — 7 years           |
| Customer base  and certification |       | 3 — 7 years           |
| Maintenance  contracts           |       | 5 years                    |
| Non-compete  agreements          |       | 3 years  (contract period) |
| Other intangible  assets         |       | 3 — 7 years           |

 

**Long-Lived Assets —** The Companyrecognizes impairment losses on long-lived assets used in operations whenindicators of impairment are present and the undiscounted cash flows estimatedto be generated by those assets are less than the assets’ carrying values. Animpairment loss would be recognized in the amount by which the recorded valueof the asset exceeds the fair value of the asset, measured by the quoted marketprice of an asset or an estimate based on the best information available in thecircumstances.  There were no such lossesrecognized during 2006, 2005 or 2004.

**Goodwill** — The Company recordsgoodwill when the cost of an acquired entity exceeds the net amounts assignedto the assets acquired (including other identified intangible assets) andliabilities assumed.  The Companyperformed an annual impairment test of goodwill in the fourth quarters of 2006,2005 and 2004.  The tests conductedduring 2006, 2005 and 2004 concluded that there had been no impairment ofgoodwill and that no adjustments were required (*see Note 8*).

**Allowance for Doubtful Accounts**— Prior to extending credit to a new customer, theCompany performs a detailed credit review of the customer and establishescredit limits based on the results of the credit review. The Company reviewscollection experience periodically to determine if the customer’s payment termsand credit limits need to be revised. The Company maintains allowances fordoubtful accounts for estimated losses resulting from the inability of itscustomers to make required payments. If the financial condition of theCompany’s customers were to deteriorate, resulting in an impairment of theirability to make payments, additional allowances may be required. Ifcircumstances change with regard to individual receivable balances that hadpreviously been determined to be uncollectible (and for which a specificreserve had been established), a reduction in the Company’s allowance fordoubtful accounts may be required. The Company’s allowance for doubtfulaccounts was $2,449 and $1,129 at December 31, 2006 and 2005, respectively.

**Allowance for Sales Returns**— The Company’s sales generally include aone-month unconditional return policy. The Company also allows additional rights of return to certain of itsdistributors, which generally extend the return period to 90 days. The Companyreserves for estimated sales returns as a reduction of revenue and cost ofsales at the time the product

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revenue is recognized based on historical sales returnexperience, which management believes provides a reasonable estimate of futurereturns.  The allowance for sales returnstotaled approximately $6,038 and $2,877 at December 31, 2006 and 2005,respectively. The reserve is included as a reduction in the carrying value ofaccounts receivable and sales in the accompanying consolidated balance sheetsand statements of income, respectively.

**Liability for Warranty Returns** —The Company’s products generally include warranties of one to three years forproduct defects. The Company accrues for warranty returns at cost to repair orreplace products. The Company also offers extended warranties to customers andrecognizes the revenue associated with the extended warranties over the life ofthe warranty *(see Note 9*).  The liability for warranty returns totaled approximately$2,486 and $2,536 at December 31, 2006 and 2005, respectively. Theseliabilities are included in accrued liabilities in the accompanyingconsolidated balance sheets.

**Stock-Based Compensation**—****OnJanuary 1, 2006, the Company adopted SFAS 123 (revised 2004), *Share-Based Payment*, (“SFAS 123R”) , whichrequires the measurement and recognition of compensation expense for allshare-based payment awards made to employees and directors, including grants ofemployee stock options, based on estimated fair values.  SFAS 123R supersedes SFAS No.123 *Accounting for Stock Based Compensation*  and Accounting Principles Board OpinionNo. 25, *Accounting for Stock Issued toEmployees*(“APB No. 25”), which the Company previously applied,for periods beginning before fiscal 2006.  In March 2005, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”)relating to SFAS 123R.  The Company hasapplied the provisions of SAB 107 in its adoption of SFAS 123R. 

The Company adopted SFAS 123R using themodified prospective transition method, which required the application of theaccounting standard as of January 1, 2006, the first day of our fiscal2006 year.  Avocent’s consolidated statementof income for the year ended December 31, 2006 reflects the impact of SFAS123R.  In accordance with the modifiedprospective transition method, Avocent’s consolidated statements of income forprior periods have not been retroactively adjusted to reflect the impact ofSFAS 123R.  New awards are valued andaccounted for prospectively upon adoption.  Prior outstanding stock option awards thatwere not fully vested as of January 1, 2006 will be recognized as compensationexpense in the consolidated statements of income over their remaining requisiteservice periods. 

Prior to the adoption of SFAS 123R, the Companyrecorded the intrinsic value of stock-based compensation as expense, inaccordance with APB No. 25, as allowed under SFAS No. 123, *Accounting for Stock-based Compensation Expense*(“SFAS123”).  Under the intrinsic value method,no stock-based compensation expense had been recorded in Avocent’s consolidatedstatements of income prior to January 1, 2006, other than as related to deferredcompensation recorded as a result of options assumed upon acquisitions, becausethe exercise price of Avocent’s stock options granted equaled the fair marketvalue of the underlying stock at the date of grant.  In the Company’s pro-forma disclosuresrequired under SFAS 123, Avocent accounted for forfeitures as they occurred. 

SFAS 123R requires companiesto estimate the fair value of share-based payment awards on the date of grantusing an option pricing model for stock options or using the current shareprice for awards of restricted stock units.  The value of the portion of the award that isultimately expected to vest will be recognized as expense over the requisiteservice periods in our consolidated statements of income.  Stock-based compensation expense recognized inAvocent’s consolidated statement of income for 2006 includes compensationexpense for stock-based payment awards granted prior to, but not yet vested asof, January 1, 2006 based on the grant date fair value estimated in accordancewith the pro forma provisions of SFAS 123, and compensation expense for thestock-based payment awards granted subsequent to December 31, 2005 basedon the grant date fair value estimated in accordance with the provisions ofSFAS 123R.  Compensation expense for all stockoption and time-based restricted stock unit payment awards are recognized usingthe ratable single-option approach. Compensation expense for performance-basedrestricted stock unit payment awards are recognized using the FIN 28tranche-based approach based on an estimate of expected outcomes.  Stock-based compensation expense recognizedin Avocent’s consolidated statements of income for 2006 is based on awardsultimately expected to vest; therefore, the expense has been reduced forestimated forfeitures.  SFAS 123Rrequires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates. 

The Company uses theBlack-Scholes option pricing model (the “Black-Scholes Model”) for the purposeof determining the estimated fair value of stock options on the date of grantunder SFAS 123R.  The Black-Scholes Modelrequires the input of certain assumptions that involve judgment.  Because Avocent’s employee stock options havecharacteristics significantly different from those of traded options, andbecause changes in the input assumptions can materially affect the fair valueestimate, existing models may not provide reliable measures of fair value of itsemployee stock options.  The Company willcontinue to assess the assumptions and methodologies used to calculateestimated fair value of stock-based compensation.  If circumstances change, and additional databecomes available over time, the Company may change its assumptions andmethodologies, which may materially impact the fair value determination. 

The Company has elected toadopt the alternative transition method, as permitted by Financial AccountingStandards Board (“FASB”) Staff Position No. FAS 123R-3, *Transition Election Related to Accounting for the TaxEffects of Share-Based*

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*Payment Awards,*tocalculate the tax effects of stock-based compensation pursuant to SFAS 123R forthose employee awards that were outstanding upon adoption of SFAS 123R.  The alternative transition method allows theuse of simplified methods to calculate the beginning capital-in-excess-of-parpool related to the tax effects of employee stock-based compensation and to determinethe subsequent impact of the tax effects of employee stock-based compensationawards on the capital-in-excess-of-par pool and the consolidated statements of cashflows.  Prior to the adoption of SFAS123R, the Company reported all tax benefits resulting from the exercise ofstock options as operating cash flows in the consolidated statements of cash flows. SFAS 123R requires cash flows resultingfrom the tax deductions in excess of the related compensation cost recognizedin the financial statements (excess tax benefits) to be classified as financingcash flows.  In accordance with SFAS123R, excess tax benefits recognized in periods after the adoption date havebeen classified as financing cash flows.  Excess tax benefits recognized in periodsprior to the adoption date are classified as operating cash flows.  The income tax benefits from stock optionexercises totaled approximately $4,575, $4,663, and $ 5,748 for years endedDecember 31, 2006, 2005, and 2004, respectively.

*Valuation and Expense Information*

The following tablesummarizes stock-based compensation expense related to employee stock options andrestricted stock units under SFAS 123R for the year ended December 31, 2006,which was allocated as follows: 
|                                                                  | ** ** | **2006** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|
|                                                             |       |     |       |
| Cost of sales                                                    |       | $        | 978        |   |
|                                                             |       |     |       |
| Research and  development                                        |       | 4,302    |       |
| Selling, general  and administrative                             |       | 9,307    |       |
|                                                             |       |     |       |
| Stock-based  compensation expense included in operating expenses |       | 13,609   |       |
|                                                             |       |     |       |
| Total  stock-based compensation expense                          |       | 14,587   |       |
| Tax benefit                                                      |       | (4,862   | )          |
|                                                             |       |     |       |
| Total  stock-based compensation expense, net of tax              |       | $        | 9,725      |   |

 

For the years ended  December 31, 2005 and 2004, the Companyrecorded stock compensation expense of $2,014 and $5,669, respectively, relatedto the amortization of deferred compensation recorded as a result of assumedoptions from acquisitions.  For 2005, $1,138was recorded in research and development expense and $876 was recorded inselling, general and administrative expense. For 2004, $190 was recorded in cost of goods sold, $2,455 was recordedin research and development expense and $3,024 was recorded in selling, generaland administrative expense.

The tablebelow illustrates the effect on net income and earnings per share as if theCompany had applied the fair-value recognition provisions of SFAS 123 to all ofits employee stock-based compensation awards for periods prior to the adoptionof SFAS 123R.
|                                                                                                                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income — as  reported                                                                                                          |       | $        | 48,349     |     | $          | 18,040 |   |
| Add: Stock-based employee  compensation expense included in reported net income, net of related tax  effects                            |       | 2,014    |       | 5,617    |       |
| Deduct: Total stock  based employee compensation expense determined under fair value method for  all awards, net of related tax effects |       | (28,684  | )          | (31,805  | )          |
| Net income (loss) — pro  forma                                                                                                     |       | $        | 21,679     |     | $          | (8,148 | ) |
|                                                                                                                                    |       |     |       |     |       |
| Basic earnings per  share — as reported                                                                                            |       | $        | 0.98       |     | $          | 0.37 |   |
| Basic earnings (loss)  per share — pro forma                                                                                       |       | $        | 0.44       |     | $          | (0.17 | ) |
| Diluted earnings per  share — as reported                                                                                          |       | $        | 0.96       |     | $          | 0.36 |   |
| Diluted earnings (loss)  per share — pro forma                                                                                     |       | $        | 0.43       |     | $          | (0.17 | ) |

 

The Company estimates thefair value of options using the Black-Scholes Model.  This model requires the input of assumptionsregarding a number of complex and subjective variables that will usually have asignificant impact on the fair value estimate.  These variables include, but are not limitedto, the volatility of the Company’s stock price and employee exercisebehaviors.  The assumptions and variablesused for the current period grants were developed based on SFAS 123R and SECguidance contained in SAB 107.  Theweighted-average estimated fair value of stock options granted to employees

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during the year ended December31, 2006 was $13.07 per share using the Black-Scholes Model with the followingweighted-average assumptions: 

| Expected volatility       |   | 44.23  | %      |
|---------------------------|--------|--------|--------|
| Risk-free interest rate   |   | 4.85   | %      |
| Expected dividend yield   |   | — |   |
| Expected life (in  years) |   | 4.31   |   |

 

The Company based itsestimate of expected volatility for the year ended December 31, 2006 on thesequential historical daily trading data of Avocent’s common stock for a periodequal to the expected life of the options granted.  The selection of the historical volatilityapproach was based on available data indicating the Company’s historicalvolatility is as equally representative of its future stock price trends as isimplied volatility.  

The risk-free interest rateassumption is based upon implied yields of U.S. Treasury zero-coupon bonds onthe date of grant having a remaining term equal to the expected life of theoptions granted.  The dividend yield isbased on the Company’s historical and expected dividend payouts. 

The expected life of Avocent’semployee stock options is based upon historical exercise and cancellationactivity of its previous stock-based grants with a ten-year contractual term. 

Stock-based compensationexpense recognized in the Company’s consolidated statements of income for theyear ended December 31, 2006 is based on options and restricted stock units ultimatelyexpected to vest, and has been reduced for estimated forfeitures.  These estimates were based upon historical forfeitureexperience. 

The Company has usedthird-party analyses to assist in developing some of the assumptions used in itsBlack-Scholes Model.  The Company willcontinue to assess the assumptions and methodologies used to calculateestimated fair value of stock-based compensation.  If circumstances change, and additional databecomes available over time, the Company may change its assumptions and methodologies, which may materially impactour fair value determination. 

*Pro Forma Information Under SFAS 123 for Periods Prior toJanuary 1, 2006*

The pro forma amounts reflected above are notrepresentative of the effects on reported net income in future years because,in general, options granted typically do not vest for several years andadditional awards are made each year. However, on April 29, 2005, the Company’s Board of Directors approved aplan to accelerate vesting of certain options (*see Note 14*)resulting in additional pro-forma expense of approximately $13,000, before tax,in 2005.  The weighted-average estimated value of stock optionsgranted to employees and directors during the years ended December 31, 2005 and2004 was $7.00 per share and $17.36 per share, respectively, using theBlack-Scholes model with the following weighted-average assumptions: 

|                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Dividend yield          |       | —   |       | —   |       |
| Expected life  (years)  |       | 1.8      |       | 4.3      |       |
| Expected  volatility    |       | 45.3     | %          | 43.4     | %          |
| Risk-free interest rate |       | 3.60     | %          | 3.03     | %          |

 

**Concentrations of Customer Base and Credit Risk —**Three customers each exceeded 10% of theCompany’s sales for 2006, while four customers exceeded 10% of the Company’ssales for 2005 and 2004.  The threecustomers accounted for 40% of net sales in 2006, while the****fourcustomers accounted for 55% of sales in 2005 and 57% of sales in 2004.  Sales to these customers are reportedprimarily through Management Systems Division, but also through the EmbeddedSoftware and Solutions and LANDesk divisions. Accounts receivable from these customers represented approximately 30%of trade receivables at December 31, 2006 and 61% of trade receivables atDecember 31, 2005.  The Company’s topfive customers, which include three OEMs and two distributors, accounted for 56%of net sales for 2006 and 64% in both 2005 and 2004.

The Company places cash and investments in several high-qualityfinancial institutions and seeks to limit the credit exposure from any oneinstitution, issuer or instrument.  TheCompany also faces interest rate risk on its bank line of credit whichcurrently bears interest at a variable rate of LIBOR plus 87.5 basispoints.  The Company has partially hedgedthis exposure to interest rate risk with an interest rate swap, which has anotional amount of $125 million, through a well established financialinstitution.

**Income Taxes** — The Company accounts for income taxes using theasset and liability method. The Company provides for income taxes currentlypayable and, in addition, provides deferred income taxes for temporarydifferences between the tax basis of assets and liabilities and their reportedamounts in the financial statements and for known tax contingencies. Temporarydifferences relate principally to the allowance for doubtful accounts,allowance for sales returns, liability for 

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warranty claims, unrealized gain (loss) oninvestments, accumulated depreciation, loss on write-down of investments,inventory reserves, and acquired intangible assets, operating losses, and stateresearch credit carryforwards.  TheCompany intends to permanently reinvest its earnings from foreign subsidiariesin its international operations and, accordingly, no provision for anyincremental net U.S. federal or state income taxes has been made for theseunremitted earnings. Valuation allowances are established when necessary toreduce deferred tax assets to the amount expected to be realized.  Tax contingencies are recorded to addressexposures involving tax positions taken which could be challenged by taxauthorities.

**Foreign Currency** — The Company records transactions denominated inforeign currencies on a monthly basis using the average monthly exchange rate.Assets and liabilities denominated in foreign currencies are translated at thebalance sheet dates using the closing rates of exchange between those foreigncurrencies and the U.S. Dollar with any transaction gains or losses reported inother income (expense). Adjustments from translating financial statements ofinternational subsidiaries are recorded as a separate component ofstockholders’ equity.

The Company uses forward contracts to reduce itsforeign currency exposure related to the net cash flows from its European andAsian operations. The majority of these contracts are short-term contracts(three months or less) and are marked-to-market each quarter and included in receivablesor payables, with the offsetting gain or loss included in other income(expense) in the accompanying consolidated statements of income. At December31, 2006 and 2005, the Company had one such contract outstanding with a fairvalue of zero.

**Derivative Instruments and HedgingActivities**— TheCompany enters into interest rate swap agreements in accordance with its risk managementpolicy to partially reduce risks related to its floating rate line of credit whichis subject to changes in the market rate of interest.  The Company does not use derivativeinstruments for trading purposes.  TheCompany records the fair value of interest rate swap agreements in other assetsor liabilities on the consolidated balance sheet.  Changes in the fair value of interest rate swapagreements that are designated and effective as cash flow hedges are recordedin accumulated other comprehensive income (loss) (“OCI”).  Those changes are released from OCI to the consolidatedstatement of income as interest expense contemporaneously with the earningseffects of the hedged item (the underlying debt agreement).  The settled amount of a swap that has beenterminated prior to its original term continues to be deferred in OCI and isrecognized in the consolidated statement of income over the term of theunderlying debt agreement designated as the hedged item.  Changes in the fair value of interest rate swapagreements that are not effective as hedges are recorded immediately in the consolidatedstatement of income as interest expense. The Company has designated its interest rate swap agreement as a cashflow hedge.  Cash flows from hedgingactivities are reported in the consolidated statement of cash flows in the sameclassification as the hedged item, generally as a component of cash flows from income.

**Revenue Recognition** — The Company generally records sales of its hardwareproducts upon shipment of the related product, net of any discounts as theCompany generally has no significant post delivery obligations, the productprice is fixed or determinable, collection of the resulting receivable isprobable, and product returns are reasonably estimable. Product shipments occurupon receipt of a purchase order from a customer. Revenue on products shippedFOB destination is recorded when the customer takes possession of the goods,and revenue on products shipped FOB shipping point is recorded when the goodsleave our facilities. The Company’s shipping and handling fees are included innet sales, and the related costs are included in cost of sales in theaccompanying consolidated statements of operations.

The Company generally records royalty revenue fromOEMs upon shipment of the related products in which its software or firmware isembedded by the OEMs, based upon shipment data provided by the OEMs.  The Company generally records license revenuefrom sales of its software upon shipment or electronic transfer of thesoftware.  The Company generally defers revenuefrom the sale of extended warranty agreements and software support andmaintenance agreements.  The deferredrevenue is amortized into income on a pro rata basis over the applicablecontract lives.

The Company recognizes software revenue inaccordance with Statements of Position 97-2, “Software Revenue Recognition”(SOP 97-2), and 98-9, “Modification of SOP 97-2, Software Revenue Recognition,with Respect to Certain Transactions” (SOP 98-9). The Company derives revenuefrom the license of software products under software license agreements andfrom the delivery of professional services and maintenance services. Whencontracts contain multiple elements, and vendor-specific objective evidence (VSOE)of fair value exists for all undelivered elements, the Company accounts for thedelivered elements in accordance with the “Residual Method” prescribed by SOP98-9 when VSOE does not exist for the delivered element. Multiple elementarrangements generally include post-contract customer support (or maintenance),and in some cases, subscriptions and other services. Vendor-specific objectiveevidence of fair value is generally determined by sales of the same element orservice sold separately to other customers, or with respect to maintenance andsubscriptions, through a renewal rate specified in the related arrangement. 

Software license revenue is recognizedwhen persuasive evidence of an arrangement exists, the fee is fixed ordeterminable, collectibility is probable, and delivery and customer acceptance(including the expiration of an acceptance period), if required under the termsof the contract, of the software products have occurred.  In instances where vendor obligations remain, revenueis deferred until the obligation has been satisfied. 

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Revenue from professional services consistsof non-recurring engineering services, training and implementation services.Non-recurring engineering and implementation service revenue is recognized asthe services are performed for time and materials contracts or upon acceptanceon fixed price contracts. Training revenue is recognized as the services areperformed. 

Maintenance and subscription revenue isrecognized ratably over the term of the contract, which is generally twelve tothirty six months. Maintenance contracts include the right to unspecifiedupgrades on a when-and-if available basis, and ongoing support.  

**Research and Development Expense** — Research and development costs areexpensed as incurred. In-process research and development obtained through acquisitionsof other companies is expensed upon consummation of the acquisition.

**Software Development Costs** —Development costs for software to besold, integrated into other Company products or otherwise marketed are includedin research and development costs and are expensed as incurred. Aftertechnological feasibility is established, software development costs arecapitalized. The capitalized costs are then amortized on a straight-line basisover the estimated product life, or using the ratio of current revenue to totalprojected product revenue, whichever is greater. To date, the period betweenachieving technological feasibility, which the Company has defined as theestablishment of a working model which typically occurs when beta testingcommences, and the general availability of such software has been short andsoftware development costs qualifying for capitalization have beeninsignificant. Accordingly, through December 31, 2006, the Company has notcapitalized any software development costs.  Certain developed software included in otherintangible assets as a result of a business combination is amortized as acomponent of cost of sales in the accompanying statements of income.

**Advertising Expense****—** Advertisingcosts are expensed as incurred and are included as a component of selling,general and administrative expenses. Advertising expense totaled approximately$7,807, $7,517 and $6,254 for the years ended December 31, 2006, 2005 and 2004,respectively.  The Company participatesin cooperative advertising and market development programs with certain,resellers, distributors and OEMs.  Theseprograms are used by the Company to reimburse resellers, distributors and OEMsfor the actual costs of certain forms of advertising, and in general, allow resellers,distributors and OEMs reimbursement up to a specified percentage of netpurchases. The Company’s costs associated with these programs are estimated andaccrued at the time of sale, and are included in sales and marketing expensesin the accompanying consolidated statements of income.

**Net Investment Income** —****Net investmentincome includes income from interest, dividends, rental property held for leaseand accretion of bond premiums and discounts, net of related expenses.

**Net Realized Investment Gains (Losses) —**Net realized investment gains (losses)include gains (losses) realized upon the sales or calls of investments andlosses realized on investments when a decline in fair value is determined bymanagement to be other than temporary.

**Interest Expense —**Interest expense****consists ofinterest and amortization of debt issuance costs related to the bank line ofcredit, and includes  the effects of theCompany’s interest rate swap hedge.

**Loan Origination Costs****—**The Company records costs incurreddirectly related to obtaining the line of credit in accordance with APB 21, *Interest on Receivables and Payables.  *Underthis method, the Company capitalizes loan origination costs and amortizes thecosts over the life of the agreement under the straight-line method as therelated interest expense is not materially different than the expensecalculated under the interest method.

**Other Income (Expense), net —**Other income (expense) consists primarilyof foreign currency exchange gains or losses.

**Comprehensive Income —**Comprehensive income includes all changesin equity (net assets) during a period from non-owner sources. Items includedin comprehensive income include net income, foreign currency translationadjustments, unrealized gains and losses on available-for-sale securities, andchanges in the fair value of interest rate swaps.

**Earnings Per Share —**Earnings per common share, and earningsper common share assuming dilution, are based on the weighted average number ofcommon and common equivalent, when dilutive, shares outstanding during the year(see *Note 12*).

**Use of Estimates**— The preparation of the Company’s consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the dates of the financialstatements and reported amounts of revenue and expenses during the reportingperiods. Actual results could differ from those estimates.

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**Reclassifications**— Certain reclassifications have been made to the 2005and 2004 consolidated financial statements in order to conform to the 2006presentation. These reclassifications had no effect on previously reported netincome, net cash provided by operating activities, net cash used in investingactivities or total stockholders’ equity.

**Recently Issued AccountingStandards**— In September 2006, the SEC issued Staff Accounting Bulletin No. 108,*Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements*(“SAB 108”). SAB 108 provides interpretive guidance onhow the effects of the carryover or reversal of prior year misstatements shouldbe considered in quantifying a current year misstatement. The SEC staffbelieves that registrants should quantify errors using both a balance sheet andan income statement approach and evaluate whether either approach results inquantifying a misstatement that, when all relevant quantitative and qualitativefactors are considered, is material. SAB 108 is effective for fiscal yearsending on or after November 15, 2006 and was adopted by Avocent in thefourth quarter of 2006. The implementation of SAB 108 did not have a materialimpact on our consolidated results of operation or financial condition. 

**In September2006, the FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS 157”), which clarifies that fair value estimates should be based on the assumptionsmarket participants would use when pricing an asset or liability andestablishes a fair value hierarchy that prioritizes the information used todevelop those assumptions.  Under SFAS157, fair value measurements would be separately disclosed by level within thefair value hierarchy.  SFAS 157 iseffective for fiscal years beginning after November 15, 2007.  The Company does not expect the adoption ofSFAS 157 to have a material impact on its consolidated results of operations orfinancial condition. **

**See Note 10 for**FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes, an interpretation of FAS Statement 109” (FIN 48)discussion.

**3.**                                   Acquisitions

**CycladesCorporation** — On March 30, 2006, the Company acquired CycladesCorporation, a privately-held company based in Fremont, California, withadditional operations primarily in Sao Paulo, Brazil and Munich, Germany. Cyclades employed approximately 325 people in 19 locations around the world.  The Cyclades product lines include serial, KVMand power management products.  Theacquisition of Cyclades enhances Avocent’s position in the Linux server andnetworking infrastructure management market, provides complementary products toits product lines, and allows Avocent to provide customers a more integratedplatform for managing their IT infrastructure. The results of Cyclades’ operations have been included in theconsolidated financial statements since the date of acquisition.  

Theacquisition was recorded under the purchase method of accounting, and thepurchase price was allocated based on the fair value of the assets acquired andliabilities assumed.  In accordance withgenerally accepted accounting principles, purchased research anddevelopment costs allocated to patented and patent-pending technology werecapitalized and will be amortized over the respective estimated usefullives.  The remaining amounts ofpurchased research and development were expensed upon the closing of thetransaction.  The goodwill recorded as aresult of the acquisition will not be amortized but will be included in theCompany’s annual review of goodwill for impairment.  Additionally, amortization of the otherintangible assets acquired and the goodwill recorded is not taxdeductible.  A summary of the total purchaseconsideration, excluding cash received, is as follows: 

| Cash paid for outstanding  shares  |   | $      | 92,700 |   |
|------------------------------------|--------|--------|--------|--------|
| Acquisition  costs paid by Avocent |   | 1,690  |   |
|                               |   |   |   |
| Total acquisition cost             |   | $      | 94,390 |   |

 

The Company fundedthe acquisition through available cash.  Onthe closing of the Cyclades transaction, Avocent acquired $2,408 in cash heldby Cyclades.  

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The acquisitioncost was allocated, on a preliminary basis, to the estimated fair values of theassets acquired and liabilities assumed, as follows:
|                                      | ** ** | **Purchase  Price  Allocation** | ** ** | **Amortization  Period** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|--------------------------|------------|
| Tangible assets                      |       | $                               | 23,338     |                     | —     |   |
| In-process  research and development |       | 2,100                           |       | —                   |       |
| Developed  technology                |       | 19,000                          |       | 5 years                  |       |
| Customer base                        |       | 12,100                          |       | 5 years                  |       |
| Trademarks                           |       | 3,100                           |       | 5 years                  |       |
| Non-compete  agreements              |       | 4,100                           |       | 3 years                  |       |
| Goodwill                             |       | 62,702                          |       | —                   |       |
| Deferred taxes                       |       | (14,860                         | )          | —                   |       |
| Assumed  liabilities                 |       | (17,190                         | )          | —                   |       |
|                                 |       |                            |       |                     |       |
|                                 |       | $                               | 94,390     |                     |       |   |

 

An escrow account with $14,700 of the above consideration wasestablished to be held for indemnifiable claims for a period of 21 months afterthe acquisition closing date.

The $2,100 in fair value of the in-process research and development(“IPR&D”) received in the acquisition was determined using a form of thediscounted cash flow method known as the multi-period excess earnings method.  These amounts were for particular researchand development projects that have no alternative future uses and weretherefore expensed rather than capitalized at the time of purchase.

Cyclades’ in-process research and developmentactivities consisted of the development of its KVM/net 3.0 product line and itsPM 45 product lines.  KVM/Net 3.0 is the nextgeneration KVM over IP technology that leverages DSP processing technology andsoftware-based compression algorithms. PM45 is an intelligent power distribution unit that provides highcurrent on a 3-phase main power source. The KVM/Net 3.0 project was completed on schedule during 2006.  The PM45 project was completed as originallyplanned in late 2006.  However, thedevelopment scope was altered before the PM45 was released in the fourthquarter of 2006.  It isanticipated that revised PM45 product will be completed during the first halfof 2007.  

**Thenew generations of products under development are projected to sell throughsales channels and to customers that are substantially the same as current andhistorical sales channels and customers. Pricing and margins will not differ significantly from historicalpricing and margins.  Revenue for theprojects under development was projected through 2015.  Net income attributable to IPR&D wascalculated by applying Cyclades’ projected gross, operating, and net profitmargins to IPR&D revenue, while considering Avocent’s historical resultsand industry prospects.  These productshave estimated economic lives of up to 10 years.  The discount rate used to value IPR&D was28%.**

**TheCompany recorded approximately $3,904 of costs associated with the integrationof Cyclades people, processes and products into Avocent during 2006.  These costs also include severance accrualsresulting from the headcount reductions associated with duplicate positionseliminated since the acquisition in March. The Company does not expect additional integration costs and severanceaccruals in 2007 to be material. **

**LANDesk Group Limited —**On August 31, 2006, the Company acquired LANDeskGroup Limited, a privately-held company based in Salt Lake City, Utah. LANDeskemployed approximately 600 people, located primarily in the United States,China, and Europe.  The LANDesk productlines include software for the centralized management and protection ofinformation technology assets.  Theacquisition agreement provides for total initial consideration of approximately$407,382 including $199,528 in stock, $202,010 in cash, and $5,844 in estimatedfair value of assumed unvested employee stock options.   As specified within the acquisitionagreement, the potential of an earn-out payment to prior shareholders existedhad LANDesk achieved certain full year 2006 revenue targets.  Based on LANDesk’s fiscal year 2006 revenueresults, the Company does not believe that LANDesk achieved the revenue targetsthat would cause an earnout payment and therefore the Company has not accruedfor any contingent consideration in the accompanying consolidated financialstatements.  The Company does not believeany earnout payment was earned or payable.

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**Theagreement also allows for additional  stockconsideration to be paid to unvested option holders equal to the per shareamounts ultimately released to the former LANDesk shareholders fromescrow.  The Company expects to incurfuture compensation expense related to the amounts expected to be paid tounvested holders deemed to be attributable to future service to the Company.**

Theacquisition was recorded under the purchase method of accounting, and thepurchase cost was allocated based on the fair value of the assets acquired andliabilities assumed.  In accordance withgenerally accepted accounting principles, purchased research anddevelopment costs allocated to patented and patent-pending technology werecapitalized and will be amortized over the respective estimated usefullives.  The remaining amounts ofpurchased research and development were expensed upon the closing of thetransaction.  The goodwill recorded as aresult of the acquisition will not be amortized but will be included inAvocent’s annual review of goodwill for impairment.  Additionally, amortization of the otherintangible assets acquired and the goodwill recorded may be tax deductible ifthe Company makes certain tax elections. The Company is currently evaluating the impact of these elections whichmust be made within certain prescribed time periods following the date ofacquisition.  The Company has indemnifiedformer LANDesk shareholders for any personal tax consequences should theCompany’s election create current tax obligations for these formershareholders.  Avocent’s preliminaryallocation of the acquisition cost does not take into consideration the taximpacts should these elections be made within the required time period.  A summary of the total acquisition cost, excludingcash received, is as follows: 
| Cash paid for outstanding  shares                                             |   | $       | 202,010 |   |
|-------------------------------------------------------------------------------|--------|---------|---------|--------|
| Avocent common  stock issued for outstanding shares                           |   | 199,528 |    |
| Acquisition  costs paid by Avocent                                            |   | 12,083  |    |
| Estimated value  of unvested options assumed related to prior service periods |   | 5,844   |    |
| Total estimated  acquisition cost                                             |   | $       | 419,465 |   |

 

The acquisition cost wasallocated, on a preliminary basis, to the estimated fair values of the assetsacquired and liabilities assumed, as follows:
|                                           | ** ** | **Purchase  Price  Allocation** | ** ** | **Amortization  Period** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|--------------------------|------------|
| Tangible assets                           |       | $                               | 36,901     |                     | —     |   |
| In-process research and  development      |       | 18,600                          |       | —                   |       |
| Developed technology                      |       | 35,400                          |       | 5 years                  |       |
| Internally developed  software for resale |       | 21,900                          |       | 6 years                  |       |
| Customer base                             |       | 78,400                          |       | 7 years                  |       |
| Trademarks                                |       | 23,600                          |       | 7 years                  |       |
| Maintenance contracts                     |       | 9,600                           |       | 5 years                  |       |
| Non-compete agreements                    |       | 6,100                           |       | 3 years                  |       |
| Goodwill                                  |       | 274,613                         |       | —                   |       |
| Deferred taxes                            |       | (32,964                         | )          | —                   |       |
| Assumed liabilities                       |       | (52,685                         | )          | —                   |       |
|                                      |       | $                               | 419,465    |                     |       |   |

 

Avocent funded the acquisition through available cash, borrowings fromits line of credit and the issuance of 7,073 shares of common stock.  On the closing of the LANDesk transaction, weacquired $10,312 in cash held by LANDesk. An escrow account with $60,000 of the above stock consideration wasestablished to be held for indemnifiable claims for a period of 18 months afterthe acquisition closing date.

The $18,600 in fair value of all of the in-processresearch and development (“IPR&D”) received in the acquisition wasdetermined using a form of the discounted cash flow method known as themulti-period excess earnings method. These amounts were deemed to be for particular research and developmentprojects that have no alternative future uses and were therefore expensedrather than capitalized at the time of purchase.

LANDesk’s in-process research and developmentactivities consisted of the development of the following products: Virtualization,Hostbase Intrusion Prevention Services (HIPS) and Configuration ManagementDatabase (CMDB) product lines.  Virtualizationis a technology that presents a logical grouping of computing resources so thataccess can be provided in 

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waysthat enhance utilization over the original resource configuration.  HIPS technology is used to monitor computerand network activities to look for signs of intrusion into the computer system,which allows system administrators to identify potential system securitythreats and weaknesses.  CMDB is a repositoryfor information about a company’s IT services and infrastructures and theirrelationships to each other, allowing IT professionals the ability to assessthe current state of the IT infrastructure at any time.   It is anticipated that the products willbe completed during 2007.  

The new generations of products under development areprojected to sell through sales channels and to customers that aresubstantially the same as current and historical sales channels andcustomers.  Pricing and margins will notdiffer significantly from historical pricing and margins.  Revenue for the projects under developmentwas projected through 2015, with peak revenue for each being achieved in2012.   Net income attributable to IPR&Dwas calculated by applying LANDesk’s projected gross, operating, and net profitmargins to IPR&D revenue, while considering LANDesk’s  historical results and industryprospects.  These products have estimatedeconomic lives of up to 10 years.  Thediscount rate used to value IPR&D was 25%.

**Sonic Mobility Inc.**— On August 31, 2004, the Company acquired all of the outstanding stock ofSonic Mobility, based in Calgary, Canada. Sonic Mobility has developed (i)software products and technologies that allow for management of network anddata center infrastructure from mobile devices, (ii) security software forintranet and extranet resource access from mobile handheld devices and (iii)software products and technologies for managing mobile devices centrally by ITadministrators. The Company’s current management products and technologiesprimarily provide management and access products and technologies for fixedplace IT devices.  The addition of SonicMobility’s proprietary products expands the Company’s markets to include bothintegrated and stand-alone products and technologies for the expanding mobileIT device market. The results of Sonic Mobility’s operations have been includedin the consolidated financial statements since the date of acquisition.

The acquisition was recorded under the purchase methodof accounting, and the purchase price was allocated based on the fair value ofthe assets acquired and liabilities assumed. In accordance with generallyaccepted accounting principles, purchased research and development costsallocated to patent-pending technology were capitalized and will be amortizedover the respective estimated useful lives. The remaining amounts of purchased research and development wereexpensed upon the closing of the transaction. The goodwill recorded as a result of the acquisition is not amortizedbut is included in the Company’s review of goodwill for impairment. Thegoodwill is amortizable for tax purposes. A summary of the total purchase consideration is as follows:
| Cash paid for outstanding  shares |   | $      | 8,948  |   |
|-----------------------------------|--------|--------|--------|--------|
| Acquisition costs                 |   | 299    |   |
|                              |   |   |   |
| Total purchase consideration      |   | $      | 9,247  |   |

 

The Company funded the acquisition through availablecash. On the closing of the Sonic Mobility transaction, the Company acquired$106 in cash held by Sonic Mobility.

The purchase consideration was allocated to theestimated fair values of the assets acquired and liabilities assumed, asfollows:
|                                      | ** ** | **Purchase  Price  Allocation** | ** ** | **Amortization  Period** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|--------------------------|------------|
| Tangible assets                      |       | $                               | 491        |                     | Various    |   |
| In-process  research and development |       | 1,050                           |       | —                   |       |
| Developed  technology                |       | 1,420                           |       | 3 years                  |       |
| Customer base                        |       | 610                             |       | 5 years                  |       |
| Non-compete  agreements              |       | 1,060                           |       | 3 years                  |       |
| Goodwill                             |       | 5,203                           |       | —                   |       |
| Assumed  liabilities                 |       | (587                            | )          | —                   |       |
|                                 |       |                            |       |                     |       |
|                                 |       | $                               | 9,247      |                     |       |   |

 

The fair value of all ofthe in-process research and development (“IPR&D”) received in theacquisition was determined using a form of the discounted cash flow methodknown as the multi-period excess earnings method.  These amounts were deemed to be forparticular research and development projects that have no alternative futureuses and were therefore expensed rather than capitalized at the time ofpurchase.

Sonic Mobility’sin-process research and development activities consisted of an upgrade of itsSonic Sentry product, software that allows for managing mobile devicescentrally by IT administrators.  Theupgrade was planned to roll out in two phases, 

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one in the fall of 2004and the second in 2005.   The first phasewas completed and available for shipping during the fourth quarter of 2004,while the second phase was completed and available for shipping during 2005.

**OSA Technologies, Inc.**— On April 6, 2004, the Company acquired the outstanding stock of OSA.  OSA is headquartered in San Jose, Californiaand has additional offices in Shanghai, China and Taipei, Taiwan. OSA hasdeveloped embedded manageability firmware and software using IntelligentPlatform Management Interface (“IPMI”) products and technologies. Theacquisition of OSA enhances the Company’s position in the embedded managementmarket and OSA’s embedded management products and technologies for the IPMImarket complements the Company’s core KVM business and builds upon prioracquisitions.  The results of OSA’soperations have been included in the consolidated financial statements sincethe date of acquisition.

The acquisition was recorded under the purchase methodof accounting, and the purchase price was allocated based on the fair value ofthe assets acquired and liabilities assumed. In accordance with generallyaccepted accounting principles, purchased research and development costsallocated to patent-pending technology were capitalized and will be amortizedover the respective estimated useful lives. The remaining amounts of purchased research and development wereexpensed upon the closing of the transaction. The goodwill recorded as result of the acquisition is not amortized butis included in the Company’s review of goodwill for impairment. Additionally,the goodwill recorded upon the OSA acquisition is not amortizable for taxpurposes.  The excess of the fair valueover the intrinsic value of the unvested OSA options and the fair value of thevested OSA options at the date of consummation have been included in thepurchase consideration. A summary of the total purchase consideration is asfollows:
| Cash paid for outstanding  shares                    |   | $      | 51,685  |   |
|------------------------------------------------------|--------|--------|---------|--------|
| Value of common stock  issued for outstanding shares |   | 45,831 |    |
| Value of stock options  assumed                      |   | 2,526  |    |
| Acquisition costs                                    |   | 1,113  |    |
|                                                 |   |   |    |
| Total purchase consideration                         |   | $      | 101,155 |   |

 

The Company funded the acquisition through availablecash and by the issuance of 1,229 shares of Avocent common stock.  The common stock, valued at approximately$45,831, was recorded as non-cash consideration for the acquisition of OSA. Onthe closing of the OSA transaction, the Company acquired $5,619 in cash held byOSA.

The purchase consideration was allocated to theestimated fair values of the assets acquired and liabilities assumed, asfollows:
|                                      | ** ** | **Purchase  Price  Allocation** | ** ** | **Amortization  Period** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|--------------------------|------------|
| Tangible assets                      |       | $                               | 11,718     |                     | Various    |   |
| In-process  research and development |       | 21,720                          |       | —                   |       |
| Developed  technology                |       | 12,380                          |       | 3 years                  |       |
| Customer base                        |       | 4,260                           |       | 5 years                  |       |
| Trademarks                           |       | 3,240                           |       | 3 years                  |       |
| Non-compete  agreements              |       | 960                             |       | 3 years                  |       |
| Goodwill                             |       | 57,131                          |       | —                   |       |
| Deferred taxes                       |       | (8,544                          | )          | Various                  |       |
| Assumed  liabilities                 |       | (1,710                          | )          | —                   |       |
|                                 |       |                            |       |                     |       |
|                                 |       | $                               | 101,155    |                     |       |   |

 

Additionally, the Company recorded $6,351 of deferredcompensation related to the intrinsic value of the unvested OSA employee stockoptions at the time of the acquisition on April 6, 2004.  The deferred compensation was amortized on astraight-line basis over the vesting period of the options for which it wasrecorded.

The fair value of all of the in-process research anddevelopment (“IPR&D”) received in the acquisition was determined using aform of the discounted cash flow method known as the multi-period excessearnings method.  These amounts weredeemed to be for particular research and development projects that have noalternative future uses and were therefore expensed rather than capitalized atthe time of purchase.

OSA’s in-process research and development activitiesconsisted of an upgrade of its Firmware Suite to Version 2.0 and an embeddedserver management product.  Theseprojects were completed during 2006.

The new generations ofproducts under development will be sold through sales channels and to customersthat are 

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substantially the same as current and historical saleschannels and customers. Pricing and margins will not differ significantly fromhistorical pricing and margins.  Revenuefor the projects under development at the acquisition was projected through2012.   Net income attributable toIPR&D was calculated by applying OSA’s projected gross, operating and netprofit margins to IPR&D revenue, while considering Avocent’s historicalresults and industry prospects.

Revenue growth related to the in-process research anddevelopment was embodied in products launched during 2006. These products haveestimated economic lives ranging from approximately six to nine years. Theproduct life cycle is characterized by a gradual 2 to 3 year ramp up period,followed by a 1 to 2 year plateau, followed by a 3 to 4 year decline period.Gross margins are projected to be well above historical Avocent margins asthese products are primarily software. The discount rate used to valueIPR&D was 24%.

**Crystal Link Technologies**—On January 6,2004, the Company acquired the outstanding common shares of Crystal Link forapproximately $6,652 in cash and common stock, plus the assumption of liabilitiesand payment of certain acquisition costs. The purchase agreement called for additional potential earn-out paymentsof up to $5,000 based on future technical enhancements and achievement ofcertain sales goals.  In October 2004,the Company paid $2,000 of the earn-out consideration based on the achievementof the specified technology enhancements. The remaining $3,000 of potential earn-out consideration was not paid asthe goals specified were not met.  Theresults of Crystal Link’s operations have been included in the consolidatedfinancial statements since the date of acquisition.  Crystal Link, headquartered in Escondido, CA,has developed wireless technology for KVM switching and extension products.

The acquisition was recorded under the purchase methodof accounting, and the purchase price was allocated based on the fair value ofthe assets acquired and liabilities assumed. In accordance with generallyaccepted accounting principles, purchased research and development costsallocated to patent-pending technology were capitalized and are amortized overthe respective estimated useful lives. The remaining amounts of purchased research and development wereexpensed upon the closing of the transaction. The goodwill recorded as a result of the acquisition, including theearn-out consideration, is not amortized but is included in the Company’sannual review of goodwill for impairment. The goodwill is amortizable for tax purposes. A summary of the totalpurchase consideration is as follows:
| Cash paid for outstanding  shares                    |   | $      | 5,152  |   |
|------------------------------------------------------|--------|--------|--------|--------|
| Value of common stock  issued for outstanding shares |   | 3,500  |   |
| Acquisition costs                                    |   | 163    |   |
|                                                 |   |   |   |
| Total purchase consideration                         |   | $      | 8,815  |   |

 

The purchaseconsideration was allocated to the estimated fair values of the assets acquiredand liabilities assumed, as follows:
|                                      | ** ** | **Purchase  Price  Allocation** | ** ** | **Amortization  Period** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|--------------------------|------------|
| Tangible assets                      |       | $                               | 295        |                     | Various    |   |
| In-process research and  development |       | 6,490                           |       | —                   |       |
| Developed technology                 |       | 520                             |       | 3 years                  |       |
| Non-compete agreements               |       | 500                             |       | 3 years                  |       |
| International marketing  rights      |       | 1,250                           |       | 3 years                  |       |
| Goodwill                             |       | 1,857                           |       |                     |       |
| Assumed liabilities                  |       | (2,097                          | )          | —                   |       |
|                                 |       |                            |       |                     |       |
|                                 |       | $                               | 8,815      |                     |       |   |

 

The acquisition was funded through available cash andby the issuance of 107 shares of Avocent common stock.  The common stock, valued at approximately$3,500, was recorded as non-cash consideration for the acquisition of CrystalLink. On the closing of the Crystal Link transaction, the Company acquired $4in cash held by Crystal Link.

The fair value of all of the IPR&D received in theacquisition was determined using a form of the discounted cash flow methodknown as the multi-period excess earnings method.  These amounts were deemed to be for particularresearch and development projects that have no alternative future uses and weretherefore expensed rather than capitalized at the time of purchase.

**Pro Forma Financial Information —**The following unaudited pro forma summarycombines the results of operations of Avocent, Crystal Link, OSA, SonicMobility, Cyclades and LANDesk as if the acquisitions had occurred at thebeginning of each period presented. Certain adjustments have been made to reflect the impact of the purchasetransactions. These pro 

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forma results have been prepared for the years endedDecember 31, 2006, 2005 and 2004 for comparative purposes only and do notpurport to be indicative of what would have occurred had the acquisitions beenmade at the beginning of each period presented, or of results which may occurin the future.
|                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |
| Net sales                |       | $        | 590,829    |     | $          | 513,492 |   |
| Net income               |       | $        | 41,947     |     | $          | 15,753 |   |
| Income per basic share   |       | $        | 0.76       |     | $          | 0.28 |   |
| Income per diluted share |       | $        | 0.74       |     | $          | 0.28 |   |

 

**The above amounts exclude acquired in-process research anddevelopment expense of $18,600 related to the LANDesk acquisition, $2,100related to the Cyclades acquisition, $789 (net of a $261 tax benefit) relatedto the Sonic Mobility acquisition, $21,720 related to the OSA acquisition, and $3,829(net of a $2,661 tax benefit) related to the Crystal Link acquisition.**

**4.**                                      Inventories

Inventories consist of the following at December 31,2006 and 2005:

|                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------|------------|----------|------------|----------|------------|
| Raw materials, net   |       | $        | 3,022      |     | $          | 3,625 |   |
| Work in process, net |       | 1,411    |       | 173      |       |
| Finished goods, net  |       | 37,332   |       | 17,380   |       |
|                 |       |     |       |     |       |
| Inventories, net     |       | $        | 41,765     |     | $          | 21,178 |   |

 

As of December 31, 2006 and2005, inventories above have been reduced by reserves for excess and obsoleteinventories of $5,578 and $4,558, respectively.

**5.**                                      Investments 

All investments in publicly traded securities atDecember 31, 2006 and 2005, are classified as available-for-sale and arecarried at fair value.   The Companyincludes certain investments with original maturities of less than 90 days asshort term investments when such investments are a part of our investmentportfolio.  Investments at December 31,2006 and 2005 are as follows:
|                                     | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|
| **Current investments:**       | ** ** | **Amortized  Cost**             | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|                                |       |                            |       |   |   |   |   |   |   |
| Corporate bonds                     |       | $                               | 12,283     |   | $ | — |   | $ | (18 | ) | $ | 12,265 |   |
| Municipal bonds                     |       | 1,154                           |       |   |   | (1 | ) | 1,153 |   |
| U.S. government  agency obligations |       | 12,520                          |       | — |   | (74 | ) | 12,446 |   |
|                                |       |                            |       |   |   |   |   |   |   |
| Totals                              |       | $                               | 25,957     |   | $ | — |   | $ | (93 | ) | $ | 25,864 |   |

 
|                                     | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|
| **Non-current investments:**   | ** ** | **Amortized  Cost**             | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|                                |       |                            |       |   |   |   |   |   |   |
| U.S. government  agency obligations |       | $                               | 1,000      |   | $ | — |   | $ | (13 | ) | $ | 987 |   |
|                                |       |                            |       |   |   |   |   |   |   |
| Totals                              |       | $                               | 1,000      |   | $ | — |   | $ | (13 | ) | $ | 987 |   |

 

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|                                                                    | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------|------------|
| **Current investments:**                                      | ** ** | **Amortized  Cost**             | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|                                                               |       |                            |       |   |   |   |   |   |   |
| Corporate bonds                                                    |       | $                               | 28,949     |   | $ | — |   | $ | (253 | ) | $ | 28,696 |   |
| Municipal bonds                                                    |       | 162,654                         |       | 16 |   | (61 | ) | 162,609 |   |
| Mortgage-backed  securities guaranteed by U.S. government agencies |       | 12,682                          |       | 86 |   | (22 | ) | 12,746 |   |
| U.S. government  agency obligations                                |       | 23,601                          |       | — |   | (174 | ) | 23,427 |   |
|                                                               |       |                            |       |   |   |   |   |   |   |
| Totals                                                             |       | $                               | 227,886    |   | $ | 102 |   | $ | (510 | ) | $ | 227,478 |   |

 
|                                                                    | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------|------------|
| **Non-current investments:**                                  | ** ** | **Amortized  Cost**             | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|                                                               |       |                            |       |   |   |   |   |   |   |
| Corporate bonds                                                    |       | $                               | 4,749      |   | $ | — |   | $ | (41 | ) | $ | 4,708 |   |
| Municipal bonds                                                    |       | 3,083                           |       | — |   | (23 | ) | 3,060 |   |
| Mortgage-backed  securities guaranteed by U.S. government agencies |       | 29,834                          |       | 42 |   | (134 | ) | 29,742 |   |
| U.S. government  agency obligations                                |       | 14,624                          |       |   |   | (195 | ) | 14,429 |   |
|                                                               |       |                            |       |   |   |   |   |   |   |
| Totals                                                             |       | $                               | 52,290     |   | $ | 42 |   | $ | (393 | ) | $ | 51,939 |   |

 

Scheduled maturities of non-current investments are asfollows:
|                       | ** ** | **December 31, 2006** | ** ** |
|-----------------------|------------|---------------------------------|------------|
| ** **            | ** ** | **Amortized  Cost**             | ** ** | **Estimated  Fair  Value** | ** ** |
| Due within two  years |       | $                               | 1,000      |   | $ | 987 |   |
| Due after two  years  |       | —                          |       | — |   |
|                  |       |                            |       |   |   |
| Totals                |       | $                               | 1,000      |   | $ | 987 |   |

 

As of December 31, 2006 substantially all of the Company’s investmentsthat had unrealized losses were in a loss position for less than twelvemonths.  The unrealized losses include 14individual securities and have been caused by slight upward variations ininterest rates in the particular securities since the time they were acquired.Most of these investments have been acquired within the past 15 months, are ofhigh credit quality, are insured or are guaranteed by an agency of the USgovernment, and Avocent anticipates that the Company will realize the full parvalue upon maturity of these securities.

Net realized gains (losses) for the years ended December 31, 2006, 2005,and 2004 is comprised of the following:
|                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |     |       |
| Gross realized gains                   |       | $        | 113        |     | $          | 20       |       | $ | 31 |   |
| Gross realized losses                  |       | (367     | )          | (830     | )          | (3,835   | )          |
| Net realized investment gains (losses) |       | $        | (254       | )        | $          | (810     | )          | $ | (3,804 | ) |

 

In the second quarter of 2002, the Company made a $1,000 investment inRymic Systems, Inc., a privately-held company based in Huntsville, Alabama,that develops hardware and software products and technologies for remotemonitoring and control of vehicles and equipment over the Internet usingstandard desktop web browsers.  TheCompany purchased 400 shares of Rymic’s common stock, giving Avocentapproximately a 14% equity position in Rymic. During 2004, as a result of Rymic’s declining financial condition, theCompany recorded an impairment charge of $450 against its investment in Rymic,which was included in net realized investment losses in the accompanyingconsolidated statements of income and which reduced its net carrying value tonil.

In the second quarter of 2003 the Company made a $3,000 preferred stockinvestment in VIEO, Inc., a privately held company based in Austin, Texas. VIEOprovides management products for Adaptive Application InfrastructureManagement.  

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VIEO’s products combine application-aware networking hardware withintelligent infrastructure management software in a secure, purpose-builtappliance to measure, analyze and control application resources.  The Company’s investment, which representsless than 10% ownership in VIEO, is being accounted for on the cost method.During 2004, as a result of VIEO’s declining financial condition and itsplanned recapitalization, the Company recorded an impairment charge of $3,000against its investment in VIEO, which was included in net realized investmentlosses in the accompanying consolidated statements of income, and which reducedthe net carrying value of the investment to nil.

**6.**                                      Property Held for Lease

In the fourth quarter of 2005, the Company sold abuilding that it owned and had previously occupied in Huntsville, Alabama. TheCompany had an agreement to lease the building to an unrelated party. Rentalincome totaled approximately $202 for the year ended December 31, 2005 and $221for the year ended December 31, 2004. The Company received approximately $1,912from the sale of the building, resulting in a gain on disposal of approximately$727.

**7.**                                      Property and Equipment 

Property and equipment consists of the following atDecember 31, 2006 and 2005:
|                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Land and land  improvements      |       | $        | 5,577      |     | $          | 4,795 |   |
| Buildings                        |       | 24,289   |       | 23,321   |       |
| Leasehold  improvements          |       | 3,147    |       | 2,454    |       |
| Computer  software and equipment |       | 29,638   |       | 22,330   |       |
| Other equipment                  |       | 17,019   |       | 14,601   |       |
| Construction in  progress        |       | 358      |       | 591      |       |
|                             |       |     |       |     |       |
|                             |       | 80,028   |       | 68,092   |       |
| Less accumulated  depreciation   |       | (42,024  | )          | (31,291  | )          |
|                             |       |     |       |     |       |
| Property and  equipment, net     |       | $        | 38,004     |     | $          | 36,801 |   |

 

Depreciation expense was $8,689, $7,037, and $6,222 for the years endedDecember 31, 2006, 2005 and 2004, respectively.

**8**.                                      **Goodwill and Other Intangible Assets**

**Other intangible assets subject to amortization, includingthe intangible assets from our acquisitions detailed in Note 3, are as follows:**
|                                           | ** ** | ** December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **Gross  Carrying  Amounts**          | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** |
| Developed  technology                     |       | $                                     | 68,720     |                            | $          | 17,741 |   | $ | 14,820 |   | $ | 8,293 |   |
| Internally  developed software for resale |       | 21,900                                |       | 1,217                           |       | — |   | — |   |
| Patents and  trademarks                   |       | 35,520                                |       | 7,753                           |       | 9,174 |   | 4,959 |   |
| Customer base  and certification          |       | 100,120                               |       | 9,449                           |       | 4,870 |   | 1,719 |   |
| Maintenance  contracts                    |       | 9,600                                 |       | 640                             |       | — |   | — |   |
| Non-compete  agreements                   |       | 12,720                                |       | 3,775                           |       | 2,520 |   | 1,289 |   |
| Other assets                              |       | 4,228                                 |       | 2,559                           |       | 1,814 |   | 1,175 |   |
|                                      |       | $                                     | 252,808    |                            | $          | 43,134 |   | $ | 33,198 |   | $ | 17,435 |   |

 

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**For the years ended December 31, 2006, 2005 and 2004,amortization expense for other intangible assets was $26,626, $18,509 and $24,279,respectively.  The approximate futureannual amortization for other intangible assets is as follows:**

| Years ending  December 31: | ** ** | ** ** |
|----------------------------|------------|------------|
| 2007                       |       | $          | 43,797 |
| 2008                       |       | 41,797     |
| 2009                       |       | 37,207     |
| 2010                       |       | 34,199     |
| 2011                       |       | 25,926     |
| Thereafter                 |       | 26,748     |
| Total                      |       | $          | 209,674 |

 

**The changes in the carrying amount of goodwill forthe year ended December 31, 2006, are as follows:**
|                                    | ** ** | ** **     | ** ** | ** **   | ** ** | **Embedded**             | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------------------------|------------|----------------|------------|--------------|------------|--------------------------|------------|--------------|------------|------------|------------|
| ** **                         | ** ** | **Management** | ** ** | ** **   | ** ** | **Software**             | ** ** | **Other**    | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Systems**    | ** ** | **LANDesk**  | ** ** | **and   Solutions** | ** ** | **Business** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Division**   | ** ** | **Division** | ** ** | **Divisions**            | ** ** | **Units**    | ** ** | **Total**  | ** ** |
|                               |       |           |       |         |       |                     |       |         |       |       |       |
| Balance as of  January 1, 2006     |       | $              | 253,728    |         |       |                     | $          | 11,927       |       | $          | 4,337      |   | $ | 269,992 |   |
|                               |       |           |       |         |       |                     |       |         |       |       |       |
| Goodwill  acquired during the year |       | 62,702         |       | $            | 274,613    |                     |       |         |       |       | 337,315    |   |
|                               |       |           |       |         |       |                     |       |         |       |       |       |
| Adjustments  during the year       |       |           |       |         |       | (65                      | )          | 246          |       | 181        |       |
|                               |       |           |       |         |       |                     |       |         |       |       |       |
| Balance as of December  31, 2006   |       | $              | 316,430    |         | $          | 274,613                  |       | $            | 11,862     |       | $          | 4,583 |   | $ | 607,488 |   |

 

**The Company performed an annual impairment test of goodwillin the fourth quarter of 2006, 2005 and 2004. The test in the fourth quarter of each year concluded that there hadbeen no impairment of goodwill and that no adjustments were required.  See Note 16 for discussion onreallocation of goodwill among reporting units.**

**9.**                                      Product Warranties 

The activitywithin the liability for warranty returns in 2006 and 2005 is as follows:
|                                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                      |       |     |       |     |       |
| Balance,  beginning of year                               |       | $        | 2,536      |     | $          | 2,760 |   |
|                                                      |       |     |       |     |       |
| Accruals for  product warranties issued during the period |       | 155      |       | 252      |       |
| Assumed on the  acquisition of Cyclades                   |       | 158      |       | —   |       |
| Settlements made  during the period                       |       | (363     | )          | (476     | )          |
|                                                      |       |     |       |     |       |
| Balance, end of year                                      |       | $        | 2,486      |     | $          | 2,536 |   |

 

Deferred revenue related to the Company’s extended warranty forhardware products program was $4,545 at December 31, 2006 and $1,922 atDecember 31, 2005.  The Company recordedearned revenue from the amortization of deferred revenue related to extendedwarranties of $2,649 during 2006, $912 during 2005, and $607 during 2004.  In addition, the Company recorded new extendedwarranties of $3,661 during 2006, $1,168 during 2005, and $1,227 during 2004.

The Company defers revenue for subscription, service and maintenancecontracts until earned, which is generally over the term of the contract orwhen services are performed.  As ofDecember 31, 2006, deferred revenue was $53,514, of which approximately $47,858related to LANDesk. As of December 31, 2005, deferred revenue was $3,833.

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**10.****                               IncomeTaxes**

The provision for income taxes for the years endedDecember 31, 2006, 2005 and 2004 is comprised of the following:
|                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |     |       |
| Current:                          |       |     |       |     |       |     |       |
| U.S. Federal                      |       | $        | 19,574     |     | $          | 17,667   |       | $ | 14,175 |   |
| U.S. State                        |       | 1,745    |       | 273      |       | 1,582    |       |
| Foreign                           |       | 7,102    |       | 4,422    |       | 4,075    |       |
|                              |       |     |       |     |       |     |       |
|                              |       | 28,421   |       | 22,362   |       | 19,832   |       |
| Deferred:                         |       |     |       |     |       |     |       |
| U.S. Federal                      |       | (5,647   | )          | (2,914   | )          | (6,367   | )          |
| U.S. State                        |       | (919     | )          | (345     | )          | (1,092   | )          |
| Foreign                           |       | (1,695   | )          | (366     | )          | 79       |       |
|                              |       |     |       |     |       |     |       |
|                              |       | (8,261   | )          | (3,625   | )          | (7,380   | )          |
|                              |       |     |       |     |       |     |       |
| Total provision  for income taxes |       | $        | 20,160     |     | $          | 18,737   |       | $ | 12,452 |   |

 

The provision for federal income taxes differs from the amount computedby applying the statutory rate of 35% to taxable income as follows:
|                                                                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                               |       |     |       |     |       |     |       |
| Expected federal  income tax provision                             |       | $        | 22,993     |     | $          | 23,480   |       | $ | 10,672 |   |
| Add (deduct):                                                      |       |     |       |     |       |     |       |
| Extraterritorial income exclusion benefit                          |       | (89      | )          | (64      | )          | (35      | )          |
| State income tax (benefit), net of federal tax                     |       | 541      |       | (47      | )          | 318      |       |
| Tax effect resulting from foreign operations taxed  at lower rates |       | (5,789   | )          | (7,450   | )          | (7,848   | )          |
| Acquired in-process research and development                       |       | 3,060    |       | —   |       | 7,602    |       |
| Compensation expense                                               |       | (1,126   | )          | 705      |       | 1,984    |       |
| Municipal bond interest income                                     |       | (739     | )          | (1,074   | )          | (602     | )          |
| Subpart F income                                                   |       | 923      |       | 1,447    |       | 1,110    |       |
| Research Credit                                                    |       | (930     | )          | (833     | )          | (325     | )          |
| Repatriation dividend                                              |       | —   |       | 3,809    |       | —   |       |
| Valuation allowance                                                |       | 1,135    |       | —   |       | —   |       |
| Other                                                              |       | 181      |       | (1,236)  |       | (424     | )          |
|                                                               |       | $        | 20,160     |     | $          | 18,737   |       | $ | 12,452 |   |

 

The components of the net deferred income tax assetsand liabilities at December 31, 2006 and 2005, are as follows:
|                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net current  deferred income tax assets:                        |       |     |       |     |       |
| Allowance for doubtful accounts                                 |       | $        | 386        |     | $          | 340 |   |
| Allowance for sales returns and liability for  warranty returns |       | 1,067    |       | 1,289    |       |
| Inventory reserves                                              |       | 3,205    |       | 1,451    |       |
| Operating loss carryforwards                                    |       | 931      |       | 44       |       |
| Other                                                           |       | 1,766    |       | 930      |       |
|                                                            |       |     |       |     |       |
|                                                            |       | $        | 7,355      |     | $          | 4,054 |   |
|                                                            |       |     |       |     |       |
| Net noncurrent  deferred income tax liabilities:                |       |     |       |     |       |
| Accumulated depreciation                                        |       | $        | (1,750     | )        | $          | (2,608 | ) |
| Acquired developed technology                                   |       | 2,641    |       | 3,011    |       |
| Acquired intangible assets                                      |       | (39,490  | )          | (4,986   | )          |
| Loss on investments                                             |       | —   |       | 272      |       |
| Operating loss carryforwards                                    |       | 3,115    |       | 478      |       |
| Capital loss carryforward                                       |       | 506      |       | 314      |       |
| Research credit carryforward                                    |       | 1,985    |       | 388      |       |
| Allowance for impairment on investments                         |       | 1,560    |       | 1,450    |       |
| Stock based-compensation expense                                |       | 4,558    |       | —   |       |
| Other                                                           |       | 673      |       | (329     | )          |
|                                                            |       | (26,202  | )          | (2,010   | )          |
| Less valuation  allowances                                      |       | (4,175   | )          | (554     | )          |
|                                                            |       |     |       |     |       |
|                                                            |       | $        | (30,377    | )        | $          | (2,564 | ) |
|                                                            |       |     |       |     |       |
| Net deferred income tax  asset (liability)                      |       | $        | (23,021    | )        | $          | 1,490 |   |

 

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During 2006, the Company wrote off a deferred tax asset of $1,040arising from an acquired research credit carryforward.  The acquired company had a full valuationallowance recorded against the deferred tax asset resulting in no impact onreported goodwill.

The net change in the valuation allowance for deferred tax assets wasan increase of $3,621 primarily due to allowances recorded against deferred taxassets attributable to operating loss and state research creditcarryforwards.  Of this amount $2,486 wasprimarily attributable to acquired deferred tax assets and $1,135 related todeferred tax assets associated with post acquisition activity. 

Periodically, the Company faces challenges from domestic and foreigntax authorities regarding the amount of taxes due. These challenges includequestions regarding the timing and amount of deductions and the allocation ofincome among various tax jurisdictions. In evaluating the exposure associatedwith various tax filing positions, the Company records reserves for probableexposures. Based on management’s evaluation of the Company’s tax position, itis believed the amounts related to these tax exposures are appropriatelyaccrued as of December 31, 2006 and 2005. To the extent the Company were toprevail in matters for which accruals have been established or be required topay amounts in excess of the aforementioned reserves, the Company’s effectivetax rate in a given financial statement period may be impacted.

The Company intends to permanently reinvest the undistributed earningsof approximately $81,110 as of December 31, 2006 of its foreign subsidiaries inits international operations. Should the Company’s intent change, additionalincome tax expense would likely be recorded due to the differential in taxrates between the U.S. and the international jurisdictions.  In 2005, the Company repatriated $90,000 offoreign earnings in accordance with the provisions of the American JobsCreation Act of 2004 (the “Act”). Additional income tax expense of $3,809 resulted from thistransaction.  The Act created a temporaryincentive for U.S. corporations to repatriate accumulated income earned abroadby providing an 85 percent dividends received deduction for certain dividendsfrom controlled foreign corporations.

For state income tax purposes, at December 31, 2006, the Company hasapproximately $5,593 of net operating loss carry forwards available to offsetfuture taxable income in certain states. These state net operating loss carryforwards are subject to certainlimitations.  If not utilized, the statenet operating loss carryforwards will expire from 2014 to 2021.  For foreign income tax purposes, the Companyhas approximately $18,543 of net operating loss carryforwards available tooffset future taxable income in certain jurisdictions.  The carryforward period for a significantportion is unlimited.

In July 2006, the FASB released FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes, an interpretation of FAS Statement 109” (FIN48).  FIN 48 clarifies the accounting andreporting for uncertainties in income tax law. This interpretation prescribes a comprehensive model for the financialstatement recognition, measurement, presentation, and disclosure of uncertaintax positions taken or expected to be taken in income tax returns.  The Company will adopt this Interpretation inthe first quarter of 2007.  Thecumulative effects, if any, of applying this Interpretation will be recorded asan adjustment to retained earnings as of the beginning of the period ofadoption.  The Company has commenced theprocess of evaluating the expected effect on adoption of FIN 48 and currentlydoes not expect it to have a material impact on its consolidated financialstatements

**11.**                               Treasury Stock

The Company may repurchase a total of 12,000 sharesunder the share repurchase program approved by our Board of Directors.  The Company purchased 7,038 shares in 2006and 2,675 shares in 2005 under the share repurchase program and has purchased9,814 shares through December 31, 2006, under the share repurchase program.  InAugust 2006, the Company reissued 7,073 shares of treasury stock in conjunctionwith the acquisition of LANDesk (see Note 3).

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**12.**                               Earnings Per Share

A summary of thecalculation of basic and diluted earnings per share (EPS) for the years endedDecember 31, 2006, 2005 and 2004, is as follows:
|                                                | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Earnings  Per-Share** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|-------------------------|------------|
| **For the  Year Ended December 31, 2006** |       |                    |       |                      |       |                    |       |
| **Basic EPS**                                  |       |                    |       |                      |       |                    |       |
| Net income                                     |       | $                       | 45,532     |                      | 48,549     |                    | $          | 0.94 |   |
| **Effect of Dilutive Securities**              |       |                    |       |                      |       |                    |       |
| Stock options and restricted stock units (RSU) |       |                    |       | 926                       |       |                    |       |
| **Diluted EPS**                                |       |                    |       |                      |       |                    |       |
| Net income and assumed conversions             |       | $                       | 45,532     |                      | 49,475     |                    | $          | 0.92 |   |
|                                           |       |                    |       |                      |       |                    |       |
| **For the  Year Ended December 31, 2005** |       |                    |       |                      |       |                    |       |
| **Basic EPS**                                  |       |                    |       |                      |       |                    |       |
| Net income                                     |       | $                       | 48,349     |                      | 49,318     |                    | $          | 0.98 |   |
| **Effect of Dilutive Securities**              |       |                    |       |                      |       |                    |       |
| Stock options                                  |       |                    |       | 936                       |       |                    |       |
| **Diluted EPS**                                |       |                    |       |                      |       |                    |       |
| Net income and assumed conversions             |       | $                       | 48,349     |                      | 50,254     |                    | $          | 0.96 |   |
|                                           |       |                    |       |                      |       |                    |       |
| **For the  Year Ended December 31, 2004** |       |                    |       |                      |       |                    |       |
| **Basic EPS**                                  |       |                    |       |                      |       |                    |       |
| Net income                                     |       | $                       | 18,040     |                      | 48,964     |                    | $          | 0.37 |   |
| **Effect of Dilutive Securities**              |       |                    |       |                      |       |                    |       |
| Stock options                                  |       |                    |       | 1,566                     |       |                    |       |
| **Diluted EPS**                                |       |                    |       |                      |       |                    |       |
| Net income and  assumed conversions            |       | $                       | 18,040     |                      | 50,530     |                    | $          | 0.36 |   |

 

Anti-dilutive options topurchase common stock outstanding were excluded from the calculationsabove.  At December 31, 2006, 2005and 2004, options or RSUs to purchase 2,242, 2,375 and 2,440 shares of commonstock, respectively, were outstanding but were not included in the computationof diluted earnings per share because inclusion of such options would have beenanti-dilutive.

**13.**                               Commitments and Contingencies 

The Company leasesbuildings and certain equipment under various operating leases. Rent expenseunder these leases totaled approximately $4,868, $3,578 and $3,035 for theyears ended December 31, 2006, 2005 and 2004, respectively.  Future minimum rental payments undernon-cancelable operating leases are approximately as follows:

| Years ending          | ** ** | ** ** |
|-----------------------|------------|------------|
| **December 31:** | ** ** | ** ** |
| 2007                  |       | $          | 4,528 |
| 2008                  |       | 3,081      |
| 2009                  |       | 1,001      |
| 2010                  |       | 286        |
| 2011                  |       | 214        |
| Thereafter            |       | 405        |
|                  |       |       |
|                  |       | $          | 9,515 |

 

In theordinary course of our business, the Company may at any point in time have asignificant amount of contractual commitments not yet recognized in ourfinancial statements.  These commitmentstotaled $31,112 as of December 31, 2006 and are all due within 2007. Thesecommitments relate primarily to the Company’s need to schedule thepurchase of inventories in advance of the related forecasted sales tocustomers. The Company also has at any point in time a variety of short-termcontractual commitments for services such as advertising, marketing,accounting, legal, and research and development activities. The liabilities forthese services and the related expenses are typically recognized upon thereceipt of the related services.

TheCompany has been involved from time to time in litigation in the normal courseof business. Management is not aware of 

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anypending or threatened litigation matters that will have a material adverseeffect on the Company’s business, results of operations, financial condition orcash flows (*see Note 18*).

**14.**                               Equity Compensation and Stock Purchase Plans

The Company has equitycompensation plans covering substantially all of its employees and directors. Inaddition, effective August 31, 2006, Avocent assumed the stock option plans andthe related underlying unvested options of LANDesk upon acquisition.  Purchase prices for common stock subject tooptions issued under the assumed plans generally approximate the fair marketvalue of the related shares at the date of grant. Generally, options vest overfour to five years and typically expire 10 years from the grant date.

The Company grantsequity incentive awards under the 2005 Avocent Corporation Equity IncentivePlan (the 2005 Plan).  As originallyapproved by the stockholders, the 2005 Plan authorized a total of 2,500 sharesof common stock for issuance, plus (i) any shares remaining available forissuance under previous stock option plans up to a maximum of 1,187 shares and(ii) any shares subject to any outstanding options under our stock optionplans that subsequently expire unexercised.  New options may no longer begranted under any former plans.  The 2005Plan allows for options, restricted stock, restricted stock units, stockappreciation rights, performance shares, performance units, deferred stockunits, and dividend equivalents, and options granted under the 2005 Plan may beeither incentive stock options or nonqualified stock options. Nonqualified stock options, restricted stock, restricted stock units,performance shares, performance units, stock appreciation rights, deferredstock units, and dividend equivalents may be granted under the 2005 Plan to Avocent’sdirectors, employees, or consultants, but incentive stock options may be granted only to its employees. Options may not be granted at less than the fair market value on date of grantand may not have a term of greater than 10 years.  The Company issues new shares to satisfy stock options exercised.  During the second quarter of 2006, Avocent’sstockholders approved an additional 2,250 shares of common stock for issuanceunder the 2005 Plan.  During 2006, wegranted both stock options and restricted stock units under the 2005 Plan.  

The following schedulesummarizes the stock option activity in the Company’s stock-based compensationplans is as follows: 
|                                              | ** ** | **Number of  Options** | ** ** | **Range of  Exercise  Prices** | ** **         | **Weighted  Average  Exercise  Price** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|-------------------------------------|--------------------|----------------------------------------|------------|
| Options  outstanding, December 31, 2005 |       | 6,622                       |       | $                                   | 0.11 — $70.94 |                                   | $          | 32.58 |   |
| Options assumed  upon acquisition of LANDesk |       | 572                         |       | $                                   | 3.34 — 33.86  |                                   | $          | 13.06 |   |
| Options granted                              |       | 63                          |       | $                                   | 22.77 — 37.50 |                                   | $          | 31.09 |   |
| Options  forfeited and cancelled             |       | (558                        | )          | $                                   | 1.31 — 69.63  |                                   | $          | 40.57 |   |
| Options  exercised                           |       | (1,770                      | )          | $                                   | 0.11 — 34.86  |                                   | $          | 21.27 |   |
|                                         |       |                        |       |                                |               |                                   |       |
| Options outstanding,  December 31, 2006 |       | 4,929                       |       | $                                   | 1.31 — $70.9  | 4                                      | $          | 33.45 |   |

 

On April 29, 2005, theCompany’s Board of Directors approved a plan to accelerate vesting of all thenoutstanding stock options with an exercise price of greater than $25.00 andunvested on December 25, 2005.  Under theprovisions of APB 25, there was no compensation expense related to acceleratingthese options as the options affected by the acceleration had exercise priceshigher than the closing price of Avocent’s common stock as of the modificationdate.  As a result of the Board’s action,stock options to purchase approximately 1,100 shares of Avocent’s common stockbecame exercisable effective December 25, 2005. The exercise prices of the affected stock options ranged from $25.17 to$41.57 per share.  The closing price ofAvocent’s common stock on April 29, 2005 was $25.14. There were no such materialaccelerations during 2006 or 2004.

The total pretax intrinsic value ofoptions exercised during the years ended December 31, 2006, 2005 and 2004 was $22,074,$15,289 and $27,253, respectively.

 

The following table summarizes information about stock optionsoutstanding at December 31, 2006:
| **Range of Exercise  Prices** | ** ** | **Number   Outstanding** | ** ** | **Weighted Avg.  Remaining   Contractual   Life** | ** ** | **Intrinsic   Value** | ** ** | **Weighted   Avg.   Exercise   Price** | ** ** | **Number   Exercisable** | ** ** | **Weighted   Avg.   Exercise   Price** | ** ** | **Intrinsic   Value** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|------------------------------------------------------------------|------------|----------------------------|------------|-------------------------------------------------------|------------|-------------------------------|------------|-------------------------------------------------------|------------|----------------------------|------------|
| $1.31 - $9.48                           |       | 207                           |       | 5.55                                                             |       | $                          | 6,286      |                                                  | $          | 3.47                          |       | 153                                                   |       | $                          | 3.56       |   | $ | 4,631 |   |
| $10.47 - $20.00                         |       | 397                           |       | 6.42                                                             |       | 7,449                      |       | 15.13                                                 |       | 190                           |       | 15.38                                                 |       | 3,505                      |       |
| $20.33 – $29.95                    |       | 2,129                         |       | 5.88                                                             |       | 18,425                     |       | 25.19                                                 |       | 2,106                         |       | 25.22                                                 |       | 18,185                     |       |
| $30.02 - $44.25                         |       | 743                           |       | 6.77                                                             |       | 265                        |       | 38.08                                                 |       | 632                           |       | 39.07                                                 |       | 102                        |       |
| $46.19 - $70.94                         |       | 1,454                         |       | 3.40                                                             |       | —                     |       | 52.46                                                 |       | 1,454                         |       | 52.46                                                 |       | —                     |       |
|                                    |       | 4,930                         |       | 5.31                                                             |       | $                          | 32,425     |                                                  | $          | 33.45                         |       | 4,535                                                 |       | $                          | 34.74      |   | $ | 26,423 |   |

 

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The options above were issued with exercise pricesthat approximated fair value at the date of grant. 

The aggregate intrinsic value in thepreceding table represents the total pretax intrinsic value, based on ourclosing price of $33.85 as of December 31, 2006, which would have been receivedby option holders had all option holders exercised their options on that date.  The weighted average remaining contractualterm for exercisable options was 5.08 at December 31, 2006.  The total number of in-the-money optionsexercisable as of December 31, 2006 was 2,502.  At December 31, 2006, 4,227 shares areavailable for grant under the Company’s 2005 plan.

*Restricted Stock Units*

Our2005 Plan permits the granting of restricted stock units to eligible employeesand directors at the fair market value of our common stock at the date ofgrant.  Awards during 2006 typicallybecome fully vested over two or three year periods.  Restricted stock units are payable in sharesof our common stock upon vesting.

Thefollowing table presents a summary of the activity in our nonvested restrictedstock units during the year ended December 31, 2006:
| Nonvested stock units             | ** ** | **Number of   Stock Units** | ** ** | **Weighted-  Average   Grant-Date   Fair Value** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------------------|------------|
| Nonvested stock  units at December 31, 2005 |       | —                                     |       | —                                                          |       |
| Granted                                     |       | 997                                        |       | $                                                               | 28.66      |   |
| Vested                                      |       | —                                     |       | —                                                          |       |
| Forfeited                                   |       | (32                                        | )          | 28.48                                                           |       |
| Nonvested stock units  at December 31, 2006 |       | 965                                        |       | $                                                               | 28.67      |   |

 

Asof December 31, 2006, there was approximately $22,207 of total unrecognizedcompensation cost related to nonvested share-based compensation arrangementsgranted under the 2005 Plan.  That costis expected to be recognized over an estimated weighted average amortizationperiod of approiximately 2 years.  Therewere no vesting of restricted stock units in 2006, however, in the firstquarter of 2007, a total of 323 shares vested. At the release of these shares, 94 shares were withheld for taxes,resulting in issuance of 229 shares, net of tax withholding.

*Performance – Based Restricted Stock Units*

Certainrestricted stock units contain both service and performance conditions thataffect the quantity of awards that will vest. Performance-based restricted stock units begin vesting upon thecompletion of a specified service period and the achievement of certainperformance targets (which can include individual and company measures) and areconverted into shares of our common stock upon vesting, typically over a threeyear period.  The fair value is based onthe market price of our common stock on the grant date and assumes that thetarget payout level will be achieved. Compensation cost is adjusted in future periods for subsequent changesin the expected outcome of the performance related conditions until the vestingdate.  All performance-based restrictedstock unit activity is included in the nonvested stock unit table of activityabove.

*Employee Stock Purchase Plan*

On December 6, 2000, the stockholders approved anemployee stock purchase plan for all Avocent employees (the AESPP), throughwhich qualified employees may participate in common stock ownership. The AESPPqualifies as a non-compensatory plan under Section 423 of the Internal RevenueCode. The Company has reserved 1,500 shares of common stock for issuance underthe AESPP. The price of stock purchased under the AESPP is generally 85% of thelower of the fair market value of the common stock (i) at the beginning of theoffering period or (ii) at the end of the purchase period. In the event thefair market value at the end of a purchase period is less than the fair marketvalue at the beginning of the offering period, the participants will bewithdrawn from the current offering period following exercise and automaticallyre-enrolled in a new offering period. The new offering period will use thelower fair market value as of the first date of the new offering period todetermine the purchase price for future purchase periods. The AESPPadministrator administers and interprets all rules and regulations applicableto the AESPP.  Pursuant to the AESPP, 247shares were issued at a weighted average price of 

71

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$24.42 per share for the year ended December 31, 2005and 204 shares were issued at a weighted average price of $15.76  per share for the year ended December 31,2004.  The Company’s Board of Directorshas indefinitely suspended participation in the AESPP following the 2005purchase periods.

**15.**                              Retirement Plans 

The Company sponsors a 401(k) savings plan covering substantially allU.S. employees and a profit-sharing plan covering substantially allinternational employees.  Under the401(k) savings plan, the Company makes discretionary contributions to match 50%of an employee’s contributions up to 6% of the employee’s compensation. TheCompany may also elect to make additional discretionary contributions asdetermined by its Board of Directors. No discretionary contributions were madeduring the years ended December 31, 2006, 2005 or 2004 under the 401(k) savingsplan. The Company’s expense for contributions under these plans totaledapproximately $2,022, $1,658 and $1,408 for the years ended December 31, 2006,2005 and 2004, respectively.

**16.**                              Segment Reporting 

In prior years, theCompany reported its operations as a single reportable segment.  In the first quarter of 2006, Avocent reorganizedits business into five divisions and in the third quarter of 2006, acquired itssixth division LANDesk*(See Note 3*).  Each of these divisions are consideredoperating segments.  The Company’sdivisions operating in 2006 were:

·            The Management SystemsDivision, which includes branded and OEM KVM, serial console, power control andmanagement appliance businesses; 

·            The Embedded Software andSolutions Division, which focuses on developing and marketing embedded systemsand software including IPMI and embedded KVM technologies primarily for Avocent’sOEM customers;

·            The Connectivity andControl Division, which focuses on expanding the markets for Avocent’s serial extension,and wireless broadcast, point-of-sale, and audio-visual products; 

·            The Desktop Solutions Division,which is developing technologies to enable desktop over IP solutions, includingblade computers; 

·            The MobileTechnologies Division, which includes mobile device management and securewireless systems administration; and

·            The LANDesk Division,which includes systems,security, and service management solutions for desktops, servers, and mobiledevices across the enterprise .

The reorganizationincluded reconfiguring the Company’s systems and defining new cost centers andoperating measures to track performance of the divisions and to use as a basisfor our chief operating decision makers to manage and allocate resources.  As a result of this change the Company hasidentified three reportable segments and has retroactively adjusted the segmentinformation previously disclosed for the year ended December 31, 2005 toconform to the current segment disclosures. In addition, and as of the effective date of the reorganization, theCompany reallocated goodwill among its reporting units based on the relativefair value of each reporting unit.  Inthe first quarter of 2007, the Company merged the Mobile Technologies Divisioninto the LANDesk Division as their products consist primarily of software soldto similar customer groups.  Also in thefirst quarter of 2007, the Company merged the Embedded Software and SolutionsDivision into the Management Systems Division as they are serving similarcustomers and market segments.

The Company evaluates the performance of its segments based on revenueand operating profit, which excludes corporate and unallocated costs,stock-based compensation, amortization of intangibles, and acquired in-processresearch and development expense.  TheCompany does not track or use assets by segment as a measure of performance and,therefore, has not presented assets by segment. The following is a presentationof information for the Company’s three reportable segments (Management Systems,LANDesk, and Embedded Software and Solutions):

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|                                  | ** ** | **For the years ended** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|
| ** **                       | ** ** | **December 31,   2006**      | ** ** | **December 31,   2005** | ** ** | **December 31,   2004** | ** ** |
| Net revenues:                    |       |                                   |       |   |   |   |   |
| Management  Systems              |       | $                                      | 426,412    |   | $ | 330,213 |   | $ | 341,446 |   |
| LANDesk                          |       | 38,682                                 |       | — |   | — |   |
| Embedded  Software and Solutions |       | 33,766                                 |       | 21,882 |   | 4,910 |   |
| Other business  units            |       | 16,658                                 |       | 14,532 |   | 18,898 |   |
| Corporate and  unallocated       |       | 3,677                                  |       | 3,261 |   | — |   |
| Total net revenues               |       | $                                      | 519,195    |   | $ | 369,888 |   | $ | 365,254 |   |

 

|                                                      | ** ** | **For the years ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **December 31,   2006**      | ** ** | **December 31,   2005** | ** ** |
| Operating income  (loss):                            |       |                                   |       |   |   |
| Management Systems                                   |       | $                                      | 129,906    |   | $ | 94,382 |   |
| LANDesk                                              |       | 6,211                                  |       | — |   |
| Embedded Software and Solutions                      |       | 12,816                                 |       | 2,040 |   |
| Other business units                                 |       | (13,239                                | )          | (11,340 | ) |
| Corporate and unallocated costs                      |       | (11,270                                | )          | (10,845 | ) |
| Stock-based compensation                             |       | (14,587                                | )          | (2,014 | ) |
| Amortization of intangibles and other expenses       |       | (27,229                                | )          | (19,126 | ) |
| Acquired in-process research and development expense |       | (20,700                                | )          | — |   |
| Total income  from operations                        |       | $                                      | 61,908     |   | $ | 53,097 |   |

 

**Revenueand operating income for our Management Systems Division includes the operatingresults of Cyclades from the date of the acquisition (*See Note 3*).**

Sales by product line for our Management Systems Division and LANDeskDivision for the years ended December 31, 2006, 2005 and 2004 are as follows:
|                                                 | ** ** | **For the years ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **December 31,  2006**            | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
| Management Systems  Division (MSD) net revenue: |       |                                   |       |   |   |   |   |
| KVM                                             |       | $                                      | 351,298    |   | $ | 311,734 |   | $ | 325,426 |   |
| Serial  Management                              |       | 46,533                                 |       | 4,124 |   | 3,714 |   |
| Other                                           |       | 28,581                                 |       | 14,355 |   | 12,306 |   |
| Total MSD net revenue                           |       | 426,412                                |       | $ | 330,213 |   | $ | 341,446 |   |
|                                                 |            |                                        |            |  |  |  |  |  |  |  |

 
|                                | ** ** | **For the four  months ended  December 31,   2006** | ** ** |
|--------------------------------|------------|------------------------------------------------------------------------------|------------|
| LANDesk Division net  revenue: |       |                                                                         |       |
| Licenses and  royalties        |       | $                                                                            | 26,596     |   |
| Maintenance and  services      |       | 12,086                                                                       |       |
| Total LANDesk net revenue      |       | $                                                                            | 38,682     |   |

 

 

The tables above present segment revenue and operating profit for theyears 2006 and 2005 under the Company’s new basis of segment reporting, butincludes only segment revenue for 2004.  The Company determined it to beimpracticable to retroactively adjust its 2004 operating profit to match thenew basis of presentation.  

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Accordingly, the Company has provided 2006, 2005 and 2004 geographic regionand customer type results under its previous basis of presentation. Followingis a presentation of sales by geographic region for the years ended December31, 2006, 2005 and 2004:
|               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales:    |       |     |       |     |       |     |       |
| United States |       | $        | 295,825    |     | $          | 210,844  |       | $ | 216,687 |   |
| International |       | 223,370  |       | 159,044  |       | 148,568  |       |
|          |       |     |       |     |       |     |       |
|          |       | $        | 519,195    |     | $          | 369,888  |       | $ | 365,255 |   |

 

Following is a presentation of sales by customer type for the yearsended December 31, 2006, 2005 and 2004:
|            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales: |       |     |       |     |       |     |       |
| Branded    |       | $        | 311,885    |     | $          | 191,901  |       | $ | 201,308 |   |
| OEM        |       | 207,310  |       | 177,987  |       | 163,947  |       |
|       |       |     |       |     |       |     |       |
|       |       | $        | 519,195    |     | $          | 369,888  |       | $ | 365,255 |   |

 

**TheCompany sells its products internationally to customers in several countries.No country accounted for more than 10% of sales in 2006 or 2005.  Sales to customers in the Netherlands,including the European distribution facility for an OEM customer, accounted for$37,464 of sales in 2004.  No othercountry accounted for more than 10% of sales in 2004.**

**As ofDecember 31, 2006, long-lived assets totaled $855,166, which includes $539,684held in the U.S. and $315,482 held outside of the U.S.  As of December 31, 2005, long-lived assetstotaled $322,556, which includes $305,286 held in the U.S. and $17,270 heldoutside of the U.S.**

**17.**                               Line of Credit and Interest Rate Swap

On June 16, 2006, the Company entered into a $250,000 unsecured,five-year revolving bank line of credit (the Credit Agreement).  The Company used $150,000 under the line ofcredit to fund a portion of the LANDesk acquisition (*See Note 3*).  Further, the Company plans to use futureborrowings for the purchase of shares under its stock repurchase program (*See Note 11*) and other business purposes.  The line of credit bears an interest rate ofLIBOR plus a credit spread and carries no set principal repayment schedule,other than any outstanding amount being due at the end of the five year term.  The credit spread is based on a leverageratio computation. Currently, the credit spread is 87.5 basis points. Directcosts incurred from securing the line of credit were capitalized and will be amortizedover the term of the agreement.  Therewas approximately $150,000 outstanding under the line of credit as of December31, 2006.  The line of credit carriescertain customary events of default and covenants, including covenants that(without the consent of the Administrative Agent) restrict the ability of theCompany and its subsidiaries to pay dividends, create or permit liens on assetsor engage in mergers and acquisitions. There also exist certain financialcovenants including a minimum interest coverage ratio and a maximum totalleverage ratio. The Company pays a commitment fee on the unused portion of theline of credit based on the results of a leverage ratio computation. Currently,the commitment fee rate is 17.5 basis points. 

In August 2006, the Company entered into aninterest rate swap agreement with a notional amount of $125,000. The objectiveof the rate swap agreement is to provide a hedge against rising LIBOR interestrates that would have a negative effect on the Company’s cash flows due tochanges in interest rates on the line of credit.  The swap was effective on August 31, 2006 andterminates on December 31, 2008.  Theswap calls for Avocent to make fixed rate payments of 5.42% over the term ofthe hedge and to receive floating rate payments based on LIBOR (matching theLIBOR rate in the line of credit above) from the counter-party.  The Company anticipates that the hedge will besettled upon maturity and it is being accounted for as a cash flow hedge. Theinterest rate swap is recorded at fair value each reporting period with thechanges in the fair value of the hedge that take place through the date ofmaturity recorded in accumulated other comprehensive income (OCI).

At December 31, 2006, the Company recorded anunrealized loss on the swap, net of tax, of $281 in accumulated OCI. There wasno ineffectiveness in the year and the Company anticipates no reclassificationof OCI into earnings in the next 12 months.

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**18.**                               SummarizedQuarterly Financial Data (Unaudited)

The following table presents unaudited quarterly consolidated operatingresults for each of the Company’s last eight fiscal quarters. This informationhas been prepared by the Company on a basis consistent with the Company’saudited consolidated financial statements and includes all adjustments,consisting only of normal recurring adjustments that the Company considersnecessary for a fair presentation of the data.

|                            | ** ** | **Three Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **March 31,  2006**         | ** ** | **June 30,  2006** | ** ** | **September 29,  2006** | ** ** | **December 31,  2006** | ** ** |
| Net sales                  |       | $                                | 94,512     |   | $ | 118,005 |   | $ | 141,814 |   | $ | 164,864 |   |
| Gross profit               |       | $                                | 55,957     |   | $ | 71,410 |   | $ | 88,991 |   | $ | 105,414 |   |
| Income from  operations    |       | $                                | 14,913     |   | $ | 17,201 |   | $ | 8,180 |   | $ | 21,614 |   |
| Net income (2)             |       | $                                | 12,933     |   | $ | 13,581 |   | $ | 2,550 |   | $ | 16,468 |   |
| Net income per  share (1): |       |                             |       |   |   |   |   |   |   |
| Basic                      |       | $                                | 0.26       |   | $ | 0.28 |   | $ | 0.06 |   | $ | 0.32 |   |
| Diluted                    |       | $                                | 0.26       |   | $ | 0.28 |   | $ | 0.05 |   | $ | 0.32 |   |

 
|                            | ** ** | **Three Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **April 1,  2005**          | ** ** | **July 1,  2005** | ** ** | **September 30,  2005** | ** ** | **December 31,  2005** | ** ** |
| Net sales                  |       | $                                | 76,805     |   | $ | 89,538 |   | $ | 96,708 |   | $ | 106,837 |   |
| Gross profit               |       | $                                | 43,582     |   | $ | 52,827 |   | $ | 57,320 |   | $ | 65,116 |   |
| Income from  operations    |       | $                                | 213        |   | $ | 7,791 |   | $ | 19,185 |   | $ | 25,908 |   |
| Net income (3)             |       | $                                | 1,834      |   | $ | 11,099 |   | $ | 16,365 |   | $ | 19,051 |   |
| Net income per  share (1): |       |                             |       |   |   |   |   |   |   |
| Basic                      |       | $                                | 0.04       |   | $ | 0.22 |   | $ | 0.33 |   | $ | 0.39 |   |
| Diluted                    |       | $                                | 0.04       |   | $ | 0.22 |   | $ | 0.33 |   | $ | 0.38 |   |

 

----

(1)                     The net income (loss) per share for each quarterwithin a fiscal year does not equal the total net income (loss) per share forthe particular fiscal year due to variations in the price of the Company’scommon stock during the year and the effect these variations had on the sharesoutstanding calculation.

(2)                     The income from operations and net income for thequarter ended March 31, 2006 include a non-recurring charge of $2,100 foracquired in-process research and development related to the Cylcadesacquisition.  Similar charges wereincurred in the quarter ended September 29, 2006, for LANDesk totaling $18,600.

(3)                     The quarter ended July 1, 2005 included a settlementfrom a lawsuit of $5,000 related to the Company’s patent infringement case againstRaritan..

**19.****                               Litigation**

In October 2003, Avocent filed a complaintfor patent infringement in the United States District Court for the NorthernDistrict of Alabama against ClearCube Technology, Inc.  The Company settled the case with ClearCubein August 2006.  As part of thesettlement, ClearCube agreed to license certain patents from Avocent andpotentially license other Avocent technologies. 

On March 14, 2006, TFS Electronic Manufacturing Services, Inc. (TFS) fileda Third-Party Complaint and an Objection to Claim of Avocent Corporation withthe United States Bankruptcy Court, District of Arizona.  As a result of the complaint,an adversary proceeding has been commenced against Avocent in the TFSbankruptcy case in an effort to disallow Avocent’s claim in its entirety.  TFS also seeks damages in an undeterminedamount for Avocent’s alleged breach of contract, negligence, negligentmisrepresentations, breaches of warranty, unjust enrichment, disparagement ofTFS’ business, and quantum merit.  TFS isseeking recovery of actual damages, punitive damages, attorneys’ fees, pre- andpost-judgment interest, costs, and the imposition of joint and severalliability as to Avocent and a named co-defendant, TopSearch Printed Circuits(HK), Ltd.  (“TopSearch”). The matter hasbeen consolidated with a separate matter between TFS and TopSearch pending inthe United States District Court for the District of Arizona, for purposes ofdiscovery through pre-trial. The court has ordered that early mediation bescheduled and a mediator has been assigned.  Discovery is under way.

In January 2007, Avocent filed a complaintfor patent infringement in the United States District Court for the WesternDistrict of Washington against Aten Technology, Inc., Aten International Co., Ltd,Belkin Corporation, Rose Electronics and its general partners, and TrippeManufacturing Company.  Some of thedefendants have not yet responded to the complaint.

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**20.****                              SubsequentEvents**

On February 2, 2007, the Board approved an additional 2,000 shares forthe Company’s share re-purchase program. As of February 22, 2007 there were 2,000 shares available for repurchaseunder the program.  During the periodfrom January 1, 2007 through February 22, 2007, the Company purchased 186additional shares of its common stock.  

**Item 9.  Changes in and Disagreements With Accountantson Accounting and Financial Disclosure.**

None.

**Item 9A. Controls and Procedures.**

(a) *Evaluation of disclosure controls and procedures.*    Based on their evaluation as of December31, 2006, our Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures (as defined in Rules13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) are effective.

(b) *Changes in internal controls*.   There were no changes in our internalcontrols or in other factors that significantly affected these controlssubsequent to the date of their evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses, except for the integration of theacquisitions during 2006, Cyclades and LANDesk. We completed the integration of Cyclades processes into Avocentprocesses during the fourth quarter of 2006. We plan to integrate LANDesk into Avocent standard processes andcontrols during 2007.  Additionally,during the year we completed several initiatives which we believe has improvedour internal controls.  We extended ourERP system to our location in Fremont, California, which has enhanced ourinternal control over financial reporting through the automation andstandardization of certain controls and processes, as all of our financiallysignificant locations, other than LANDesk which was recently acquired, are nowoperating under the same ERP system. We also created new corporate tax directorand internal audit director positions during the third quarter of 2006 toprovide enhanced oversight of our tax planning, tax compliance, and riskmanagement activities.  We also implemented new controls tomanage interest rate risk related to our new bank line of credit during 2006.

Management’sReport on Internal Control over Financial Reporting and the Report ofIndependent Registered Public Accounting Firm is included in Part II,Item 8 of this Annual Report on Form 10-K.

**Item 9B. Other.**

None.

**PART III**

Information withrespect to Items 10 through 14 of this Part III may be found in thedefinitive proxy statement to be delivered to stockholders in connection withthe 2007 Annual Meeting of Stockholders. Such information is incorporatedherein by reference.

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**PART IV**

**Item 15.  Exhibits, Financial Statement Schedules, andReports on Form 8-K.**

**(a)Financial Statement Schedule**

**Schedule of Valuation andQualifying Accounts**

*For theyears ended December 31, 2006, 2005 and 2004 (in thousands)*
| ** **                            | ** ** | **Beginning Balance** | ** ** | **Assumed on  Acquisitions(1)** | ** ** | **Charged to  Income** | ** ** | **Deductions from  Reserves** | ** ** | **Ending Balance** | ** ** |
|---------------------------------------|------------|----------------------------|------------|--------------------------------------|------------|-----------------------------|------------|------------------------------------|------------|-------------------------|------------|
|                                  |       |                       |       |                                 |       |                        |       |                               |       |                    |       |
| Year ended  December 31, 2004:   |       |                       |       |                                 |       |                        |       |                               |       |                    |       |
| Allowance for  doubtful accounts      |       | $                          | 1,991      |                                 | —     |                        | (265       | )                                  | 14         |                    | $          | 1,740 |   |
| Allowance for  inventory obsolescence |       | $                          | 4,020      |                                 | —     |                        | 2,052      |                               | (2,287     | )                       | $          | 3,785 |   |
| Allowance for  sales returns          |       | $                          | 3,909      |                                 | —     |                        | 6,366      |                               | (7,101     | )                       | $          | 3,174 |   |
| Liability for  warranty returns       |       | $                          | 2,652      |                                 | —     |                        | 528        |                               | (420       | )                       | $          | 2,760 |   |
| Valuation  allowance for income taxes |       | $                          | 2,465      |                                 | 388        |                        | —     |                               | —     |                    | $          | 2,853 |   |
|                                  |       |                       |       |                                 |       |                        |       |                               |       |                    |       |
| Year ended  December 31, 2005:   |       |                       |       |                                 |       |                        |       |                               |       |                    |       |
| Allowance  for doubtful accounts      |       | $                          | 1,740      |                                 | —     |                        | (585       | )                                  | (26        | )                       | $          | 1,129 |   |
| Allowance  for inventory obsolescence |       | $                          | 3,785      |                                 | —     |                        | 3,308      |                               | (2,535     | )                       | $          | 4,558 |   |
| Allowance  for sales returns          |       | $                          | 3,174      |                                 | —     |                        | 7,923      |                               | (8,220     | )                       | $          | 2,877 |   |
| Liability  for warranty returns       |       | $                          | 2,760      |                                 | —     |                        | 252        |                               | (476       | )                       | $          | 2,536 |   |
| Valuation  allowance for income taxes |       | $                          | 2,853      |                                 | —     |                        | 167        |                               | (2,466     | )                       | $          | 554 |   |
|                                  |       |                       |       |                                 |       |                        |       |                               |       |                    |       |
| Year ended  December 31, 2006:   |       |                       |       |                                 |       |                        |       |                               |       |                    |       |
| Allowance  for doubtful accounts      |       | $                          | 1,129      |                                 | 840        |                        | 480        |                               | —     |                    | $          | 2,449 |   |
| Allowance  for inventory obsolescence |       | $                          | 4,558      |                                 | 1,131      |                        | 6,151      |                               | (6,262     | )                       | $          | 5,578 |   |
| Allowance  for sales returns          |       | $                          | 2,877      |                                 | 3,140      |                        | 9,061      |                               | (9,040     | )                       | $          | 6,038 |   |
| Liability  for warranty returns       |       | $                          | 2,536      |                                 | 158        |                        | 155        |                               | (363       | )                       | $          | 2,486 |   |
| Valuation allowance for  income taxes |       | $                          | 554        |                                 | 2,486      |                        | 1,135      |                               | —     |                    | $          | 4,175 |   |

 

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(1)                                  Amountsrepresent balances assumed from the acquisition of Cyclades and LANDesk in2006, and OSA in 2004 .

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**(b) Exhibits**
|                     | ** ** | ** **                                                                                                                                                               | ** ** | **Incorporated by Reference** |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                                                                  | ** ** | **Form**                      | ** ** | **Entity(1)** | ** ** | **Date** | ** ** | **Number** | ** ** | **Included** |
| 3.1                 |       | Certificate of Incorporation of Aegean Sea Inc.                                                                                                                     |       | S-4                           |   | AGI |   | 3/31/00 |   | Ex. 3.1 |   |   |
| 3.1.1               |       | Certificate of Amendment of Certificate of  Incorporation (changing name from Aegean Sea Inc. to Avocent  Corporation)                                              |       | 10-K                          |   | AVCT |   | 3/27/01 |   | Ex 3.1.1 |   |   |
| 3.2                 |       | Amended and Restated Bylaws of Avocent Corporation                                                                                                                       |       | 10-K                          |   | AVCT |   | 3/12/04 |   | Ex. 3.2 |   |   |
| 10.1                |       | Amended and Restated Employment and Noncompetition  Agreement dated December 13, 2006, among Avocent Huntsville Corp., the  Company, and Edward H. Blankenship |       |                          |   |   |   |   |   |   |   | X |
| 10.2                |       | Amended and Restated Employment and Noncompetition  Agreement dated December 13, 2006, among Avocent Huntsville Corp., the  Company, and John R. Cooper        |       |                          |   |   |   |   |   |   |   | X |
| 10.3                |       | Amended and Restated Employment and Noncompetition  Agreement dated December 13, 2006, among Avocent Huntsville Corp., the  Company, and Stephen M. Daly       |       |                          |   |   |   |   |   |   |   | X |
| 10.4                |       | Amended and Restated Employment and Noncompetition  Agreement dated December 12, 2006, among Avocent International Ltd., the  Company, and Kieran MacSweeney        |       |                          |   |   |   |   |   |   |   | X |
| 10.5                |       | Amended and Restated Employment and Noncompetition  Agreement dated December 13, 2006, among Avocent Huntsville Corp., the  Company, and Eugene F. Mulligan    |       |                          |   |   |   |   |   |   |   | X |
| 10.6                |       | Amended and Restated Employment and Noncompetition  Agreement dated December 13, 2006, among Avocent Texas, L.P., the Company,  and C. David Perry             |       |                          |   |   |   |   |   |   |   | X |
| 10.7                |       | Amended and Restated Employment and Noncompetition  Agreement dated December 13, 2006, among Avocent Huntsville Corp., the  Company, and Douglas E. Pritchett            |       |                          |   |   |   |   |   |   |   | X |
| 10.8                |       | Amended and Restated Employment and Noncompetition  Agreement dated December 13, 2006, among Avocent Redmond Corp., the Company,  and Samuel F. Saracino       |       |                          |   |   |   |   |   |   |   | X |
| 10.9                |       | Amended and Restated                                                                                                                                                     |       |                          |   |   |   |   |   |   |   | X |
|                     |       | Employment and Noncompetition Agreement dated  December 13, 2006, among Avocent Huntsville Corp., the Company, and  Christopher Thomas                                   |       |                          |   |   |   |   |   |   |   |   |

 

78

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| 10.10 |   | Amended and Restated Employment and Noncompetition  Agreement dated December 13, 2006, among Avocent Huntsville Corp., the  Company, and Doyle C. Weeks                       |   |   |   |   |   |    |   |        |   | X      |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|---------|--------|-------------|--------|--------|
| 10.11 |   | Amended and Restated Amendment Agreement among the  Company, Avocent Employment Services Company, Cybex Computer Products  Corporation and Stephen F. Thornton                          |   | 10-Q   |   | AVCT   |   | 8/9/02  |   | Ex. 10.30.1 |   |   |
| 10.12 |   | Form of Avocent Corporation Indemnification  Agreement for Officers and Directors                                                                                                       |   | 10-Q   |   | AVCT   |   | 9/29/00 |   | Ex. 10.11   |   |   |
| 10.13 |   | Form of Amendment to Option Agreement for Directors  regarding Change of Control of the Company                                                                                         |   | 10-K   |   | AVCT   |   | 3/12/04 |   | Ex. 10.31   |   |   |
| 10.14 |   | Transaction Agreement dated April 26, 2006, among  the Company, Crimson Acquisition Corp, LANDesk Group Limited, and the  Shareholder Representative                                    |   | 10-Q   |   | AVCT   |   | 5/10/06 |   | Ex. 99.14   |   |   |
| 10.15 |   | Avocent Corporation 2005 Equity Incentive Plan, as  amended, and Form of Agreements                                                                                                |   | 8-K    |   | AVCT   |   | 6/15/06 |   | Ex. 99.16   |   |   |
| 10.16 |   | $250,000,000 Credit Agreement dated June 16, 2006,  among Avocent Corporation, the Guarantors Party thereto, the Lenders Party  thereto, and Regions Bank                               |   | 8-K    |   | AVCT   |   | 6/20/06 |   | Ex. 99.18   |   |   |
| 10.17 |   | Put Option Agreement dated September 7, 2006,  between Avocent Corporation and Zhuo Wang                                                                                           |   | 8-K    |   | AVCT   |   | 9/11/06 |   | Ex. 99.28   |   |   |
| 21.1  |   | Subsidiaries of Avocent Corporation                                                                                                                                                     |   |   |   |   |   |    |   |        |   | X      |
| 23.1  |   | Consent of PricewaterhouseCoopers LLP, Independent  Registered Public Accounting Firm                                                                                                   |   |   |   |   |   |    |   |        |   | X      |
| 24.1  |   | Power of Attorney(2)                                                                                                                                                                    |   |   |   |   |   |    |   |        |   | X      |
| 31.1  |   | Sarbanes-Oxley Act of 2002 Section 302(a)  Certification of the Chief Executive Officer                                                                                                 |   |   |   |   |   |    |   |        |   | X      |
| 31.2  |   | Sarbanes-Oxley Act of 2002 Section 302(a)  Certification of the Chief Financial Officer                                                                                                 |   |   |   |   |   |    |   |        |   | X      |
| 32.1  |   | Certification of the Chief Executive Officer and the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |   |   |   |   |   |    |   |        |   | X      |

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(1)           The followingabbreviations are used to identify corporate entities:

AVCT = Avocent Corporation andAGI = Aegean Sea Inc. (now known as Avocent Corporation)

(2)           Set forth on thesignature page and incorporated herein by reference.

**(c)  Reports on Form 8-K**

None

79

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.
|            | **AVOCENT  CORPORATION**                 |
|------------|------------------------------------------|
| ** ** | ** **                               |
| ** ** | ** **                               |
|       | By:                                      | /s/ John R.  Cooper |   |
|       | John R. Cooper,  Chief Executive Officer |
|       | Date: March 1,  2007                |

 

**POWER OFATTORNEY**

KNOW ALL PERSONS BY THESEPRESENTS:

That the undersignedofficers and directors of Avocent Corporation do hereby constitute and appointEdward H. Blankenship, Samuel F. Saracino, and Doyle C. Weeks, andeach of them, the lawful attorney and agent with power and authority to do anyand all acts and things and to execute any and all instruments which saidattorneys and agents, or either of them, determine may be necessary oradvisable or required to enable Avocent Corporation to comply with theSecurities Exchange Act of 1934, as amended, and any rules or regulations orrequirements of the Securities Exchange Act of 1934, as amended, and any rulesor regulations or requirements of the Securities and Exchange Commission inconnection with this Form 10-K Report. Without limiting the generality ofthe foregoing power and authority, the powers granted include the power andauthority to sign the names of the undersigned officers and directors in thecapacities indicated below to this Form 10-K Report of amendments orsupplements thereto, and each of the undersigned hereby ratifies and confirmsall that said attorneys and agents or either of them, shall do or cause to bedone by virtue hereof. This Power of Attorney may be signed in severalcounterparts.

IN WITNESSWHEREOF, each of the undersigned has executed this Power of Attorney as of thedate indicated opposite his name.

In accordance withthe Exchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.
| Signature                  | ** ** | **Title**                                                                           | ** ** | **Date**      |
|----------------------------|------------|-------------------------------------------------------------------------------------|------------|---------------|
|                       |       |                                                                                |       |          |
| /s/ John R. Cooper         |       | Chief Executive Officer and Chairman of the Board of  Directors                     |       | March 1, 2007 |
| John R. Cooper             |       | (Principal Executive Officer)                                                       |       |          |
|                       |       |                                                                                |       |          |
| /s/ Edward H. Blankenship  |       | Senior Vice President of Finance, Chief Financial  Officer, and Assistant Secretary |       |          |
| Edward H. Blankenship      |       | (Principal Financial and Accounting Officer)                                        |       | March 1, 2007 |
|                       |       |                                                                                |       |          |
| /s/ Harold D. Copperman    |       | Director                                                                            |       | March 1, 2007 |
| Harold D. Copperman        |       |                                                                                |       |          |
|                       |       |                                                                                |       |          |
| /s/ Francis A. Dramis, Jr. |       | Director                                                                            |       | March 1, 2007 |
| Francis A. Dramis, Jr.     |       |                                                                                |       |          |
|                       |       |                                                                                |       |          |
| /s/ Edwin L. Harper        |       | Director                                                                            |       | March 1, 2007 |
| Edwin L. Harper            |       |                                                                                |       |          |
|                       |       |                                                                                |       |          |
| /s/ William H. McAleer     |       | Director                                                                            |       | March 1, 2007 |
| William H. McAleer         |       |                                                                                |       |          |
|                       |       |                                                                                |       |          |
| /s/ Stephen F. Thornton    |       | Director                                                                            |       | March 1, 2007 |
| Stephen F. Thornton        |       |                                                                                |       |          |
|                       |       |                                                                                |       |          |
| /s/ David P. Vieau         |       | Director                                                                            |       | March 1, 2007 |
| David P. Vieau             |       |                                                                                |       |          |
|                       |       |                                                                                |       |          |
| /s/ Doyle C. Weeks         |       | President and Director                                                              |       | March 1, 2007 |
| Doyle C. Weeks             |       |                                                                                |       |          |

 

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