**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

# **FORM 10-Q**

| **(Mark One)**                                                                                                                                                    |       |                                                                                          |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                              |       |                                                                                          |
| **x**                                                                                                                                                             | ** ** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|                                                                                                                                                              |       |                                                                                          |
| **For the quarterly period ended September  29, 2006 or**                                                                                                         |
|                                                                                                                                                              |       |                                                                                          |
| **o**                                                                                                                                                             | ** ** | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                              |       |                                                                                          |
| **For the transition period from             to            ** |
|                                                                                                                                                              |       |                                                                                          |
| **Commission file number: 000-30575**                                                                                                                             |

 

**AVOCENTCORPORATION**

(Exact Name of Registrantas Specified in Its Charter)

| **Delaware**                                                    |   | **91-2032368**                           |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |   | (I.R.S. Employer  Identification Number) |
|                                                            |   |                                     |
| **4991  Corporate Drive  Huntsville, Alabama**                  |   | **35805**                                |
| (Address of Principal  Executive Offices)                       |   | (Zip Code)                               |

 

**256-430-4000**(Registrant’s Telephone Number, Including Area Code)

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

xYes o No

Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. (See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Securities Exchange Acto.)
| 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

As of November 1,2006, the number of outstanding shares of the Registrant’s Common Stock was 50,844,128.

 

----

**AVOCENTCORPORATION****FORM 10-Q****September 29, 2006**

**INDEX**
| Part I    | Financial Information |                                                                                                                       |
|-----------|-----------------------|----------------------------------------------------------------------------------------------------------------------------|
|      |                  |                                                                                                                       |   |
|      | Item 1.               | Financial Statements  (unaudited)                                                                                          |   |
|      |                  |                                                                                                                       |   |
|      |                  | Condensed Consolidated Statements of Income for the  Three and Nine Months Ended September 29, 2006 and September 30, 2005 |   |
|      |                  | Condensed Consolidated Balance Sheets at September 29,  2006 and December 31, 2005                                         |   |
|      |                  | Condensed Consolidated Statements of Cash Flows for  the Nine Months Ended September 29, 2006 and September 30, 2005       |   |
|      |                  | Notes to Condensed Consolidated Financial Statements                                                                       |   |
|      |                  |                                                                                                                       |   |
|      | Item 2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                |   |
|      |                  |                                                                                                                       |   |
|      | Item 3.               | Quantitative  and Qualitative Disclosures about Market Risk                                                                |   |
|      |                  |                                                                                                                       |   |
|      | Item 4.               | Controls and  Procedures                                                                                                   |   |
|      |                  |                                                                                                                       |   |
| Part II   | Other Information     |                                                                                                                       |
|      |                  |                                                                                                                       |   |
|      | Item 1.               | Legal Proceedings                                                                                                          |   |
|      |                  |                                                                                                                       |   |
|      | Item 1A.              | Risk Factors                                                                                                               |   |
|      |                  |                                                                                                                       |   |
|      | Item 2.               | Unregistered  Sales of Equity Securities and Use of Proceeds                                                               |   |
|      |                  |                                                                                                                       |   |
|      | Item  6.              | Exhibits                                                                                                                   |   |
|      |                  |                                                                                                                       |   |
| Signature |                  |

 

2

----

**PART I –FINANCIAL INFORMATION**

**AVOCENT CORPORATION****CONDENSED CONSOLIDATED STATEMENTS OF INCOME**(Unaudited, in thousands except for per share amounts)

**Item1.  Financial Statements**
| ** **                                                     | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                     | ** ** | **September 29,**                             | ** ** | **September 30,**                            | ** ** | **September 29,** | ** ** | **September 30,** | ** ** |
| ** **                                                     | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales:                                                     |       |                                               |       |                                              |       |   |   |   |   |
| Products and services                                          |       | $                                                  | 124,365    |                                              | $          | 91,162 |   | $ | 324,359 |   | $ | 248,447 |   |
| Licenses and royalties                                         |       | 17,349                                             |       | 5,546                                             |       | 29,972 |   | 14,604 |   |
| Total net sales                                                |       | 141,814                                            |       | 96,708                                            |       | 354,331 |   | 263,051 |   |
|                                                           |       |                                               |       |                                              |       |   |   |   |   |
| Cost of sales:                                                 |       |                                               |       |                                              |       |   |   |   |   |
| Products and services                                          |       | 51,813                                             |       | 39,388                                            |       | 136,963 |   | 109,322 |   |
| Licenses and royalties                                         |       | 1,010                                              |       | —                                            |       | 1,010 |   | — |   |
| Total cost of  sales                                           |       | 52,823                                             |       | 39,388                                            |       | 137,973 |   | 109,322 |   |
|                                                           |       |                                               |       |                                              |       |   |   |   |   |
| Research and  development expenses                             |       | 16,004                                             |       | 14,640                                            |       | 43,535 |   | 43,495 |   |
| Acquired in-process  research and development expense          |       | 18,600                                             |       | —                                            |       | 20,700 |   | — |   |
| Selling, general and  administrative expenses                  |       | 38,314                                             |       | 20,764                                            |       | 94,414 |   | 67,069 |   |
| Cyclades integration  expenses                                 |       | 1,304                                              |       | —                                            |       | 3,573 |   | — |   |
| Amortization of intangible  assets                             |       | 6,589                                              |       | 2,731                                             |       | 13,841 |   | 15,976 |   |
| Total operating  expenses                                      |       | 80,811                                             |       | 38,135                                            |       | 176,063 |   | 126,540 |   |
|                                                           |       |                                               |       |                                              |       |   |   |   |   |
| Income from operations                                         |       | 8,180                                              |       | 19,185                                            |       | 40,295 |   | 27,189 |   |
|                                                           |       |                                               |       |                                              |       |   |   |   |   |
| Income from settlement  of lawsuit                             |       | —                                             |       | —                                            |       | — |   | 5,000 |   |
| Net investment income                                          |       | 1,615                                              |       | 2,242                                             |       | 6,811 |   | 6,558 |   |
| Net realized investment  losses                                |       | (199                                               | )          | (100                                              | )          | (226 | ) | (483 | ) |
| Interest expense                                               |       | (1,011                                             | )          | —                                            |       | (1,157 | ) | — |   |
| Other expense, net                                             |       | (133                                               | )          | (75                                               | )          | (361 | ) | (129 | ) |
|                                                           |       |                                               |       |                                              |       |   |   |   |   |
| Income before income  taxes                                    |       | 8,452                                              |       | 21,252                                            |       | 45,362 |   | 38,135 |   |
| Provision for income  taxes                                    |       | 5,902                                              |       | 4,887                                             |       | 16,297 |   | 8,838 |   |
|                                                           |       |                                               |       |                                              |       |   |   |   |   |
| Net income (1)                                                 |       | $                                                  | 2,550      |                                              | $          | 16,365 |   | $ | 29,065 |   | $ | 29,297 |   |
|                                                           |       |                                               |       |                                              |       |   |   |   |   |
| Earnings per share:                                            |       |                                               |       |                                              |       |   |   |   |   |
| Basic                                                          |       | $                                                  | 0.06       |                                              | $          | 0.33 |   | $ | 0.61 |   | $ | 0.59 |   |
| Diluted                                                        |       | $                                                  | 0.05       |                                              | $          | 0.33 |   | $ | 0.60 |   | $ | 0.58 |   |
|                                                           |       |                                               |       |                                              |       |   |   |   |   |
| Weighted average shares  used in computing earnings per share: |       |                                               |       |                                              |       |   |   |   |   |
| Basic                                                          |       | 46,289                                             |       | 48,966                                            |       | 47,770 |   | 49,550 |   |
| Diluted                                                        |       | 47,164                                             |       | 49,879                                            |       | 48,575 |   | 50,524 |   |

 

----

(1) Net income for the three and nine monthsended September 29, 2006 includes stock-based compensation expense underSFAS 123R related to stock-based compensation of $3,510 and $5,842,respectively, net of tax. Net income for the three and nine months ended September30, 2005 included stock-based compensation expense related to theamortization of deferred compensation recorded as a result of assumed optionsfrom the acquisition of OSA Technologies Inc of $510 and $1,529, respectively.  See Note 13 to the Condensed ConsolidatedFinancial Statements for more information.

 

See notesaccompanying these condensed consolidated financial statements.

3

----

**AVOCENT CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited, in thousands)**
| ** **                                                                                                                                                                                               | ** ** | **September 29,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                               | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Current  assets**                                                                                                                                                                                      | ** ** | ** **             | ** ** | ** **            | ** ** |
| Cash and cash equivalents                                                                                                                                                                                |       | $                      | 81,733     |                  | $          | 66,425 |   |
| Investments maturing within one year                                                                                                                                                                     |       | 39,643                 |       | 227,478               |       |
| Accounts receivable, net                                                                                                                                                                                 |       | 119,188                |       | 68,712                |       |
| Other receivables                                                                                                                                                                                        |       | 12,562                 |       | 8,328                 |       |
| Inventories, net                                                                                                                                                                                         |       | 38,530                 |       | 21,178                |       |
| Other current assets                                                                                                                                                                                     |       | 4,872                  |       | 2,196                 |       |
| Deferred tax assets, net                                                                                                                                                                                 |       | 9,073                  |       | 4,054                 |       |
| Total current assets                                                                                                                                                                                     |       | 305,601                |       | 398,371               |       |
| Investments                                                                                                                                                                                              |       | 9,631                  |       | 51,939                |       |
| Property and  equipment, net                                                                                                                                                                             |       | 38,151                 |       | 36,801                |       |
| Goodwill                                                                                                                                                                                                 |       | 607,889                |       | 269,992               |       |
| Other intangible  assets, net                                                                                                                                                                            |       | 221,405                |       | 15,763                |       |
| Other assets                                                                                                                                                                                             |       | 3,436                  |       | 885                   |       |
| Total assets                                                                                                                                                                                             |       | $                      | 1,186,113  |                  | $          | 773,751 |   |
|                                                                                                                                                                                                     |       |                   |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                           |       |                   |       |                  |       |
| Current  liabilities:                                                                                                                                                                                    |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                         |       | $                      | 26,912     |                  | $          | 13,069 |   |
| Accrued wages and commissions                                                                                                                                                                            |       | 20,792                 |       | 10,500                |       |
| Accrued liabilities                                                                                                                                                                                      |       | 21,592                 |       | 14,438                |       |
| Income taxes payable                                                                                                                                                                                     |       | 16,050                 |       | 11,270                |       |
| Deferred revenue, current                                                                                                                                                                                |       | 38,555                 |       | 2,768                 |       |
| Accrued LANDesk acquisition costs                                                                                                                                                                        |       | 8,556                  |       | —                |       |
| Other current liabilities                                                                                                                                                                                |       | 6,909                  |       | 1,702                 |       |
| Total current liabilities                                                                                                                                                                                |       | 139,366                |       | 53,747                |       |
|                                                                                                                                                                                                     |       |                   |       |                  |       |
| Note payable                                                                                                                                                                                             |       | 162,005                |       | —                |       |
| Deferred tax liabilities, net                                                                                                                                                                            |       | 46,946                 |       | 2,564                 |       |
| Deferred revenue, non-current                                                                                                                                                                            |       | 8,594                  |       | —                |       |
| Other non-current liabilities                                                                                                                                                                            |       | 1,616                  |       | 2,118                 |       |
| Total liabilities                                                                                                                                                                                        |       | 358,527                |       | 58,429                |       |
|                                                                                                                                                                                                     |       |                   |       |                  |       |
| Commitments and  contingencies (see Note 12)                                                                                                                                                             |       |                   |       |                  |       |
|                                                                                                                                                                                                     |       |                   |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                              |       |                   |       |                  |       |
| Preferred stock, $0.001 par value; 5,000 shares  authorized, no shares issued and outstanding as of September 29, 2006 and  December 31, 2005, respectively                                              |       | —                 |       | —                |       |
| Common stock, $0.001 par value; 200,000 shares  authorized, September 29, 2006 – 52,714 shares issued and 50,823 outstanding;  December 31, 2005 – 51,612 shares issued and 48,837 outstanding |       | 53                     |       | 52                    |       |
| Additional paid-in capital                                                                                                                                                                               |       | 1,164,709              |       | 1,104,899             |       |
| Accumulated other comprehensive loss                                                                                                                                                                     |       | (20                    | )          | (497                  | )          |
| Accumulated deficit                                                                                                                                                                                      |       | (278,439               | )          | (307,503              | )          |
| Treasury stock, at cost; September 29, 2006 – 1,891  shares; December 31, 2005 – 2,775 shares                                                                                                  |       | (58,717                | )          | (81,629               | )          |
| Total stockholders’ equity                                                                                                                                                                          |       | 827,586                |       | 715,322               |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                         |       | $                      | 1,186,113  |                  | $          | 773,751 |   |

 

Seenotes accompanying these condensed consolidated financial statements.

4

----

**AVOCENT CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited, in thousands)**
| ** **                                                                         | ** **   | **For the nine months ended** | ** **   |
|------------------------------------------------------------------------------------|--------------|---------------------------------------------------|--------------|
| ** **                                                                         | ** **   | **September 29,**                            | ** **   | **September 30,** | ** ** |
| ** **                                                                         | ** **   | **2006**                                          | ** **   | **2005** | ** ** |
| *** ***                                                                       | *** *** | *** ***                                      | *** *** | *** *** | *** *** |
| Cash flows from  operating activities:                                             | * *     | * *                                          | * *     | * * | * * |
| Net income                                                                         |         | $                                                 | 29,065       |   | $ | 29,297 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |         |                                              |         |   |   |
| Depreciation                                                                       |         | 5,813                                             |         | 5,082 |   |
| Amortization of intangible assets                                                  |         | 14,735                                            |         | 15,976 |   |
| Stock-based compensation                                                           |         | 8,158                                             |         | 1,529 |   |
| Acquired in-process research and development expenses                              |         | 20,700                                            |         | — |   |
| Amortization of premiums on investments                                            |         | 8                                                 |         | 695 |   |
| Net loss on sales of investments                                                   |         | 226                                               |         | 483 |   |
| Income tax benefit from exercise of stock options  (see Note 13)                   |         | —                                            |         | 3,871 |   |
| Excess tax benefit from stock-based compensation (see Note 13)                     |         | (4,130                                            | )            | — |   |
| Changes in operating assets and liabilities (net of  effects of acquisitions):     |         |                                              |         |   |   |
| Accounts receivable, net                                                           |         | (21,470                                           | )            | 3,063 |   |
| Inventories, net                                                                   |         | (10,588                                           | )            | (263 | ) |
| Other assets                                                                       |         | (1,687                                            | )            | (2,853 | ) |
| Accounts payable                                                                   |         | (1,581                                            | )            | (469 | ) |
| Accrued wages and commissions                                                      |         | 3,628                                             |         | (3,786 | ) |
| Accrued liabilities (1) (2)                                                        |         | 11,811                                            |         | 2,115 |   |
| Income taxes, current and deferred                                                 |         | (1,957                                            | )            | (2,757 | ) |
| Net cash provided by operating activities                                          |         | 52,731                                            |         | 51,983 |   |
| ** **                                                                         | ** **   | ** **                                        | ** **   | ** ** | ** ** |
| Cash flows from  investing activities:                                             |         |                                              |         |   |   |
| Purchase of Cyclades, net of cash received                                         |         | (91,568                                           | )            | — |   |
| Purchase of LANDesk, net of cash received (2)                                      |         | (198,145                                          | )            | — |   |
| Purchase of other intangibles                                                      |         | (3,750                                            | )            | — |   |
| Purchases of property and equipment                                                |         | (2,079                                            | )            | (3,553 | ) |
| Purchases of investments                                                           |         | (147,422                                          | )            | (202,245 | ) |
| Maturities and proceeds from sales of investments                                  |         | 377,849                                           |         | 209,431 |   |
| Net cash provided by (used in) investing activities                                |         | (65,115                                           | )            | 3,633 |   |
| ** **                                                                         | ** **   | ** **                                        | ** **   | ** ** | ** ** |
| Cash flows from  financing activities:                                             | ** **   | ** **                                        | ** **   | ** ** | ** ** |
| Repayment of debt assumed in acquisition                                           |         | (1,965                                            | )            | — |   |
| Borrowings under unsecured line of credit                                          |         | 160,000                                           |         | — |   |
| Proceeds from employee stock option exercises                                      |         | 22,892                                            |         | 13,675 |   |
| Excess tax benefit from stock-based compensation (see Note 13)                     |         | 4,130                                             |         | — |   |
| Proceeds from employee stock purchase plan                                         |         | —                                            |         | 4,505 |   |
| Purchases of treasury stock (see Note 3)                                           |         | (157,617                                          | )            | (66,089 | ) |
| Net cash provided by (used in) financing activities                                |         | 27,440                                            |         | (47,909 | ) |
|                                                                               |         |                                              |         |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                      |         | 252                                               |         | (121 | ) |
|                                                                               |         |                                              |         |   |   |
| Net increase in  cash and cash equivalents                                         |         | 15,308                                            |         | 7,586 |   |
| Cash and cash  equivalents at beginning of period                                  |         | 66,425                                            |         | 44,724 |   |
| Cash and cash  equivalents at end of period                                        |         | $                                                 | 81,733       |   | $ | 52,310 |   |

 

----

(1)   As of September 29, 2006, $3,250 is includedin accrued liabilities related to the purchase of certain tangible andintangible assets of an existing product line.

(2)   As of September 29, 2006, $5,572 is includedin accrued liabilities related to LANDesk acquisition costs. See Note 8regarding shares issued to fund the LANDesk acquisition.

See notesaccompanying these condensed consolidated financial statements.

5

----

**AVOCENT CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited, in thousands, except per share data)

Note 1.          Basis of Presentation

The accompanyingunaudited condensed consolidated financial statements have been prepared inconformity with generally accepted accounting principles and reflect alladjustments consisting of normal recurring adjustments which, in the opinion ofmanagement, are necessary for a fair presentation of the results for theperiods shown.  The results of operationsfor these periods are not necessarily indicative of the results expected forthe full fiscal year or for any future periods. The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates and assumptions.

The accompanyingunaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and the relatednotes contained in our Annual Report onForm 10-K for the year ended December 31, 2005, which is on file with theSecurities and Exchange Commission and is available at our website,www.avocent.com.  The consolidatedbalance sheet presented in the accompanying financial statements for December31, 2005, was derived from the audited consolidated financial statements filedin our 10-K for the period ended December 31, 2005, but does not include alldisclosures required by accounting principles generally accepted in the UnitedStates of America.

We report our annualresults based on years ending December 31. We report our quarterly results for the first three interim periodsbased on 13 week periods ending on Fridays and for the fourth interim periodending on December 31.  Our financialstatements are consolidated and include the accounts of Avocent Corporation andour wholly owned subsidiaries.  Allsignificant inter-company transactions and balances have been eliminated inconsolidation.  Certain prior periodamounts were reclassified to conform with current period presentation.

Note 2.          Inventories

Inventories consisted of the following at:
|                  | ** ** | **September 29, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Raw materials    |       | $                                | 3,840      |                            | $          | 3,625 |   |
| Work-in-process  |       | 782                              |       | 173                             |       |
| Finished goods   |       | 33,908                           |       | 17,380                          |       |
| Inventories, net |       | $                                | 38,530     |                            | $          | 21,178 |   |

Inventories above have beenreduced by reserves for excess and obsolete inventories of $7,915 and $4,558 asof September 29, 2006 and December 31, 2005, respectively.  The increase in inventories since December31, 2005 includes inventories added through the Cyclades acquisition (see Note8).

Note 3.          Stock Options and Treasury Stock

Stock option exercises —Shares of our common stock issued as a result of option exercises totaled 116shares during the quarter ended September 29, 2006 and 396 shares during thequarter ended September 30, 2005.  Totalproceeds received from these option exercises were $2,306 for the quarter endedSeptember 29, 2006 and $7,235 for the quarter ended September 30, 2005.  Shares of our common stock issued as a resultof option exercises totaled 1,103 shares during the nine months ended September29, 2006 and 776 shares during the nine months ended September 30, 2005.  Total proceeds received from these optionexercises were $22,892 for the nine months ended September 29, 2006 and $13,675for the nine months ended September 30, 2005. Additionally, common stock issued under our Employee Stock Purchase Plantotaled 181 shares during the nine months ended September 30, 2005.  Total proceeds received from the sharesissued under the ESPP were $4,505 for the nine months ended September 30,2005.  There were no shares issued underthe ESPP for the quarter or

6

----

nine months ended September 29, 2006 following thesuspension of the ESPP by our Board of Directors in 2005.

Stock repurchases — Wemay repurchase a total of 10,000 shares under the share repurchase programapproved by our Board of Directors.  Werepurchased 1,400 shares of our common stock during the quarter ended September29, 2006 at a cost totaling $35,362 for an average price of $25.26 pershare.  We repurchased 6,189 shares ofour common stock during the nine months ended September 29, 2006 at a costtotaling $157,617 for an average price of $25.47 per share.  We repurchased 500 shares of our common stockduring the quarter ended September 30, 2005 at a cost totaling $15,818 for anaverage price of $31.64 per share.  Werepurchased 2,275 shares of our common stock during the nine months endedSeptember 30, 2005 at a cost totaling $66,089 for an average price of $29.05per share.  These treasury shares werepurchased on the open market through various brokers.  As of September 29, 2006, we have repurchased8,964 shares under the plan since the initial approval of the plan in 2004.  In August 2006, we used 7,073 of thesetreasury shares to help fund the LANDesk acquisition *(See Note 8)*.

Note 4.          Accumulated Other Comprehensive Loss

We record unrealizedgains and losses on our foreign currency translation adjustments, unrealized gainsand losses on derivatives which are cash flow hedges, and unrealized holdinggains or losses on our available-for-sale securities, net of tax, asaccumulated other comprehensive income (loss), which is included as a separatecomponent of stockholders’ equity. Comprehensive income in the first nine months of 2006 of $29,539consists of $29,065 of net income, $381 of unrealized gains on investments and$433 of unrealized losses on the cash flow hedge (net of deferred income taxes)and $526 of foreign currency translation adjustments.  Comprehensive income for the first ninemonths of 2005 of $28,590 consists of $29,297 of net income, $301 of unrealizedlosses on investments (net of deferred income taxes) and $406 of foreigncurrency translation adjustments.  As ofSeptember 29, 2006 and December 31, 2005, total accumulated other comprehensiveloss was $(20) and $(497), respectively.

Note 5.          EarningsPer Share
| ** **                                                           | ** ** | **Income**      | ** ** | **Shares**        | ** ** | **Per-Share  Amount** | ** ** |
|----------------------------------------------------------------------|------------|-----------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | ** **            | ** ** |
| **For the  three months ended September 29, 2006**                   | ** ** | ** **      | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Basic EPS**                                                        | ** ** | ** **      | ** ** | ** **        | ** ** | ** **            | ** ** |
| Net income available to common stockholders                          |       | $               | 2,550      |              | 46,289     |                  | $          | 0.06 |   |
| **Effect of Dilutive Securities**                                    |       |            |       |              |       |                  |       |
| Stock options and restricted stock awards                            |       | —          |       | 875               |       | —                |       |
| **Diluted EPS**                                                      |       |            |       |              |       |                  |       |
| Net income available to common stockholders and  assumed conversions |       | $               | 2,550      |              | 47,164     |                  | $          | 0.05 |   |
|                                                                 |       |            |       |              |       |                  |       |
| **For the  three months ended September 30, 2005**                   |       |            |       |              |       |                  |       |
| **Basic EPS**                                                        |       |            |       |              |       |                  |       |
| Net income available to common stockholders                          |       | $               | 16,365     |              | 48,966     |                  | $          | 0.33 |   |
| **Effect of Dilutive Securities**                                    |       |            |       |              |       |                  |       |
| Stock options                                                        |       | —          |       | 913               |       | —                |       |
| **Diluted EPS**                                                      |       |            |       |              |       |                  |       |
| Net income available to common stockholders and  assumed conversions |       | $               | 16,365     |              | 49,879     |                  | $          | 0.33 |   |
|                                                                 |       |            |       |              |       |                  |       |
| **For the  nine months ended September 29, 2006**                    |       |            |       |              |       |                  |       |
| **Basic EPS**                                                        |       |            |       |              |       |                  |       |
| Net income available to common stockholders                          |       | $               | 29,065     |              | 47,770     |                  | $          | 0.61 |   |
| **Effect of Dilutive Securities**                                    |       |            |       |              |       |                  |       |
| Stock options and restricted stock awards                            |       | —          |       | 805               |       | —                |       |
| **Diluted EPS**                                                      |       |            |       |              |       |                  |       |
| Net income available to common stockholders and  assumed conversions |       | $               | 29,065     |              | 48,575     |                  | $          | 0.60 |   |
|                                                                 |       |            |       |              |       |                  |       |
| **For the  nine months ended September 30, 2005**                    |       |            |       |              |       |                  |       |
| **Basic EPS**                                                        |       |            |       |              |       |                  |       |
| Net income available to common stockholders                          |       | $               | 29,297     |              | 49,550     |                  | $          | 0.59 |   |
| **Effect of Dilutive Securities**                                    |       |            |       |              |       |                  |       |
| Stock options                                                        |       | —          |       | 974               |       | —                |       |
| **Diluted EPS**                                                      |       |            |       |              |       |                  |       |
| Net income  available to common stockholders and assumed conversions |       | $               | 29,297     |              | 50,524     |                  | $          | 0.58 |   |

 

7

----

Anti-dilutive options to purchase common stock outstanding wereexcluded from the calculations above. Anti-dilutive options totaled 2,674 as of September 29, 2006.  Anti-dilutive options totaled 2,567 as ofSeptember 30, 2005.

Note 6.          SegmentReporting

In prior years, wereported our operations as a single reportable segment.  However, in the first quarter of 2006, wereorganized our business into five divisions and in the third quarter of 2006,we acquired our sixth division LANDesk*(See Note 8*).

·                       TheManagement Systems Division, which includes our branded and OEM KVM, serialconsole, power control and management appliance businesses;

·                       TheEmbedded Software and Solutions Division, which focuses on developing and marketingembedded systems and software including IPMI and embedded KVM technologiesprimarily for our OEM customers;

·                       TheConnectivity and Control Division, which focuses on expanding the markets forAvocent’s serial and wireless broadcast, point-of-sale, and audio-visualproducts;

·                       TheDesktop Solutions Division, which is developing new products to facilitateclient blade deployments;

·                       TheMobile Technologies Division, which includes mobile device management andsecure wireless systems administration; and

·                       TheLANDesk Division, which includes software management solutions.

The reorganizationincluded reconfiguring our systems and defining new cost centers and operatingmeasures to track performance of the divisions and to use as a basis for ourchief operating decision makers to manage and allocate resources.  As a result of this change in reportablesegments, we have retroactively adjusted the segment information previouslydisclosed for the quarter and nine months ended September 30, 2005 to conformto the current segment disclosures.  Inthe fourth quarter of 2006, we plan to merge the Mobile Technologies Divisioninto the LANDesk Division as their products consist primarily of software soldto similar customer groups.

We evaluate theperformance of our segments based on revenue and operating profit, whichexcludes corporate and unallocated costs, amortization of intangibles, andacquired in-process research and development expense.  We do not track or use assets by segment as ameasure of performance and, therefore, we have not presented assets by segment.
|                                 | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|---------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                      | ** ** | **September  29, 2006**                       | ** ** | **September  30, 2005**                      | ** ** | **September  29, 2006** | ** ** | **September  30, 2005** | ** ** |
| Net revenue:                    | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Management Systems              |       | $                                                  | 114,841    |                                              | $          | 85,542 |   | $ | 302,201 |   | $ | 235,186 |   |
| LANDesk                         |       | 13,042                                             |       | —                                            |       | 13,042 |   | — |   |
| Embedded Software and Solutions |       | 9,368                                              |       | 6,191                                             |       | 24,329 |   | 14,899 |   |
| Other business units            |       | 3,690                                              |       | 3,844                                             |       | 11,962 |   | 10,804 |   |
| Corporate and unallocated       |       | 873                                                |       | 1,131                                             |       | 2,797 |   | 2,162 |   |
| Total net revenue               |       | $                                                  | 141,814    |                                              | $          | 96,708 |   | $ | 354,331 |   | $ | 263,051 |   |

 
|                                                      | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **September  29, 2006**                       | ** ** | **September  30, 2005**                      | ** ** | **September  29, 2006** | ** ** | **September  30, 2005** | ** ** |
| Operating income  (loss):                            |       |                                               |       |                                              |       |   |   |   |   |
| Management Systems                                   |       | $                                                  | 34,931     |                                              | $          | 25,837 |   | $ | 84,807 |   | $ | 60,905 |   |
| LANDesk                                              |       | 5,055                                              |       | —                                            |       | 5,055 |   | — |   |
| Embedded Software and Solutions                      |       | 3,558                                              |       | 490                                               |       | 8,039 |   | (609 | ) |
| Other business units                                 |       | (4,266                                             | )          | (3,115                                            | )          | (10,918 | ) | (7,304 | ) |
| Corporate and unallocated costs                      |       | (4,864                                             | )          | (1,145                                            | )          | (10,801 | ) | (9,361 | ) |
| Amortization of intangibles and other expenses       |       | (7,634                                             | )          | (2,882                                            | )          | (15,187 | ) | (16,442 | ) |
| Acquired in-process research and development expense |       | (18,600                                            | )          | —                                            |       | (20,700 | ) | — |   |
| Total income from operations                         |       | $                                                  | 8,180      |                                              | $          | 19,185 |   | $ | 40,295 |   | $ | 27,189 |   |

 

8

----

**Revenueand operating income for our Management Systems Division includes the operatingresults of Cyclades from the date of the acquisition (*See Note 8*).**

Sales by product line forour Management Systems Division and LANDesk Division for the three and ninemonths ended September 29, 2006 and September 30, 2005 are as follows:
|                                                 | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                      | ** ** | **September  29, 2006**                       | ** ** | **September  30, 2005**                      | ** ** | **September  29, 2006** | ** ** | **September  30, 2005** | ** ** |
| Management  Systems Division (MSD) net revenue: |       |                                               |       |                                              |       |   |   |   |   |
| KVM                                             |       | $                                                  | 90,704     |                                              | $          | 80,483 |   | $ | 252,500 |   | $ | 221,627 |   |
| Serial Management                               |       | 15,880                                             |       | 844                                               |       | 30,690 |   | 2,701 |   |
| Other                                           |       | 8,257                                              |       | 4,215                                             |       | 19,011 |   | 10,858 |   |
| Total MSD net revenue                           |       | $                                                  | 114,841    |                                              | $          | 85,542 |   | $ | 302,201 |   | $ | 235,186 |   |

 
|                                | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                     | ** ** | **September  29, 2006**                       | ** ** | **September  30, 2005**                      | ** ** | **September  29, 2006** | ** ** | **September  30, 2005** | ** ** |
| LANDesk Division  net revenue: |       |                                               |       |                                              |       |   |   |   |   |
| Licenses and royalties         |       | $                                                  | 10,257     |                                              | $          | — |   | $ | 10,257 |   | $ | — |   |
| Maintenance and services       |       | 2,785                                              |       | —                                            |       | 2,785 |   | — |   |
| Total LANDesk net  revenue     |       | $                                                  | 13,042     |                                              | $          | — |   | $ | 13,042 |   | $ | — |   |

We defer revenue forservice and maintenance contracts until earned. As of September 29, 2006, deferred revenue was $47,149.  Approximately, $41,420 related to LANDesk andincluded a reduction of approximately 10%, as of the acquisition date inaccordance with purchase accounting guidelines, to reflect the balance at itsthen estimated fair value.  As ofSeptember 30, 2005, deferred revenue was $2,768.

We sell our productsinternationally to customers in several countries; however no foreign countryaccounted for more than 10% of sales in the first nine months of 2006 or2005.  Total foreign sales for the ninemonths ending September 29, 2006 and September 30, 2005 were each 43% of ourtotal net sales.

**As of September 29, 2006, long-lived assets totaled$867,445, which includes $563,793 held in the U.S. and $303,652 held outside ofthe U.S.  As of December 31, 2005, long-livedassets totaled $322,556, which includes $305,286 held in the U.S. and $17,270held outside of the U.S.  The largeincrease in long lived assets held outside the U.S. primarily relates tointangible assets acquired through the LANDesk acquisition.**

**Note 7.**          Forward Contracts

We occasionally use forward contracts to reduce aportion of our foreign currency exposure related to the net cash flows from ourinternational operations.  The majorityof these contracts are short-term contracts (three months or less) and aremarked-to-market each quarter and included in trade payables, with theoffsetting gain or loss included in other income (expense) in the accompanyingconsolidated statements of income.  As ofSeptember 29, 2006, and December 31, 2005, we had one open forward contractwith an immaterial fair value.

**Note 8.**          Acquisitions

On March 30, 2006, we acquired Cyclades Corporation, a privately-heldcompany based in Fremont, California, with additional operations in Sao Paulo,Brazil and Munich, Germany.  Cyclades employed approximately 325 people in19 locations around the world.  TheCyclades product lines include serial, KVM and power management products.  The acquisition of Cyclades enhances ourposition in the Linux server and networking infrastructure management market,provides complementary products to our product lines, and allows us to provideour customers a more integrated platform for managing their ITinfrastructure.  The results of Cyclades’operations have been included in the consolidated financial statements sincethe date of acquisition.

The acquisition was recorded under the purchasemethod of accounting, and the purchase price was allocated based on the fairvalue of the assets acquired and liabilities assumed.  In accordance with generally acceptedaccounting principles, purchased research and development costsallocated to patented and patent-pending technology were capitalized and willbe

9

----

amortized over therespective estimated useful lives.  Theremaining amounts of purchased research and development were expensed upon theclosing of the transaction.  The goodwillrecorded as a result of the acquisition will not be amortized but will beincluded in our 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 purchase consideration, excluding cash received,is as follows: 

| Cash paid for outstanding  shares  |   | $      | 90,000 |   |
|------------------------------------|--------|--------|--------|--------|
| Acquisition  costs paid by Avocent |   | 3,976  |   |
|                               |   |   |   |
| Total purchase  consideration      |   | $      | 93,976 |   |

We funded theacquisition through available cash.  Onthe closing of the Cyclades transaction, we acquired $2,408 in cash held byCyclades.

The purchase consideration was allocated, on apreliminary basis, to the estimated fair values of the assets acquired andliabilities assumed, as follows:
|                                      | ** ** | **Purchase**   | ** ** | ** **       | ** ** |
|--------------------------------------|------------|----------------|------------|------------------|------------|
| ** **                           | ** ** | **Price**      | ** ** | **Amortization** | ** ** |
| ** **                           | ** ** | **Allocation** | ** ** | **Period**       | ** ** |
| ** **                           | ** ** | ** **     | ** ** | ** **       | ** ** |
| Tangible assets                      |       | $              | 22,973     |             | **—** | ** ** |
| 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                             |       | 62,394         |       | —           |       |
| Deferred taxes                       |       | (14,860        | )          | —           |       |
| Assumed  liabilities                 |       | (16,931        | )          | —           |       |
|                                 |       |           |       |             |       |
|                                 |       | $              | 93,976     |             |       |   |

A $15,000 escrow accountwill be open for 21 months from the date of acquisition for indemnifiableevents specified in the acquisition agreements.

The$2,100 in fair value of all of the in-process research and development (“IPR&D”)received in the acquisition was determined using a form of the discounted cashflow method known as the multi-period excess earnings method.  These amounts were for particular researchand development projects that have no alternative future uses and were thereforeexpensed 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 next generation KVM overIP technology that leverages DSP processing technology and software-basedcompression algorithms.  PM45 is anintelligent power distribution unit that provides high current on a 3-phasemain power source.  It isanticipated that the products will be completed during late 2006.  These projects were still in process at theend of the third quarter of 2006.

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%.

**On August 31, 2006, we acquired LANDesk Group Limited, aprivately-held company based in Salt Lake City, Utah.  LANDesk employs approximately 600 people,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 agreementprovides for total consideration of approximately $408 million, including $200million in stock, $202 million in cash, and approximately $6 million inestimated fair value of assumed unvested employee stock options.  The transaction value may be**

10

----

**increasedby up to $60 million in cash if LANDesk meets certain 2006 revenue targetsspecified in the agreement.  The resultsof LANDesk’s operations have been included in the consolidated financialstatements since the date of acquisition.**

The acquisition was recorded under the purchasemethod of accounting, and the purchase price was allocated based on the fairvalue of the assets acquired and liabilities assumed.  In accordance with generally acceptedaccounting principles, purchased research and development costsallocated to patented and patent-pending technology were capitalized and willbe amortized over the respective estimated useful lives.  The remaining amounts of purchased researchand development were expensed upon the closing of the transaction.  The goodwill recorded as a result of theacquisition will not be amortized but will be included in our annual review ofgoodwill for impairment.  Additionally,amortization of the other intangible assets acquired and the goodwill recordedmay 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.  Ourpreliminary allocation of the purchase consideration does not take intoconsideration the tax impacts should these elections be made within therequired time period.  A summary of the total purchase consideration,excluding cash received, is as follows:
| Cash paid for outstanding  shares                                             |   | $       | 202,010 |   |
|-------------------------------------------------------------------------------|--------|---------|---------|--------|
| Avocent common  stock issued for outstanding shares                           |   | 199,527 |    |
| Estimated  acquisition costs paid by Avocent                                  |   | 12,019  |    |
| Estimated value  of unvested options assumed related to prior service periods |   | 5,788   |    |
|                                                                          |   |    |    |
| Total estimated  purchase consideration                                       |   | $       | 419,344 |   |

 

The purchase consideration was allocated, on apreliminary basis, to the estimated fair values of the assets acquired and liabilitiesassumed, as follows:
|                                      | ** ** | **Purchase**   | ** ** | ** **       | ** ** |
|--------------------------------------|------------|----------------|------------|------------------|------------|
| ** **                           | ** ** | **Price**      | ** ** | **Amortization** | ** ** |
| ** **                           | ** ** | **Allocation** | ** ** | **Period**       | ** ** |
| ** **                           | ** ** | ** **     | ** ** | ** **       | ** ** |
| Tangible assets                      |       | $              | 36,777     |             | —     |   |
| In-process  research and development |       | 18,600         |       | —           |       |
| Developed  technology                |       | 35,400         |       | 5 years          |       |
| Core technology                      |       | 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                             |       | 275,322        |       | —           |       |
| Deferred taxes                       |       | (32,964        | )          | —           |       |
| Assumed  liabilities                 |       | (53,391        | )          | —           |       |
|                                 |       | $              | 419,344    |             |       |   |

 

We funded the acquisitionthrough available cash, borrowings from our line of credit and the issuance of7,073 shares of common stock.  On theclosing of the LANDesk transaction, we acquired $10,312 in cash held by LANDesk.  An escrow account with $60 million of thestock consideration is held for indemnifiable claims for a period of 18 monthsafter the acquisition.

The$18,600 in fair value of all of the in-process research and development (“IPR&D”)received in the acquisition was determined using a form of the discounted cashflow method known as the multi-period excess earnings method.  These amounts were deemed to be forparticular research and development projects that have no alternative future usesand were therefore expensed rather 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 ConfigurationManagement Database (CMDB) product lines. Virtualization is a technologythat presents a logical grouping of computing resources so that access can beprovided in ways that enhance utilization over the original resourceconfiguration.  HIPS technology is usedto monitor computer and

11

----

network activities to look for signs of intrusioninto the computer system, which allows system administrators to identifypotential system security threats and weaknesses.  CMBD is a repository for information about acompany’s IT services and infrastructures and their relationships to eachother, allowing IT professionals the ability to assess the current state of theIT infrastructure at any time.   Itis anticipated that the products will be completed during 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, with peak revenue foreach being achieved in 2012.   Net incomeattributable to IPR&D was calculated by applying LANDesk’s projected gross,operating, and net profit margins to IPR&D revenue, while consideringLANDesk’s  historical results andindustry prospects.  These products haveestimated economic lives of up to 10 years. The discount rate used to value IPR&D was 25%.

**Pro FormaFinancial Information -**The following unaudited pro formasummary combines the results of operations of Avocent, Cyclades and LANDesk asif the acquisitions had occurred prior to the beginning of each periodpresented.  Certain adjustments have beenmade to reflect the impact of the purchase transactions.  These pro forma results have been preparedfor comparative purposes only and do not purport to be indicative of what wouldhave occurred had the acquisitions been made at the beginning of 2005, or ofresults which may occur in the future. 
|                                  | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                       | ** ** | **September 29,  2006**                       | ** ** | **September 30,  2005**                      | ** ** | **September 29,  2006** | ** ** | **September 30,  2005** | ** ** |
| Net sales                        |       | $                                                  | 154,559    |                                              | $          | 132,578 |   | $ | 428,679 |   | $ | 362,293 |   |
| Net income  (loss)               |       | $                                                  | 6,908      |                                              | $          | 7,885 |   | $ | 18,825 |   | $ | (3,097 | ) |
| Income (loss) per  basic share   |       | $                                                  | 0.14       |                                              | $          | 0.14 |   | $ | 0.35 |   | $ | (0.06 | ) |
| Income (loss) per  diluted share |       | $                                                  | 0.13       |                                              | $          | 0.14 |   | $ | 0.34 |   | $ | (0.05 | ) |

 

**The above amounts exclude acquired in-processresearch and development expense of $18,600 and $20,700 for the three monthsended September 29, 2006 and the nine months ended September 26, 2006,respectively, related to the LANDesk and Cyclades acquisitions.**

**Note 9.**          Goodwill and Other IntangibleAssets

**Other intangible assets subject to amortization wereas follows:**
|                                   | ** ** | **September 29, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **Gross  Carrying  Amounts**     | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                        | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Developed  technology             |       | $                                | 91,120     |                            | $          | 14,679 |   | $ | 14,820 |   | $ | 8,293 |   |
| Patents and trademarks            |       | 32,916                           |       | 4,038                           |       | 9,174 |   | 4,959 |   |
| Customer base  and certifications |       | 100,060                          |       | 5,426                           |       | 4,870 |   | 1,719 |   |
| Non-compete  agreements           |       | 12,720                           |       | 2,729                           |       | 2,520 |   | 1,289 |   |
| Maintenance  Contracts            |       | 9,600                            |       | 160                             |       | — |   | — |   |
| Licenses                          |       | 4,228                            |       | 2,207                           |       | 1,814 |   | 1,175 |   |
|                              |       | $                                | 250,644    |                            | $          | 29,239 |   | $ | 33,198 |   | $ | 17,435 |   |

 

**During March 2006, we acquired theremote systems management and diagnostics product line from AgilentTechnologies, Inc. for approximately $6,250. We recorded approximately $5,839 in other intangible assets related tothis transaction, which is subject to future amortization.**

**For the three months ended September29, 2006 and September 30, 2005, amortization expense for other intangibleassets was $7,483 and $2,731, respectively. For the nine months ended September 29, 2006 and September 30, 2005,amortization expense for other intangible assets was $14,735 and $15,976,respectively.  For the three and ninemonths ended September 29, 2006, we recorded $894 of amortization expense incost of sales related to the amortization of certain software technologypurchased in the LANDesk acquisition. The approximate estimated annual amortization for other intangibles isas follows:**

12

----

 

| Years ending December 31: | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
| 2006, remaining  quarter only            |       | $          | 12,374     |   |
| 2007                                     |       | $          | 43,597     |   |
| 2008                                     |       | $          | 41,597     |   |
| 2009                                     |       | $          | 37,107     |   |
| 2010                                     |       | $          | 34,056     |   |
| Thereafter                               |       | $          | 52,674     |   |

**For the nine months ended September29, 2006, we recorded $275,322 of goodwill related to the LANDesk acquisition,$62,394 of goodwill related to the Cyclades acquisition and $181 of additionalgoodwill related to prior acquisitions.**

**Note 10.**    Product Warranties

**The activity within the liability for warranty returns forthe nine months ended September 29, 2006 is:**
| Balance, January 1, 2006                                  |   | $      | 2,536  |   |
|-----------------------------------------------------------|--------|--------|--------|--------|
| Accruals for  product warranties issued during the period |   | 1,799  |   |
| Assumed on  acquisition of Cyclades                       |   | 180    |   |
| Settlements made  during the period                       |   | (1,821 | )      |
|                                                      |   |   |   |
| Balance,  September 29, 2006                         |   | $      | 2,694  |   |

**Deferred revenue related to our extended warranty programwas $2,143 as of September 29, 2006.  Werecorded earned revenue from the amortization of deferred revenue related toextended warranties of $548 for the nine months ended September 29, 2006.  In addition, we recorded deferred revenue fornew extended warranties of $769 during the nine months ended September 29,2006.**

Note 11.    Effective Tax Rate

Theeffective tax rate in the first nine months of 2006 was approximately 35.9%,compared to an effective tax rate of approximately 23.2% in the first ninemonths of 2005.  The provision for income taxes was approximately$16,297 for the first nine months of 2006, compared to $8,838 in the firstnine months of 2005.  The increase in2006 effective tax rate over that of 2005 is primarily due to $20.7 million ofin-process research and development for the LANDesk and Cyclades acquisitionswhich were immediately expensed upon purchase. Also, these items are not currently expected to be deductible for thetax purposes and therefore increased the effective tax.  The increase in provision for income taxeswas partly the result of the change in mix of our pre-tax profit among our U.S.and international companies.  Additionally, the Irish statutory tax rateon manufactured goods increased from 10% to 12.5% on January 1, 2006.  The U.S. Research and Development credit alsohas expired, and as of September 29, 2006, this credit has not yet beenreinstated by Congress.  The increaseswere partially offset by a deduction attributable to incentive stock optionsand the release of tax contingency reserves due to the favorable settlement ofcertain international tax examinations.

Theamount of income taxes we pay is subject to audits by federal, state, andforeign authorities, and can result in proposed assessments.  We have reserves for taxes and associatedinterest that may become payable in future years as a result of audits by taxauthorities.  Although we believe thatthe positions taken on previously filed tax returns are appropriate, we havenevertheless established tax and interest reserves in recognition that varioustax authorities may challenge the positions taken by us resulting in additionalliabilities and interest.  The taxreserves are reviewed as circumstances warrant and adjusted as events occurthat affect our potential liability for additional taxes, such as lapsing ofapplicable statutes of limitations, conclusions of tax audits, additionalexposure based on current calculations, identification of new issues, releaseof administrative guidance, or rendering of a court decision affecting aparticular tax issue.

Additionally,in July 2006, the Financial Accounting Standards Board (FASB) releasedFASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109” (FIN 48).  FIN 48 clarifies theaccounting and reporting for uncertainties in income tax law.  ThisInterpretation prescribes a comprehensive model for the financial statementrecognition, measurement, presentation and disclosure of uncertain tax positionstaken or expected to be taken in income tax returns.  We will adopt thisInterpretation in the first quarter of 2007.  The cumulative effects, ifany, of applying this Interpretation will be recorded as an adjustment toretained earnings as of the beginning of the period of adoption.  We havecommenced the process of evaluating the expected effect of FIN 48 on ourconsolidated financial

13

----

statements but are currently not yet in a position todetermine such effects.

Note 12.    Legal Proceedings

InOctober 2003, Avocent filed a complaint for patent infringement in the UnitedStates District Court for the Northern District of Alabama against ClearCubeTechnology, Inc.  We settled our casewith ClearCube in August 2006.  As partof the settlement, ClearCube agreed to license certain patents from us andpotentially license other Avocent technologies.

On March 14, 2006, TFSElectronic Manufacturing Services, Inc. filed a Third-Party Complaint and anObjection to Claim of Avocent Corporation with the United States BankruptcyCourt, District of Arizona.  As a resultof the complaint, an adversary proceeding has been commenced againstAvocent in the TFS bankruptcy case in an effort to disallow Avocent’s claim inits entirety.  TFS also seeks damages inan undetermined amount for Avocent’s alleged breach of contract, negligence,negligent misrepresentations, breaches of warranty, unjust enrichment,disparagement of TFS’ business, and quantum merit.  TFS is seeking recovery of actual damages,punitive damages, attorneys’ fees, pre- and post-judgment interest, costs, andthe imposition of joint and several liabilities as to Avocent and a namedco-defendant, TopSearch Printed Circuits (HK), Ltd.  Avocent has moved to dismiss all claims, anddiscovery is under way.

**Note 13.**    Stock Based Compensation

On January 1, 2006, we adopted SFAS 123(revised 2004), *Share-Based Payment*,(“SFAS 123R”), which requires the measurement and recognition of compensationexpense for all share-based payment awards made to employees and directors,including grants of employee stock options, based on estimated fairvalues.  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 we previously applied, forperiods beginning before fiscal 2006.  InMarch 2005, the Securities and Exchange Commission (“SEC”) issued StaffAccounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123R.  We have applied the provisions of SAB 107 inour adoption of SFAS 123R.

We adopted SFAS 123R using the modifiedprospective transition method, which requires the application of the accountingstandard as of January 1, 2006, the first day of our fiscal 2006year.  Our consolidated statements ofincome for the three and nine months ended September 29, 2006 reflect theimpact of SFAS 123R.  In accordance withthe modified prospective transition method, our consolidated statements ofincome for prior periods have not been retroactively adjusted to reflect theimpact of SFAS 123R.  New awards arevalued and accounted for prospectively upon adoption.  Prior outstanding stock option awards thatwere not fully vested as of January 1, 2006 will be recognized as compensationexpense in our consolidated statements of income over their remaining requisiteservice periods.

*Stock Option ProgramDescriptions*

We have stock option plans coveringsubstantially all of our employees and directors.  Avocent also assumed the stock option planand the related unvested stock options of LANDesk at the acquisition effectiveAugust 31, 2006.  Purchase prices forcommon stock subject to options issued under the assumed plans generallyapproximate the fair market value of the related shares at the date ofgrant.  Generally, options vest overthree to four years and typically expire 10 years from the grant date.

We currently grant equity incentiveawards under the 2005 Avocent Corporation Equity Incentive Plan (the 2005Plan).  As originally approved by ourstockholders, the 2005 Plan authorized a total of 2,500 shares of common stockfor issuance, plus (i) any shares remaining available for issuance underprevious stock option plans up to a maximum of 1,187 shares and (ii) anyshares subject to any outstanding options under our stock option plans thatsubsequently expire unexercised.  New options may no longer be grantedunder any former plans.  The 2005 Planallows 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 ourdirectors, employees, or consultants, but incentive stock options may be granted only to our 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.  Weissue new shares to satisfy stock options exercised.  During the second quarter of 2006, ourstockholders approved an additional 2,250 shares of common stock for issuanceunder the 2005 Plan.  In the first ninemonths of 2006, we granted both stock options and restricted stock units underthe 2005 Plan.

14

----

The following schedule summarizes the stockoption activity in our stock-based compensation plans for the nine months endedSeptember 29, 2006:
|                                              | ** ** | **Number of** | ** ** | **Range of**        | ** **          | **Weighted Avg.**  | ** ** | **Vesting**    | ** ** |
|----------------------------------------------|------------|--------------------|------------|--------------------------|---------------------|-------------------------|------------|----------------|------------|
| ** **                                   | ** ** | **Options**        | ** ** | **Exercise Prices** | ** **          | **Exercise Price** | ** ** | **Provisions** | ** ** |
| Options  outstanding, December 31, 2005 |       | 6,623              |       | $                        | 0.11– $70.94   |                    | $          | 32.00          |       | Various |   |
|                                         |       |               |       |                     |                |                    |       |           |       |
| Options assumed  (LANDesk)                   |       | 572                |       | $                        | 3.34 - $33.86       |                    | 13.03      |           | Various    |   |
| Options granted                              |       | 62                 |       | $                        | 22.77 – $34.64 |                    | $          | 31.02          |       | Various |   |
| Options  cancelled/forfeited                 |       | (322               | )          | $                        | 1.31– $69.63   |                    | $          | 36.11          |       | Various |   |
| Options  exercised                           |       | (1,102             | )          | $                        | 0.11– $31.00   |                    | $          | 20.79          |       | Various |   |
|                                         |       |               |       |                     |                |                    |       |           |       |
| Options outstanding,  September 29, 2006     |       | 5,833              |       | $                        | 1.31– $70.94   |                    | $          | 33.96          |       | Various |   |

 

The total pretax intrinsic value of options exercisedduring the nine months ended September 29, 2006 was $12,959.

Thefollowing table summarizes information about stock options outstanding atSeptember 29, 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** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|------------------------------------------------------|------------|----------------------|------------|-------------------------------------|------------|-------------------------|------------|-------------------------------------|------------|----------------------|------------|
| $0.11 - $9.48                           |       | 242                     |       | 5.89                                                 |       | $                    | 6,382      |                                | $          | 3.72                    |       | 129                                 |       | $                    | 4.13       |   | $ | 1,535 |   |
| $10.46 - $20.00                         |       | 511                     |       | 6.82                                                 |       | 7,782                |       | 14.88                               |       | 258                     |       | 14.86                               |       | 2,733                |       |
| $20.33 – $29.95                    |       | 2,659                   |       | 6.24                                                 |       | 13,235               |       | 25.10                               |       | 2,603                   |       | 25.12                               |       | 13,028               |       |
| $30.02 - $44.25                         |       | 790                     |       | 7.49                                                 |       | —               |       | 38.15                               |       | 678                     |       | 39.11                               |       | —               |       |
| $46.19 - $70.94                         |       | 1,631                   |       | 3.97                                                 |       | —               |       | 52.46                               |       | 1,631                   |       | 52.46                               |       | —               |       |
|                                    |       | 5,833                   |       | 5.82                                                 |       | $                    | 27,399     |                                | $          | 34.69                   |       | 5,299                               |       | $                    | 34.22      |   | $ | 17,296 |   |

 

The aggregate intrinsicvalue in the preceding table represents the total pretax intrinsic value, basedon our closing price of $30.12 as of September 29, 2006, which would have beenreceived by option holders had all option holders exercised their options onthat date.  The total number ofin-the-money options exercisable as of September 29, 2006 was 2,990.  As of December 31, 2005, 6,248 options wereexercisable and the weighted average exercise price was $32.33.

*Restricted Stock Units*

Our 2005 Plan permitsthe granting of restricted stock units to eligible employees and directors atthe fair market value of our common stock at the date of grant.  Awards during the first nine months of 2006typically become fully vested over two or three year periods.  Restricted stock units are payable in sharesof our common stock upon vesting.

The following tablepresents a summary of the activity in our nonvested restricted stock unitsduring the nine months ended September 29, 2006:
|                                              | ** ** | **Number of ** | ** ** | **Weighted-Average  Grant-Date** | ** ** |
|----------------------------------------------|------------|--------------------------|------------|----------------------------------|------------|
| **Nonvested stock units**          | ** ** | **Stock Units**     | ** ** | **Fair Value**              | ** ** |
| Nonvested stock  units at December 31, 2005  |       | —                   |       | —                           |       |
| Granted                                      |       | 977                      |       | $                                | 28.63      |   |
| Vested                                       |       | —                   |       | —                           |       |
| Forfeited                                    |       | (27                      | )          | 29.11                            |       |
| Nonvested stock units  at September 29, 2006 |       | 950                      |       | $                                | 28.61      |   |

 

15

----

As of September 29,2006, there was approximately $21,234 of total unrecognized compensation costrelated to nonvested share-based compensation arrangements granted under the2005 Plan.  That cost is expected to berecognized over an estimated weighted average amortization period of 2.4 years.

*Performance – Based Restricted Stock Units*

Certain restrictedstock units contain both service and performance conditions that affect thequantity of awards that will vest. Performance-based restricted stock units begin vesting upon thecompletion of a specified service period and the achievement of certain performancetargets (which can include individual and company measures) and are convertedinto shares of our common stock upon vesting, typically over a three yearperiod.  The fair value is based on themarket price of our common stock on the grant date and assumes that the targetpayout 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.

*Valuation and Expense Information*

The following table summarizes stock-basedcompensation expense related to employee stock options and restricted stockunits under SFAS 123R for the three and nine months ended September 29, 2006,which was allocated as follows:
|                                                                  | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                       | ** ** | **September 29, 2006** | ** ** | **September 29, 2006** | ** ** |
| Cost of sales                                                    |       | $                                | 289        |                             | $          | 502 |   |
|                                                             |       |                             |       |                             |       |
| Research and  development                                        |       | 1,109                            |       | 2,172                            |       |
| Selling, general  and administrative                             |       | 3,197                            |       | 5,484                            |       |
|                                                             |       |                             |       |                             |       |
| Stock-based  compensation expense included in operating expenses |       | 4,306                            |       | 7,656                            |       |
|                                                             |       |                             |       |                             |       |
| Total  stock-based compensation expense                          |       | 4,595                            |       | 8,158                            |       |
| Tax benefit                                                      |       | (1,085                           | )          | (2,316                           | )          |
|                                                             |       |                             |       |                             |       |
| Total stock-based  compensation expense, net of tax              |       | $                                | 3,510      |                             | $          | 5,842 |   |

For the three and nine months ended September30, 2005, we recorded stock compensation expense of $510 and $1,529,respectively, related to the amortization of deferred compensation recorded asa result of assumed options from the acquisition of OSA Technologies Inc.

The table below illustrates the effect on netincome and earnings per share as if we had applied the fair-value recognitionprovisions of SFAS 123 to all of our stock-based compensation awards forperiods prior to the adoption of SFAS 123R.
|                                                                                                                                         | ** ** | **Three months Ended** | ** ** | **Nine months Ended**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                              | ** ** | **September 30, 2005** | ** ** | **September 30, 2005** | ** ** |
| Net income — as  reported                                                                                                          |       | $                                | 16,365     |                             | $          | 29,297 |   |
| Add: Stock-based  employee compensation expense included in reported net income, net of related  tax effects                            |       | 510                              |       | 1,529                            |       |
| Deduct: Total  stock based employee compensation expense determined under fair value method  for all awards, net of related tax effects |       | 8,343                            |       | 21,466                           |       |
| Net income — pro  forma                                                                                                            |       | $                                | 8,532      |                             | $          | 9,360 |   |
|                                                                                                                                    |       |                             |       |                             |       |
| Basic earnings  per share — as reported                                                                                            |       | $                                | 0.33       |                             | $          | 0.59 |   |
| Basic earnings  per share — pro forma                                                                                              |       | $                                | 0.17       |                             | $          | 0. 19 |   |
| Diluted earnings  per share — as reported                                                                                          |       | $                                | 0.33       |                             | $          | 0.58 |   |
| Diluted earnings per  share — pro forma                                                                                            |       | $                                | 0.17       |                             | $          | 0.19 |   |

 

16

----

As of January 1, 2006, total pre-taxcompensation cost related to non-vested stock options not yet recognized wasapproximately $1,900, which is expected to be recognized over the following 18months using the ratable single-option approach.  Of this amount, we expensed $841 in the firstquarter of 2006.  As a result of grantingadditional options, as well as granting restricted stock units and performance-basedrestricted stock units during the second quarter of 2006, stock-basedcompensation increased to $2,722 and $4,595 in the second and third quarters of2006, respectively.  Excluding the effectof any future grants, we expect to record stock based compensation expense ofapproximately $4,900 in the fourth quarter of 2006.

We estimate the fair value of options using theBlack-Scholes Model.  This model requiresthe input of assumptions regarding a number of complex and subjective variablesthat will usually have a significant impact on the fair value estimate.  These variables include, but are not limitedto, the volatility of our stock price and employee exercise behaviors.  The assumptions and variables used for thecurrent period grants were developed based on SFAS 123R and SEC guidancecontained in SAB 107.  Theweighted-average estimated fair value of stock options granted to employeesduring the nine months ended September 29, 2006 was $13.10 per share using theBlack-Scholes Model with the following weighted-average assumptions:

| Expected volatility       |   | 44.24  | %      |
|---------------------------|--------|--------|--------|
| Risk-free interest  rate  |   | 4.86   | %      |
| Expected  dividend yield  |   | — |   |
| Expected life (in  years) |   | 4.34   |   |

We based our estimate of expected volatility forthe nine months ended September 29, 2006 on the sequential historical dailytrading data of our common stock for a period equal to the expected life of theoptions granted.  The selection of thehistorical volatility approach was based on available data indicating ourhistorical volatility is as equally representative of our future stock pricetrends as is implied volatility.

The risk-free interest rate assumption is basedupon implied yields of U.S. Treasury zero-coupon bonds on the date of granthaving a remaining term equal to the expected life of the options granted.  The dividend yield is based on our historicaland expected dividend payouts.

The expected life of our employee stock optionsis based upon historical exercise and cancellation activity of our previousstock-based grants with a ten-year contractual term.

Stock-based compensation expense recognized inour consolidated statements of income for the nine months ended September 29,2006 is based on options and stock units ultimately expected to vest, and hasbeen reduced for estimated forfeitures. These estimates were based upon historical experience.

We have used third-party analyses to assist indeveloping some of the assumptions used in our Black-Scholes Model.  We will continue to assess the assumptionsand methodologies used to calculate estimated fair value of stock-based compensation.  If circumstances change, and additional databecomes available over time, we may change our assumptions and methodologies,which may materially impact our fair value determination.

*Pro Forma Information UnderSFAS 123 for Periods Prior to January 1, 2006*

The weighted-average estimated value of stockoptions granted to employees and directors during the nine months ended September30, 2005 was $6.89 per share using the Black-Scholes model with the followingweighted-average assumptions:

| Expected volatility       |   | 45.28  | %      |
|---------------------------|--------|--------|--------|
| Risk-free  interest rate  |   | 3.58   | %      |
| Expected  dividend yield  |   | — |   |
| Expected life (in  years) |   | 1.73   |   |

During the second quarter of 2005, we grantedover 300 options which vested on December 31, 2005, which reduced the weightedaverage expected life of options granted during the nine months ended September30, 2005.

Prior to the adoption of SFAS 123R, the expectedlife and expected volatility of the stock options were based upon historicaland other economic data.  Forfeitures ofstock options were accounted for as they occurred.

17

----

Note 14.  Line of Credit andInterest Rate Swap

During the second quarterof 2006, we obtained a $250,000 unsecured, five-year revolving bank line ofcredit.  We used $150,000 under the lineof credit to fund a portion of the LANDesk acquisition (*See Note 8*).  Further, we plan to use future borrowings forthe purchase of shares under our stock repurchase program (*See Note 3*).  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.  Currently, the credit spread is 70 basispoints. Direct costs incurred from securing the line of credit were capitalizedand will be amortized over the term of the agreement.  There was approximately $162,005 outstandingunder the line of credit as of September 29, 2006.  The line of credit carries certain financialcovenants including a minimum interest coverage ratio and a maximum totalleverage ratio.

In August 2006, we entered into an interest rateswap agreement with a notional amount of $125,000. The objective of the hedgeis to protect us against rising LIBOR interest rates that would have a negativeeffect on our cash flows due to changes in interest payments on the line ofcredit.  The swap was effective on August31, 2006 and terminates on December 31, 2008. The swap calls for us to make fixed rate payments of 5.42% over the termof the hedge and to receive floating rate payments based on LIBOR (matching theLIBOR rate in the line of credit above) from the counter-party.  We anticipate that the hedge will be settledupon maturity and it is being accounted for as a cash flow hedge. The interestrate swap is recorded at fair value each reporting period with the changes inthe fair value of the hedge that take place through the date of maturityrecorded in accumulated other comprehensive income (OCI).

During the quarter, we recorded an unrealized losson the swap, net of tax, of $433 in accumulated other comprehensive income(loss). There was no ineffectiveness in the quarter and we anticipate noreclassification of OCI into earnings in the next 12 months.

**Note 15.  CycladesIntegration Expenses**

**We recorded $1,304 of costs associated with the integrationof Cyclades people, processes and products into Avocent in the third quarter of2006.  These costs also include severanceaccruals resulting from the headcount reductions associated with duplicatepositions eliminated in Avocent during the third quarter.  We expect additional integration costs andseverance accruals in the fourth quarter of 2006 to be immaterial.**

**Note16.  Recently Issued Accounting Standards**

**In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements* (“SFAS 157”), which clarifies that fairvalue estimates should be based on the assumptions market participants woulduse when pricing an asset or liability and establishes a fair value hierarchythat prioritizes the information used to develop those assumptions. Under SFAS157, fair value measurements would be separately disclosed by level within thefair value hierarchy. SFAS 157 is effective for fiscal years beginning afterNovember 15, 2007.  We do not expectthe adoption of SFAS 157 to have a material impact on our consolidated resultsof operation and financial condition.**

**Note 17.  SubsequentEvents**

**During the period from September 30,2006 through October 27, 2006, approximately 400 employee stock options wereexercised.  During the period fromSeptember 30, 2006 through October 27, 2006, we repurchased 200 additionalshares of our common stock on the open market under our Board approved stockrepurchase program, for a total cost of $7,207.**

18

----

**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

*THEINFORMATION IN THIS ITEM 2**“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS”**CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITATION,STATEMENTS RELATING TO OUR FUTURE BUSINESS PROSPECTS AND ECONOMIC CONDITIONS INGENERAL; STATEMENTS REGARDING OUR ABILITY TO PREDICT FUTURE SALES AND MANAGEINVENTORY LEVELS; STATEMENTS REGARDING THE FLUCTUATION OF OUR REVENUE GROWTH INRELATION TO ECONOMIC CONDITIONS AND IT RELATED SPENDING TRENDS; STATEMENTSREGARDING OUR REVENUE, GROSS MARGINS, STOCK-BASED COMPENSATION EXPENSE, OURRESEARCH AND DEVELOPMENT EXPENSES, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES,CYCLADES INTEGRATION EXPENSES, AMORTIZATION EXPENSES AND INVESTMENT INCOME INTHE FOURTH QUARTER OF 2006; STATEMENTS REGARDING THE EARN-OUT PROVISION IN THELANDESK ACQUISITION AND BORROWINGS UNDER OUR LINE OF CREDIT; AND STATEMENTSREGARDING FUTURE PURCHASES OF STOCK UNDER OUR STOCK REPURCHASE PROGRAM. THESEFORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THATCOULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED INTHE FORWARD-LOOKING STATEMENTS.  FACTORSTHAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO THOSE DISCUSSEDIN ITEM 1A “RISK FACTORS.”*

**Overview**

Avocentdesigns, manufactures, licenses, and sells products and technologies thatprovide connectivity and centralized management of information technology (IT)infrastructure.  We (meaning Avocent andits wholly-owned subsidiaries) provide connectivity and managementproducts and technologies that centralize control of servers, desktopcomputers, serial devices, wireless devices, mobile devices, and networkappliances, thus increasing the efficiency of IT personnel.  Server manufacturers resell private-labeledAvocent KVM (keyboard, video, and mouse) switches and embedded technology intheir systems, and companies large and small utilize our products andtechnologies for managing their growing IT infrastructure.  For a description of our products, technologiesand markets, please refer to our Form 10-K, which was filed on March 6, 2006.

On August 31, 2006, weacquired LANDesk Group Limited, a privately held company in Salt Lake City, Utah,which significantly expands our product lines to include software for thecentralized management and protection of information technology assets.  (*See Note 8 to the condensedconsolidated financial statements*)

A substantial portion ofour revenue is derived from sales to major server 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 42%of sales in the first nine months of 2006 and 49% of sales in the first nine monthsof 2005.  Sales to our branded customersaccounted for 58% of sales in the first nine months of 2006 and 51% of sales inthe first nine months of 2005.  We do nothave contracts with many of our branded customers, and in general, our OEM andbranded business customers are obligated to purchase products from us onlypursuant to binding purchase orders.  Theloss of, or material decline in orders from, these customers would have amaterial adverse effect on our business, financial condition, results ofoperations, and cash flows.  Our top fivecustomers include both OEM and branded customers, and accounted for 58% ofsales in the first nine months of 2006 and 62% of sales in the first nine monthsof 2005.

We sell products todealers, end-users, and OEMs in the United States, Canada, Europe, and Asia aswell as in other foreign markets.  Saleswithin the United States accounted for approximately 57% of the first nine monthsof sales in 2006 and 2005.  Sales outsideof the United States accounted for 43% of the first nine months of sales in2006 and 2005.  No single foreign countryaccounted for more than 10% of sales in 2006 or in 2005.

In prior years, wehave reported our operations as a single operating segment.  However, in the first quarter of 2006, weorganized our business into five divisions, and we acquired our sixth division,LANDesk, in the third quarter 2006:

·                  TheManagement Systems Division, which includes our branded and OEM KVM, serialconsole, power control and management appliance businesses;

·                  TheEmbedded Software and Solutions Division, which focuses on developing and marketingembedded systems and software including IPMI and embedded KVM technologiesprimarily for our OEM customers;

·                  TheConnectivity and Control Division, which focuses on expanding the markets forAvocent’s serial and wireless products;

·                  TheDesktop Solutions Division, which is developing new products to facilitateclient blade deployments;

19

----

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

·                  The LANDeskDivision, which includes software systems management solutions.

Our ManagementSystems Division accounted for 85% of sales in the first nine months of 2006and 89% of sales in the first nine months of 2005.  Our Embedded Software and Solutions Divisionaccounted for 7% of sales in the first nine months of 2006 and 6% of sales inthe first nine months of 2005.  OurLANDesk Division, which was acquired on August 31, 2006, contributed 4% ofsales in the first nine months of 2006. The Mobile Technologies Division will be merged into the LANDeskDivision during the fourth quarter of 2006.

We continue toexperience significant price competition in the market for all of our products,and we expect that pricing pressures will continue in the future.  In addition, general economic conditions arenot predictable, and we expect our revenue growth rate to fluctuate in relationto economic conditions and IT related spending trends.  Depending on future general economicconditions and other factors, our revenue could decline in the future.

Many of our executiveofficers and directors are vested in significant amounts of options to purchaseshares of our common stock and continue to vest in additional shares on aregular basis.  These officers anddirectors have informed us that they have sold, and may sell additional, sharesof our common stock to provide liquidity and diversify their portfolios.  In April 2006, our Board of Directorsapproved approximately 875,000 restricted and performance stock awards to ourexecutive officers, directors and other employees.  These awards will vest over two or threeyears and in some cases are subject to the achievement of certain performancegoals.

****Our Boardof Directors recently approved stock ownership guidelines for our directors andsenior corporate officers.  Under theseownership guidelines, the non-executive members of our Board of Directors areexpected to own Avocent stock with a value equal to at least their annual Boardretainer, our Chief Executive Officer is expected to own Avocent stock with avalue equal to at least three times his base salary, our President and ChiefOperating Officer is expected to own Avocent stock with a value equal to atleast one and one-half times his base salary, and our other senior officers areexpected to own Avocent stock with a value equal to at least the officer’s basesalary.  These ownership levels are to beachieved over a period of time by requiring the director or the officer toretain a significant portion of any restricted stock award until such time asthe required minimum ownership level is reached.****

**Results of Operations**

The following table sets forth, for the periods indicated, selectedstatement of income data expressed as a percentage of net sales:
|                                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **September  29, 2006**     | ** ** | **September  30, 2005**    | ** ** | **September  29, 2006** | ** ** | **September  30, 2005** | ** ** |
| Net sales                                              |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                          |       | 37.2                             |       | 40.7                            |       | 38.9 |   | 41.6 |   |
| Gross profit                                           |       | 62.8                             |       | 59.3                            |       | 61.1 |   | 58.4 |   |
| Operating  expenses:                                   |       |                             |       |                            |       |   |   |   |   |
| Research and  development expenses                     |       | 11.3                             |       | 15.1                            |       | 12.3 |   | 16.5 |   |
| Acquired  in-process research and development expenses |       | 13.1                             |       | —                          |       | 5.8 |   | — |   |
| Selling, general  and administrative expenses          |       | 27.0                             |       | 21.5                            |       | 26.6 |   | 25.5 |   |
| Cyclades  integration expenses                         |       | 0.9                              |       | —                          |       | 1.0 |   | — |   |
| Amortization of  intangible assets                     |       | 4.6                              |       | 2.8                             |       | 3.9 |   | 6.1 |   |
| Total operating expenses                               |       | 57.0                             |       | 39.4                            |       | 49.6 |   | 48.1 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Income from operations                                 |       | 5.8                              |       | 19.9                            |       | 11.5 |   | 10.3 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Income from  settlement of a lawsuit                   |       | —                           |       | —                          |       | — |   | 1.9 |   |
| Net investment  income                                 |       | 1.1                              |       | 2.3                             |       | 1.9 |   | 2.5 |   |
| Net realized  investment losses                        |       | (0.1                             | )          | (0.1                            | )          | (0.1 | ) | (0.2 | ) |
| Interest expense                                       |       | (0.7                             | )          | —                          |       | (0.3 | ) | — |   |
| Other income  (expense), net                           |       | (0.1                             | )          | (0.1                            | )          | (0.2 | ) | — |   |
| Income before provision for income taxes               |       | 6.0                              |       | 22.0                            |       | 12.8 |   | 14.5 |   |
| Provision for  income taxes                            |       | 4.2                              |       | 5.1                             |       | 4.6 |   | 3.4 |   |
| Net income                                             |       | 1.8                              | %          | 16.9                            | %          | 8.2 | % | 11.1 | % |

 

20

----

*Net sales.*  Net sales increased 47% to $141.8 million forthe third quarter of 2006 from $96.7 million for the third quarter of2005.  The increase in sales resultedfrom the contribution of revenue from our Cyclades acquisition, completedduring the first quarter of 2006, our LANDesk acquisition, completed August 31,2006, and increased revenues from our traditional products.  Branded sales increased 66% from $52.2million in the third quarter of 2005 to $86.4 million in the third quarter of2006.  As a percentage of sales, brandedrevenue accounted for 61% of sales in the third quarter of 2006 and 54% ofrevenue in the third quarter of 2005. OEM sales grew 25% from $44.5 million in the third quarter of 2005 to$55.4 million in the third quarter of 2006. OEM sales were 39% of sales for thethird quarter of 2006, compared to 46% of sales for the third quarter of 2005.  The Cyclades and LANDesk businesses have a significantlysmaller portion of their sales to OEM customers than Avocent has historicallyhad.

From a divisional perspective, revenue from our Management SystemsDivision, which is comprised of our traditional KVM business as well as revenuefrom Cyclades, increased to $114.8 million in the third quarter of 2006 from$85.5 million in the third quarter of 2005 and accounted for 81% of our revenuein the third quarter of 2006 and 88% of our revenue in the third quarter of2005.  Within our Management SystemsDivision, revenues from our traditional KVM products increased to $90.7million in the third quarter of 2006 from $80.5 million in the third quarter of2005.  Additionally, revenues from ourserial management products, consisting mostly of our Cyclades products,increased to $15.9 million in the third quarter of 2006 from $844,000 in thethird quarter of 2005.

Revenues from our Embedded Software and Solutions Division, whichincludes our embedded KVM and IPMI solutions and the Agilent product lineacquired in the first quarter of 2006, increased to $9.4 million in the thirdquarter of 2006 from $6.2 million in the third quarter of 2005 and accountedfor 7% of our revenue in the third quarter of 2006 and 6% of our revenue in thethird quarter of 2005.  The increase inrevenue can be attributed primarily to the increased contribution of theembedded KVM solutions as adoption of these platforms by our OEM customersincreases and to the Agilent product line which was acquired late in the firstquarter of 2006.

Sales within the United States increased 45% to $83.8 million in thethird quarter of 2006 from $58.0 million in the third quarter of 2005, due toincreases in both branded and OEM sales. International sales increased 50%, to $58.0 million in the third quarterof 2006 from $38.7 million in the third quarter of 2005, primarily as a resultof increased OEM sales and branded sales in Europe and Asia.  Sales within the United States were 59% ofsales in the third quarter of 2006, compared to 60% of sales for the thirdquarter of 2005.  International saleswere 41% of sales in the third quarter of 2006 and 40% of sales for the thirdquarter of 2005.

Net sales increased 35%to $354.3 million for the first nine months of 2006 from $263.1 million for thefirst nine months of 2005. The increase is primarily a result of the addedrevenue from the acquisitions of Cyclades completed in the first quarter of2006 and LANDesk completed in the third quarter of 2006 as well as increasedsales of our KVM products and embedded solutions.  Sales within the United States increasedapproximately 35% to $203.6 million in the first nine months of 2006 from$150.8 million in the first nine months of 2005.  International sales increased approximately 34% to $150.7 million in the first ninemonths of 2006 from $112.3 million in the first nine months of 2005.  Additionally, sales to our branded customersincreased 52% to $205.0 million in the first nine months of 2006 from $134.8 inthe first nine months of 2005, while sales to our OEM customers increased 16%to $149.3 million in the first nine months of 2006 from $128.3 in the firstnine months of 2005.

In recent years, we have experienced a sequential increase in revenuesfrom the third quarter to the fourth quarter primarily as a result of trends inIT spending for this period, as companies tend to purchase additional serversand other IT equipment in the second half of the calendar year.  Additionally, we will have LANDesk includedin our results for the entire fourth quarter of 2006 compared to just havingone month of LANDesk results in the third quarter of 2006. Accordingly, for thefourth quarter of 2006, we expect revenue to be in the range of $167 to $176million.

*Gross profit.* Gross profit is affected by a variety offactors, including the ratio of sales between our hardware and softwaresolutions as software products tend to have significantly higher gross margins;absorption of fixed costs as sales levels fluctuate; product mix, rawmaterials, and labor costs; new product introductions by us and by ourcompetitors; and the level of our outsourcing of manufacturing and assemblyservices.  Gross profit increased to 62.8% in the thirdquarter 2006 compared to 59.3% in the third quarter of 2005.  This increase in gross margins relates to theeffect of higher revenue from our digital and serial products as well as theadded sales from LANDesk, acquired on August 31, 2006.   Our LANDesk products are primarily softwareand include related service and maintenance revenues.  The margins on the LANDesk products typicallyexceed 90%.  Additionally, approximatelyhalf of LANDesk’s sales of new product licenses tend to occur in the last monthof each quarter.  In line with thattrend, the high LANDesk sales in the month of September resulted in a very favorablemargin for the month.  Our overallincreased revenue better covered the fixed costs related to procurement,warehousing, and shipping.  Additionally,the Cyclades products are sold primarily through our branded channel and, as aresult, have a higher gross margin. Increased sales of our digital solutions, which are sold through ourManagement Systems Division, positively affected our margins in the thirdquarter of 2006 as compared to the third quarter of 2005, because our digitalsolutions carry higher margins than our analog solutions.  Increased sales by our Embedded Software andSolutions Division in the third quarter of 2006 as compared to the thirdquarter of 2005 also had a positive impact on margins as these products havehigher margins than our traditional KVM products.  A portion of the other intangible assetsrecorded as a result of the LANDesk acquisition related to internally developedsoftware for resale, and the resulting amortization of these assets is includedin cost of goods sold.  As a result, weexpensed approximately $894,000 of amortization in the third quarter of 2006,which somewhat offset our increased margins previously discussed.  Gross margin

21

----

increased to 61.1% for the first nine months of 2006 from 58.4% for thefirst nine months of 2005, primarily as a result of the higher digital,embedded, Cyclades and LANDesk revenues for the first nine months of 2006.

We believe continued strong sales of our digitalKVM and serial products, a full quarter of revenue from LANDesk, and thesubstantial completion of the Cyclades integration in the fourth quarter of2006 will have a positive affect on our gross margin.  We expect the combination of these factors tooffset price declines, the ongoing costs expected from complying withnew environmental regulations andcompetitive factors in the fourth quarter of 2006.  Accordingly, we expect gross margins to improveto 66% - 66.5% in the fourth quarter of 2006.

*Research and development expenses.*  Research and development expenses were $16.0million, or 11.3% of sales, in the third quarter of 2006 compared to $14.6million, or 15.1% of net sales, in the third quarter of 2005.  The increase in the amount spent on researchand development is due to the additional costs from the Cyclades and LANDeskacquisitions.  The additional costs fromthe acquisitions were partially offset by reduced headcount and certainresearch and development site closings undertaken during the second half of2005.  Researchand development expenses for the first nine months of 2006 remained flat at$43.5 million compared to the first nine months of 2005 due to therecognized savings for the reduced headcount and other savings related to thesesite closings being offset by the increased costs from LANDesk and Cycladesacquisitions.  As a percentage of net sales, year-to-dateresearch and development expenses decreased to 12.3% from 16.5%.

We believe that the timely development of innovative products andenhancements to existing products is essential to maintaining our competitiveposition, and we will continue to make significant investments in research anddevelopment.  We implemented plans duringthe second half of 2005 to contain the growth in legacy Avocent spending, however,we will continue to incur research and development expense related to ourCyclades and LANDesk acquisitions.  Webelieve these factors will result in research and development expenses in therange of $19 to $21 million for the fourth quarter of 2006.

*Acquired in-process research anddevelopment expense.*  Acquired in-process research and developmentexpense recorded in the third quarter of 2006 was comprised solely of the non-recurring write-off of $18.6 millionof in-process research and development expense related to the acquisition ofLANDesk.   Acquisition related expensesrecorded in the first nine months of 2006 include the $18.6 related toLANDesk and the non-recurring write-off of$2.1 million of in-process research and development expense related to theacquisition of Cyclades recorded in the first quarter of 2006.  There were no such charges in 2005.

***Selling, general andadministrative expenses.***  Selling, general and administrative expenseswere $38.3 million, or 27.0% of net sales, for the third quarter of 2006compared to $20.8 million, or 21.5% of net sales, for the third quarter of2005.  As we expected, we experiencedhigher costs as a result of expensing equity-based compensation awards in 2006(see Note 13 to the condensed consolidated financial statements) and adding Cycladesand LANDesk’s selling, general and administrative expenses.  However, these higher costs were somewhatoffset by the savings resulting from our Cyclades integration efforts.  Year-to-date selling, general, andadministrative expenses increased to $94.4 million, or 26.6% of net sales for2006, from $67.1 million, or 25.5% of year-to-date net sales in 2005, as aresult of the factors mentioned above.

**We will continue our work to integrate the Cycladesadministrative functions during the fourth quarter of 2006.  Additionally, legal costs are expected to be lowerin the fourth quarter of 2006 as a result of the settlement of the ClearCubecase during the third quarter of 2006. However, we will have three months of LANDesk selling, general andadministrative expenses in the fourth quarter of 2006 compared to just onemonth’s expense in the third quarter of 2006. As a result of these factors, we expect selling, general andadministrative expenses to be in the range of $46 to $48 million in the fourthquarter of 2006.**

***Cyclades integration expenses***.  We recorded$1.3 million of expenses, or 0.9% of sales, in the third quarter of 2006related to costs associated with the integration of Cyclades people, processes,and products into Avocent.  These costsalso include severance accruals resulting from the headcount reductionsassociated with duplicate positions eliminated during the third quarter.  We recorded $3.6 million of expenses, or 1.0%of sales, for the first nine months of 2006 related to Cyclades integrationexpenses.  We expect additionalintegration costs and severance accruals will not be material in the fourthquarter of 2006.  There were no suchcharges incurred during 2005.

***Amortization of intangible assets***. Amortization of $6.6 million in the third quarter of 2006 was primarilycomprised of the amortization of the identifiable intangible assets created asa result of the acquisitions of 2C, Soronti, Crystal Link, OSA, Sonic Mobility,Cyclades, and LANDesk.  Amortization of$2.7 million in the third quarter of 2005 was primarily comprised of theamortization of the identifiable intangible assets created as a result of theacquisitions of Equinox, 2C, Soronti, Crystal Link, OSA, and Sonic Mobility.  The increasein amortization expense relates primarily to additional amortization expenserelated to the intangible assets recorded in the acquisitions of Cyclades andLANDesk.  We expect amortization ofintangibles to be approximately $12 million in the fourth quarter of 2006,reflecting three months of intangible amortization from the acquisition ofLANDesk.

22

----

*Stock Compensation. *We adopted SFAS123 (revised 2004), *Share-Based Payment,* on January1, 2006 and as a result recorded stock compensation expense forall share-based payment awards made to employees and directors, includinggrants of employee stock options, restricted stock units, and performance-basedrestricted stock units, based on estimated fair values. Thecompensation expense is recorded in each line of our condensed consolidatedfinancial statements based on the department in which an employee works.  For the third quarter of 2006, we expensed$4.6 million of stock-based compensation, $289,000 was recorded in cost ofgoods sold, $1.1 million was recorded in research and development expense and$3.2 million was recorded in selling, general and administrative expenses. * *For the first ninemonths of 2006, we expensed $8.2 million of stock based compensation, $502,000was recorded in cost of goods sold, $2.2 million was recorded in research anddevelopment expense and $5.5 million was recorded in selling, general andadministrative expense.

For options and restricted stock units outstanding as of September 29,2006, we expect to record stock-based compensation expense ofapproximately $4.9 million in the fourth quarter of 2006.  We believe equity based compensation is animportant part of our total compensation package and is needed to attract andretain key employees.

*Income from settlement of lawsuit**.** *The$5 million of income from the settlement of lawsuit in the first nine months of2005 is comprised entirely of the payment received in May 2005 as a result ofthe settled patent infringement lawsuit brought by Avocent against RaritanComputer Inc.  The terms of thesettlement called for an initial payment of $5 million, related to past productsales by Raritan and settlement of the lawsuit. There was no such income in2006, although we continue to receive quarterly royalties from Raritan based onRaritan’s current period sales under a licensing agreement.

*Netinvestment income**.** *Net******investmentincome decreased to $1.6 million in the third quarter of 2006 as compared to$2.2 million in the third quarter of 2005. The decrease in investment income inthe third quarter of 2006 was the result of lower cash and investments as aresult of funding the purchase of Cyclades in the first quarter of 2006 and theinvestment of the remaining funds in shorter term investments in order to havecash on hand to fund the cash component of the LANDesk acquisition as well asfund the purchase of treasury shares under our stock buyback program.  For the year, net******investmentincome increased to $6.8 million in the first nine months of 2006 as comparedto $6.6 million in the first nine months of 2005.  We expectour investment income to decrease in the fourth quarter of 2006 due to lowercash and investments resulting from funding our share repurchases in 2006 and fundingthe purchase of LANDesk in the third quarter of 2006 and our continuing sharerepurchases in the fourth quarter of 2006.

*Netrealized investment losses. *Netrealized investment losses increased from $100,000 in the third quarter of 2005to $199,000 in the third quarter of 2006.  For the year, net realized investmentlosses decreased from $483,000 in the first nine months of 2005 to $226,000 infirst nine months of 2006.

*Interestexpense. *Interestexpense was $1.0 million in the third quarter of 2006 and $1.2 million for thefirst nine months of 2006.  There were nosuch expenses in 2005.  Interest expense resultsfrom our borrowings under our $250 million unsecured line of credit.

*Other expense net.*  Net other expense increased from an expenseof $75,000 in the third quarter of 2005 to an expense of $133,000 in the thirdquarter of 2006. For the year, net other expense increased from expense of$129,000 in the first nine months of 2005 to an expense of $361,000 in thefirst nine months of 2006.

*Provisionfor income taxes.*  The effective tax rate in the third quarterof 2006 was approximately 69.8%, compared to an effective tax rate ofapproximately 23.0% in the third quarter of 2005.  The provision forincome taxes was approximately $5.9 million for the third quarter of 2006,compared to $4.9 million in the third quarter of 2005. The effective tax ratein the first nine months of 2006 was approximately 35.9% compared to aneffective tax rate of approximately 23.2% in the first nine months of 2005.   The increase in the 2006 effective taxrate over that of 2005 is primarily due to $18.6 million of in-process researchand development for the LANDesk acquisition which was immediately expensed uponthe purchase.  This item is not currentlyexpected to be deductible for tax purposes and therefore increased theeffective tax rate for the third quarter ended September 29, 2006.  This as well as the $2.1 million in expensedin-process research and development related to the Cyclades purchase in thefirst quarter of 2006 were the primary cause of the year-to-date September 29,2006 effective tax rage increase over that of 2005.  Also, the provision for income taxes wasapproximately $16.3 million for the first nine months of 2006, compared to $8.8million in the first nine months of 2005. The increase in provision for income taxes was partly the result of thechange in mix of our pre-tax profit among our U.S. and internationalcompanies.  Additionally, the Irish statutory tax rate on manufacturedgoods increased from 10% to 12.5% on January 1, 2006.  The U.S. Research and Development credit alsohas expired, and as of September 29, 2006, this credit has not yet beenreinstated by Congress.

*Net income.*  Netincome for the third quarter of 2006 was $2.6 million compared to $16.4 millionfor the third quarter of 2005, as a result of the factors detailed in the previousdiscussion.  Net income, as a percentageof sales for the third quarter of 2006, was 1.8% compared to 16.9% for thethird quarter of 2005.  Net income forthe first nine months of 2006 was $29.1 million compared to $29.3 million forthe first nine months of 2005, also as a result of the factors detailed in the previousdiscussion.  Net income, as a percentageof sales for the first nine months of 2006, was 8.2% compared to 11.1% for thefirst nine months of 2005.

23

----

**Liquidity and Capital Resources**

Asof September 29, 2006, our principal sources of liquidity consisted of $131million in cash, cash equivalents, and investments.  We also have a $250 million unsecured fiveyear revolving bank line of credit.  We mayuse borrowings under the line of credit to fund the purchase of shares underour stock repurchase program.  The lineof credit currently bears an interest rate of LIBOR plus 70 basis points.  There was approximately $162 millionoutstanding under the line of credit as of September 29, 2006.  We expect to repay the borrowings from futurecash flows from operations.

Our operating activities generated cash of $52.7 million in the first ninemonths of 2006, compared to approximately $52.0 million in the first nine monthsof 2005.  The slight increase in cashprovided by operations is the result of several offsetting factors.  Earnings remained relatively constant at $29.1and $29.3 million for the nine months ended September 29, 2006 and September30, 2005, respectively.  The nine monthsended September 29, 2006, however, included $20.7 million in expensed acquiredin-process research and development related to the Cyclades and LANDeskacquisitions.  No such item was presentin 2005.  However, an increase toinventories during the first nine months of 2006 served to partially offset thisitem.  Inventories increased $10.1 million from December 31, 2005 to September29, 2006, which excludes the impact of $7.0 million of inventory received in theacquisition of Cyclades during the first quarter.  The increase in inventory was primarily theresult of adding inventory related to the planned transition of Cycladesmanufacturing to our contract manufacturers and in anticipation of expectedhigher sales.  Accordingly, as a resultof the increased inventories, our inventory turns decreased to 5.3 in the firstnine months of 2006 from 5.9 for the first nine months of 2005.  Our sales volume increased substantially, andas a result, our receivables balance increased by $21.5 million from December31, 2005 to September 29, 2006, excluding the impact of over $10 million ofreceivables received at the acquisition of Cyclades and $19.3 million ofreceivables received at the acquisition of LANDesk.  Excluding LANDesk, our DSO increased toapproximately 62 days for the third quarter of 2006 compared to 54 days for thethird quarter of 2005, and was slightly higher than our goal of 60 days.  Our DSO increased as a result of the increasedproportion of sales that occurred late in the third quarter of 2006.  The tax benefit from stock-based compensation was reported in cash flow from operations in thefirst nine months of 2005, but as a result of SFAS 123R, is now reported infinancing activities, and accordingly reduced cash flow from operations for thefirst nine months of 2006.

In the ordinary course of our business, we may at any point in timehave a significant amount of contractual commitments not yet recognized in ourfinancial statements.  These commitmentsrelate primarily to our need to schedule the purchase of inventories in advanceof the related forecasted sales to customers. We have longer lead times for the products we purchase from suppliersbased in Asia than those for our U.S. based and European suppliers.  Our actual contractual commitments aretypically limited to products needed for one to three months of forecastedsales.  The liabilities for theseinventory purchases along with the related inventory assets are typicallyrecognized upon our receipt of the products. We also have at any point in time a variety of short term contractualcommitments for services such as advertising, marketing, accounting, legal, andresearch and development activities.  Theliabilities for these services and the related expenses are typicallyrecognized upon our receipt of the related services.  As of September 29, 2006, we hadapproximately $28.0 million of such purchase commitments.  None of our expected purchase commitmentsrequires payment beyond the next year.

We repurchased 1.4million shares of our common stock during the quarter ended September 29, 2006at a cost totaling $35.4 million.  Werepurchased 6.2 million shares of our common stock during the nine months endedSeptember 29, 2006 at a cost totaling $157.6 million.  These treasury shares were purchased on theopen market through various brokers under the stock repurchase program approvedby our Board of Directors.  As of September29, 2006, we have repurchased 9.0 million shares under the program since theinitial approval of the program in 2004. We may repurchase an additional 1.0 million shares under this programand expect to repurchase shares from time to time, particularly to offsetdilution from equity compensation awards and to offset the shares being issuedin the LANDesk acquisition.

**Investments**

As of September29, 2006, our investments consist of corporate bonds, commercial paper,certificates of deposit and municipal bonds. We classify our debt and equity securities as available-for-salesecurities and report them at fair value, with unrealized gains and lossesexcluded from earnings and reported as a separate component of stockholders’equity.  We periodically review ourinvestment portfolio for investments considered to have sustained another-than-temporary decline in value. Upon review of our investment portfolio as of September 29, 2006, noinvestments were considered to have sustained an other-than-temporary decline,and no charge was recorded in the third quarter of 2006.

**CertainTransactions**

***Acquisition of Cyclades Corporation***

On March 30, 2006, we acquired Cyclades Corporation, a privately-heldcompany based in Fremont, California, for approximately $90 million in cashplus an additional $4 million in transaction costs.  Cyclades also has operations in Sao Paulo,Brazil

24

----

and Munich,Germany, and at the time of acquisition employed approximately 325 people in 19locations around the world.  The Cycladesproduct lines include serial and power management products.  The acquisition of Cyclades enhanced ourposition in the Linux server and networking infrastructure management marketand provides complementary products to our product lines allowing us to provideour customers a more integrated platform for managing their ITinfrastructure.  Cyclades had unauditedrevenues of approximately $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.

**The acquisition was recorded underthe purchase method of accounting, and the purchase price was allocated basedon the fair value of the assets acquired and liabilities assumed.  In accordance with generally acceptedaccounting principles,**purchasedresearch and development costs allocated to 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 asresult of the acquisition will not be amortized but will be included in ourannual review of goodwill for impairment. Additionally, the goodwill recordedis not tax deductible.

***Acquisition of LANDesk Group Limited***

**On August 31, 2006, we acquired LANDesk Group Limited, aprivately-held company based in Salt Lake City, Utah.  LANDesk employs approximately 600 people,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 total consideration of approximately $408 million, including $200million in stock, $202 million in cash, and approximately $6 million in estimatedfair value of assumed unvested stock options. The transaction value may be increased by up to $60 million in cash ifLANDesk meets certain revenue targets for 2006 specified in the acquisition agreement.**

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 developmentcosts allocated to patented and patent-pending technology was capitalized andwill be amortized over the respective estimated useful lives.  The remaining amounts of purchased researchand development were expensed upon the closing of the transaction.  The goodwill recorded as a result of theacquisition will not be amortized but will be included in our annual review ofgoodwill for impairment.  Additionally,amortization of the other intangible assets acquired and the goodwill recorded maybe 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.

**NewCritical Accounting Policy**

*DerivativeInstruments and Hedging Activities*

We enter into interestrate swap agreements in accordance with our risk management policy to partiallyreduce risks related to our floating rate line of credit which is subject tochanges in the market rate of interest.  Wedo not use derivative instruments for trading purposes.  We record the fair value of interest rateswap agreements in other assets or liabilities on the condensed consolidatedbalance sheet.  Changes in the fair valueof interest rate swap agreements that are designated and effective as cash flowhedges are recorded in 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 rateswap agreements that are not effective as hedges are recorded immediately inthe consolidated statement of income as interest expense.  We have designated our interest rate swapagreements as cash flow hedges.  Cashflows from hedging activities are reported in the condensed consolidated statementof cash flows in the same classification as the hedged item, generally as acomponent of cash flows from operations.

*Stock Based Compensation*

On January 1, 2006, weadopted SFAS 123 (revised 2004),*Share-Based Payment,*(“SFAS123R”), which requires the measurement and recognition of compensation expensefor all share-based payment awards made to employees and directors, includinggrants of employee stock options, based on estimated fair values.  SFAS 123R supersedes SFAS No.123 *Accounting for Stock Based Compensation* and AccountingPrinciples Board Opinion No. 25, *Accounting for StockIssued to Employees* (“APB No. 25”), which we previously applied, forperiods beginning before fiscal 2006.  InMarch 2005, the Securities and Exchange Commission (“SEC”) issued StaffAccounting Bulleting No. 107 (“SAB 107”) relating to SFAS 123R.  We have applied the provisions of SAB 107 inour adoption of SFAS 123R.

25

----

We adopted SFAS 123Rusing the modified prospective transition method, which requires theapplication of the accounting standard as of January 1, 2006, the first day ofour fiscal 2006 year.  Our condensed consolidatedstatements of income for the three and nine months ended September 29, 2006reflect the impact of SFAS 123R.  Inaccordance with the modified prospective transition method, our condensed consolidatedstatements of income for prior periods have not been retroactively adjusted toreflect the impact of SFAS 123R.  Newawards are valued and accounted for prospectively upon adoption.  Prior outstanding stock option awards thatwere not fully vested as of January 1, 2006 will be recognized as compensationexpense in our consolidated statements of income over their remaining requisiteservice periods.

**Recently Issued Accounting Standards and Regulatory Standards**

In July 2006, theFinancial Accounting Standards Board (FASB) released FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASBStatement No. 109” (FIN 48).  FIN 48 clarifies the accounting andreporting for uncertainties in income tax law.  This Interpretationprescribes a comprehensive model for the financial statement recognition,measurement, presentation and disclosure of uncertain tax positions taken orexpected to be taken in income tax returns.  We will adopt thisInterpretation in the first quarter of 2007.  The cumulative effects, ifany, of applying this Interpretation will be recorded as an adjustment toretained earnings as of the beginning of the period of adoption.  We havecommenced the process of evaluating the expected effect of FIN 48 on ourconsolidated financial statements and are currently not yet in a position todetermine such effects.

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements*(“SFAS 157”), which clarifies that fairvalue estimates should be based on the assumptions market participants woulduse when pricing an asset or liability and establishes a fair value hierarchythat prioritizes the information used to develop those assumptions. UnderSFAS 157, fair value measurements would be separately disclosed by levelwithin the fair value hierarchy. SFAS 157 is effective for fiscal yearsbeginning after November 15, 2007. We do not expect the adoption of SFAS 157 to have a material impacton our consolidated results of operation and financial condition.

**Item 3.** **Quantitativeand Qualitative Disclosures About Market Risk.**

Our primary market risk is the potential loss arising from increases ininterest rates, which could have an adverse impact on the fair value of ourinvestment securities.  Our investmentpolicy is to manage our investment portfolio to preserve principal andliquidity while maximizing the return on our investment portfolio through theinvestment of available funds.  Wediversify our investment portfolio by investing in a variety of highly-ratedinvestment-grade securities and through the use of different investmentmanagers.  Our investment securitiesportfolio is primarily invested in securities with maturities (or interest rateresets) of two years or less with at least an investment grade rating to minimizeinterest rate and credit risk as well as to provide for an immediate source offunds.  Market risk, calculated as thepotential change in fair value in our investment portfolio resulting from ahypothetical 10% change in interest rates, was not material at September 29,2006.  We generally hold investmentsecurities until maturity.

We also face interest rate risk on our bank line of credit whichcurrently bears interest at a variable rate of LIBOR plus 70 basis points.  We have partially hedged this exposure tointerest rate risk with an interest rate swap, which has a notional amount of $125million, through a well established financial institution.

We also face foreign currency exchange rate risk to the extent that thevalue of certain foreign currencies relative to the U.S. dollar affects ourfinancial results.  Our internationaloperations transact 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 revenues, 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 September 29, 2006, we had oneopen forward contract with an immaterial fair value.

**Item 4.**  **Controlsand Procedures.**

(a) *Evaluation of disclosure controls and procedures.*  Based on their evaluation as of September 29,2006, our Chief Executive Officer and Chief Financial Officer have concludedthat our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) are effective.

(b) *Changes in internal control over financial reporting*.  There were no changes in our internalcontrols over financial reporting during the quarter ended September 29, 2006that materially affected or are reasonably likely to materially affect, ourinternal controls over financial reporting except for ongoing integration of ouracquisition of Cyclades.  We expect to completethe integration of Cyclades processes into Avocent processes during the fourthquarter of 2006.  We plan to integrateLANDesk into Avocent standard processes and controls during 2007.  We also implemented new controls over ournewly created process to manage interest rate risk related to our bank line ofcredit during the third quarter of 2006.

26

----

**PART II —OTHER INFORMATION**

**Item 1.****           LegalProceedings.**

InOctober 2003, Avocent filed a complaint for patent infringement in the UnitedStates District Court for the Northern District of Alabama against ClearCubeTechnology, Inc.  We settled our casewith ClearCube in August 2006.  As partof the settlement, ClearCube agreed to license certain patents from us andpotentially license other Avocent technologies.

On March 14, 2006, TFSElectronic Manufacturing Services, Inc. filed a Third-Party Complaint and anObjection to Claim of Avocent Corporation with the United States BankruptcyCourt, District of Arizona.  As a resultof the complaint, an adversary proceeding has been commenced againstAvocent in the TFS bankruptcy case in an effort to disallow Avocent’s claim inits entirety.  TFS also seeks damages inan undetermined amount for Avocent’s alleged breach of contract, negligence,negligent misrepresentations, breaches of warranty, unjust enrichment,disparagement of TFS’ business, and quantum merit.  TFS is seeking recovery of actual damages,punitive damages, attorneys’ fees, pre- and post-judgment interest, costs, andthe imposition of joint and several liability as to Avocent and a namedco-defendant, TopSearch Printed Circuits (HK), Ltd.  Avocent has moved to dismiss all claims, anddiscovery is under way.

**Item 1A.  Risk Factors.**

*THIS QUARTERLY REPORT CONTAINSFORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULDCAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN THISQUARTERLY REPORT.  THESE RISKS ANDUNCERTAINTIES INCLUDING THE FOLLOWING:*

**Our acquisition of LANDesk could disrupt ourbusiness, expose us to new risks, and adversely affect the results of ouroperations.**

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 software productsand 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.  We will also needto expand and improve our internal systems, including our managementinformation systems, and 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 have a material adverse effect on our result ofoperations, cash flows, and financial position.

**We have acquired, and expect tocontinue to acquire, technologies and companies that could disrupt our businessor expose us to other risks.**

A key component of ourengineering and product development strategy is the acquisition of technologiesand companies.  We acquired EquinoxSystems Inc. in 2001, 2C Computing, Inc. in 2002, Soronti, Inc. in 2003,and Crystal Link Technologies, OSA Technologies, Inc., Sonic Mobility, Inc. in2004, and Cyclades Corporation  andLANDesk in 2006.  We intend to continueto execute our strategy through the acquisition of technologies or companies orthrough investments in complementary companies, products, or technologies, andit 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, technologies, andoperations;

·                                          Diversionof management’s attention;

·                                          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 key personnel;

·                                          Delaysor difficulties in coordinating and combining administrative, manufacturing,research and development and other operations, facilities, and relationshipswith third parties in accordance with local laws and other obligations

27

----

while maintaining adequate standards, controls and procedures;

·                                          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;

·                                          Assumptionof liabilities of the acquired company, including any potential intellectualproperty infringement claims; 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 the anticipatedbenefits or synergies on which the value of a transaction was based.  Future transactions could cause our financialresults to differ from expectations of market analysts or investors for anygiven quarter.

**Intense competition from new and existingcompetitors could impair our ability to grow our business and sell our productsand technologies.**

The markets for ourproducts and technologies are highly fragmented and intensely competitive.  Aggressive competition from both hardware andsoftware products and technologies could result in price reductions and loss ofsales, which would materially harm our business.  Our business is becoming increasinglysensitive to the introduction of new products and technologies, price changes,and marketing efforts by numerous and varied competitors.  Accordingly, our future success will behighly dependent upon our timely completion and introduction of new productsand technologies and features at competitive prices and performance levels thataddress the evolving needs of our customers. We continue to experience aggressive price competition and increasedcustomer sensitivity to product prices, and pricing and margin pressures arelikely to increase in the future. Because of this competition, we may have to continue to lower the pricesof many of our products and technologies to stay competitive, while at the sametime trying to maintain or improve our revenue and gross margin.  Because our business model is based onproviding innovative and high quality products, we may spend a proportionatelygreater amount on research and development than some of our competitors.  If we cannot proportionately decrease ourcost structure on a timely basis in response to competitive price pressures,our gross margin and profitability could be adversely affected.  In addition, if our pricing and other factorsare not sufficiently competitive, or if there is an adverse reaction to ourproduct decisions, we may lose market share in certain areas, which couldadversely affect our revenue and prospects.

We compete for sales ofswitching systems, systems management, and extension products with companiessuch as Raritan Computer, Rose Electronics, Minicom Advanced Systems, AtenInternational, Belkin, Lantronix, and Digital V6.  We also face competition from softwareproviders (such as Microsoft, Computer Associates, Tivoli, Altiris and BMCSoftware), who may be able to offer competitive software products at a muchlower cost or even bundled for free, and from server manufacturers (including ourOEM customers), who are able to offer their competitive technologies orproducts at the time of the server sale. These software and hardware products address many of the problems ourswitching systems and technologies, extension products, and remote accessproducts are designed to address.

Current and potentialcompetitors may be able to respond more quickly to new or emerging technologiesor products and to changes in customer requirements or to devote greaterresources to the research, development, promotion, and sale of their productsand technologies than we do.  Inaddition, current and potential competitors have established or may establishcooperative relationships among themselves or with third parties that enhancethe ability of their products and technologies to address the needs of ourcurrent and prospective customers.  Wemay not be able to compete successfully against current and future competitorsand competitive pressure may materially harm our business.

Certain of our customers,such as Dell, Hewlett-Packard, IBM, and Microsoft, presently offer competitivehardware and/or software products and technologies that address many of theproblems our products and technologies address. These customers could decide to manufacture their own switching orremote access products, enhance their own internally-developed switching, IPMI,or other embedded technologies, or offer products or technologies supplied bycompetitors.  Companies with hardwaremanufacturing experience or network management products, many of which aresubstantially larger than we are and have significantly more financialresources than we do, also offer products or technologies that compete withus.  Established companies with hardwaremanufacturing or network management experience (such as Intel, Cisco, or EMC)could also offer new products, new technologies, or new solutions that competewith our products and technologies.

28

----

**Our failure to respond to rapid technologicalchange or to introduce successful new products and technologies may result inreduced 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-terminvestments, develop or obtain appropriate intellectual property, and commitsignificant resources before knowing whether our predictions will accuratelyreflect customer demand for our products and services.  After we develop a product, we must thenaccurately forecast volumes and configurations that meet customer requirements,manufacture appropriate volumes quickly and at low cost, and train our salesforce 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, system management and remote access products and technologies arecharacterized by rapid technological advances, frequent new product andtechnological introductions and enhancements, and significant price competition.  If we do not keep pace with these changes, wewill lose customers, and our business will be adversely 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 offeredby us or our competitors could compete with our existing products at a lowerprice, which would reduce our revenue.

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 future success willdepend in large part upon our continued innovative application of suchcommercially available components and continued enhancements to our proprietarysoftware, firmware, and other technologies, our expansion and enhancement ofexisting products and technologies, and our development and introduction of newproducts and technologies that address changing customer needs on acost-effective and timely basis.  If wefail to respond on a timely basis to technological developments, changes inindustry standards, customer requirements, or software innovations, we willlose customers, and our business will be greatly harmed.  Similar results could occur if we experiencesignificant delays in the development or introduction of new products ortechnologies.

Due to our significantreliance on OEM relationships, our development efforts may often be focused ondeveloping new products, technologies, or enhancements for OEM customers.  As a result, our OEM relationships maynegatively affect our ability to develop new and enhanced products andtechnologies for our non-OEM customers. Moreover, these new products, technologies, or enhancements for OEM customersmay not be available to, or readily marketable to, other customers withoutsignificant modification and delay.  Thetermination 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 are likely to experience fluctuations inoperating results.**

We have in the pastexperienced substantial fluctuations in operating results, on a quarterly andan annual basis, and we expect these fluctuations will continue in thefuture.  Our operating results will beaffected by a number of factors, including, but not limited to:

·                                          Thevolume and timing of orders, particularly from OEM and other large customers;

·                                          Thetiming of shipments;

·                                          Thetiming of new product introductions, new technologies, and enhancements by usand by our competitors;

·                                          Changesin product or distribution channel mixes;

·                                          Changesin pricing policies or price reductions;

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

·                                          Theavailability and cost of supplies and components;

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

·                                          Fluctuationsin sales of servers due to changes in economic conditions or capital spendinglevels.

Our operating resultswill continue to be affected by seasonal trends, by general conditions in theIT market, and by general economic conditions. We have experienced, and we expect to continue to experience, somedegree of seasonality due to customer

29

----

buying cycles. We believe that the third and fourth quarters will generally have highernet sales levels due to customer budgeting and procurement cycles, which maydepress net sales in other quarters.  Inaddition, European sales are often weaker during the summer months.  Inthe past, revenue in our fourth quarter of each year has typically been higherthan revenue 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 isdifficult to predict revenue in any quarter, we expect that this pattern willcontinue 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 each quarter’stotal sales occur toward the end of the quarter, and this trend has become morepronounced in recent periods.  Thisuneven sales pattern makes prediction of revenue, earnings, and working capitalfor each financial period difficult, increases the risk of unanticipated variationsin quarterly results and financial condition, and places pressure on ourinventory management and logistics systems. If predicted demand is substantially greater than orders, there will beexcess inventory.  Alternatively, iforders substantially exceed predicted demand, we may not be able to fulfill allof the orders received in the last few weeks of each quarter.  Other developments late in a quarter, such asa systems failure, component pricing movements, or global logisticsdisruptions, could adversely impact inventory levels and results of operationsin a manner that is disproportionate to the number of days in the quarteraffected.

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 quarterly operating results fail tomeet the expectations of equity research analysts, the price of our commonstock could be negatively affected.

**Due to the international nature of our business,political or economic changes or other factors could harm our future revenue,increase our costs and expenses, and impair our financial condition.**

Sales outside the UnitedStates generate approximately half of our revenue, and over half of ourmanufacturing takes place outside the United States.  Accordingly, our future revenue, grossmargin, expenses, and financial condition could suffer due to a variety of internationalfactors, 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;

·                                          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 and procedures and actions affecting production, pricing,and marketing of or payments for products;

·                                          Locallabor conditions and other regulations;

·                                          Differingtechnology standards or customer requirements;

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

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

·                                          Medicalepidemics, such as avian flu or Severe Acute Respiratory Syndrome.

The factors describedabove also could disrupt our product manufacturing and key suppliers locatedoutside of the United States.  Forexample, we rely on manufacturers in Asia and Europe for the assembly andmanufacture of many of our products.

**Our grossmargins are expected to vary and may decline.**

Gross margins may vary ordecline 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;

·                                          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 and technologies by us and by our competitors; and

·                                          Thelevel of outsourcing of our manufacturing and assembly services.

30

----

We expect that our grossmargins may vary and may decline in the future primarily due to the factorslisted above and to increased competition and the introduction of new productsand technologies that may affect product prices.

**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.  Sales to these OEMs representedapproximately 48% of net sales in 2005, 45% of net sales in 2004, and 46% ofnet sales in 2003.  Sales toHewlett-Packard represented approximately 20% of our net sales in 2005, 23% ofour net sales in 2004, and 23% of our net sales in 2003.  Sales to Dell represent approximately 15% ofour net sales in 2005, 12% of our net sales in 2004, and 14% of our sales in2003.

We have experienced, andwe expect to continue to experience, period-to-period variability in sales tothese OEM customers.  Any cancellation,rescheduling, or reduction of orders by OEM customers in the future couldmaterially adversely affect our operating results.  Although our OEM customers typically placeorders for products up to several months prior to scheduled shipment dates,these orders are subject to cancellation.

Our OEM business issubject 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 OEMsor by the OEMs’ internal development teams; and

·                                          Changesin corporate ownership, financial condition, business direction, or product mixby 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 to experience, pricing pressures and significantvariability in orders from our OEM customers, which may in the future have amaterial adverse effect on our quarterly sales and operating results.

The loss of one or morelarge OEM customers would materially harm our business.  While we have contracts with some of ourexisting OEM customers, none of our OEM customers is obligated to purchaseproducts from us except pursuant to binding purchase orders.  Consequently, any OEM customer could ceasedoing business with us at any time.  Ourdependence upon a few OEMs also results in a significant concentration ofcredit risk, thus a substantial portion of our trade receivables outstandingfrom time to time may be concentrated among a limited 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 orders under ajust-in-time inventory management system, which requires us to maintainsufficient inventory levels of our products at each of these warehouses tosatisfy our OEMs anticipated customer demand, and we generally recognizerevenue only when these OEM customers take possession of our products.  We are required to plan production, ordercomponents, and undertake our manufacturing activities prior to the time thatthese orders become firm or the products are accepted.  In addition, our OEM customers haverequested, and are likely to continue to request from time to time, that wedelay shipment dates or cancel orders for products that are subject to firmorders.  As a result, at any time we maybe holding a significant amount of OEM-branded products in inventory, and oursales to OEMs for future quarters are difficult to predict.  The inability to accurately predict thetiming and volume of orders for our OEM customers during any given quartercould adversely affect operating results for that quarter and, potentially, forfuture quarters.  If we underestimatesales, we may not be able to fill orders on a timely basis.  This could cause customer dissatisfaction andloss of future business.  If weoverestimate sales, we may experience increased costs from inventory storage,waste, and obsolescence.

**A substantial portion of our business consists ofsales of branded products, and these sales are difficult to forecast.  Failure to accurately forecast these salescould lead to costly overproduction or product shortages.**

A substantial portion ofour sales consists of sales of branded products.  We expect these sales to increase in thefuture, and if we are successful in increasing branded sales as a percentage ofnet sales, our quarterly sales and operating results will become more dependentupon the volume and timing of branded product orders received during thequarter.  Because many customers of ourbranded products typically place orders shortly before their requested shipmentdate, revenues from branded sales are difficult to forecast.  With continued industry-wide initiatives bydistributors and resellers to reduce their inventories and to shorten theirlead

31

----

times, our major distributor and reseller customersare reducing early commitments to firm orders. Furthermore, many purchasers typically require prompt delivery ofproducts.  This results in a limitedbacklog of orders for these products and requires us to maintain sufficientinventory levels to satisfy anticipated customer demand.  The inability to accurately forecast thetiming and volume of orders for branded products during any given quarter couldadversely affect operating results for such quarter and, potentially, forfuture periods.  If we underestimatesales, we will not be able to fill orders on a timely basis.  This could cause customer dissatisfaction andloss of future business.  If weoverestimate sales, we will experience increased costs from inventory storage,waste, and obsolescence.

**We willneed to expand sales through distributors and resellers in order to develop ourbusiness and increase revenue.**

We expect to relyincreasingly on distributors and resellers, VARs, and systems integrators forthe distribution and sale of our branded products.  Our strategy contemplates the expansion ofour distributor and reseller network both domestically and internationally,particularly in Asia.  Our future successwill depend in part on our ability to attract, train, and motivate newdistributors and resellers and expand our relationships with currentdistributors and resellers.  We may notbe successful in expanding our distributor and reseller relationships.  We will be required to invest significantadditional resources in order to expand these relationships, and the cost ofthis investment may exceed the margins generated from this investment.

In addition, distributorsand resellers often have rights of return, and in the future, these returnsfrom our existing or any new distributors and resellers may have a materialadverse effect on our business, financial condition, and results ofoperations.  Our agreements with ourcurrent distributors and resellers are generally nonexclusive and may beterminated on short notice by either party without cause, and any newdistributor or reseller agreements are likely to contain similar provisions.  Distributors and resellers are not obligatedto purchase products from us and frequently offer products of several differentmanufacturers, including competitors’ products, and distributors and resellersmay give higher priority to the sale of our competitors’ products.  A reduction in sales efforts by ourdistributors or resellers could lead to a reduction in our sales and couldmaterially adversely affect our business, financial condition, and results ofoperations.

**If we are unable to successfully develop ourinternational distribution networks and international sales efforts, results ofoperations may suffer.**

We are working todevelop, integrate, and expand our international distribution networks in aneffort to increase international sales of switching, extension, remote access,and other products.  We may not besuccessful in developing or expanding the international distribution network orin marketing and selling products in foreign markets, particularly Asia.  If the revenues generated by ourinternational sales are not adequate to recover the expense of establishing,expanding, and maintaining an international distribution network, our business,financial condition, and results of operations could be materially adverselyaffected.  If international sales becomea more significant component of net sales, our business could become morevulnerable to the risks inherent in doing business on an international level,including:

·                                          Difficultiesin managing foreign resellers;

·                                          Longerpayment cycles and problems in collecting accounts receivable;

·                                          Theeffects of seasonal customer demand;

·                                          Changesin regulatory requirements;

·                                          Difficultiesin meeting the requirements of different international product regulations;

·                                          Risksrelating to the protection of our intellectual property rights;

·                                          Theimpact on our marketing expenses and our research and development resources aswe localize our product offerings to meet local user requirements such aslanguage translations and hardware compatibility issues;

·                                          Exportrestrictions, tariffs, and other trade barriers;

·                                          Fluctuationsin currency exchange rates; and

·                                          Potentiallyadverse tax consequences and political instability.

The existence oroccurrence of any one of these factors could have a material adverse effect onour business, financial condition, and results of operations.

32

----

**We are dependent upon third-party suppliers andoutsourced manufacturing for our hardware products.  Disruption of our access to these suppliesand services, or problems with the quality of supplies or services, couldprevent us from filling customer orders and 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.  We generally buy components under purchaseorders and generally do not have long-term agreements with our suppliers.  Also, we generally do not maintain largeinventories of components.  Anytermination of, or significant disruption of, our relationships with thesuppliers of our product components may prevent us from filling customer ordersin a timely manner which could result in customer dissatisfaction and lostsales.

We have occasionallyexperienced, and we may in the future experience, shortages or delays indelivery of components.  Althoughalternate suppliers are available for most of the components and servicesneeded to produce our products, the number of suppliers of some components islimited, and qualifying a replacement supplier and receiving components fromalternate suppliers could take several months.

We have limited abilityto control quality issues (particularly with respect to faulty componentsmanufactured by third parities), 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.  Disruption in supply, a significant increasein the cost of one or more components, failure of a third party supplier toremain competitive in functionality or price, or the failure of a supplier tocomply with any of our procurement needs could delay or interrupt our abilityto manufacture and deliver our products to customers on a timely basis, therebydelaying our revenue recognition and adversely affecting our business,financial condition, and results of operations.

We rely on third partymanufacturers for subassembly of products and for final assembly, quality assurance,and testing of some of our products. These outsourcing arrangements and any future outsourcing arrangementsinvolve numerous risks, including the economic and financial viability of thesemanufacturers, reduced control over product quality, delivery schedules,manufacturing yields, and costs. Moreover, although arrangements with such manufacturers may containprovisions for warranty obligations on the part of such manufacturers, we areprimarily responsible to our customers for warranty obligations.

**Ourproducts are subject to warranty 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 warrantiesfor parts and service on all our products, ranging from one to three years(and, in the case of some of our Equinox branded products, five years).  Although our historical return experience hasnot been significant, our returns may increase in the future.  An increase in returns would have an adverseeffect on our sales and could negatively affect our financial results.  We may, as a result of competitive pressuresor customer demands, change our warranty policies in the future to providecoverage that is greater in scope and duration than the coverage we currentlyoffer.  If we were to increase ourwarranty coverage, our risk of warranty claims, and therefore our warrantyexpense and reserves, would likely increase.

**We mustmeet the increased demands on customer service operations or customersatisfaction and sales could suffer.**

Continued growth of our sales is likely to beaccompanied by increasing demands on customer service operations.  As a result of our commitment to a high levelof customer service, we will need to invest significant resources in themaintenance and improvement of our customer service resources.  Any failure to maintain adequate customerservice could cause customer dissatisfaction, result in reduced sales ofproducts and, accordingly, materially adversely affect our business, financialcondition, and results of operations.

**Executive officers and other key personnel maydepart, which could adversely affect our results of operations and harm ourability to grow the business.**

We are greatlydependent on the ability to retain key management, sales, and technicalpersonnel, and our future success is highly dependent upon the personal effortsof our management, sales, and technical personnel.  The loss of services of key personnel could havea material adverse effect on our business, financial condition, and results ofoperations.  We have historically usedstock options as a key component in our executive and employee compensationprograms in order to align employees’ interests with the interests of ourstockholders, encourage employee retention, and provide competitivecompensation packages.  Many of ouremployee stock options either have exercise prices in excess of our stockprice, which reduces the value of the stock options to employees, or are fullyvested.  This could affect our ability toretain present employees.  In addition,we are now required to record a charge to earnings for employee stock option grantsand other equity incentives.  Moreover,applicable stock exchange listing standards relating to obtaining stockholderapproval of equity compensation plans could make it more difficult or expensivefor us to grant options to employees in the future.  As a result, we may incur increased compensationcosts, change our equity compensation strategy or plans, or find it difficultto attract, retain, and motivate employees, any of which could materiallyadversely affect our business. Competition for employees with the skills required, particularlyengineering and other technical personnel, is intense, and there can be noassurance that we will be able to attract and retain highly skilled employeesin sufficient numbers to sustain our current business or to support future

33

----

growth.  We may need to offer additional compensationor incentives to attract and retain these and other employees.

**Difficulties encountered during changing economicconditions 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 acquireda number of companies in the same time period. This growth and these acquisitions have resulted in increasedresponsibilities and placed significant strain on our managerial, operational,and financial resources and resulted in new and increased responsibilities formanagement personnel.  There can be noassurance that our management, personnel, systems, procedures, and controlsare, or will be, adequate to support our existing and future operations or thatwe will continue to grow.  If we fail torecruit and retain sufficient and qualified managerial, operational, orfinancial personnel or to implement or maintain internal systems that enable usto effectively manage our growing business and operations worldwide, ourfinancial results in any given period may be adversely affected and ourbusiness and financial condition 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 thatwe must continue to develop greater engineering, financial, marketing, sales,and customer service capabilities in order to develop new products andtechnologies, secure new customers, and effectively serve the evolving needs ofpresent and future customers.  We may notbe successful in strengthening these capabilities.  Without adequate management, engineering,financial, product development, marketing, sales, and customer service capabilities,our ability to effectively manage during changing economic conditions, expandand enhance our product lines, further penetrate existing markets, and developnew markets will be significantly limited. If we are unable to effectively manage during changing economicconditions, our business, financial condition, and results of operations couldbe 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, wecontinue to see industry-wide initiatives by OEMs and by distributors andresellers to reduce their inventories and to shorten their lead times, therebyreducing early commitments to firm orders by our major OEM and our distributorand reseller customers.

**We have limited protection of proprietary rightsand face risks of third party infringements.**

Our future successdepends in part upon our ability to protect proprietary rights in ourproducts.  We seek to protect ourintellectual property rights by invoking the benefits of the patent, trademark,copyright, trade secret, and unfair competition laws of the United States andother countries.  These laws, however,afford only limited protection.  Therecan be no assurance that the steps we have taken to protect our intellectualproperty rights, or that the steps we take in the future, will be adequate toprevent 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.

The U.S. Patent andTrademark Office has issued several patents to us for various aspects of ourproducts.  We have 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 United States and foreignpatent applications pending.  There canbe no assurance that any additional patents will be issued from any of thosepending applications or that any patents will be issued in any additionalcountries where our products can be sold. Claims allowed in our patents or in any pending patent applications maynot be of sufficient scope or strength for, or provide meaningful protection orany commercial advantage to us.  Also,competitors may develop their own intellectual property or technologies, obtaintheir own patents, or challenge the validity of, 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.

InOctober 2003, we filed a complaint for patent infringement in the United StatesDistrict Court for the Northern District of Alabama against ClearCubeTechnology, Inc.  ClearCube filedcounterclaims alleging non-infringement, unenforceability, invalidity, andmisuse of the Avocent patents.  Wesettled this case with ClearCube in August 2006.  ClearCube is now licensing certain of ourpatents and is evaluating certain of our newer technologies for future licensingarrangements.

We may initiate claims orlitigation against other third parties for infringement of proprietary rightsor to establish the validity of proprietary rights.  Similarly, our competitors may initiateclaims or litigation against us alleging infringement of their proprietaryrights or improper use of their intellectual property.  Existing litigation, and any other litigationrelating to intellectual property to which we become a party, is subject to numerousrisks and uncertainties, including the risk of counterclaims or otherlitigation against

34

----

us, and we may not be successful in any suchlitigation.  Litigation is veryexpensive, and the existing litigation or any other litigation by or against uscould result in significant additional expense and divert the efforts oftechnical and management personnel, whether or not such litigation results in afavorable determination.  In the event ofan adverse result in any such litigation, we could be required to paysubstantial damages, suspend or cease the manufacture, use, 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 assurance that we would be successful in suchdevelopment or that such licenses would be available on reasonable terms, or atall, and any such development or license could require us to expend substantialtime and other resources.  In the eventthat any third party makes a successful claim against us, or our customers, anda license is not made available on commercially reasonable terms, our business,financial condition, and results of operations could be adversely affected.

The network server,electronics, and related industries are characterized by vigorous pursuit andprotection of intellectual property rights or positions, which has resulted insignificant and often protracted and expensive litigation.  We have in the past been, and we may fromtime to time in the future be, a party in proceedings alleging infringement ofintellectual property rights owned by third parties.  If necessary or desirable, we may seeklicenses under such intellectual property rights.  However, licenses may not be offered on termsacceptable to us, or at all.  The failureto obtain a license from a third party for technology used by us could cause usto incur substantial liabilities and to suspend or cease the manufacture ofproducts requiring such technology. Additionally, current or future competitors could obtain patents thatmay prevent us from developing or selling our products.

**Our line ofcredit could adversely affect us and our operations.**

Werecently obtained a $250,000,000 unsecured, five-year, revolving, bank line ofcredit, and we used borrowings under this line of credit to fund a portion ofthe 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;

·                                          Increasingour vulnerability to economic downturns in our industry;

·                                          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.

Theline of credit contains affirmative and negative covenants, includinglimitations on our ability to (i) make distributions, investments, and otherpayments unless we satisfy certain financial tests or other criteria, (ii)incur additional indebtedness, and (iii) make acquisitions and capitalexpenditures.  All of these restrictionscould affect our ability to operate our business and may limit our ability totake advantage of potential business opportunities as they arise.  The failure to comply with these covenantscould result in an event of default which, if not cured or waived, could have amaterial adverse effect on us.

Ourability to comply with these provisions of our line of credit may be affectedby changes in the economic or business conditions or other events beyond ourcontrol.  If we do not comply with thesecovenants and restrictions, we could be in default under our line of credit,and our debt, together with accrued interest, could then be declared immediatelydue and payable.  There can be noassurance that we will be able to obtain sufficient funds to enable us to repayor refinance our debt obligations on commercially reasonable terms or at all.

**Our reorganization intoseparate business divisions or units could disrupt our business or affect ourprofitability.**

Ourreorganization into new business divisions became effective in the firstquarter of 2006, and LANDesk became a new division when the acquisition wascompleted.  The creation of thesebusiness units was designed to streamline our operations and put vitaldecisions closer to our customers, but the allocation of our previouslyexisting business among the divisions could confuse and distract our customers,suppliers, and employees.  In addition,the reorganization 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

35

----

administrative expense, all of which could affect ourprofitability.

**Unanticipated changesin our tax rates or exposure to additional income tax liabilities could affectour profitability.**

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.  Oureffective tax rates could be adversely affected by changes in the mix ofearnings in countries with differing statutory tax rates, in the valuation ofdeferred tax assets and liabilities, in tax laws, or by material auditassessments, which could affect our profitability.  In addition, the amount of income taxes wepay is subject to audit in various jurisdictions, and a material assessment bya governing tax authority could affect our profitability.

**Fluctuations in the value of foreign currenciescould result in currency exchange losses.**

Currently, a majority ofour international business is conducted in U.S. dollars.  However, as we expand our internationaloperations, it is likely that international business will increasingly beconducted in foreign currencies.  Inparticular, the introduction of the euro has led many of our European customersto request or insist that our sales to them be denominated in euros instead ofU.S. dollars.  Fluctuations in the valueof foreign currencies relative to the U.S. dollar have caused, and are expectedto increasingly cause, currency translation gains and losses.  While we attempt to hedge our foreigncurrency exposure, we cannot predict the effect of exchange rate fluctuationsupon future quarterly and annual operating results, and we may experiencecurrency losses in the future.

**Unforeseenenvironmental costs could negatively 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 hazardoussubstances and wastes, and the cleanup of contaminated sites.  Many of our products are subject to variousfederal, state, and international laws governing chemical substances inproducts, including those regulating the manufacture and distribution ofchemical substances and those restricting the presence of certain substances inelectronics products.  We could incur substantialcosts, including cleanup costs, fines, civil or criminal sanctions, third-partyproperty damage, or personal injury claims if we were to violate or becomeliable under environmental laws or if our products become non-compliant withenvironmental laws.  We also faceincreasing complexity in our product design and procurement operations as weadjust to new and future requirements relating to the materials composition ofour products, including the restrictions on lead and certain other substancesthat will apply to specified electronics products put on the market in theEuropean Union as of July 1, 2006 (Restriction of Hazardous SubstancesDirective) and similar legislation currently proposed in China and othercountries as well as in certain states in the United States.  The ultimate costs under environmental lawsand the timing of these costs are difficult to predict, and liability undersome environmental laws relating to contaminated sites can be imposedretroactively and on a joint and several basis.

We could also facesignificant costs and liabilities in connection with product take-backlegislation.  The European Union hasfinalized the Waste Electrical and Electronic Equipment Directive, which makesproducers of electrical goods, including computers and peripherals, financiallyresponsible for specified collection, recycling, treatment, and disposal ofpast and future covered products.  Thisdeadline to enact and implement the directive by individual European Uniongovernments generally was August 13, 2004, although extensions were grantedto some countries (such legislation, together with the directive, the “WEEELegislation”), and producers are financially responsible under the WEEELegislation beginning in August 2005. Similar legislation has been or may be enacted in other geographies,including in the United States and Japan, the cumulative impact of which couldbe significant for us.  We will incursome costs under the WEEE legislation but the amount and timing of these costsare difficult to predict.

**Provisions in our charter documents and inDelaware law may discourage potential acquisition bids for us and may preventchanges 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 ofdiscouraging others from making tender offers for shares, and as a result,these provisions may prevent the market price of our common stock from reflectingthe effects of actual or rumored takeover attempts and may prevent stockholdersfrom reselling their shares at or above the price at which they purchased theirshares.  These provisions may alsoprevent changes in management that stockholders may favor.  Our charter documents do not permitstockholders to act by written consent, limit the ability of stockholders tocall a stockholders meeting, and provide for a classified board of directors,which means stockholders can only elect, or remove, a limited number ofdirectors in any given year. Furthermore, the board of directors has the authority to issue up tofive million shares of preferred stock in one or more series.  The board of directors can fix the price,rights, preferences, privileges, and restrictions of such preferred stockwithout any further vote or action by our stockholders.  The issuance of shares of preferred stock maydelay or prevent a change in control transaction without further action by our stockholders.

In addition, Delaware lawmay inhibit potential acquisition bids for us. Delaware law prevents certain Delaware corporations,

36

----

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 2.****           Unregistered Sales ofEquity Securities and Use of Proceeds.**

In the fourth quarter of2004 our Board of Directors approved a stock repurchase program whereby we may,from time to time, purchase up to 2 million shares of our common stock in theopen market, in privately negotiated transactions or otherwise, at prices thatwe deem appropriate.  On the followingdates, our Board added shares to the program: On April 29, 2005, 2 millionshares, May 23, 2006, 3 million shares, June 20, 2006, 3 million shares.Currently, a total of 10 million shares are authorized to be repurchased.  The plan has no expiration date. Details ofpurchases made during the quarters ended March 31, June 30 and September 29,2006 are as follows:
| ** **                                   | ** ** | ** **                      | ** ** | ** **                              | ** ** | ** **                        | ** ** | **Maximum**                   | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|-----------------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|
| ** **                                   | ** ** | ** **                      | ** ** | ** **                              | ** ** | ** **                        | ** ** | **Number of**            | ** ** |
| ** **                                   | ** ** | ** **                      | ** ** | ** **                              | ** ** | **Total Cumulative**         | ** ** | **Shares**                    | ** ** |
| ** **                                   | ** ** | ** **                      | ** ** | ** **                              | ** ** | **Number of**                | ** ** | **Remaining to**         | ** ** |
| ** **                                   | ** ** | **Total Number of**   | ** ** | **Average Price Paid**        | ** ** | **Shares Purchased as** | ** ** | **Purchase Under ** | ** ** |
| ** **                                   | ** ** | **Shares Purchased**       | ** ** | **Per Share for Period** | ** ** | **Part of Publicly**    | ** ** | **the**                       | ** ** |
| **Period:**                                  | ** ** | **During the Period** | ** ** | **Presented**                           | ** ** | **Announced Plan**           | ** ** | **Plan**                      | ** ** |
| ** **                                   | ** ** | ** **                      | ** ** | ** **                              | ** ** | ** **                        | ** ** | ** **                    | ** ** |
| January 1, 2006  — January 31, 2006     |       | 50,000                          |       | $                                       | 29.35      |                              | 2,825,000  |                          | 1,175,000  |   |
| February 1, 2006  — February 28, 2006   |       | 250,000                         |       | $                                       | 33.59      |                              | 3,075,000  |                          | 925,000    |   |
| March 1, 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 30, 2006         |       | —                          |       | $                                       | —     |                              | 3,600,000  |                          | 400,000    |   |
| May 1, 2006 —  May 31, 2006             |       | 1,169,488                       |       | $                                       | 23.64      |                              | 4,769,488  |                          | 2,230,512  |   |
| June 1, 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 31, 2006           |       | 948,600                         |       | $                                       | 25.11      |                              | 8,511,975  |                          | 1,488,025  |   |
| August 1, 2006 —  August 31, 2006       |       | 451,758                         |       | $                                       | 25.54      |                              | 8,963,733  |                          | 1,036,267  |   |
| September 1,  2006 — September 29, 2006 |       | —                          |       | $                                       | —     |                              | 8,963,733  |                          | 1,036,267  |   |
| Quarter ended September  29, 2006            |       | 1,400,358                       |       | $                                       | 25.23      |                              |       |                          |       |   |

 

In August 2006, approximately 7,073,000 shares of the repurchased stockabove were re-issued in conjunction with the LANDesk acquisition.

**Item 6.****           Exhibits.**

(a) Exhibits

**31.1**                        Sarbanes-Oxley Act of 2002 Section 302(a) Certification of the ChiefExecutive Officer

**31.2**                        Sarbanes-Oxley Act of 2002 Section 302(a) Certification of the Chief FinancialOfficer

32.1                           Certification of the Chief Executive Officerand the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

ITEMS 3, 4 AND 5 ARE NOTAPPLICABLE AND HAVE BEEN OMITTED.

37

----

**SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|        |              | AVOCENT CORPORATION                                             |   |
|--------|-------------------|-----------------------------------------------------------------|--------|
|   |              | (Registrant)                                                    |
|   |              |                                                            |
|   |              |                                                            |
|   |              |                                                            |
| Date:  | November  7, 2006 | /s/ Edward H. Blankenship                                       |   |
|   |              | Edward H. Blankenship                                           |
|   |              | Senior Vice President of Finance, Chief Financial               |
|   |              | Officer, and Assistant Secretary (Principal  Financial Officer) |

 

38

----