**U.S. SECURITIES ANDEXCHANGE 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 March 30, 2007 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 ofRegistrant as 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’sTelephone Number, Including Area Code)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934, as amended, duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.

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 ofMay 1, 2007, the number of outstanding shares of the Registrant’s Common Stockwas 50,459,429.

 

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**AVOCENT CORPORATION**

**FORM 10-Q**

**March 30,2007**

**INDEX**
| Part I    | Financial Information |                                                                                                           |
|-----------|-----------------------|----------------------------------------------------------------------------------------------------------------|
|      |                  |                                                                                                           |   |
|      | Item 1.               | Financial Statements  (unaudited)                                                                              |   |
|      |                  |                                                                                                           |   |
|      |                  | Consolidated  Statements of Income for the Three Months Ended March 30, 2007 and March 31,  2006               |   |
|      |                  |                                                                                                           |   |
|      |                  | Consolidated Balance  Sheets at March 30, 2007 and December 31, 2006                                           |   |
|      |                  |                                                                                                           |   |
|      |                  | Condensed  Consolidated Statements of Cash Flows for the Three Months Ended March 30,  2007 and March 31, 2006 |   |
|      |                  |                                                                                                           |   |
|      |                  | 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 Risks                                                   |   |
|      |                  |                                                                                                           |   |
|      | 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

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**PART I —FINANCIAL INFORMATION**

**Item1.  Financial Statements**

**AVOCENT CORPORATIONCONSOLIDATED STATEMENTS OF INCOME**(Unaudited, in thousands, except per share data)
| ** **                                                                                                                                                          | ** ** | **For the three months ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                                                                          | ** ** | **March 30,**                                 | ** ** | **March 31,** | ** ** |
| ** **                                                                                                                                                          | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
| Net sales:                                                                                                                                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Products and  services                                                                                                                                              |       | $                                                  | 113,576    |   | $ | 88,190 |   |
| Licenses and  royalties                                                                                                                                             |       | 19,575                                             |       | 6,322 |   |
| Total net sales                                                                                                                                                     |       | 133,151                                            |       | 94,512 |   |
|                                                                                                                                                                | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Cost of sales:                                                                                                                                                      | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Products and  services                                                                                                                                              |       | 49,094                                             |       | 38,555 |   |
| Licenses and  royalties                                                                                                                                             |       | 3,042                                              |       | — |   |
| Total cost of  sales (includes $179 and $50 of stock compensation expense in 2007 and 2006  respectively; includes $2,683 of intangible asset amortization in 2007) |       | 52,136                                             |       | 38,555 |   |
|                                                                                                                                                                |       |                                               |       |   |   |
| Gross profit                                                                                                                                                        |       | 81,015                                             |       | 55,957 |   |
|                                                                                                                                                                |       |                                               |       |   |   |
| Research and  development expenses (includes $1,116 and $301 of stock compensation expense  in 2007 and 2006, respectively)                                         |       | 20,881                                             |       | 13,209 |   |
| Acquired in-process  research and development expense                                                                                                               |       | —                                             |       | 2,100 |   |
| Selling, general and  administrative expenses (includes $2,366 and $490 of stock compensation  expense in 2007 and 2006, respectively)                              |       | 48,660                                             |       | 23,384 |   |
| Amortization of  intangible assets                                                                                                                                  |       | 8,962                                              |       | 2,351 |   |
| Total operating  expenses                                                                                                                                           |       | 78,503                                             |       | 41,044 |   |
|                                                                                                                                                                |       |                                               |       |   |   |
| Income from operations                                                                                                                                              |       | 2,512                                              |       | 14,913 |   |
|                                                                                                                                                                |       |                                               |       |   |   |
| Net investment income                                                                                                                                               |       | 879                                                |       | 3,091 |   |
| Net realized investment  losses                                                                                                                                     |       | —                                             |       | (55 | ) |
| Interest expense                                                                                                                                                    |       | (2,234                                             | )          | — |   |
| Other income (expense),  net                                                                                                                                        |       | (317                                               | )          | (20 | ) |
|                                                                                                                                                                |       |                                               |       |   |   |
| Income before provision  for income taxes                                                                                                                           |       | 840                                                |       | 17,929 |   |
| Provision for income  taxes                                                                                                                                         |       | 94                                                 |       | 4,996 |   |
|                                                                                                                                                                |       |                                               |       |   |   |
| Net income                                                                                                                                                          |       | $                                                  | 746        |   | $ | 12,933 |   |
|                                                                                                                                                                |       |                                               |       |   |   |
| Earnings per share:                                                                                                                                                 |       |                                               |       |   |   |
| Basic                                                                                                                                                               |       | $                                                  | 0.01       |   | $ | 0.26 |   |
|                                                                                                                                                                |       |                                               |       |   |   |
| Diluted                                                                                                                                                             |       | $                                                  | 0.01       |   | $ | 0.26 |   |
|                                                                                                                                                                |       |                                               |       |   |   |
| Weighted average shares  used in computing earnings per share:                                                                                                      |       |                                               |       |   |   |
| Basic                                                                                                                                                               |       | 50,733                                             |       | 49,095 |   |
|                                                                                                                                                                |       |                                               |       |   |   |
| Diluted                                                                                                                                                             |       | 51,886                                             |       | 50,109 |   |

 

See notesaccompanying these condensed consolidated financial statements.

3

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**AvocentCorporation**

**Consolidated Balance Sheets**

**March 30, 2007 and December 31, 2006**

**(Unaudited,in thousands, except per share data)**
| ** **                                                                                                                                                                                                     | ** ** | **March 30,   2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                     | ** ** | ** **                     | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                |       |                           |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                      |       | $                              | 70,840     |                        | $          | 81,301 |   |
| Investments maturing within one year                                                                                                                                                                           |       | 38,099                         |       | 25,864                      |       |
| Accounts receivable, less allowance for doubtful  accounts of $2,064 and $2,449 at March 30, 2007 and December 31, 2006,  respectively                                                                    |       | 109,192                        |       | 126,471                     |       |
| Other receivables                                                                                                                                                                                              |       | 12,393                         |       | 13,365                      |       |
| Inventories                                                                                                                                                                                                    |       | 40,137                         |       | 41,765                      |       |
| Other current assets                                                                                                                                                                                           |       | 5,507                          |       | 3,904                       |       |
| Deferred tax assets, net                                                                                                                                                                                       |       | 8,705                          |       | 7,355                       |       |
| Total current assets                                                                                                                                                                                           |       | 284,873                        |       | 300,025                     |       |
|                                                                                                                                                                                                           |       |                           |       |                        |       |
| Investments                                                                                                                                                                                                    |       | —                         |       | 987                         |       |
| Property and equipment, net                                                                                                                                                                                    |       | 38,087                         |       | 38,004                      |       |
| Goodwill                                                                                                                                                                                                       |       | 606,787                        |       | 607,488                     |       |
| Other intangible assets, net                                                                                                                                                                                   |       | 199,235                        |       | 209,674                     |       |
| Other assets                                                                                                                                                                                                   |       | 2,370                          |       | 2,676                       |       |
| Total assets                                                                                                                                                                                                   |       | $                              | 1,131,352  |                        | $          | 1,158,854 |   |
|                                                                                                                                                                                                           |       |                           |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                  | ** ** | ** **                     | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                                                          |       |                           |       |                        |       |
| Accounts payable                                                                                                                                                                                               |       | $                              | 15,294     |                        | $          | 16,260 |   |
| Accrued wages and commissions                                                                                                                                                                                  |       | 16,087                         |       | 25,511                      |       |
| Accrued liabilities                                                                                                                                                                                            |       | 24,756                         |       | 29,754                      |       |
| Income taxes payable                                                                                                                                                                                           |       | 20,340                         |       | 17,364                      |       |
| Deferred revenue, current                                                                                                                                                                                      |       | 45,144                         |       | 44,453                      |       |
| Total current liabilities                                                                                                                                                                                      |       | 121,621                        |       | 133,342                     |       |
|                                                                                                                                                                                                           |       |                           |       |                        |       |
| Unsecured bank line of credit                                                                                                                                                                                  |       | 150,000                        |       | 150,000                     |       |
| Deferred tax liabilities, net                                                                                                                                                                                  |       | 28,137                         |       | 30,377                      |       |
| Deferred revenue, non-current                                                                                                                                                                                  |       | 9,593                          |       | 10,070                      |       |
| Other non-current liabilities                                                                                                                                                                                  |       | 872                            |       | 1,222                       |       |
| Total liabilities                                                                                                                                                                                              |       | 310,223                        |       | 325,011                     |       |
|                                                                                                                                                                                                           |       |                           |       |                        |       |
| Commitments and  contingencies*(see Note 11)*                                                                                                                                                                  |       |                           |       |                        |       |
|                                                                                                                                                                                                           |       |                           |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                                    |       |                           |       |                        |       |
| Preferred stock, par value $0.001 per share; 5,000  shares authorized; no shares issued and outstanding                                                                                                        |       | —                         |       | —                      |       |
| Common stock, par value $0.001 per share; 200,000  shares authorized; March 30, 2007— 53,752 shares issued and 50,525  outstanding; December 31, 2006 — 53,382 shares issued and 50,642 outstanding; |       | 54                             |       | 53                          |       |
| Additional paid-in capital                                                                                                                                                                                     |       | 1,189,690                      |       | 1,185,114                   |       |
| Accumulated other comprehensive income                                                                                                                                                                         |       | 143                            |       | 65                          |       |
| Accumulated deficit*(see Note  10)*                                                                                                                                                                            |       | (263,902                       | )          | (261,971                    | )          |
| Treasury stock, at cost; March 30, 2007, 3,227  shares; December 31, 2006, 2,740 shares;                                                                                                                       |       | (104,856                       | )          | (89,418                     | )          |
| Total stockholders’ equity                                                                                                                                                                                |       | 821,129                        |       | 833,843                     |       |
|                                                                                                                                                                                                           |       |                           |       |                        |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                               |       | $                              | 1,131,352  |                        | $          | 1,158,854 |   |

 

See notesaccompanying these condensed consolidated financial statements.

4

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**AVOCENT CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited, inthousands)
| ** **                                                                         | ** ** | **For the three months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **March 30,**                                 | ** ** | **March 31,** | ** ** |
| ** **                                                                         | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
| *** ***                                                                       | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                             | * *   | * *                                           | * *   | * * | * * |
| Net income                                                                         |       | $                                                  | 746        |   | $ | 12,933 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                               |       |   |   |
| Depreciation                                                                       |       | 2,354                                              |       | 1,774 |   |
| Amortization of intangible assets                                                  |       | 11,747                                             |       | 2,351 |   |
| Stock-based compensation                                                           |       | 3,661                                              |       | 841 |   |
| Acquired in-process research and development expenses                              |       | —                                             |       | 2,100 |   |
| Amortization of premiums (discounts) on investments                                |       | (73                                                | )          | 16 |   |
| Net loss on sales of investments                                                   |       | —                                             |       | 55 |   |
| Net loss on disposition of fixed assets                                            |       | 214                                                |       | — |   |
| Excess tax benefit from stock-based compensation                                   |       | (820                                               | )          | (3,695 | ) |
| Changes in operating assets and liabilities, net of  acquisition:                  |       |                                               |       |   |   |
| Accounts receivable, net                                                           |       | 17,332                                             |       | 6,568 |   |
| Inventories                                                                        |       | 1,640                                              |       | (1,855 | ) |
| Other assets                                                                       |       | (302                                               | )          | 391 |   |
| Accounts payable                                                                   |       | (956                                               | )          | (1,466 | ) |
| Accrued wages and commissions                                                      |       | (9,424                                             | )          | (2,219 | ) |
| Accrued other liabilities and deferred revenue (2)                                 |       | (4,984                                             | )          | (1,991 | ) |
| Income taxes, current and deferred                                                 |       | (3,291                                             | )          | 761 |   |
| Net cash provided by operating activities                                          |       | 17,844                                             |       | 16,564 |   |
| ** **                                                                         | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Cash flows from investing  activities:                                             |       |                                               |       |   |   |
| Purchase of other intangible assets                                                |       | (2,769                                             | )          | — |   |
| Purchase of Cyclades, net of cash received (1)                                     |       | —                                             |       | (72,751 | ) |
| Purchases of property and equipment (2)                                            |       | (2,616                                             | )          | (1,689 | ) |
| Purchases of investments                                                           |       | (26,124                                            | )          | (89,928 | ) |
| Maturities and proceeds from sales of investments                                  |       | 15,005                                             |       | 173,805 |   |
| Net cash (used in) provided by investing activities                                |       | (16,504                                            | )          | 9,437 |   |
| ** **                                                                         | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Cash flows from  financing activities:                                             | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Proceeds from employee stock option exercises                                      |       | 2,793                                              |       | 19,198 |   |
| Excess tax benefit from stock-based compensation                                   |       | 820                                                |       | 3,695 |   |
| Purchases of treasury stock                                                        |       | (15,438                                            | )          | (26,952 | ) |
| Net cash used in financing activities                                              |       | (11,825                                            | )          | (4,059 | ) |
|                                                                               |       |                                               |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                      |       | 24                                                 |       | 17 |   |
|                                                                               |       |                                               |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                              |       | (10,461                                            | )          | 21,959 |   |
| Cash and cash  equivalents at beginning of period                                  |       | 81,301                                             |       | 66,425 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                  | 70,840     |   | $ | 88,384 |   |

 

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(1)   $17,135 of the purchaseconsideration for Cyclades was not yet paid at March 31, 2006.  These funds were distributed in April 2006.

(2)   $6,250included in accrued liabilities related to the purchase of certain tangible andintangible assets of an existing product line on March 31, 2006.

See notesaccompanying these condensed consolidated financial statements.

5

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**AVOCENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, inthousands, except per share data)

Note 1.   Basis of Presentation

The accompanyingunaudited condensed consolidated financial statements have been prepared inconformity with United States generally accepted accounting principles and reflectall adjustments consisting of normal recurring adjustments which, in theopinion of management, are necessary for a fair statement of the results forthe periods shown.  The results ofoperations for these periods are not necessarily indicative of the resultsexpected for the full fiscal year or for any future periods.  The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the reporting period.  Actualresults could differ 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 on Form 10-K for the year ended December31, 2006, which is on file with the Securities and Exchange Commission and isavailable at our website, www.avocent.com. The consolidated balance sheetpresented in the accompanying condensed consolidated financial statements forDecember 31, 2006, was derived from the audited financial statements filed inour 10-K for the period ended December 31, 2006, but does not include alldisclosures required by accounting principles generally accepted in the UnitedStates of America.

We report ourannual results based on years ending December 31.  We report our quarterly results for the firstthree interim periods based on 13 week periods ending on Fridays and for thefourth interim period ending 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.

Note 2.   Inventories

Inventories consisted of the following at:
|                 | ** ** | **March 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **      | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Raw materials   |       | $                            | 3,169      |                            | $          | 3,022 |   |
| Work-in-process |       | 1,401                        |       | 1,411                           |       |
| Finished goods  |       | 35,567                       |       | 37,332                          |       |
| Inventories     |       | $                            | 40,137     |                            | $          | 41,765 |   |

 

Inventories above have beenreduced by reserves for excess and obsolete inventories of $7,256 and $5,578 asof March 30, 2007 and December 31, 2006, respectively.

Note 3.   Equity and Treasury Stock

Stock option exercises and restricted stock unit (RSU)vesting — Shares of our common stock issued as a result of option exercisestotaled 136 shares during the quarter ended March 30, 2007 and 915 sharesduring the quarter ended March 31, 2006. In the first quarter of 2007, atotal of 329 restricted stock units vested. At the release of these shares, 96 shares were withheld for taxes, resultingin issuance of 233 shares, net of tax withholding.

Stock repurchases — We repurchased 487 shares of ourcommon stock during the quarter ended March 30, 2007 at a cost totaling$15,438.  We repurchased 825 shares ofour common stock during the quarter ended March 31, 2006 at a cost totaling$26,952. These treasury shares were purchased on the open market throughvarious brokers under the stock re-purchase plan approved by our Board ofDirectors.   During the first quarter of2007, our Board approved an additional 2,000 shares for repurchase under our share repurchase program and hasapproved a total of 12,000 shares for repurchase under the program.  As of March 30, 2007 we may repurchase anadditional 1,700 shares under this program.

6

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Note 4.   Accumulated Other ComprehensiveIncome (Loss)

Werecord unrealized gains and losses on our foreign currency translationadjustments, unrealized gains and losses on derivatives which are cash flowhedges, and unrealized holding gains or losses on our available-for-salesecurities, net of tax, as accumulated other comprehensive income (loss), whichis included as a separate component of stockholders’ equity.  Comprehensive income in the first quarter of2007 of totaling $825 consists of $746 of net income, $37 of unrealized gainson investments (net of deferred income taxes) and $38 of unrealized losses onthe cash flow hedge (net of deferred income taxes) and $80 of foreign currencytranslation adjustments.  Comprehensiveincome in the first quarter of 2006 of $13,016 consists of $12,933 of netincome, $8 of unrealized gains on investments (net of deferred income taxes)and $75 of foreign currency translation adjustments.  As of March 30, 2007 and December 31, 2006,total accumulated other comprehensive income was $143 and $65, respectively.

Note 5.   Earnings Per Share
| ** **                                                           | ** ** | **Income (Numerator)** | ** ** | **Shares   (Denominator)** | ** ** | **Per-Share   Amount** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| ** **                                                           | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **                  | ** ** |
| **For the  three months ended March 30, 2007**                       |       |                        |       |                            |       |                        |       |
| **Basic EPS**                                                        |       |                        |       |                            |       |                        |       |
| Net income available to common stockholders                          |       | $                           | 746        |                            | 50,733     |                        | $          | 0.01 |   |
| **Effect of Dilutive Securities**                                    |       |                        |       |                            |       |                        |       |
| Stock options and unvested RSUs                                      |       | —                      |       | 1,153                           |       | —                      |       |
| **Diluted EPS**                                                      |       |                        |       |                            |       |                        |       |
| Net income available to common stockholders and  assumed conversions |       | $                           | 746        |                            | 51,886     |                        | $          | 0.01 |   |
|                                                                 |       |                        |       |                            |       |                        |       |
| **For the  three months ended March 31, 2006**                       |       |                        |       |                            |       |                        |       |
| **Basic EPS**                                                        |       |                        |       |                            |       |                        |       |
| Net income available to common stockholders                          |       | $                           | 12,933     |                            | 49,095     |                        | $          | 0.26 |   |
| **Effect of Dilutive Securities**                                    |       |                        |       |                            |       |                        |       |
| Stock options                                                        |       | —                      |       | 1,014                           |       | —                      |       |
| **Diluted EPS**                                                      |       |                        |       |                            |       |                        |       |
| Net income  available to common stockholders and assumed conversions |       | $                           | 12,933     |                            | 50,109     |                        | $          | 0.26 |   |

 

Anti-dilutive options to purchase commonstock outstanding were excluded from the calculations above.  Anti-dilutive options totaled 2,130 and 2,369as of March 30, 2007 and March 31, 2006, respectively.

Note 6.   SegmentReporting

In the first quarter of 2007, we merged the MobileTechnologies Division into the LANDesk Division as their products consistprimarily of software sold to similar customer groups.  Also in the first quarter of 2007, we mergedthe Embedded Software and Solutions Division into the Management SystemsDivision as they are serving similar customers and market segments. As a resultof merging these two divisions we re-evaluated our segment disclosures andidentified two reportable segments. Accordingly, we have provided revenue and operating income (loss) belowunder the new segment structure and have retroactively adjusted the segmentinformation previously disclosed for the three months ended March 31, 2006 toconform to the current segment disclosures. In addition, as a result of the merger of divisions, we reallocatedgoodwill among our reporting units (*see Note 8*).

We evaluate the performance of our segments based onrevenue and operating profit, which is calculated before corporate andunallocated costs, amortization of intangibles, acquired in-process researchand development expense, and stock compensation costs.  We do not track or use assets by segment as ameasure of performance, therefore, we have not presented assets bysegment.  The following is a presentationof information for our two reportable segments, Management 

7

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Systems and LANDesk:
| ** **                | ** ** | **For the three months ended** | ** ** |
|---------------------------|------------|----------------------------------------------------|------------|
| ** **                | ** ** | **March 30, 2007**                       | ** ** | **March 31, 2006** | ** ** |
| Net revenue:              | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Management Systems        |       | $                                                  | 105,104    |   | $ | 90,498 |   |
| LANDesk                   |       | 23,078                                             |       | — |   |
| Other business units      |       | 4,219                                              |       | 3,021 |   |
| Corporate and unallocated |       | 750                                                |       | 993 |   |
| Total net revenue         |       | $                                                  | 133,151    |   | $ | 94,512 |   |

 
| ** **                                           | ** ** | **For the three months ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                           | ** ** | **March 30, 2007**                       | ** ** | **March 31, 2006** | ** ** |
| Operating income  (loss):                            | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Management Systems                                   |       | $                                                  | 25,911     |   | $ | 25,783 |   |
| LANDesk                                              |       | (536                                               | )          | — |   |
| Other business units                                 |       | (3,149                                             | )          | (2,698 | ) |
| Corporate and unallocated costs                      |       | (3,615                                             | )          | (2,729 | ) |
| Amortization of intangibles                          |       | (12,438                                            | )          | (2,502 | ) |
| Acquired in-process research and development expense |       | —                                             |       | (2,100 | ) |
| Stock-based compensation expense                     |       | (3,661                                             | )          | (841 | ) |
| Total income  from operations                        |       | 2,512                                              |       | 14,913 |   |
|                                                 |       |                                               |       |   |   |
| Other income (expense)                               |       | (1,672                                             | )          | 3,016 |   |
| Income before provision  for income taxes            |       | $                                                  | 840        |   | $ | 17,929 |   |

 

**Revenue and operating income forour Management Systems Division includes the operating results of Cyclades fromthe date of the acquisition on March 30, 2006.**

Salesby product line for our Management Systems Division and LANDesk Division forthe three months ended March 30, 2007 and March 31, 2006 are as follows:
|                                                 | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                      | ** ** | **March 30, 2007**                       | ** ** | **March 31, 2006** | ** ** |
| Management  Systems Division (MSD) net revenue: |       |                                               |       |   |   |
| KVM                                             |       | $                                                  | 80,688     |   | $ | 77,975 |   |
| Serial management                               |       | 11,286                                             |       | 993 |   |
| Embedded software and solutions                 |       | 7,577                                              |       | 6,133 |   |
| Other                                           |       | 5,553                                              |       | 5,397 |   |
| Total MSD net revenue                           |       | $                                                  | 105,104    |   | $ | 90,498 |   |

 
|                                | ** ** | **For the Three  months ended  March 30, 2007** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------------|------------|
| LANDesk Division  net revenue: |       |                                                                     |       |
| Licenses and royalties         |       | $                                                                        | 13,094     |   |
| Maintenance and services       |       | 9,979                                                                    |       |
| Total LANDesk net  revenue     |       | $                                                                        | 23,073     |   |

 

We sell our productsinternationally to customers in several countries; however no foreign countryaccounted for more than 10% of sales in the first quarter of 2007 or 2006.

8

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**As of March 30, 2007, long-lived assets totaled $844,109,which includes $552,936 held in the U.S. and $291,173 held outside of theU.S.  As of December 31, 2006, long-livedassets totaled $855,166, which includes $539,684 held in the U.S. and $315,482held outside of the U.S.**

**Note 7.**   Forward Contracts and InterestRate Swap

We use forward contracts to reduce our foreign currencyexposure related to the net cash flows from our international operations.  The majority of these contracts areshort-term contracts (three months or less) and are marked-to-market eachquarter and included in trade payables, with the offsetting gain or lossincluded in other income (expense) in the accompanying consolidated statementsof income.  As of March 30, 2007, we hadthree open forward contracts with an approximate fair value of $2.  As of December 31, 2006, we had one openforward contract with an approximate fair value of zero.

In 2006, we entered into an interest rate swapagreement with a notional amount of $125,000. The objective of the rate swapagreement is to provide a hedge against rising LIBOR interest rates that wouldhave a negative effect on our cash flows due to changes in interest rates onthe line of credit.  The swap was effective on August 31, 2006 andterminates on December 31, 2008.  The swap calls for us to make fixed ratepayments of 5.42% over the term of the hedge and to receive floating ratepayments based on LIBOR (matching the LIBOR rate in the line of credit above)from the counter-party. We anticipate that the hedge will be settled uponmaturity and it is being accounted for as a cash flow hedge. The interest rateswap is recorded at fair value each reporting period with the changes in thefair value of the hedge that take place through the date of maturity recordedin accumulated other comprehensive income (OCI).

At March 30, 2007, we recorded an unrealized loss onthe swap, net of tax, of $319 in accumulated OCI. There was no ineffectivenessin the year and we anticipate no reclassification of OCI into earnings in thenext 12 months.

**Note 8.**   Goodwill and Other IntangibleAssets

**Other intangible assets subject to amortization were asfollows:**
|                                           | ** ** | **March 30, 2007**             | ** ** | **December 31, 2006**     | ** ** |
|-------------------------------------------|------------|------------------------------------------|------------|-------------------------------------|------------|
| ** **                                | ** ** | **Gross   Carrying   Amounts** | ** ** | **Accumulated   Amortization** | ** ** | **Gross   Carrying   Amounts** | ** ** | **Accumulated   Amortization** | ** ** |
|                                      |       |                                     |       |                                |       |   |   |   |   |
| Developed  technology                     |       | $                                        | 69,740     |                                | $          | 21,564 |   | $ | 68,720 |   | $ | 17,741 |   |
| Internally  developed software for resale |       | 21,900                                   |       | 2,129                               |       | 21,900 |   | 1,217 |   |
| Patents and  trademarks                   |       | 35,781                                   |       | 9,065                               |       | 35,520 |   | 7,753 |   |
| Customer base  and certifications         |       | 100,147                                  |       | 13,472                              |       | 100,120 |   | 9,449 |   |
| Maintenance  contracts                    |       | 9,600                                    |       | 1,120                               |       | 9,600 |   | 640 |   |
| Non-compete  agreements                   |       | 12,720                                   |       | 4,780                               |       | 12,720 |   | 3,775 |   |
| Other                                     |       | 4,228                                    |       | 2,751                               |       | 4,228 |   | 2,559 |   |
|                                      |       | $                                        | 254,116    |                                | $          | 54,881 |   | $ | 252,808 |   | $ | 43,134 |   |

 

**During the first quarter of 2007, we acquired anexisting product line and related technology from a third party forapproximately $1,020 in cash, which we recorded in intangible assets.  The amounts are subject to futureamortization over an estimated three year life. **Additionally, thepurchase agreement provides for certain incentive payments of approximately$600.  These potential incentive costswill be recognized as expense over the periods for which the related servicesare provided.

**For the three months ended March 30, 2007 and March31, 2006, amortization expense for other intangible assets was $11,747 and$2,351, respectively.  The approximateestimated annual amortization for other intangibles is as follows:**

9

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| Years ending December 31: | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
| 2007, remaining                          |       | $          | 32,350     |   |
| 2008                                     |       | $          | 42,097     |   |
| 2009                                     |       | $          | 37,507     |   |
| 2010                                     |       | $          | 34,499     |   |
| 2011                                     |       | $          | 26,034     |   |
| Thereafter                               |       | $          | 26,748     |   |

 

**As a result of the merger of certaindivisions (*see Note 6*) there were changes in thecarrying amount of goodwill among the divisions for the three months endedMarch 30, 2007, as follows:**
|                                    | ** ** | ** **     | ** ** | ** **   | ** ** | **Embedded**          | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------------------------|------------|----------------|------------|--------------|------------|-----------------------|------------|--------------|------------|------------|------------|
| ** **                         | ** ** | **Management** | ** ** | ** **   | ** ** | **Software and** | ** ** | **Other**    | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Systems**    | ** ** | **LANDesk**  | ** ** | **Solutions**         | ** ** | **Business** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Division**   | ** ** | **Division** | ** ** | **Divisions**         | ** ** | **Units**    | ** ** | **Total**  | ** ** |
|                               |       |           |       |         |       |                  |       |         |       |       |       |
| Balance as of  December 31, 2006   |       | $              | 316,430    |         | $          | 274,613               |       | $            | 11,862     |       | $          | 4,583 |   | $ | 607,488 |   |
|                               |       |           |       |         |       |                  |       |         |       |       |       |
| Reallocation  from segment changes |       | 11,862         |       |         |       | (11,862               | )          |         |       | —     |       |
|                               |       |           |       |         |       |                  |       |         |       |       |       |
| Adjustments  during the quarter    |       |           |       | (701         | )          |                  |       |         |       | (701       | )          |
|                               |       |           |       |         |       |                  |       |         |       |       |       |
| Balance as of March 30,  2007      |       | $              | 328,292    |         | $          | 273,912               |       | $            | —     |       | $          | 4,583 |   | $ | 606,787 |   |

 

**For the threemonths ended March 31, 2006, we recorded $61,741 of goodwill related to theCyclades Corporation acquisition and $181 of adjustments to goodwill related toa prior acquisition and are included in MSD.**

**Note 9.  Product Warranties and Deferred Revenue**

The activitywithin the liability for warranty returns for the quarter ended March 30, 2007is as follows:

|                                                           | ** ** | **2007** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|
|                                                      |       |     |       |
| Balance, January  1, 2007                                 |       | $        | 2,486      |   |
|                                                      |       |     |       |
| Accruals for  product warranties issued during the period |       | 1,036    |       |
|                                                      |       |     |       |
| Settlements made  during the period                       |       | (1,036   | )          |
| Balance, March 30, 2007                                   |       | $        | 2,486      |   |

 

Deferred revenuerelated to our extended warranty for hardware products program was $4,298 atMarch 30, 2007 and $4,545 at December 31, 2006. We recorded earned revenue from the amortization of deferred revenuerelated to extended warranties of $1,022 during the three months ended March30, 2007.  In addition, we recorded newextended warranties of $994 during the three months ended March 30, 2007.

We defer revenuefor subscription, service and maintenance contracts until earned, which isgenerally over the term of the contract or when services are performed. As ofMarch 30, 2007, deferred revenue was $54,737, of which approximately $48,761related to LANDesk.  As of December 31,2006, deferred revenue was $53,514, of which approximately $47,858 related toLANDesk.

10

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Note 10. Income taxes

The effective taxrate in the first quarter of 2007 was approximately 11.2% compared to aneffective tax rate of approximately 27.9% in the first quarter of 2006.  The provision for income taxes was $94 forthe first quarter of 2007, compared to $5,000 in the first quarter of2006.  The decrease in the effective taxrate was primarily the result of the change in the mix of pre-tax profit amongour U.S. and international companies, the reinstatement of the U.S. Researchand Development Tax Credit, expenses related to stock options, and in the firstquarter of 2006 an acquisition occurred resulting in an increase in theeffective tax rate for In-process Research and Development.  The decreases to the effective tax rate werepartially offset by an increase due to the lower amount of interest earned ontax-free municipal bonds.

We adopted FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109” on January 1, 2007. As a result ofadopting this FASB Interpretation, we recorded an increase to reserves foruncertain tax positions of $2,900.  Thisincrease was recorded as an increase to the January 1, 2007 accumulated deficitbalance.  As of the adoption date, we hadtotal reserves for uncertain tax positions related to gross unrecognized taxbenefits of $11,400 of which $9,300, if recognized, would affect the effectivetax rate.  We recognize potential accruedinterest and penalties related to unrecognized tax benefits from our globaloperations within income tax expense. As of the adoption date, we had accruedinterest expense related to the unrecognized tax benefits of approximately$2,200.  Penalties may be charged incertain jurisdictions for the underpayment or late payment of tax.  As of the adoption date, we had accruedpenalties related to the unrecognized tax benefits of approximately $200.

We conductbusiness globally, and as a result our subsidiaries file income tax returns inthe U.S. federal jurisdiction and various state and foreign jurisdictions.  In the normal course of business we aresubject to examinations by taxing authorities throughout the world includingthe U.S.  With few exceptions, we are nolonger subject to U.S. federal, state, and local, or non-U.S. income taxexaminations before 2003.

We are currentlyunder audit by the Internal Revenue Service for the 2004 and 2005 taxyears.  It is likely that the examinationphase of the audit for those years will conclude in 2007, and it is reasonablypossible a change in the unrecognized tax benefits may occur; however,quantification of an estimated range cannot be made at this time.

The amortizationof the other intangible assets acquired and the goodwill recorded related tothe LANDesk acquisition in 2006 may be tax deductible if we make certain taxelections.  We are currently evaluating the impact of these elections,which must be made within certain prescribed time periods following the date ofacquisition (May 15, 2007).  We have indemnified former LANDeskshareholders for any personal tax consequences should our election createcurrent tax obligations for these former shareholders.  Our initialpurchase price allocation of this acquisition does not take into considerationthe tax impact should these elections be made within the required time period,thus previously established deferred taxes and intangible assets may beadjusted if we choose to make these elections.

Note 11.  Litigation

On March 14, 2006,TFS Electronic Manufacturing Services, Inc. (TFS) filed a Third-Party Complaintand an Objection to Claim of Avocent Corporation with the United StatesBankruptcy Court, District of Arizona. As a result of the complaint, an adversary proceeding has beencommenced against Avocent in the TFS bankruptcy case in an effort to disallowAvocent’s claim in its entirety.  TFSalso seeks damages in an undetermined amount for Avocent’s alleged breach ofcontract, 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.  (“TopSearch”).  The matter has been consolidated with aseparate matter between TFS and TopSearch pending in the United States DistrictCourt for the District of Arizona, for purposes of discovery through pre-trial.The court has ordered that early mediation be scheduled and a mediator has beenassigned.  Discovery is under way. We intend to vigorously defend our positions.

In January 2007,we filed a complaint for patent infringement in the United States DistrictCourt for the Western District of Washington against Aten Technology, Inc.,Aten International Co., Ltd, Belkin Corporation, Rose Electronics and itsgeneral partners, and Trippe Manufacturing Company. The defendants havefiled counterclaims alleging non-infringement, unenforceability, andinvalidity, and discovery is currently underway.

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In March 2007,KBM Enterprises, formerly a contract manufacturer forAvocent, filed a complaint against Avocent in the Circuit Court of MadisonCounty, Alabama, seeking $9.5 million for costs allegedly incurred byKBM in its manufacturing efforts on behalf of Avocent.  Avocent has filed a motion to dismiss thecase.  We intend to vigorously defend ourpositions.

In April 2007, wefiled a complaint for declaratory judgment against Aten International Co., Ltd.in the United States District Court for the Northern District of Alabama.  We are seeking a declaratory judgment thattwo patents owned by Aten and asserted against Avocent are invalid and thatcertain of products alleged by Aten to infringe do not infringe these patents.

**Note 12. Subsequent Events**

Duringthe period from March 31, 2007 through May 1, 2007, we purchased 100 additionalshares of our common stock under our share repurchase program for a total costof $2,493.

During the secondquarter of 2007 our Compensation Committee approved the grant of 1,075time-based and 399 performance-based restricted stock units to our officers,directors and other employees.

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

*THE INFORMATION IN THIS ITEM 2**“MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”**CONTAINS FORWARD-LOOKINGSTATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTS RELATING TO OUR FUTUREBUSINESS PROSPECTS AND ECONOMIC CONDITIONS IN GENERAL; STATEMENTS REGARDING OURABILITY TO PREDICT FUTURE SALES AND MANAGE INVENTORY LEVELS; STATEMENTSREGARDING PRICING PRESSURE; STATEMENTS REGARDING THE FLUCTUATION OF OUR REVENUEGROWTH IN RELATION TO ECONOMIC CONDITIONS AND IT RELATED SPENDING TRENDS;STATEMENTS REGARDING OUR PRODUCT PLATFORMS AND OUR  ABILITY TO RESUME GROWTH IN OUR OVERALLBUSINESS; STATEMENTS REGARDING INCREASED SALES OF OUR DIGITAL PRODUCTS ANDEMBEDDED SOLUTIONS AND THEIR ABILITY TO OFFSET PRICE DECLINES AND COMPETITIVEFACTORS; STATEMENTS REGARDING OUR GROSS MARGINS, OUR RESEARCH AND DEVELOPMENTEXPENSES AND OUR SELLING, GENERAL AND ADMINISTRATIVE EXPENSES IN THE SECOND QUARTEROF 2007; AND STATEMENTS REGARDING OUR LEGAL COSTS FOR PATENT AND OTHERLITIGATION MATTERS.  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, THOSEDISCUSSED IN PART II, ITEM 1A “RISK FACTORS.”*

**Overview**

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

For a morecomplete description of our products, technologies and markets, please refer toour Form 10-K, which was filed on March 1, 2007.

A substantialportion of our revenue is derived from sales to major server OEMs who purchaseour switching systems on a private-label or branded basis for integration andsale with their own products, sales through our reseller and distributornetwork, and sales to a limited number of direct customers. Sales to ourbranded customers accounted for 64% of sales in the first quarter of 2007 and51% of sales in the first quarter of 2006. Sales to our OEM customers accounted for 36% of sales in the firstquarter of 2007 and 49% of sales in the first quarter of 2006.  We do not have contracts with many of ourbranded customers, and in general, our OEM and branded business customers areobligated to purchase products from us only pursuant to binding purchaseorders.  The loss of, or material declinein orders from, these customers would have a material adverse effect on our business,financial condition, results of operations, and cash flows.  Our top five customers include both OEM andbranded customers, and accounted for 44% and 65% of sales in the first quarterof 2007 and 2006, respectively.

We sell productsto resellers, distributors, end-users, and OEMs in the United States, Canada,Europe, and Asia as well as in other foreign markets.  Sales within the United States accounted forapproximately 55% of first quarter sales in both 2007 and 2006.  Sales outside of the United States accountedfor 45% of first quarter sales in both 2007 and 2006.  No foreign country accounted for more than10% of sales in the first quarter of 2007 or 2006.

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

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

**Many of our executive officers anddirectors are vested in significant amounts of options to purchase shares ofour common stock and RSUs.  Theseofficers and directors have informed us that they have sold, and may selladditional, shares of our common stock to provide liquidity and diversify theirportfolios.  During the second quarter of2007 and 2006 our Board of Directors granted both time-based andperformance-based restricted stock units (RSUs) with two and three yearvesting.**

**In the first quarter of 2007, wemerged our Mobile Technologies Division into the LANDesk Division and ourEmbedded Software and Solutions Division into the Management Systems Divisionto better focus on the respective customer needs and sales channels.**  We believeour new divisions allow us to focus on new technology and growth opportunitiesto add product and customer value

13

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**in the future.  Webelieve this structure enhances customer service, speeds delivery of productsto market and better focuses Avocent’s research, development, and marketingactivities.**

**Our largest division, theManagement Systems Division (which now includes our former Embedded Softwareand Solutions Division), comprised 79% of our consolidated net revenue in thefirst quarter of 2007 and 96% in 2006. Our LANDesk Division (which is our newest division and now includes ourformer Mobile Technologies Division), contributed 17% of net revenue to thefirst quarter of 2007.  Our otherdivisions and unallocated revenue comprised the remaining 4% of ourconsolidated net revenue in 2007 and 2006. See Note 6 in the notes to the condensed c**onsolidated financial statements contained in Part I, Item 1 of this document.

**In the first quarter of 2007, wemerged our Mobile Technologies Division into the LANDesk Division and ourEmbedded Software and Solutions Division into the Management Systems Divisionto better focus on the respective customer needs and sales channels.**  We believeour new divisions allow us to focus on new technology and growth opportunitiesto add product and customer value in the future.  We believe this structure enhances customerservice, speeds delivery of products to market and better focuses Avocent’sresearch, development, and marketing activities.

**Results of Operations**

The following table sets forth,for the periods indicated, selected statement of income data expressed as apercentage of net sales:
| ** **                                            | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **March 30,  2007**         | ** ** | **March 31,  2006** | ** ** |
| Net sales                                             |       | 100.0                            | %          | 100.0 | % |
| Cost of sales                                         |       | 39.2                             |       | 40.8 |   |
| Gross profit                                          |       | 60.8                             |       | 59.2 |   |
| Operating  expenses:                                  |       |                             |       |   |   |
| Research and  development expenses                    |       | 15.7                             |       | 14.0 |   |
| Acquired  in-process research and development expense |       | —                           |       | 2.2 |   |
| Selling, general  and administrative expenses         |       | 36.5                             |       | 24.7 |   |
| Amortization of  intangible assets                    |       | 6.7                              |       | 2.5 |   |
| Total operating expenses                              |       | 58.9                             |       | 43.4 |   |
|                                                  |       |                             |       |   |   |
| Income from operations                                |       | 1.9                              |       | 15.8 |   |
| Net investment  income                                |       | 0.7                              |       | 3.3 |   |
| Net realized  investment losses                       |       | —                           |       | (0.1 | ) |
| Interest expense                                      |       | (1.7                             | )          | — |   |
| Other income  (expense), net                          |       | (0.2                             | )          | — |   |
| Income before provision for income taxes              |       | 0.7                              |       | 19.0 |   |
| Provision for  income taxes                           |       | 0.1                              |       | 5.3 |   |
| Net income                                            |       | 0.6                              | %          | 13.7 | % |

 

*Net sales.*  Net sales increased 41% to $133.2 million forthe first quarter of 2007 from $94.5 million for the first quarter of2006.  The increase in sales resultedprimarily from the contribution of revenue from both our Cyclades acquisition,completed on March 30, 2006 and our LANDesk acquisition, completed on August31, 2006.  Branded sales increased 77%from $47.9 million in the first quarter of 2006 to $85.1 million in the firstquarter of 2007.  As a percentage ofsales, branded revenue accounted for 64% of sales in the first quarter of 2007and 51% of revenue in the first quarter of 2006.  OEM sales grew 3% from $46.6 million in thefirst quarter of 2006 to $48.1 million in the first quarter of 2007.  OEM saleswere 36% of sales for the first quarter of 2007, compared to 49% of sales forthe first quarter of 2006.  Sales of ourdigital products increased 28% to $64.7 million in the first quarter of 2007from $50.6 million in the first quarter of 2006.  Although revenue from sales of digitalproducts increased in dollars, as a percentage of sales of our digital productsrepresented 48% of our revenue in the first quarter of 2007 compared to 54% ofour revenue in the first quarter of 2006. This percentage decline combined with the overall dollar increase is aresult of the diversification to our business that the LANDesk acquisitionprovided.

From a divisional perspective, revenues from ourManagement Systems Division increased from $90.5 million in the first quarterof 2006 to $105.1 million in the first quarter of 2007.  Our Management Systems Division is comprisedof our traditional KVM products, our serial products and our embedded softwareand solutions products.  Revenue from theManagement Systems Division accounted for 79% of our revenue in the firstquarter of 2007 and 96% of our revenue in the first quarter of 2006.  The decline in Management System’s percentageof revenue is a result of the diversification of our business, primarily as aresult of the addition of LANDesk.  OurManagement Systems Division still generates a majority of our revenue andexperienced an increase in revenue for the first quarter of 2007 primarily as aresult of the additional sales contributed by our acquisition of Cyclades.  Sales by product line for ourManagement Systems Division for the three months ended March 30, 2007 and March31, 2006 are as follows:

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|                                                 | ** ** | **For the three months  ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                      | ** ** | **March 30,  2007**                                 | ** ** | **March 31,  2006** | ** ** |
| Management  Systems Division (MSD) net revenue: |       |                                                     |       |   |   |
| KVM                                             |       | $                                                        | 80,688     |   | $ | 77,975 |   |
| Serial management                               |       | 11,286                                                   |       | 993 |   |
| Embedded software and solutions                 |       | 7,577                                                    |       | 6,133 |   |
| Other                                           |       | 5,553                                                    |       | 5,397 |   |
| Total MSD net revenue                           |       | $                                                        | 105,104    |   | $ | 90,498 |   |

 

The LANDesk Division contributed $23.1 million of net revenue duringthe first quarter of 2007, or 17% of our net revenue.  LANDesk’s revenue and bookings are comprisedof both license-based revenue, primarily LANDesk Management Suite, andsubscription-based revenue, primarily LANDesk Security Suite, with the growthin bookings from the subscription-based revenue outpacing the license-basedrevenue.  This change in mix has animpact on the revenue we recognize because subscription revenue is deferred andamortized over the subscription term.  Sales by product line for our LANDesk Divisionfor the three months ended March 30, 2007 and March 31, 2006 are as follows:
|                                | ** ** | **For three months ended** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **March 30,  2007**                  | ** ** | **March 31,  2006** | ** ** |
| LANDesk Division  net revenue: |       |                                      |       |   |   |
| Licenses and royalties         |       | $                                         | 13,094     |   | $ | — |   |
| Maintenance and services       |       | 9,979                                     |       | — |   |
| Total LANDesk net  revenue     |       | $                                         | 23,073     |   | $ | — |   |

 

Sales increased 41%, both within the United States andinternationally, from the first quarter of 2006 to the first quarter of 2007due to the additional revenue resulting from our acquisitions. Sales within theUnited States were $73.8 million and $52.4 million in the first quarter of 2007and 2006 respectively.  Internationalsales were $59.4 million and $42.1 million in the first quarter of 2007 and2006, respectively.  Sales within theUnited States were 55% of sales in the first quarter of 2007 and 2006.  International sales were 45% of sales in thefirst quarter of 2007 and 2006.

We typically experience a sequential decrease inbusiness from the fourth quarter of one year to the first quarter of thefollowing year.  This trend was againevident from the fourth quarter of 2006 to the first quarter of 2007.  In recent years, we have also experienced asequential increase in revenue from the first quarter to the second quarter,primarily as a result of similar trends in IT spending for this period, and webelieve the trend will continue in 2007. We believe the tone of our business is generally positive and industryanalysts continue to forecast growth in IT spending on a year-over-yearbasis.  Accordingly, for the secondquarter of 2007, we expect revenue to be in the $145 million to $154 millionrange.

*Gross profit.* Gross profit isaffected by a variety of factors: including the ratio of sales among ourdistribution channels, as OEM sales typically have lower gross margins than ourbranded sales; absorption of fixed costs as sales levels fluctuate; productmix; raw material costs; labor costs; new product introductions by us and byour competitors; sales levels of our software products which tend to havehigher gross margins; and our outsourcing of manufacturing and assemblyservices. Gross profit increased to 60.8% inthe first quarter of 2007 compared to 59.2% in the first quarter of 2006 dueto:

·                  Higherrevenue from our digital, serial and embedded products as our digital KVM andembedded solutions typically carry higher margins than our analog solutions(sold through our Management Systems Division);

·                 Salesby our LANDesk Division, whose products are primarily higher margin softwarewith related service and maintenance revenue; and

·                 Sales by our Cyclades branded products, which aresold primarily through our branded channels and, as a result, have a highergross margin.

These increases togross margins were somewhat offset by:

·                 Additional costs included in cost ofsales from amortization of other intangibleassets recorded as a result of the LANDesk acquisition related to internallydeveloped software for resale;

·                 Additional excess and obsoleteinventory reserves related to product end-of-life issues, including legacyCyclades products that were replaced or enhanced; and

·                 Lowerthan anticipated revenue that did not fully absorb our previously committedfixed indirect costs and overhead.

Based on our forecasted revenuerange for the second quarter of 2007, we expect positive contributions fromLANDesk and

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higher revenue from our digital products and embeddedsolutions in the second quarter of 2007, all of which we expect will have apositive affect on our gross margin.  Weexpect the combination of these factors to offset price declinesand competitive factors in the second quarter of2007.  Accordingly, we expect grossmargins to be between 63% and 66% in the second quarter of 2007.

*Research and development expenses.*  Research and development expenses were $20.9million, or 15.7% of sales, in the first quarter of 2007 compared to $13.2million, or 14.0% of net sales, in the first quarter of 2006.  The increase in the amount spent on researchand development was due to the additional costs from the Cyclades and LANDeskacquisitions, including costs related to the integration of the Avocent andLANDesk software platforms.  The amountof stock compensation expensed in the first quarter of 2007 was higher ascompared to 2006 because our Board did not approve the 2006 grants until thesecond quarter of 2006, and therefore, we did not begin expensing the relatedcost until the second quarter of 2006.

We believe that the timely development of innovativeproducts and enhancements to existing products is essential to maintaining ourcompetitive position, and we will continue to make significant investments inresearch and development.  We believeresearch and development expenses in the second quarter of 2007 will berelatively consistent with the first quarter of 2007.

*Acquired in-process research anddevelopment expense.*  Acquisition related expenses in 2006 werecomprised solely of the non-recurringwrite-off of $2.1 million of in-process research and development expenserelated to the acquisition of Cyclades. There were no such charges in the first quarter of 2007.

***Selling, general andadministrative expenses.***  Selling, general and administrative expenseswere $48.7 million, or 36.5% of net sales, for the first quarter of 2007compared to $23.4 million, or 24.7% of net sales, for the first quarter of2006.  The increase in selling, generaland administrative expenses was attributed to increased headcount as a resultof the acquisitions of Cyclades and LANDesk. We also experienced higher costs as a result of equity-basedcompensation awards as compared to 2006 because our Board did not approve the2006 grants until the second quarter of 2006. We believe certain elements of selling, general and administrativeexpenses will be flat from the first quarter of 2007, with the exceptionof sales incentive compensation, which weexpect to increase as a result of increased revenue as compared to the firstquarter of 2007.  As a result of thesefactors, including stock compensation expense, we expect selling, general andadministrative expenses to be in the range of $51 to $54 million in the secondquarter of 2007.

***Amortization of intangible assets***. Amortization of $9.0 million in the first quarter of 2007 included theamortization of the identifiable intangible assets created as a result of theacquisitions of OSA, Sonic Mobility, Cyclades, and LANDesk.  Amortization of $2.4 million in the firstquarter of 2006 included primarily the amortization of the identifiableintangible assets created as a result of the acquisitions of Equinox, 2C,Soronti, Crystal Link, OSA, and Sonic Mobility. The increase in amortization expense relates primarily to additionalamortization expense related to the intangible assets recorded in theacquisitions of Cyclades and LANDesk. Amortization expense is expected to be approximately $9.0 million in thesecond quarter of 2007.

*Stock Compensation. *We recordcompensation expense in each line of our condensed consolidated financial statementsbased on the department in which an employee works.  Stock compensation increased from $841,000 inthe first quarter of 2006 to $3.7 million in the first quarter of 2007.  The increase was due primarily to the factthat most of our outstanding option awards were vested at the end of  2005 and our Board did not approve ourrestricted stock unit grants until the second quarter of 2006.  Accordingly our stock compensation expensewas lower in the first quarter of 2006. Of the $3.7 million of stock compensation recorded in the first quarterof 2007, $179,000 was recorded in cost of goods sold, $1.1 million was recordedin research and development expense, and $2.4 million was recorded in selling,general and administrative expenses. * *Of the $841,000 of stock basedcompensation recorded in the first quarter of 2006, $50,000 was recorded incost of goods sold, $301,000 was recorded in research and development expense,and $490,000 was recorded in selling, general and administrative expenses.

During the secondquarter of 2007 our Compensation Committee approved the grant of 815 time-basedand 220 performance-based restricted stock units to our officers, directors,and other employees.  The awards willvest over two or three years and in some cases are subject to the achievementof certain performance goals.  We expectstock compensation expense to be in the range of $4.0 million to $5.0 millionin the second quarter of 2007.  We believeequity based compensation is an important part of our total compensation packagesand is needed to attract and retain key employees.

*Netinvestment income**.** *Net******investmentincome decreased to $879,000 in the first quarter of 2007 as compared to $3.1million in the first quarter of 2006.  The decrease in investment income in the firstquarter of 2007 was the result of lower cash and investments as a result offunding the purchase of Cyclades late in the first quarter of 2006 and the cashcomponent of the LANDesk acquisition in the third quarter of 2006, as well asfunding the purchase of common stock under our stock repurchase program.

*Net realized investment losses. *Net realized investmentlosses decreased from $55,000 in the first quarter of 2006 to zero in firstquarter of 2007.

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*Interest expense. *Interest expense was $2.2 million in the first quarterof 2007.  There were no such expenses inthe first quarter of 2006.  Interestexpense results from borrowings under our $250 million unsecured line of creditobtained in the second quarter of 2006, which we used to finance a portion ofthe LANDesk acquisition and share repurchases.

*Other income (expense), net.*  Net otherincome increased from an expense of $20,000 in the first quarter of 2006 to$317,000 in the first quarter of 2007.

*Provision for income taxes.*  The effective tax ratein the first quarter of 2007 was approximately 11.2% compared to an effectivetax rate of approximately 27.9% in the first quarter of 2006.  The provision for income taxes was $94,000for the first quarter of 2007, compared to $5.0 million in the first quarter of2006.  The decrease in the effective taxrate was primarily the result of the change in the mix of pre-tax profit amongour U.S. and international companies, the reinstatement of the U.S. researchand development tax credit and expenses related to stock options. In addition,in the first quarter of 2006, the Cyclades acquisition occurred resulting in anincrease in the effective tax rate for in-process research anddevelopment.  The decreases to the effectivetax rate were partially offset by an increase due to the lower amount ofinterest earned on tax-free municipal bonds. We adopted FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes, an interpretation of FASB Statement No. 109” on January 1,2007.  As a result of adopting this FASBInterpretation, we recorded an increase to reserves for uncertain tax positionsof $2.9 million.  This increase wasrecorded as an increase to the January 1, 2007 accumulated deficit.

*Net income.*  Netincome for the first quarter of 2007 was $746,000 compared to $12.9 million forthe first quarter of 2006, as a result of the factors detailed in the abovediscussion.  Net income, as a percentageof sales for the first quarter of 2007, was 0.6% compared to 13.7% for thefirst quarter of 2006.

**Liquidity and Capital Resources**

As of March 30, 2007, our principal sources of liquidity consisted of $109million in cash, cash equivalents, and investments.  We also have a $250 million unsecured fiveyear revolving bank line of credit that is available for general corporatepurposes.  The line of credit currentlybears an interest rate of LIBOR plus 87.5 basis points.  There was approximately $150 millionoutstanding under the line of credit as of March 30, 2007.  We classify the entire obligation as long-termas it carries a five-year term and has no required repayment schedule.  We expect to repay the borrowings with futurecash flows from operations or potential future capital raising activities.

Our operating activities generated cash of $17.8 million in the first three months of 2007, compared to approximately $16.6 million in the first three months of 2006.  The improvement in cash flow in the first quarter of 2007 was primarily the result of increases in accounts receivable collections during the first quarter of 2007.  Our accounts receivable decreased $17.3 million from December 31, 2006 to March 30, 2007 as a result of the improved cash collections as well as the lower sales experienced in the first quarter of 2007 as compared to the fourth quarter of 2006.  Although our accounts receivable balance declined, our days sales outstanding (DSO) increased to 74 days from approximately 70 days at the end of 2006.  DSO increased as a result of a higher concentration of sales in the third month of the first quarter of 2007 than we typically experience.  Also, adding LANDesk customer balances to our receivables, which tend to have longer payment terms than legacy Avocent balances, increased our DSO.  Excluding our LANDesk Division, our DSO was approximately 67 days at the end of the first quarter of 2007 and was 57 days at the end of 2006.

Inventories decreased $1.6 million from December 31, 2006 to March 30, 2007.  Our operations group worked to reduce our inventories in the first quarter of 2007, despite planning and stocking for higher sales volume in the quarter.  However, our inventory turns decreased to 4.9, primarily as a result of our lower sales volume experienced in the first quarter of 2007.  Had we achieved our revenue expectation, the inventory levels would have been lower at quarter end.  A decline in accrued compensation due to the payment of 2006 annual bonuses somewhat offset the decline in accounts receivable and inventories impact to cash flow from operations for the first quarter of 2007.

In the ordinary course of our business, we may at anypoint in time have a significant amount of contractual commitments not yetrecognized in our financial statements. These commitments relate primarily to our need to schedule the purchaseof inventories in advance of the related forecasted sales to customers.  We have longer lead times for the products wepurchase from suppliers based in Asia than those for our U.S. based andEuropean suppliers.  Our actualcontractual commitments are typically limited to products needed for one tothree months of forecasted sales.  Theliabilities for these inventory purchases along with the related inventoryassets are typically recognized upon our receipt of the products.  We also have at any point in time a varietyof short term contractual commitments for services such as advertising,marketing, accounting, legal, and research and development activities.  The liabilities for these services and therelated expenses are typically recognized upon our receipt of the related services.  As of March 30, 2007, we had approximately $23.0million of such purchase commitments. None of our expected purchase commitments requires payment beyond thenext year.

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We adopted FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109” on January 1, 2007. As a result ofadopting this FASB Interpretation, we recorded an increase to reserves foruncertain tax positions of $2.9 million. This increase was recorded as an increase to the January 1, 2007accumulated deficit balance.  As of theadoption date, we had total reserves for uncertain tax positions related togross unrecognized tax benefits of $11.4 million of which $9.3 million, ifrecognized, would affect the effective tax rate.  We recognize potential accrued interest andpenalties related to unrecognized tax benefits from our global operationswithin income tax expense.  As of theadoption date, we had accrued interest expense related to the unrecognized taxbenefits of approximately $2.2 million. Penalties may be charged in certain jurisdictions for the underpaymentor late payment of tax.  As of theadoption date, we had accrued penalties related to the unrecognized taxbenefits of approximately $200,000 (*see Note 10 in the notesto the condensed consolidated financial statements in Part I, Item 1*).

We may use aportion of our cash and investments or our line of credit for strategicacquisitions of technologies and companies that will enhance and complement ourexisting technologies and help increase our sales.

We repurchased487,000 shares of our common stock for a total cost of approximately $15.4million during first quarter of 2007 under the stock repurchase programapproved by our Board of Directors. During the first quarter of 2007, our Board approved the repurchase ofup to an additional 2.0 million shares under our share repurchase program.  As of March 30, 2007 we had the authority torepurchase an additional 1.7 million shares under this program.

**Investments**

Ourinvestments consist of corporate bonds, municipal bonds, commercial paper, andmortgage backed securities guaranteed by U.S. government agencies.  We classify our debt and equity securities asavailable-for-sale securities and report them at fair value, with unrealizedgains and losses excluded from earnings and reported as a separate component ofstockholders’ equity.  We periodicallyreview our investment portfolio for investments considered to have sustained another-than-temporary decline in value. Upon review of our investment portfolio as of March 30, 2007, noinvestments were considered to have sustained an other-than-temporary decline,and no charge was recorded in the first quarter of 2007.

**Recently Issued AccountingStandards and Regulatory Standards**

**See above regarding adoption of FIN48 during the first quarter of 2007.**

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

Our primary market risk is the potential loss arisingfrom increases in interest rates, which could have an adverse impact on thefair value of our investment securities. Our investment policy is to manage our investment portfolio to preserveprincipal and liquidity while maximizing the return on our investment portfoliothrough the investment of available funds. We diversify our investment portfolio by investing in a variety ofhighly-rated investment-grade securities and through the use ofdifferent investment managers.  Ourinvestment securities portfolio is primarily invested in securities withmaturities (or interest rate resets) of two years or less with at least aninvestment grade rating to minimize interest rate and credit risk as well as toprovide for an immediate source of funds. Market risk, calculated as the potential change in fair value in ourinvestment portfolio resulting from a hypothetical 10% change in interestrates, was not material at March 30, 2007. We generally hold investment securities until maturity.

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

We also face foreign currency exchange rate risk to theextent that the value of certain foreign currencies relative to the U.S. dollaraffects our financial results.  Ourinternational operations transact a portion of our business in currencies otherthan the U.S. dollar, predominantly the euro, and changes in exchange rates maypositively or negatively affect our revenue, gross margins, operating expenses,and retained earnings since these transactions are reported by us in U.S.dollars.  We occasionally purchaseforeign currency forwards aimed at limiting the impact of currencyfluctuations.  These instruments provideonly limited protection against currency exchange risks, and there can be noassurance that such an approach will be successful, especially if a significantand sudden decline occurs in the value of local currencies.  As of March 30, 2007, we had threeopen forward contracts with an approximate fair value of $2,000.

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

(a) *Evaluation of disclosure controls and procedures.*  Based on their evaluation as of March 30,2007, 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.

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(b) *Changes in internal control over financial reporting*.  There were no changes in our internalcontrols over financial reporting during the quarter ended March 30, 2007 thatmaterially affected or is reasonably likely to materially affect, our internalcontrols over financial reporting.  Wehave begun to integrate LANDesk into our standard processes and controls andERP System and we expect to complete the integration during 2007.

### **PART II — OTHER INFORMATION**

**Item 1.  LegalProceedings.**

On March 14, 2006,TFS Electronic Manufacturing Services, Inc. (“TFS”) filed a Third-PartyComplaint and an Objection to Claim of Avocent Corporation with the UnitedStates Bankruptcy Court, District of Arizona. As a result of the complaint, an adversary proceeding has beencommenced against Avocent in the TFS bankruptcy case in an effort to disallowAvocent’s claim in its entirety.  TFSalso seeks damages in an undetermined amount for Avocent’s alleged breach ofcontract, 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.  (“TopSearch”).  The matter has been consolidated with aseparate matter between TFS and TopSearch pending in the United States DistrictCourt for the District of Arizona, for purposes of discovery through pre-trial.The court has ordered that early mediation be scheduled and a mediator has beenassigned.  Discovery is under way. We intend to vigorously defend our positions.

In January 2007,we filed a complaint for patent infringement in the United States DistrictCourt for the Western District of Washington against Aten Technology, Inc.,Aten International Co., Ltd, Belkin Corporation, Rose Electronics and itsgeneral partners, and Trippe Manufacturing Company.  The defendants have filed counterclaimsalleging non-infringement, unenforceability, and invalidity, and discovery iscurrently underway.

In March 2007,KBM Enterprises, formerly a contract manufacturer forAvocent, filed a complaint against Avocent in the Circuit Court of MadisonCounty, Alabama, seeking $9.5 million for costs allegedly incurred byKBM in its manufacturing efforts on behalf of Avocent.  Avocent has filed a motion to dismiss thecase.  We intend to vigorously defend ourpositions.

In April 2007, wefiled a complaint for declaratory judgment against Aten International Co., Ltd.in the United States District Court for the Northern District of Alabama.  We are seeking a declaratory judgment thattwo patents owned by Aten and asserted against Avocent are invalid and thatcertain of products alleged by Aten to infringe do not infringe these patents.

**Item1A.  Risk Factors.**

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

**Ouracquisition of LANDesk could disrupt our business, expose us to new risks, andadversely affect the results of our operations.**

We acquired LANDesk Group Limited (“LANDesk”) in thethird quarter of 2006.  This acquisitionrepresents a departure from our core products and technologies and our entryinto a new market (systems management software products and services) in whichwe have very limited experience.  Themarket for systems management products is highly competitive, and we expectcompetition in this market to continue and intensify.  Many of LANDesk’s competitors havesubstantially 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 LANDeskacquisition may divert the attention of management and other personnel from ourcore business operations, which may adversely affect our financial performancein one or more quarters.  LANDeskpresents us with new and different issues regarding revenue recognition,channel management, and collection of existing or new receivables, any of whichcould have a material adverse effect on our business, financial condition, andresults of operations.  We will need toexpand and improve our internal systems, including our management informationsystems, to monitor these items.  Inparticular, we have not yet completed our review and assessment of the internalsystems and controls over the LANDesk financial reporting and informationsystems, and we will also need to expand our operating, administrative, andfinancial systems and controls to include the LANDesk operations.  The acquisition

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and integration ofLANDesk and its software products and services will require significant time,expense, and resources and subject us to the acquisition risks detailed belowas we move into this new market.  Anyfailure to successfully integrate and operate LANDesk could thus materially andadversely affect our result of operations, cash flows, and financial position.

**We haveacquired, and expect to continue to acquire, technologies, and companies andthese acquisitions could disrupt our business or expose us to other risks.**

A key component ofour engineering and product development strategy and our future growth is theinvestment in or the acquisition of technologies and companies.  We acquired Equinox Systems Inc. in2001, 2C Computing, Inc. in 2002, Soronti, Inc. in 2003, and Crystal LinkTechnologies, OSA Technologies, Inc., Sonic Mobility, Inc. in 2004, andCyclades Corporation and LANDesk in 2006. We intend to continue to execute our strategy through the acquisition oftechnologies or companies or through investments in complementary companies,products, personnel, or technologies, and it is likely we will complete suchacquisitions or investments in the future. These acquisitions and investments involve many risks, including thefollowing:

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

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

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

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

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

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

·                                          Delaysor difficulties and the attendant expense in evaluating, coordinating, and combiningadministrative, manufacturing, research and development and other operations,facilities, and relationships with third parties in accordance with local lawsand other obligations  while maintainingadequate standards, controls and procedures, including financial controls andcontrols over information systems;

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

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

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

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

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

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

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

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**Intensecompetition from new and existing competitors or consolidation in the serverand systems management sectors could impair our ability to grow our business,to sustain our profitability, and to sell our products and technologies.**

The markets forour products and technologies are highly fragmented, rapidly evolving, andintensely competitive, and we expect this competition to continue andincrease.  Aggressive competition from both hardware and software productsand technologies could lengthen the customer evaluation process and result inprice reductions and loss of sales, which would materially harm ourbusiness.  Our business is becoming increasingly sensitive to theintroduction of new products and technologies (such as virtualization), pricechanges, and marketing efforts by numerous and varied competitors. Accordingly, our future success will be highly dependent upon our timelycompletion and introduction of new products and technologies and features atcompetitive prices and performance levels that address the evolving needs ofour customers.  We continue to experience aggressive price competition andincreased customer sensitivity to product prices, and pricing and marginpressures are likely to increase in the future.  Because of thiscompetition, we may have to continue to lower the prices of many of ourproducts and technologies or offer greater functionality within our products todeliver greater value to customers to stay competitive, while at the same timetrying to maintain or improve our revenue and gross margin.  Because ourbusiness model is based on providing innovative and high quality products, wemay spend a proportionately greater amount on research and development thansome of our competitors.  If we cannot proportionately decrease our coststructure on a timely basis in response to competitive price pressures, ourgross margin and profitability could be adversely affected.  In addition,if our pricing, functionality, and other factors are not sufficientlycompetitive, or if there is an adverse reaction to our product decisions, wemay lose market share in certain areas, which could adversely affect ourrevenue and prospects.

We compete forsales of switching systems and extension products with companies such asRaritan Computer, Rose Electronics, Minicom Advanced Systems, Aten, Belkin,Lantronix, and Digital V6.  These products also face competition fromsoftware providers (such as Microsoft, Computer Associates, Tivoli, Symantec,Novell, and BMC Software), who may be able to offer software productscompetitive with our hardware products at a much lower cost or even bundled forfree, and from server manufacturers (including our OEM customers), who are ableto offer their competitive technologies or products at the time of the server sale. These competitive software and hardware products address many of the problemsour switching systems and technologies, extension products, and remote accessproducts are designed to address.

We compete forsales of our systems management products with companies such as Microsoft,Computer Associates, BMC Software, Novell, and Symantec, many of whom havegreater financial, technical, and marketing resources, a larger customer base,a longer operating history, greater name recognition, and more establishedrelationships in the industry than we do, and may offer their own orthird-party competitive software products at a lower cost or bundled for freewith their other products.  Microsoft, in particular, has deliveredcompetitive systems management products and announced its intention to continueto develop competitive software.  IfMicrosoft is successful in delivering systems management software that iscompetitive with our products, our ability to grow our systems managementbusiness may be limited.

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

Certain of ourcustomers, such as Dell, Hewlett-Packard, IBM, Symantec, and Microsoft,presently offer competitive hardware and/or software products and technologiesthat address many of the problems our products and technologies address. These customers could decide to manufacture or enhance their own switching,IPMI or other embedded technologies, or systems management or securityproducts, or offer products or technologies supplied by competitors. Companies with hardware manufacturing experience or network management products,many of which are substantially larger than we are and have significantly morefinancial resources than we do, also offer products or technologies thatcompete with us.  Established companies with hardware manufacturing ornetwork management experience (such as Intel, Cisco, or EMC) could also offernew products, new technologies (such as virtualization), or new solutions thatcompete with, or reduce the demand for, our products and technologies.

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

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**Ourfailure to respond to rapid technological change or to introduce successful newproducts and technologies may result in reduced revenue or revenue growth.**

The process ofdeveloping or acquiring new products and technologies and enhancing existingproducts and technologies is complex, costly, and uncertain, and any failure byus to anticipate customers’ changing needs and emerging technological trendsaccurately could significantly harm our market share and results ofoperations.  We must make long-term investments, develop or obtainappropriate intellectual property, and commit significant resources beforeknowing whether our predictions will accurately reflect customer demand for ourproducts and services.  After we develop a product, we must thenaccurately forecast volumes and configurations that meet customer requirements,manufacture appropriate hardware volumes quickly and at low cost and developcost-effective software solutions, and train our sales force andresellers.  Any delay in the development, production, marketing of, ortraining for new products or technologies could result in our not being amongthe first to market, which could further harm our competitive position.

Sales ofswitching, extension, and remote access products and technologies arecharacterized by rapid technological advances, frequent new product andtechnological introductions and enhancements, and significant pricecompetition.  If we do not keep pace with these changes, we will losecustomers, and our business will be adversely affected.  The introductionof products or technologies incorporating superior alternatives such asvirtualization hardware and software, other switching software, the emergenceof new industry standards, or changes in pricing structure could render ourexisting products and technologies and those under development obsolete orunmarketable.  New technologies offered by us or our competitors couldcompete with our existing products at a lower price, which could reduce ourrevenue.

Our hardwareproducts combine components, such as printed circuit boards, connectors,semiconductors, memory, cable assemblies, power supplies and enclosures thatare manufactured by other companies and are generally available to competitorsand potential competitors.  Our software products combine software orcontent from third parties, such as open source software or technology,drivers, security, or anti-virus information, which may also be generallyavailable to our competitors and potential competitors.  Our futuresuccess will depend in large part upon continued innovative application ofcommercially available components and third party software or technology, andcontinued enhancements to our proprietary hardware, software, firmware, andother technologies, the expansion and enhancement of existing products andtechnologies, and our development and introduction of new products andtechnologies that address changing customer needs on a cost-effective andtimely basis.  If we fail to respond on a timely basis to technologicaldevelopments, changes in industry standards, customer requirements, competitiveproducts, product localization, or software innovations, we will losecustomers, and our business will be greatly harmed.  Similar results couldoccur if we experience significant delays in the development or introduction ofnew products or technologies.

Due to oursignificant reliance on OEM relationships, our hardware development efforts mayoften be focused on developing new products, technologies, or enhancements forOEM customers.  As a result, our OEM relationships may negatively affectour ability to develop new and enhanced products and technologies for ournon-OEM customers.  Moreover, these new products, technologies, orenhancements for OEM customers may not be available to, or readily marketableto, other customers without significant modification and delay.  Theexpansion, termination, or significant disruption of our relationship withcertain OEMs or other customers for whom we devote significant productdevelopment resources is likely to result in lost opportunities with respect tothe development of products, technologies, or enhancements for our othercustomers.

**We havelimited protection of proprietary rights and face risks of third partyinfringements.**

Our future successdepends in part upon our ability to protect proprietary rights in our productsand technologies.  We seek to protect our intellectual property rights byinvoking the benefits of the patent, trademark, copyright, trade secret, andunfair competition laws of the United States and other countries and protectionsprovided by confidentiality and nondisclosure agreements and other legalagreements.  These laws and practices, however, afford only limitedprotection.  There can be no assurance that the steps we have taken toprotect our intellectual property rights, or that the steps we take in thefuture, will be adequate to prevent or detect misappropriation of ourintellectual property or technologies or that our competitors will notindependently develop proprietary or other technologies that are substantiallyequivalent or superior to our products or technologies.  In addition, our proprietary information maybe misused or improperly disclosed by third parties entrusted with thisinformation.

The U.S. Patentand Trademark Office has issued several patents to us for various aspects ofour products.  We have various corresponding patent applications pendingunder the provisions of the Patent Cooperation Treaty, which permits the filingof corresponding foreign patent applications in numerous foreign countries withina limited time period.  We also have other United States and foreignpatent applications pending.  There can be no assurance that anyadditional patents will be issued from any of those pending applications orthat any patents will be issued in any additional countries where our productscan be sold.  Claims allowed in our patents or in any pending patentapplications may not be of sufficient scope or strength for, or providemeaningful protection or

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any commercial advantageto us or such claims may not be upheld if challenged.  Also, competitorsmay develop their own intellectual property or technologies, obtain their ownpatents, or challenge the validity of, or be able to design around, ourpatents.  The laws of certain foreign countries in which our products areor may be developed, manufactured, or sold (particularly certain countries inAsia) may not protect our products or intellectual property rights to the sameextent as do the laws of the United States and thus increase the likelihood ofpiracy of our technologies and products.

In January 2007, we filed a complaint for patent infringement in theUnited States District Court for the Western District of Washington againstAten Technology, Inc., Aten International Co., Ltd, Belkin Corporation, RoseElectronics and its general partners, and Trippe Manufacturing Company.  In April 2007, we filed a complaintfor declaratory judgment against Aten International Co., Ltd. in the UnitedStates District Court for the Northern District of Alabama seeking a declaratoryjudgment that two patents owned by Aten and asserted against us are invalid andthat certain products alleged by Aten to infringe do not infringe thesepatents.

We may initiateclaims or litigation against other third parties for infringement ofproprietary rights or to establish the validity of proprietary rights. Similarly, our competitors or other third parties may initiate claims orlitigation against us alleging infringement of their proprietary rights orimproper use of their intellectual property, and from time to time, thirdparties notify us that our products may infringe their intellectual propertyrights, which regardless of merit, requires our time and resources to evaluateand respond.  Existing litigation, andany other litigation relating to intellectual property to which we become aparty, is subject to numerous risks and uncertainties, including the risk ofcounterclaims or other litigation against us, and we may not be successful inany such litigation.  Litigation is expensive, and the existing litigationor any other litigation by or against us could result in significant additionalexpense, divert the efforts of technical and management personnel, whether ornot such litigation results in a favorable determination, harm our relationshipswith existing customers, and deter future customers from purchasing orlicensing our products.  In the event of an adverse result in any suchlitigation, we could be required to pay substantial damages, suspend or ceasethe development, manufacture, use, marketing, and sale of any infringingproducts, expend significant resources to redesign products or developnon-infringing technology, discontinue the use of certain processes, or obtainlicenses to the infringing technology.  There can be no assurance that wewould be successful in such development or that such licenses would beavailable on reasonable terms, or at all, and any such development or licensecould require us to expend substantial time and other resources.  In theevent that any third party makes a successful claim against us, or ourcustomers, and a license is not made available on commercially reasonableterms, our business, financial condition, and results of operations could beadversely affected.  In addition, anydispute involving our intellectual property could result in our customers,distributors, or resellers becoming involved in the litigation, which couldtrigger indemnification obligations in certain of our sales, license, orservice agreements.

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

**We arelikely to experience fluctuations in operating results.**

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

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

·                                          Thetiming of shipments;

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

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

·                                          Changesin demand for our products;

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·                                          Fluctuationsor a decline in sales of servers due to changes in technology (such asvirtualization), economic conditions, or capital spending levels;

·                                          Changesin pricing policies or price reductions;

·                                          Changesin renewal rates for software upgrade protection or maintenance;

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

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

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

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

·                                          Fluctuationsin foreign currency exchange rates and interest rates;

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

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

Our operatingresults will continue to be affected by seasonal trends, by general conditionsin the IT market, and by general economic conditions.  We haveexperienced, and we expect to continue to experience, some degree ofseasonality due to customer buying cycles.  We believe that the third andfourth quarters will generally have higher net sales levels due to customerbudgeting and procurement cycles, which may depress net sales in otherquarters.  In addition, European sales are often weaker during the summermonths.  In the past, revenue in our fourth quarter of each year hastypically been higher than revenue in prior quarters for the year, and wetypically see a sequential decline in revenue from the fourth quarter of a yearto the first quarter of the following year.  While it is difficult topredict revenue in any quarter, we expect that this pattern will continue inthe future.  Many of the factors that create and affect seasonal trendsare beyond our control.

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

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

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

**Ourgross margins are expected to vary and may decline.**

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

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

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

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

·                                          Rawmaterials, freight, and labor costs;

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

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

We expect that ourgross margins may vary and may decline in the future primarily due to thefactors listed above and to increased competition and the introduction of newproducts and technologies that may affect product prices and demand for ourproducts.

**Asubstantial portion of our business consists of sales to a limited number ofOEM customers that are not obligated to continue doing business with us, andthese sales vary considerably from quarter to quarter.**

A substantialportion of our sales is concentrated among a limited number of OEMcustomers.  Sales to these OEMs represented approximately 40% of netsales in 2006, 48% of net sales in 2005, and 45% of net sales in 2004. Sales to Hewlett-Packard represented approximately 14% of our net sales in2006, 20% of our net sales in 2005, and 23% of our net sales in 2004. Sales to Dell represent approximately 14% of net sales in 2006, 15% of our netsales in 2005, and 12% of our net sales in 2004.

We haveexperienced, and we expect to continue to experience, period-to-periodvariability in sales to these OEM customers.  Any cancellation,rescheduling, or reduction of orders by OEM customers in the future couldmaterially adversely affect our operating results.  Although our OEMcustomers typically place orders for products up to several months prior toscheduled shipment dates, these orders are subject to cancellation.

Our OEM businessis subject to many risks, including:

·                                          Contracttermination or reduced or delayed orders;

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

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

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

·                                          Changesin corporate ownership, financial condition, business direction, salescompensation related to our products, or product mix by the OEMs: and

·                                          Fluctuationsor a decline in sales of servers due to changes in technology (such asvirtualization), economic conditions, or capital spending levels.

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

The loss of one ormore large OEM customers would materially harm our business.  While wehave contracts with some of our existing OEM customers, none of our OEMcustomers is obligated to purchase products from us except pursuant to bindingpurchase orders.  Consequently, any OEM customer could cease doingbusiness with us at any time.  Our dependence upon a few

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OEMs also results ina significant concentration of credit risk, thus a substantial portion of ourtrade receivables outstanding from time to time may be concentrated among alimited number of customers.  In addition, OEM customers have longerpayment cycles that increase the likelihood of aged or problem accounts receivable.

We use multiplewarehouses for many of our OEM customers to fulfill their hardware orders undera just-in-time inventory management system, which requires us to maintainsufficient inventory levels of our hardware products at each of thesewarehouses to satisfy our OEMs anticipated customer demand, and we generallyrecognize revenue only when these OEM customers take possession of our hardwareproducts.  We are required to plan production, order components, andundertake our manufacturing activities prior to the time that these ordersbecome firm or the products are accepted.  In addition, our OEM customershave requested, and are likely to continue to request from time to time, thatwe delay shipment dates or cancel orders for hardware products that are subjectto firm orders.  As a result, at any time we may be holding a significantamount of OEM-branded hardware products in inventory, and our sales toOEMs for future quarters are difficult to predict.  The inability toaccurately predict the timing and volume of hardware orders for our OEMcustomers during any given quarter could adversely affect operating results forthat quarter and, potentially, for future quarters.  If we underestimatesales, we may not be able to fill orders on a timely basis.  This couldcause customer dissatisfaction and loss of future business.  If weoverestimate sales, we may experience increased costs from inventory storage,waste, and obsolescence.

**Asubstantial portion of our business consists of sales to a limited number ofresellers and distributors that are not obligated to continue doing businesswith us, and these sales vary considerably from quarter to quarter.**

Asubstantial portion of our sales consists of sales of our branded products to alimited number of resellers and distributors.  Sales to resellers anddistributors represented approximately 56% of net sales in 2006, 48% ofnet sales in 2005, and 52% of net sales in 2004.  The loss of significantrevenue opportunities with these resellers and distributors could negativelyimpact our results of operations.  Inaddition, many of these customers also have or distribute competingproducts.  If resellers and distributorselect to increase the marketing of competing products or reduced marketing ofour products, our ability to grow our business will be negatively impacted andwill impair one of our substantial revenue sources.

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

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

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

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

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

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

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

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

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

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

·                                          Difficultiesin replacing any lost or terminated distributors or resellers;

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

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

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

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

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

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

In addition,distributors and resellers of our hardware products often have rights ofreturn, and in the future, these returns from our existing or any newdistributors and resellers may have a material adverse effect on our business,financial condition, and results of operations.  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 similarprovisions.  Distributors and resellers are not obligated to purchaseproducts from us and frequently offer products from several differentcompanies, including competitors’ products, and distributors and resellers maygive higher priority to the sale of our competitors’ products.  Areduction in sales efforts or efficiency by our distributors or resellers couldlead to a reduction in our sales and could materially adversely affect ourbusiness, financial condition, and results of operations.

**We aredependent upon third-party suppliers and outsourced manufacturing for ourhardware products.  Disruption of our access to these supplies andservices, or problems with the quality of supplies or services, could preventus from filling customer orders and harm our business.**

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

We haveoccasionally experienced, and we may in the future experience, shortages ordelays in delivery of components.  Although alternate suppliers areavailable for most of the components and services needed to produce ourproducts, the number of suppliers of some components is limited, and qualifyinga replacement supplier and receiving components from alternate suppliers couldtake several months.

We have limitedability to control quality issues (particularly with respect to faultycomponents manufactured by third parties), and we depend upon suppliers todeliver components that are free from defects, competitive in functionality andcost, and in compliance with specifications and delivery schedules. Disruption in supply, a significant increase in the cost of one or morecomponents, failure of a third party supplier to remain competitive infunctionality or price, or the failure of a supplier to comply with

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any of our procurementneeds could delay or interrupt our ability to manufacture and deliver ourproducts to customers on a timely basis, thereby delaying our revenuerecognition and adversely affecting our business, financial condition, andresults of operations.

We rely on thirdparty manufacturers for subassembly of products and for final assembly, qualityassurance, and testing of some of our products.  These outsourcing arrangementsand any future outsourcing arrangements involve numerous risks, including theeconomic and financial viability of these manufacturers, reduced control overproduct quality, delivery schedules, manufacturing yields, and costs. Moreover, although arrangements with such manufacturers may contain provisionsfor warranty obligations on the part of such manufacturers, we are primarilyresponsible to our customers for warranty obligations.

**Ourhardware products are subject to warranty claims and returns.  Increasedwarranty claims or returns could harm our business.**

We typically offera 30-day unconditional money-back guarantee on our appliance products sold inNorth America.  We also offer warranties for parts and service on all ourhardware products, ranging from one to three years (and, in the case of some ofour Equinox branded products, five years).  Although our historical returnexperience has not been significant, our returns may increase in thefuture.  An increase in returns would have an adverse effect on our salesand could negatively affect our financial results.

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

In the future, wemay, as a result of competitive pressures or customer demands, change ourwarranty policies or our warranty terms to provide coverage that is greater inscope and duration than the coverage we currently offer.  If we were toincrease our warranty coverage, our risk of warranty claims, and therefore ourwarranty expense and reserves, would likely increase.

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

Continued growthof our sales is likely to be accompanied by increasing demands on customerservice operations.  As a result of our commitment to a high level ofcustomer service, we will need to invest significant resources in themaintenance and improvement of our customer service resources.  Anyfailure to maintain adequate customer service could cause customerdissatisfaction, result in reduced sales of products and, accordingly,materially adversely affect our business, financial condition, and results ofoperations.

**If weare unable to successfully develop our international distribution and reseller networksand international sales efforts, results of operations may suffer.**

We are working todevelop, integrate, and expand our international distribution and resellernetworks in an effort to increase international sales of switching, extension,remote access, systems management and security software, and otherproducts.  We may not be successful in developing or expanding theinternational distribution and reseller network or in marketing and sellingproducts in foreign markets, particularly Asia.  If the revenue generatedby our international sales is not adequate to recover the expense ofestablishing, expanding, and maintaining an international distribution andreseller network, our business, financial condition, and results of operationscould be materially adversely affected.  If international sales become amore 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 distributors and 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,including import and export requirements;

·                                          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;

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·                                          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.

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

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

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

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

·                                          Longeraccounts receivable cycles and financial instability among customers;

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

·                                          Locallabor conditions and other regulations;

·                                          Differingtechnology standards or customer requirements;

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

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

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

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

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

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

·                                          Restrictionsagainst repatriation of earnings from our international operations;

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

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

·                                          Increasedfinancial accounting and reporting burdens and complexities; and

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·                                          Theneed to localize our products.

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

Continued orincreased international political instability, evidenced by the threat oroccurrence of terrorist attacks, enhanced national security measures in theUnited States, sustained military action or other conflicts, or strainedinternational relations may impair our ability to do business, increase ourcosts and adversely affect our stock price. Increased international instability may negatively impact our ability toobtain adequate insurance at reasonable rates or require us to take extrasecurity precautions for our domestic and international operations.

**Fluctuationsin the value of foreign currencies could result in currency exchange losses.**

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

**Thesales cycle for our software products is unpredictable, making it difficult toforecast operating results for any given period.**

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

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

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

·                                          Concernsabout the future or performance of our company; and

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

For largeopportunities, especially for enterprise-wide sales, the sales cycle is oftensignificantly longer than our average sales cycle.  In addition, these large opportunities aremore difficult to forecast, and if we do not correctly forecast the timing in agiven period, the amount of revenue we recognize in a period could be lowerthan we expect, which could negatively affect our operating results for thethen current period and future periods over which revenue would have beenrecognized.  In addition, the terms andconditions of the legal agreements for these large opportunities are oftenbased on our customers’ purchase agreements and may contain terms that are generallyless favorable to us than our standard terms and conditions. As a result,revenue recognition may be delayed.

**Oursoftware revenue is dependent on sales to existing customers or the renewal ofannual software upgrade protection or maintenance services by existingcustomers.**

Our LANDeskDivision has historically derived, and plans to continue to derive, asignificant portion of our total software revenue from existing customers whopurchase additional products or annual maintenance or upgrade protection.  We depend on our installed base of softwarecustomers for future revenue from the purchase of annual software upgradeprotection or maintenance services.  Aswe introduce new software products, our current customers may not require ordesire the functionality of our new products and may choose not to licensethese products or renew their agreements for maintenance or upgradeprotection.  If our customers do notpurchase additional products or increased numbers of products already in use,or renew annual software upgrade protection or maintenance services, ourability to increase or maintain revenue levels could be limited to only newcustomers.

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

**Oursoftware products are designed with interoperability or compatibility with manythird-party platforms, systems, and applications, the absence of which may harmour business.**

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

**Oursoftware products include third-party content or code upon which we rely forthe interoperability, integration, development, or updates of our products, anddisruption of our access to such code or content could delay product releases,inhibit our compatibility with third party products, and harm our business.**

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

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

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

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

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

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

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

Our softwareproducts are generally large and intricate programs.  As a result, our current software products,updates, upgrades or future products may contain errors, failures, or “bugs,”some of which may not become known until after the product has

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been released by us foruse by customers.  While we routinelytest our products for such errors and identify and correct bugs through ourcustomer support group, these problems are inevitable.  Any significant errors may result in, amongother things, loss of, or delay in, the market acceptance or our products, lostrevenue and sales of our products, reallocation of, or increases in,development and customer support resources, impairment to our reputation, lossof future renewal or maintenance revenue, and increased service and warrantycosts.  Errors could also result insignificant delays in the release of updates, upgrades, or new products whilesuch errors are corrected.  Moreover,because our products primarily support other systems and applications, anysoftware errors or bugs in these other systems or applications may affect theperformance of our software, and it may be difficult or impossible to determinewhere the errors reside.  As a result,product errors, failures, or bugs could result in significant harm to ourbusiness and have a material adverse effect on our results of operations.

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

**Use ofopen source software or technology in our products may reduce our ability tocontrol the quality and support for products and may result in damage to ouroperating results.**

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

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

·                                          Requiringthat we make available the source code for any modifications or derivativeworks we make to or from the open source software, and that we license orcontribute such modifications or derivative works under the terms of aparticular open source license or other license granting third parties certainrights of further use;

·                                          Ourproprietary software could be combined with open source software in such a waythat we would be required to release the source code of our proprietarysoftware; and

·                                          Thelack of any warranty, maintenance, or support for most open source software ortechnology.

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

**Executiveofficers and other key personnel may depart, which could adversely affect ourresults of operations and harm our ability 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 and other keyemployees.  The loss of services of key personnel, including those whorecently joined us a result of the Cyclades and LANDesk acquisitions, couldhave a material adverse effect on our business, financial condition, andresults of operations.  We have attempted to mitigate these risks byoffering key Cyclades and LANDesk employees retention bonuses (payable only ifthey continue employment with us for specified periods) and equity awards, butthere is the risk that we could nevertheless lose key management, sales, andtechnical employees.

We havehistorically used stock options and are currently using restricted stock unitsas a key component in our executive and employee compensation programs in orderto align employees’ interests with the interests of our stockholders, encourageemployee retention, and provide competitive compensation packages.  Manyof our employee stock options are fully vested.  This could affect ourability to retain present employees.  In addition, we are now required torecord a charge to earnings for employee stock option grants and other equityincentives.  Moreover, applicable stock exchange listing standardsrelating to obtaining stockholder approval of

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equity compensation planscould make it more difficult or expensive for us to grant options to employeesin the future.  As a result, we may incur increased compensation costs,change our equity compensation strategy, or find it difficult to attract,retain, and motivate employees, any of which could materially adversely affectour business.

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

**Difficultiesencountered during changing economic conditions could adversely affect ourresults of operations.**

For the lastseveral years, we have experienced rapid revenue and customer growth andexpansion in the number of employees, product offerings, customers, operatinglocations, and suppliers.  In addition, we have acquired a number ofcompanies in the same time period.  This growth and these acquisitionshave resulted in increased responsibilities and placed significant strain onour managerial, operational, and financial resources and resulted in new andincreased responsibilities for management 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 that we must continue to developgreater engineering, financial, marketing, sales, and customer servicecapabilities in order to develop new products and technologies, secure new customers,and effectively serve the evolving needs of present and future customers. We may not be successful in strengthening these capabilities.  Withoutadequate management, engineering, financial, product development, marketing,sales, and customer service capabilities, our ability to effectively manageduring changing economic conditions, expand and enhance our product lines,further penetrate existing markets, and develop new markets will besignificantly limited.  If we are unable to effectively manage duringchanging economic conditions, our business, financial condition, and results ofoperations could be materially adversely affected.

Because ourbusiness and operating results depend to a significant extent on the generalconditions in the server market, any adverse change in the server market due toadverse economic conditions, declining capital spending levels, or otherfactors could have a material adverse effect on our business, financialcondition, and results of operations.  In addition, we continue to seeindustry-wide initiatives by OEMs and by distributors and resellers of ourhardware products to reduce their inventories and to shorten their lead times,thereby reducing early commitments to firm orders by our major OEM and ourdistributor and reseller customers.

**Our line of credit couldadversely affect us and our operations.**

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

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

·              Increasing ourvulnerability 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;

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

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

The lineof credit contains affirmative and negative covenants, including limitations onour ability to (i) make distributions, investments, and other paymentsunless we satisfy certain financial tests or other criteria, (ii) incuradditional 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.

Our ability tocomply with these provisions of our line of credit may be affected by changesin the economic or business conditions or other events beyond our control.  If we do not comply with these covenants andrestrictions, we could be in default under our line of credit, and our debt,together with accrued interest, could then be declared immediately due andpayable.  There can be no assurance thatwe will be able to obtain sufficient funds to enable us to repay or refinanceour debt obligations on commercially reasonable terms or at all.  We also face interest rate risk on our bankline of credit which currently bears interest at a variable rate of LIBOR plus87.5 basis points.  We have partiallyhedged this exposure to interest rate risk with an interest rate swap, whichhas a notional amount of $125 million, through a well established financialinstitution.

**Unanticipatedchanges in our tax rates or exposure to additional income tax liabilities couldaffect our profitability.**

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

**Failureto maintain adequate internal systems and effective internal controls over ourfinancial reporting and information systems could result in our management andauditors being unable to certify the effectiveness of our internal controlsover financial reporting and information systems, which could harm our businessreputation and cause our stock price to decline.**

Section 404 of theSarbanes-Oxley Act of 2002 requires that we implement and maintain adequateinternal systems and effective internal controls over financial reporting and informationsystems.  We have not yet completed ourreview and assessment of the internal systems and controls over the LANDeskfinancial reporting and information systems, and we have until December 31,2007 to do so.  The absence of suchcontrols could have a material adverse effect on our business, financialcondition, and results of operations.  Inaddition, correction of any “significant deficiencies” or “material weaknesses”(as defined under PCAOB guidelines) could require additional remedial measuresincluding hiring additional personnel which could be costly andtime-consuming.  If a significantdeficiency or material weakness exists as of a future period year-end(including a material weakness identified prior to year-end for which there isan insufficient period of time to evaluate and confirm the effectiveness of thecorrections or related new procedures), our management and our auditors will beunable to report favorably as to the effectiveness of our control overfinancial reporting or information systems. This could result in a loss of investor confidence in the accuracy andcompleteness of our financial reports and our management, which could result ina decline of our stock price, damage to our business reputation, and potentiallitigation.

**Changesin accounting standards or the interpretation of accounting standards,including changes related to revenue recognition, could cause significantimpact on our revenue or earnings.**

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

**Unforeseenenvironmental costs could negatively affect our future earnings.**

Some of ouroperations use substances regulated under various federal, state, andinternational laws governing the environment, including those governing thedischarge of pollutants into the air and water, the management and disposal ofhazardous substances and wastes, and the cleanup of contaminated sites. Many of our products are subject to various federal, state, and internationallaws governing chemical substances in products, including those regulating themanufacture and distribution of chemical substances and those restricting thepresence of certain substances in electronics products.  We could incursubstantial costs, including

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cleanup costs, fines,civil or criminal sanctions, third-party property damage, or personal injuryclaims if we were to violate or become liable under environmental laws or ifour products become non-compliant with environmental 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.  The ultimate costs under environmental laws and the timing ofthese costs are difficult to predict, and liability under some environmentallaws relating to contaminated sites can be imposed retroactively and on a jointand several basis.

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

**Provisionsin our charter documents and in Delaware law may discourage potentialacquisition bids for us and may prevent changes in management that stockholdersmay favor.**

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

In addition,Delaware law may inhibit potential acquisition bids for us.  Delaware lawprevents certain Delaware corporations, including Avocent, from engaging, undercertain circumstances, in a business combination with any interestedstockholder for three years following the date that such stockholder became aninterested stockholder.

**Item2.  Unregistered Sales of Equity Securities and Use of Proceeds.**

In 2004 our Boardof Directors approved a stock repurchase program whereby we may purchase sharesof our common stock.  Our Board hasapproved a total of 12.0 million shares to be repurchased under this program,including 2.0 million additional shares approved by our Board in February2007.  The plan has no expirationdate.  Details of purchases made duringthe quarter ended March 30, 2007 are as follows:
| **Period:**                                | ** ** | **Total Number of  Shares Purchased  During the Period** | ** ** | **Average Price Paid  Per Share for Period  Presented** | ** ** | **Total Cumulative  Number of  Shares Purchased as  Part of Publicly  Announced Plan** | ** ** | **Maximum  Number of  Shares  Remaining to  Purchase Under  the  Plan** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
|                                       |       |                                                                              |       |                                                                             |       |                                                                                                                      |       |                                                                                   |       |
| January 1, 2007  — January 26, 2007   |       | —                                                                            |       | $                                                                                | —     |                                                                                                                      | 9,813,733  |                                                                                   | 186,267    |   |
| January 27, 2007  — February 23, 2007 |       | 186,267                                                                           |       | $                                                                                | 35.03      |                                                                                                                      | 10,000,000 |                                                                                   | 2,000,000  |   |
| February 24,  2007 — March 30, 2007   |       | 300,000                                                                           |       | $                                                                                | 29.71      |                                                                                                                      | 10,300,000 |                                                                                   | 1,700,000  |   |
| Quarter ended  March 30, 2007              |       | 486,267                                                                           |       | $                                                                                | 31.75      |                                                                                                                      |       |                                                                                   |       |   |

 

Approximately 96,000 shares were withheld as payment for employeepayroll withholding taxes at the release of vested

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restrictedstock units in the first quarter of 2007 (*seenote 3 to the financial statements*). The 96,000 shares were considered to be treasury shares; however, thesetreasury shares were immediately retired and are not considered in the tableabove.

**Item6.  Exhibits.**

(a) Exhibits
|        | 31.1   | Sarbanes-Oxley Act of 2002 Section 302(a)  Certification of the Chief Executive Officer                                                                                                  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                     |
|   | 31.2   | Sarbanes-Oxley Act of 2002 Section 302(a)  Certification of the Chief Financial Officer                                                                                                  |
|   |   |                                                                                                                                                                                     |
|   | 32.1   | Certification of the Chief Executive Officer and the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                                                     |
|   | 99.10  | Summary of Avocent Corporation 2007 Executive Bonus  Program.                                                                                                                            |

 

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

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### **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:     May 7, 2007 | /s/ Edward H. Blankenship                                       |   |
|   |                                           | Edward H. Blankenship                                           |
|   |                                           | Senior Vice President of Finance, Chief Financial               |
|   |                                           | Officer, and Assistant Secretary (Principal  Financial Officer) |

 

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