** **

**U.S.SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

# **FORM 10-Q**

# ** **

| **(Mark One)**                                                                                                                                                    | ** ** | ** **                                                                                    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                              |       |                                                                                          |
| **x**                                                                                                                                                             | ** ** | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|                                                                                                                                                              |       |                                                                                          |
| **For the quarterly period ended  September 28, 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**                                                                                                                             |

 

**AVOCENT CORPORATION**

(Exact Name of Registrantas Specified in Its Charter)

 

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

 

**256-430-4000**

(Registrant’s TelephoneNumber, Including Area Code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934, as amended, during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2)has been subject to such filing requirements for the past 90 days.

 

xYes o No

 

Indicate by check mark whether the Registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. (Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Securities Exchange Acto.)

 
| Large Accelerated filer x |   | Accelerated Filer o |   | Non- Accelerated filer o |
|---------------------------|--------|---------------------|--------|--------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act): Yes  o  No  x

 

As of November 1, 2007, the number ofoutstanding shares of the Registrant’s Common Stock was 49,981,297.

 

 

----

 

**AVOCENT CORPORATION**

**FORM 10-Q**

**September 28, 2007**

 

**INDEX**

 
| Part I    | Financial  Information |                                                                                                                  |
|-----------|------------------------|-----------------------------------------------------------------------------------------------------------------------|
|      |                   |                                                                                                                  |   |
|      | Item 1.                | Financial Statements (unaudited)                                                                                      |   |
|      |                   |                                                                                                                  |   |
|      |                   | Consolidated  Statements of Income for the Three and Nine Months Ended September 28, 2007  and September 29, 2006     |   |
|      |                   | Consolidated  Balance Sheets at September 28, 2007 and December 31, 2006                                              |   |
|      |                   | Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended September 28,  2007 and September 29, 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 4.                | Submission of  Matters to a Vote of Security Holders                                                                  |   |
|      |                   |                                                                                                                  |   |
|      | Item  6.               | Exhibits                                                                                                              |   |
|      |                   |                                                                                                                  |   |
| Signature |                   |                                                                                                                  |

 

2

----

 

**PART I—FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**AVOCENT CORPORATION**

**CONSOLIDATEDSTATEMENTS OF INCOME**

(Unaudited, in thousands,except per share data)

 
| ** **                                                                                                                                                                                                                   | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                   | ** ** | **Sept. 28,**                                 | ** ** | **Sept. 29,**                                | ** ** | **Sept. 28,** | ** ** | **Sept. 29,** | ** ** |
| ** **                                                                                                                                                                                                                   | ** ** | **2007**                                           | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales:                                                                                                                                                                                                                   | * *   | * *                                           | * *   | * *                                          | * *   | * * | * * | * * | * * |
| Products and  services                                                                                                                                                                                                       |       | $                                                  | 136,492    |                                              | $          | 124,465 |   | $ | 375,475 |   | $ | 324,359 |   |
| Licenses and  royalties                                                                                                                                                                                                      |       | 25,580                                             |       | 17,349                                            |       | 69,973 |   | 29,972 |   |
| Total net sales                                                                                                                                                                                                              |       | 162,072                                            |       | 141,814                                           |       | 445,448 |   | 354,331 |   |
|                                                                                                                                                                                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Cost of sales:                                                                                                                                                                                                               |       |                                               |       |                                              |       |   |   |   |   |
| Products and  services                                                                                                                                                                                                       |       | 55,151                                             |       | 51,813                                            |       | 156,023 |   | 136,963 |   |
| Licenses and  royalties                                                                                                                                                                                                      |       | 564                                                |       | 116                                               |       | 1,521 |   | 116 |   |
| Amortization of  intangibles related to licenses and royalties                                                                                                                                                               |       | 2,767                                              |       | 894                                               |       | 8,217 |   | 894 |   |
| Total cost of sales (including stock compensation of $373 and  $853 for the three and nine months ended Sept. 28, 2007; $289 and $502 for  the three and nine months ended Sept. 29, 2006)                              |       | 58,482                                             |       | 52,823                                            |       | 165,761 |   | 137,973 |   |
|                                                                                                                                                                                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Gross profit                                                                                                                                                                                                                 |       | 103,590                                            |       | 88,991                                            |       | 279,687 |   | 216,358 |   |
|                                                                                                                                                                                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Research and development expenses (including stock compensation  of $1,916 and $4,422 for the three and nine months ended Sept. 28, 2007;  $1,109 and $2,172 for the three and nine months ended Sept. 29, 2006)        |       | 22,751                                             |       | 16,004                                            |       | 64,821 |   | 43,535 |   |
| Acquired  in-process research and development expense                                                                                                                                                                        |       | —                                             |       | 18,600                                            |       | — |   | 20,700 |   |
| Selling, general and administrative expenses (including stock  compensation of $4,021 and $9,799 for the three and nine months ended Sept.  28, 2007; $3,197 and $5,484 for the three and nine months ended Sept. 29,  2006) |       | 52,820                                             |       | 38,314                                            |       | 153,922 |   | 94,414 |   |
| Cyclades  integration expenses                                                                                                                                                                                               |       | —                                             |       | 1,304                                             |       | — |   | 3,573 |   |
| Amortization of  intangible assets                                                                                                                                                                                           |       | 7,581                                              |       | 6,589                                             |       | 24,124 |   | 13,841 |   |
| Total operating  expenses                                                                                                                                                                                                    |       | 83,152                                             |       | 80,811                                            |       | 242,867 |   | 176,063 |   |
|                                                                                                                                                                                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Income from  operations                                                                                                                                                                                                      |       | 20,438                                             |       | 8,180                                             |       | 36,820 |   | 40,295 |   |
|                                                                                                                                                                                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Net investment  income                                                                                                                                                                                                       |       | 1,074                                              |       | 1,615                                             |       | 2,857 |   | 6,811 |   |
| Net realized  investment losses                                                                                                                                                                                              |       | —                                             |       | (199                                              | )          | — |   | (226 | ) |
| Interest expense                                                                                                                                                                                                             |       | (1,853                                             | )          | (1,011                                            | )          | (6,355 | ) | (1,157 | ) |
| Other income  (expense), net                                                                                                                                                                                                 |       | 207                                                |       | (133                                              | )          | (95 | ) | (361 | ) |
|                                                                                                                                                                                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Income before  income taxes                                                                                                                                                                                                  |       | 19,866                                             |       | 8,452                                             |       | 33,227 |   | 45,362 |   |
| Provision for  income taxes                                                                                                                                                                                                  |       | 3,749                                              |       | 5,902                                             |       | 1,364 |   | 16,297 |   |
|                                                                                                                                                                                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Net income                                                                                                                                                                                                                   |       | $                                                  | 16,117     |                                              | $          | 2,550 |   | $ | 31,863 |   | $ | 29,065 |   |
|                                                                                                                                                                                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Earnings per  share:                                                                                                                                                                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Basic                                                                                                                                                                                                                        |       | $                                                  | 0.32       |                                              | $          | 0.06 |   | $ | 0.63 |   | $ | 0.61 |   |
| Diluted                                                                                                                                                                                                                      |       | $                                                  | 0.32       |                                              | $          | 0.05 |   | $ | 0.62 |   | $ | 0.60 |   |
| Weighted average  shares used in computing earnings per share:                                                                                                                                                               |       |                                               |       |                                              |       |   |   |   |   |
| Basic                                                                                                                                                                                                                        |       | 50,310                                             |       | 46,289                                            |       | 50,506 |   | 47,770 |   |
| Diluted                                                                                                                                                                                                                      |       | 51,149                                             |       | 47,164                                            |       | 51,399 |   | 48,575 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

3

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**AvocentCorporation**

**Consolidated Balance Sheets**

**September28, 2007 and December 31, 2006**

**(Unaudited,in thousands, except per share data)**

 
| ** **                                                                                                                                                                                                     | ** ** | **Sept. 28,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                     | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                     |       | $                        | 96,080     |                        | $          | 81,301 |   |
| Investments  maturing within one year                                                                                                                                                                          |       | 25,214                   |       | 25,864                      |       |
| Accounts  receivable, less allowance for doubtful accounts of $2,136 and $2,449 at  Sept. 28, 2007 and December 31, 2006, respectively                                                                    |       | 115,622                  |       | 126,471                     |       |
| Other  receivables                                                                                                                                                                                             |       | 11,667                   |       | 13,365                      |       |
| Inventories                                                                                                                                                                                                    |       | 30,961                   |       | 41,765                      |       |
| Other current  assets                                                                                                                                                                                          |       | 7,130                    |       | 3,904                       |       |
| Deferred tax  assets, net                                                                                                                                                                                      |       | 11,291                   |       | 7,355                       |       |
| Total current  assets                                                                                                                                                                                          |       | 297,965                  |       | 300,025                     |       |
|                                                                                                                                                                                                           |       |                     |       |                        |       |
| Investments                                                                                                                                                                                                    |       | —                   |       | 987                         |       |
| Property and  equipment, net                                                                                                                                                                                   |       | 37,745                   |       | 38,004                      |       |
| Goodwill                                                                                                                                                                                                       |       | 595,739                  |       | 607,488                     |       |
| Other intangible  assets, net                                                                                                                                                                                  |       | 178,818                  |       | 209,674                     |       |
| Other assets                                                                                                                                                                                                   |       | 2,777                    |       | 2,676                       |       |
| Total assets                                                                                                                                                                                                   |       | $                        | 1,113,044  |                        | $          | 1,158,854 |   |
|                                                                                                                                                                                                           |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                  | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                                                          |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                                                               |       | $                        | 23,100     |                        | $          | 16,260 |   |
| Accrued wages  and commissions                                                                                                                                                                                 |       | 19,651                   |       | 25,511                      |       |
| Accrued  liabilities                                                                                                                                                                                           |       | 33,087                   |       | 29,754                      |       |
| Income taxes  payable                                                                                                                                                                                          |       | 20,039                   |       | 17,364                      |       |
| Deferred  revenue, current                                                                                                                                                                                     |       | 48,810                   |       | 44,453                      |       |
| Total current  liabilities                                                                                                                                                                                     |       | 144,687                  |       | 133,342                     |       |
|                                                                                                                                                                                                           |       |                     |       |                        |       |
| Unsecured bank  line of credit                                                                                                                                                                                 |       | 95,000                   |       | 150,000                     |       |
| Deferred tax  liabilities, net                                                                                                                                                                                 |       | 6,674                    |       | 30,377                      |       |
| Deferred  revenue, non-current                                                                                                                                                                                 |       | 9,797                    |       | 10,070                      |       |
| Other  non-current liabilities                                                                                                                                                                                 |       | 875                      |       | 1,222                       |       |
| Total  liabilities                                                                                                                                                                                             |       | 257,033                  |       | 325,011                     |       |
|                                                                                                                                                                                                           |       |                     |       |                        |       |
| Commitments and  contingencies *(see Notes 10 and 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; Sept. 28, 2007—53,855  shares issued and 50,228 outstanding; December 31, 2006 — 53,382 shares  issued and 50,642 outstanding; |       | 54                       |       | 53                          |       |
| Additional  paid-in capital                                                                                                                                                                                    |       | 1,203,107                |       | 1,185,114                   |       |
| Accumulated  other comprehensive income                                                                                                                                                                        |       | 1,522                    |       | 65                          |       |
| Accumulated  deficit *(see Note 10)*                                                                                                                                                                           |       | (232,785                 | )          | (261,971                    | )          |
| Treasury stock,  at cost; Sept. 28, 2007, 3,627 shares; December 31, 2006, 2,740 shares;                                                                                                                       |       | (115,887                 | )          | (89,418                     | )          |
| Total  stockholders’ equity                                                                                                                                                                               |       | 856,011                  |       | 833,843                     |       |
|                                                                                                                                                                                                           |       |                     |       |                        |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                               |       | $                        | 1,113,044  |                        | $          | 1,158,854 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

4

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**AVOCENT CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited, in thousands)

 
| ** **                                                                         | ** **   | **For the nine months ended** | ** **   |
|------------------------------------------------------------------------------------|--------------|---------------------------------------------------|--------------|
| ** **                                                                         | ** **   | **Sept. 28,**                                | ** **   | **Sept. 29,** | ** ** |
| ** **                                                                         | ** **   | **2007**                                          | ** **   | **2006** | ** ** |
| *** ***                                                                       | *** *** | *** ***                                      | *** *** | *** *** | *** *** |
| Cash flows from  operating activities:                                             | * *     | * *                                          | * *     | * * | * * |
| Net income                                                                         |         | $                                                 | 31,863       |   | $ | 29,065 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |         |                                              |         |   |   |
| Depreciation                                                                       |         | 7,232                                             |         | 5,813 |   |
| Amortization of  intangible assets                                                 |         | 32,677                                            |         | 14,735 |   |
| Stock-based  compensation                                                          |         | 15,074                                            |         | 8,158 |   |
| Acquired  in-process research and development expenses                             |         | —                                            |         | 20,700 |   |
| Amortization of  premiums (discounts) on investments                               |         | (155                                              | )            | 8 |   |
| Net loss on  sales of investments                                                  |         | —                                            |         | 226 |   |
| Net loss on  disposition of fixed assets                                           |         | 277                                               |         | — |   |
| Excess tax benefit from stock-based  compensation                                  |         | (907                                              | )            | (4,130 | ) |
| Changes in  operating assets and liabilities, net of acquisitions:                 |         |                                              |         |   |   |
| Accounts  receivable, net                                                          |         | 11,159                                            |         | (21,470 | ) |
| Inventories, net                                                                   |         | 10,846                                            |         | (10,588 | ) |
| Other assets                                                                       |         | (1,394                                            | )            | (1,687 | ) |
| Accounts payable                                                                   |         | 6,562                                             |         | (1,581 | ) |
| Accrued wages  and commissions                                                     |         | (5,860                                            | )            | 3,628 |   |
| Accrued other  liabilities and deferred revenue                                    |         | 1,007                                             |         | 11,811 |   |
| Income taxes,  current and deferred                                                |         | (9,497                                            | )            | (1,957 | ) |
| Net cash  provided by operating activities                                         |         | 98,884                                            |         | 52,731 |   |
| ** **                                                                         | ** **   | ** **                                        | ** **   | ** ** | ** ** |
| Cash flows from  investing activities:                                             |         |                                              |         |   |   |
| Purchase of  other intangible assets                                               |         | (3,841                                            | )            | (3,750 | ) |
| Purchase of  Cyclades, net of cash received                                        |         | —                                            |         | (91,568 | ) |
| Purchase of  LANDesk, net of cash received                                         |         | —                                            |         | (198,145 | ) |
| Purchases of  property and equipment                                               |         | (7,027                                            | )            | (2,079 | ) |
| Purchases of  investments                                                          |         | (70,568                                           | )            | (147,422 | ) |
| Maturities and  proceeds from sales of investments                                 |         | 72,458                                            |         | 377,849 |   |
| Net cash used in  investing activities                                             |         | (8,978                                            | )            | (65,115 | ) |
| ** **                                                                         | ** **   | ** **                                        | ** **   | ** ** | ** ** |
| Cash flows from  financing activities:                                             | ** **   | ** **                                        | ** **   | ** ** | ** ** |
| Repayment of  debt assumed in acquisition                                          |         | —                                            |         | (1,965 | ) |
| Borrowings  (repayments) under unsecured line of credit, net                       |         | (55,000                                           | )            | 162,005 |   |
| Payment of  financing costs                                                        |         | —                                            |         | (2,005 | ) |
| Proceeds from  employee stock option exercises                                     |         | 4,294                                             |         | 22,892 |   |
| Excess tax benefit from stock-based  compensation                                  |         | 907                                               |         | 4,130 |   |
| Purchases of  treasury stock                                                       |         | (26,469                                           | )            | (157,617 | ) |
| Net cash  provided by (used in) financing activities                               |         | (76,268                                           | )            | 27,440 |   |
|                                                                               |         |                                              |         |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                      |         | 1,141                                             |         | 252 |   |
|                                                                               |         |                                              |         |   |   |
| Net increase in  cash and cash equivalents                                         |         | 14,779                                            |         | 15,308 |   |
| Cash and cash  equivalents at beginning of period                                  |         | 81,301                                            |         | 66,425 |   |
| Cash and cash  equivalents at end of period                                        |         | $                                                 | 96,080       |   | $ | 81,733 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

5

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**AVOCENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited, in thousands,except per share data)

 

Note 1.   Basisof Presentation

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inconformity with United States generally accepted accounting principles andreflect all adjustments consisting of normal recurring adjustments which, inthe opinion of management, are necessary for a fair statement of the resultsfor the 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 revenues 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 Form 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 ofthe following at:

 
| ** **      | ** ** | **September 28, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **      | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Raw materials   |       | $                                | 1,866      |                            | $          | 3,022 |   |
| Work-in-process |       | 2,068                            |       | 1,411                           |       |
| Finished goods  |       | 27,027                           |       | 37,332                          |       |
| Inventories     |       | $                                | 30,961     |                            | $          | 41,765 |   |

 

Inventoriesabove have been reduced by reserves for excess and obsolete inventories of$6,080 and $5,578 as of September 28, 2007 and December 31, 2006, respectively.

 

Note 3.   Equity and TreasuryStock

 

Stock option exercisesand restricted stock unit (RSU) vesting — Shares of our common stock issued asa result of option exercises totaled 40 shares during the quarter endedSeptember 28, 2007 and 116 shares during the quarter ended September 29,2006.  Shares of our common stock issuedas a result of option exercises totaled 226 shares during the nine months endedSeptember 28, 2007 and 1,103 shares during the nine months ended September 29,2006.

 

During the quarter endedSeptember 28, 2007, a total of 1.2restricted stock units vested.  At therelease of these shares, .4 shares were withheld for taxes and consideredimmediately retired, resulting in issuance of 1 shares, net of tax withholding.  During the nine months ended September 28,2007, a total of 350 restricted stockunits vested.  At the release of these shares,105 shares were withheld for taxes and considered immediately retired,resulting in issuance of 245 shares, net of tax withholding.  There was no such vesting during the threeand nine months ended September 29, 2006.

 

Stock repurchases — Werepurchased 300 shares of our common stock during the quarter ended September28, 2007 at a cost totaling $8,538. We repurchased 887 shares of our commonstock during the nine months ended September 28, 2007 

 

6

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at a cost totaling $26,469.  We repurchased 1,400 shares of our commonstock during the quarter ended September 29, 2006 at a cost totaling$38,431.  We repurchased 6,189 shares ofour common stock during the nine months ended September 29, 2006 at a cost totaling$157,617.

 

These treasury shareswere purchased on the open market through various brokers under the stockre-purchase plan approved by our Board of Directors.  Our Board has approved a total of 12,000shares for repurchase under the program. As of September 28, 2007 we may repurchase an additional 1,300 sharesunder this program.

 

Note 4.   Accumulated OtherComprehensive Income

 

We record unrealized gains and losseson our foreign currency translation adjustments, unrealized gains and losses onderivatives which are cash flow hedges, and unrealized holding gains or losseson our available-for-sale securities, net of tax, as a separate component ofstockholders’ equity as accumulated other comprehensive income (loss).  Comprehensive income in the first nine monthsof 2007 of $33,320 consists of $31,863 of net income, $87 of unrealized gainson investments (net of deferred income taxes), $142 of unrealized gains on thecash flow hedge (net of deferred income taxes) and $1,228 of foreign currencytranslation adjustments.  Comprehensiveincome in the first nine months of 2006 of $29,539 consists of $29,065 of netincome, $381 of unrealized gains on investments (net of deferred income taxes),($433) of unrealized losses on the cash flow hedge (net of deferred incometaxes) and $526 of foreign currency translation adjustments.  As of September 28, 2007 and December 31,2006, total accumulated other comprehensive income was $1,522 and $65,respectively.

 

Note 5.   Earnings Per Share

 
| ** **                                                           | ** ** | **Income (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per-Share  Amount** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **            | ** ** |
| **For the  three months ended September 28, 2007**                   |       |                        |       |                      |       |                  |       |
| **Basic  EPS**                                                       |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders                         |       | $                           | 16,117     |                      | 50,310     |                  | $          | 0.32 |   |
| **Effect  of Dilutive Securities**                                   |       |                        |       |                      |       |                  |       |
| Stock options  and unvested restricted stock awards                  |       | —                      |       | 839                       |       | —                |       |
| **Diluted  EPS**                                                     |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders and assumed conversions |       | $                           | 16,117     |                      | 51,149     |                  | $          | 0.32 |   |
|                                                                 |       |                        |       |                      |       |                  |       |
| **For the  three months ended September 29, 2006**                   |       |                        |       |                      |       |                  |       |
| **Basic  EPS**                                                       |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders                         |       | $                           | 2,550      |                      | 46,289     |                  | $          | 0.06 |   |
| **Effect  of Dilutive Securities**                                   |       |                        |       |                      |       |                  |       |
| Stock options  and unvested restricted stock awards                  |       | —                      |       | 875                       |       | —                |       |
| **Diluted  EPS**                                                     |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders and assumed conversions |       | $                           | 2,550      |                      | 47,164     |                  | $          | 0.05 |   |
|                                                                 |       |                        |       |                      |       |                  |       |
| **For the  nine months ended September 28, 2007**                    |       |                        |       |                      |       |                  |       |
| **Basic  EPS**                                                       |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders                         |       | $                           | 31,863     |                      | 50,506     |                  | $          | 0.63 |   |
| **Effect  of Dilutive Securities**                                   |       |                        |       |                      |       |                  |       |
| Stock options  and unvested restricted stock awards                  |       | —                      |       | 893                       |       | —                |       |
| **Diluted  EPS**                                                     |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders and assumed conversions |       | $                           | 31,863     |                      | 51,399     |                  | $          | 0.62 |   |

 

7

----

 
| **For the  nine months ended September 29, 2006**                    |   |   |   |   |   |   |   |
|----------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| **Basic  EPS**                                                       |   |   |   |   |   |   |   |
| Net income  available to common stockholders                         |   | $      | 29,065 |   | 47,770 |   | $      | 0.61 |   |
| **Effect  of Dilutive Securities**                                   |   |   |   |   |   |   |   |
| Stock options  and unvested restricted stock awards                  |   | — |   | 805    |   | — |   |
| **Diluted  EPS**                                                     |   |   |   |   |   |   |   |
| Net income  available to common stockholders and assumed conversions |   | $      | 29,065 |   | 48,575 |   | $      | 0.60 |   |

 

Anti-dilutive options to purchase commonstock outstanding were excluded from the calculations above. Anti-dilutiveoptions totaled 2,192 and 2,203 for the three and nine months ended September28, 2007, respectively. Anti-dilutive options totaled 2,649 and 2,723 for thethree and nine months ended September 29, 2006, respectively.

 

Note 6.   Segment Reporting

 

We evaluate theperformance of our segments based on revenue and operating profit, which iscalculated before corporate and unallocated costs, amortization of intangiblesand other purchase accounting adjustments, acquired in-process research anddevelopment expense, and stock-based 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 areconciliation of information for our reportable segments to our consolidatedresults:

** **
| ** **                                                         | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                         | ** ** | **Sept. 28,  2007**                           | ** ** | **Sept. 29,  2006**                          | ** ** | **Sept. 28,  2007** | ** ** | **Sept. 29,  2006** | ** ** |
| Net revenue:                                                       |       |                                               |       |                                              |       |   |   |   |   |
| Management  Systems                                                |       | $                                                  | 126,343    |                                              | $          | 124,209 |   | $ | 346,411 |   | $ | 326,530 |   |
| LANDesk                                                            |       | 28,648                                             |       | 13,522                                            |       | 80,065 |   | 13,522 |   |
| Other business  units                                              |       | 6,698                                              |       | 3,690                                             |       | 16,957 |   | 11,962 |   |
| Corporate and  unallocated                                         |       | 981                                                |       | 873                                               |       | 3,889 |   | 2,797 |   |
| Amortization of  fair value adjustment to LANDesk deferred revenue |       | (598                                               | )          | (480                                              | )          | (1,874 | ) | (480 | ) |
| Total net  revenue                                                 |       | $                                                  | 162,072    |                                              | $          | 141,814 |   | $ | 445,448 |   | $ | 354,331 |   |

 
| ** **                                                         | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                         | ** ** | **Sept. 28,  2007**                           | ** ** | **Sept. 29,  2006**                          | ** ** | **Sept. 28,  2007** | ** ** | **Sept. 29,  2006** | ** ** |
| Operating income  (loss):                                          |       |                                               |       |                                              |       |   |   |   |   |
| Management  Systems                                                |       | $                                                  | 42,295     |                                              | $          | 40,360 |   | $ | 102,794 |   | $ | 96,152 |   |
| LANDesk                                                            |       | 885                                                |       | 5,905                                             |       | 969 |   | 5,905 |   |
| Other business  units                                              |       | (1,628                                             | )          | (3,829                                            | )          | (6,850 | ) | (8,981 | ) |
| Corporate and  unallocated costs                                   |       | (3,856                                             | )          | (2,947                                            | )          | (10,779 | ) | (8,256 | ) |
| Amortization of  fair value adjustment to LANDesk deferred revenue |       | (598                                               | )          | (480                                              | )          | (1,874 | ) | (480 | ) |
| Amortization of  intangibles and other expenses                    |       | (10,350                                            | )          | (7,634                                            | )          | (32,366 | ) | (15,187 | ) |
| Stock-based  compensation expense                                  |       | (6,310                                             | )          | (4,595                                            | )          | (15,074 | ) | (8,158 | ) |
| Acquired  in-process research and development expense              |       | —                                             |       | (18,600                                           | )          | — |   | (20,700 | ) |
| Total income  from operations                                      |       | $                                                  | 20,438     |                                              | $          | 8,180 |   | $ | 36,820 |   | $ | 40,295 |   |
|                                                               |       |                                               |       |                                              |       |   |   |   |   |
| Other income  (expense)                                            |       | (572                                               | )          | 272                                               |       | (3,593 | ) | 5,067 |   |
| Income before  provision for income taxes                          |       | 19,866                                             |       | 8,452                                             |       | $ | 33,227 |   | $ | 45,362 |   |

 

8

----

 

Revenue and operating income for our Management Systems Division includes the operating results of Cyclades from the date of the acquisition on March 30, 2006. LANDesk revenue and operating income includes the operating results from the date of the acquisition on August 31, 2006.  The amortization of fair value adjustment to LANDesk deferred revenue, which was reduced in the application of purchase accounting, represents the portion of deferred revenue existing at the acquisition date that LANDesk would have recognized as earned during the respective periods had they not been acquired.

 

Sales by product line forour Management Systems Division and LANDesk Division for the three months andnine months ended September 28, 2007 and September 29, 2006 are as follows:

 
| ** **                             | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|----------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                             | ** ** | **Sept. 28,  2007**                           | ** ** | **Sept. 29,  2006**                          | ** ** | **Sept. 28,  2007** | ** ** | **Sept. 29,  2006** | ** ** |
| Management  Systems net revenue:       |       |                                               |       |                                              |       |   |   |   |   |
| KVM                                    |       | $                                                  | 98,456     |                                              | $          | 91,946 |   | $ | 266,603 |   | $ | 253,417 |   |
| Serial Management                      |       | 13,387                                             |       | 15,879                                            |       | 37,425 |   | 30,689 |   |
| Embedded  software and solutions       |       | 8,662                                              |       | 9,368                                             |       | 24,136 |   | 24,329 |   |
| Other                                  |       | 5,838                                              |       | 7,016                                             |       | 18,247 |   | 18,095 |   |
| Total Management  Systems net revenue: |       | $                                                  | 126,343    |                                              | $          | 124,209 |   | $ | 346,411 |   | $ | 326,530 |   |

 
| ** **                     | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                     | ** ** | **Sept. 28, 2007**                       | ** ** | **Sept. 29, 2006**                      | ** ** | **Sept. 28, 2007** | ** ** | **Sept. 29, 2006** | ** ** |
| LANDesk Division  net revenue: |       |                                               |       |                                              |       |   |   |   |   |
| Licenses and  royalties        |       | $                                                  | 16,741     |                                              | 10,257     |   | 46,912 |   | 10,257 |   |
| Maintenance and  services      |       | 11,907                                             |       | 3,265                                             |       | 33,153 |   | 3,265 |   |
| Total LANDesk  net revenue     |       | $                                                  | 28,648     |                                              | 13,522     |   | 80,065 |   | 13,522 |   |

 

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

 

**As of September 28, 2007, long-livedassets totaled $37,745, which includes $26,641 held in the United States and$11,104 held outside of the U.S.  As ofDecember 31, 2006, long-lived assets totaled $38,004, which includes $25,585held in the United States and $12,419 held outside of the United States.**

** **

**Note 7.   ForwardContracts and Interest Rate Swap**

** **

We use forward contracts to reduce our foreigncurrency exposure 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 September 28, 2007, wehad four open forward contracts with an approximate fair value of ($1).  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 an original notional amount of $125,000. The objective of therate swap agreement is to provide a hedge against rising LIBOR interest ratesthat would have a negative effect on our cash flows due to changes in interest rateson the 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 September 28, 2007, we recorded an unrealized losson the swap, net of tax, of $314 in accumulated OCI. There was noineffectiveness in the year and we anticipate no reclassification of OCI intoearnings in the next 12 months.  Thenotional amount of the swap as of September 28, 2007 is $95,000.

 

9

----

 

**Note 8.   Goodwill andOther Intangible Assets**

** **

**Other intangible assets subject toamortization were as follows:**

** **
| ** **                                | ** ** | **September 28, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **Gross  Carrying  Amounts**     | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** |
|                                      |       |                             |       |                            |       |   |   |   |   |
| Developed  technology                     |       | $                                | 56,840     |                            | $          | 14,416 |   | $ | 68,720 |   | $ | 17,741 |   |
| Internally  developed software for resale |       | 21,900                           |       | 3,954                           |       | 21,900 |   | 1,217 |   |
| Patents and  trademarks                   |       | 30,554                           |       | 5,517                           |       | 35,520 |   | 7,753 |   |
| Customer base  and certifications         |       | 100,248                          |       | 21,540                          |       | 100,120 |   | 9,449 |   |
| Maintenance  contracts                    |       | 9,600                            |       | 2,080                           |       | 9,600 |   | 640 |   |
| Non-compete  agreements                   |       | 11,260                           |       | 5,168                           |       | 12,720 |   | 3,775 |   |
| Other                                     |       | 2,310                            |       | 1,219                           |       | 4,228 |   | 2,559 |   |
|                                      |       | $                                | 232,712    |                            | $          | 53,894 |   | $ | 252,808 |   | $ | 43,134 |   |

** **

**During the first quarter of 2007, weacquired an existing 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, the purchase agreement provides for certain potentialincentive payments of approximately $600. These potential incentive costs will be recognized as expense over theperiods for which the related services are provided.**

** **

**Amortization expense for other intangibleassets for the three months ended September 28, 2007 and September 29, 2006,was $10,469 and $7,483, respectively. Amortization expense for other intangible assets for the nine monthsended September 28, 2007 and September 29, 2006, was $32,677 and $14,735,respectively.  The approximate estimatedannual amortization for other intangibles is as follows:**

** **
| **Years ending December 31:** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2007, remaining                              |       | $          | 11,420     |   |
| 2008                                         |       | $          | 42,222     |   |
| 2009                                         |       | $          | 37,632     |   |
| 2010                                         |       | $          | 34,624     |   |
| 2011                                         |       | $          | 26,172     |   |
| Thereafter                                   |       | $          | 26,748     |   |

 

**As a result of the merger of certaindivisions there were reallocations of the carrying amount of goodwill among thedivisions during the first quarter of 2007. Additionally, as a result of making certain tax elections during thesecond quarter of 2007, we adjusted the carrying amount of goodwill for theLANDesk division (*see Note 10*).  A summary of changes in goodwill for the ninemonths ended September 28, 2007, is 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 nine months |       | (281           | )          | (11,468      | )          | —                |       | —       |       | (11,749    | )          |
|                                |       |           |       |         |       |                  |       |         |       |       |       |
| Balance as of  September 28, 2007   |       | $              | 328,011    |         | $          | 263,145               |       | $            | —     |       | $          | 4,583 |   | $ | 595,739 |   |

 

10

----

 

**Note9.  Product Warranties and DeferredRevenue**

** **

The activity within theliability for warranty returns for the nine months ended September 28, 2007 isas follows:

 
| ** **                                                | ** ** | **2007** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|
|                                                      |       |     |       |
| Balance, January  1, 2007                                 |       | $        | 2,486      |   |
|                                                      |       |     |       |
| Accruals for  product warranties issued during the period |       | 4,651    |       |
|                                                      |       |     |       |
| Settlements made  during the period                       |       | (5,415   | )          |
|                                                      |       |     |       |
| Balance,  September 28, 2007                              |       | $        | 1,722      |   |

 

Deferred revenue relatedto our extended warranty for hardware products program was $4,941 at September28, 2007 and $4,545 at December 31, 2006. We recorded earned revenue from the amortization of deferred revenuerelated to extended warranties of $2,827 during the nine months ended September28, 2007.  In addition, we recordeddeferred revenue related to new extended warranties of $3,223 during the ninemonths ended September 28, 2007.

 

We defer revenue forsubscription, service and maintenance contracts until earned, which isgenerally over the term of the contract or when services are performed. As ofSeptember 28, 2007, deferred revenue was $53,696, of which approximately$52,142 related to LANDesk.  As ofDecember 31, 2006, deferred revenue was $53,514, of which approximately $47,858related to LANDesk.

 

Note 10. Income taxes

 

The effective tax rate inthe first nine months of 2007 was 4.1%, compared to an effective tax rate of35.9% in the first nine months of 2006.  The provision for income taxeswas $1,364 for the first nine months of 2007, compared to income taxexpense of $16,297 for the first nine months of 2006.  The decrease in the effective tax rate from2006 is primarily due to a decrease in pre-tax income and the recognition of atax benefit of $6,500 during the second quarter of 2007 attributable toacquired in-process research and development previously charged to expense aspart of the LANDesk acquisition.

 

During the second quarterof 2007, we made certain elections under Internal Revenue Code Sec. 338(g)related to the August 2006 acquisition of LANDesk.  As a result of making these elections, theacquisition is now treated for U.S. tax purposes as an asset acquisition wherewe stepped up the tax basis in assets and liabilities previously recorded inthe initial purchase accounting.  Wepreviously accounted for this acquisition as a qualified stock purchase, withcarryover tax basis in the assets and liabilities recorded.  Our preliminary purchase price allocation wasbased upon the initial structure of the transaction and did not take intoconsideration the tax impacts should these elections be made within therequired time period, including the tax impacts associated with the amountassigned to acquired in-process research and development that was charged toexpense at acquisition.

 

During the second quarterof 2007, we reconsidered the measurement of deferred taxes related to thisbusiness combination to take into consideration the tax impacts of theelections made.  As a result, we adjustedthe deferred tax accounts with the offsetting reduction to goodwill previouslyrecorded from this transaction.  We haveindemnified former LANDesk shareholders for any personal tax consequencesshould this election create current tax obligations for these formershareholders.

 

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.  This increase was recorded as anincrease to the January 1, 2007 accumulated deficit balance.  As ofSeptember 28, 2007 we had total reserves for uncertain tax positions related togross unrecognized tax benefits of $10,094 of which $8,980, if recognized,would affect the effective tax rate.  We recognize potential accruedinterest and penalties related to unrecognized tax benefits from our globaloperations within income tax expense. As of September 28, 

 

11

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2007, we had accruedinterest expense related to the unrecognized tax benefits of $2,763.

 

We conduct businessglobally, and as a result our subsidiaries file income tax returns in the U.S.federal jurisdiction and various state and foreign jurisdictions.  In thenormal course of business we are subject to examinations by taxing authoritiesthroughout the world including the U.S.  With few exceptions, we are nolonger subject to U.S. federal, state, and local, or non-U.S. income taxexaminations before 2004.

 

We are currently underaudit by the Internal Revenue Service for the 2004 and 2005 tax years.  Itis possible that the examination phase of the audit for those years willconclude in 2007, and it is possible a change in the unrecognized tax benefitsmay occur; however, quantification of an estimated range cannot be made at thistime.

 

Note 11.  Litigation

 

In March 2006, TFSElectronic 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 us in the TFS bankruptcy case in an effort to disallow ourclaim in its entirety.  TFS also seeksdamages in an undetermined amount for our alleged breach of contract,negligence, negligent misrepresentations, breaches of warranty, unjustenrichment, 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 us 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.A Mediation session was held on October 3, 2007 and concluded withoutresolution.  Discovery continues to beunderway.  We intend to vigorously defendour 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 May 2007, weentered into a Settlement and License Agreement with Trippe Manufacturing, anddismissed Trippe from the lawsuit.

 

In March 2007,KBM Enterprises, formerly a contract manufacturer forAvocent, filed a complaint against Avocent in the Circuit Court of MadisonCounty, Alabama, seeking $9,500 for costs allegedly incurred by KBMin its manufacturing efforts on behalf of Avocent.  We have filed an answer and counterclaimsagainst KBM and one of its principals, and we intend to vigorously defend ourpositions.  Discovery is currently underway.

 

In April 2007, we filed acomplaint for declaratory judgment against Aten International Co., Ltd. in theUnited 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 thesepatents.  In August 2007, Aten’s motionto dismiss for lack of personal jurisdiction was granted, and we have appealedthat ruling to the Federal Circuit Court of Appeals.

 

**Note 12. Subsequent Events**

** **

During the period from September 29, 2007 throughNovember 1, 2007, we purchased 300 additional shares of our common stock underour share repurchase program for a total cost of $8,260.  We paid $15,000 towards our line of credit duringthis same period, reducing the balance outstanding to $80,000.

 

12

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

** **

*THE INFORMATION IN THISITEM 2**“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS”**CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTSRELATING TO OUR FUTURE BUSINESS PROSPECTS AND ECONOMIC CONDITIONS IN GENERAL;STATEMENTS REGARDING OUR ABILITY TO PREDICT FUTURE SALES AND MANAGE INVENTORYLEVELS; STATEMENTS REGARDING PRICING PRESSURE; STATEMENTS REGARDING THEFLUCTUATION OF OUR REVENUE GROWTH IN RELATION TO ECONOMIC CONDITIONS AND ITCAPITAL SPENDING TRENDS; STATEMENTS ABOUT INTEREST RATES AND FOREIGN EXCHANGERATES; STATEMENTS ABOUT OUR USE OF CASH AND THE REPAYMENT OF OUR BANK LINE OFCREDIT; 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 software and hardware products andtechnologies that provide connectivity and centralized management ofinformation technology (IT) infrastructure. We (meaning Avocent and its wholly-owned subsidiaries) provide connectivityand systems management products and technologies that centralize control ofservers, desktop computers, serial devices, wireless devices, mobile devices,and network appliances, thus increasing the efficiency of IT personnel.  Server manufacturers resell private-labeledAvocent KVM (keyboard, video, and mouse) switches and embedded software andhardware technology in their systems, and companies large and small depend onour software and hardware products and technologies for managing their growingIT infrastructure.

 

For a more complete description of our products,technologies and markets, please refer to our Form 10-K, which was filed onMarch 1, 2007.

 

A substantial portion of our revenue is derived fromsales to major server OEMs who purchase our switching systems on aprivate-label or branded basis for integration and sale with their ownproducts, sales through our reseller and distributor network, and sales to alimited number of direct customers. Sales to our branded customers accountedfor 66% of sales in the first nine months of 2007 and 58% of sales in the firstnine months of 2006.  Sales to our OEMcustomers accounted for 34% of sales in the first nine months of 2007 and 42% ofsales in the first nine months of 2006. We do not have contracts with many of our branded customers, and ingeneral, our OEM and branded business customers are obligated to purchaseproducts from us only pursuant to binding purchase orders.  The loss of, or material decline in ordersfrom, 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 53% and 58% of sales in the first ninemonths of 2007 and 2006, respectively.

 

We sell products to resellers, distributors,end-users, and OEMs in the United States, Canada, Europe, and Asia as well asin other foreign markets.  Sales withinthe United States accounted for approximately 58% of sales in the first ninemonths of 2007 and 57% of sales in the first nine months of 2006.  Sales outside of the United States accountedfor 42% of sales in the first nine months of 2007 and 43% of sales in the firstnine months of 2006.  No foreign countryaccounted for more than 10% of sales in the first nine months of 2007 or 2006.

 

With continued industry-wide initiatives to reduce allchannel inventories and to shorten lead times, generally trends with our majorcustomers are to reduce the number of weeks of forward-committed firmorders.  This trend continues to affectour business with certain distributors, OEMs, and other servermanufacturers, and we believe that it will continue to make our future salesmore difficult to predict and inventory levels more difficult to manage.

 

We continue to experiencesignificant price competition in the market for all of our products, and weexpect that pricing pressures will continue in the future.  In addition, general economic conditions arenot predictable and we expect our revenue growth rate to fluctuate in relationto economic conditions and IT related spending trends.

 

**Many of our executive officers and directors are vestedin significant amounts of options to purchase shares of our common stock andrestricted stock units (RSUs).  Theseofficers and directors have informed us that they have sold, and may continueto sell, shares of our common stock to provide liquidity and diversify theirportfolios.**

** **

**Our largest division, the Management Systems Divisioncomprised 78% of our consolidated net revenue in the first nine months of 2007and 92% in 2006.  Our LANDesk Divisioncontributed 17% of net revenue to the first nine months of 2007 and 4% in2006.  Our other divisions andunallocated revenue comprised the remaining 5% of our consolidated net revenuein the first nine months of 2007 and 4% of our consolidated net revenue in thefirst nine months of 2006.  See Note 6 inthe notes to the condensed c**onsolidated financial 

 

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**statements** contained in Part I, Item 1 ofthis document.

** **

**Results of Operations**

** **

The following table setsforth, for the periods indicated, selected statement of income data expressedas a percentage of net sales:

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **Sept. 28,  2007**         | ** ** | **Sept. 29,  2006**        | ** ** | **Sept. 28,  2007** | ** ** | **Sept. 29,  2006** | ** ** |
| Net sales                                              |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                          |       | 36.1                             |       | 37.2                            |       | 37.2 |   | 38.9 |   |
| Gross profit                                           |       | 63.9                             |       | 62.8                            |       | 62.8 |   | 61.1 |   |
| Operating  expenses:                                   |       |                             |       |                            |       |   |   |   |   |
| Research and  development expenses                     |       | 14.0                             |       | 11.3                            |       | 14.5 |   | 12.3 |   |
| Acquired  in-process research and development expenses |       | —                           |       | 13.1                            |       | — |   | 5.8 |   |
| Selling, general  and administrative expenses          |       | 32.6                             |       | 27.0                            |       | 34.6 |   | 26.6 |   |
| Cyclades  integration expenses                         |       | —                           |       | 0.9                             |       | — |   | 1.0 |   |
| Amortization of  intangible assets                     |       | 4.7                              |       | 4.6                             |       | 5.4 |   | 3.9 |   |
| Total operating  expenses                              |       | 51.3                             |       | 57.0                            |       | 54.5 |   | 49.6 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Income from  operations                                |       | 12.6                             |       | 5.8                             |       | 8.3 |   | 11.4 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Net investment  income                                 |       | 0.7                              |       | 1.1                             |       | 0.6 |   | 1.9 |   |
| Net realized  investment losses                        |       | —                           |       | (0.1                            | )          | — |   | (0.1 | ) |
| Interest expense                                       |       | (1.1                             | )          | (0.7                            | )          | (1.4 | ) | (0.3 | ) |
| Other income  (expense), net                           |       | 0.1                              |       | (0.1                            | )          | — |   | (0.2 | ) |
| Income before  provision for income taxes              |       | 12.3                             |       | 6.0                             |       | 7.5 |   | 12.8 |   |
| Provision for  income taxes                            |       | 2.4                              |       | 4.2                             |       | 0.3 |   | 4.6 |   |
| Net income                                             |       | 9.9                              | %          | 1.8                             | %          | 7.2 | % | 8.2 | % |

 

*Net sales.*  Net sales increased 14% to $162.1 million forthe third quarter of 2007 from $141.8 million for the third quarter of2006.  The increase in sales resultedprimarily from the full quarter of contribution from our LANDesk division inthe third quarter of 2007, which was acquired on August 31, 2006.  As a result of the timing of the acquisition,we recorded $13.1 million in LANDesk revenue in the third quarter of 2006 comparedto $28.1 million in the third quarter of 2007. Branded sales increased 26% from $86.4 million in the third quarter of2006 to $109.7 million in the third quarter of 2007.  As a percentage of sales, branded revenueaccounted for 68% of sales in the third quarter of 2007 and 61% of revenue inthe third quarter of 2006.  OEM salesdeclined 5% from $55.4 million in the third quarter of 2006 to $52.4 million inthe third quarter of 2007.  The primaryreason for the decline relates to the approximate $1.4 million “catch-up”royalty payment made in the third quarter of 2006 by an OEM customer.   The OEM customer discovered an error in theroyalty calculation that affected royalty payments for periods prior to thethird quarter of 2006.  There was nocorresponding payment in the third quarter of 2007.  OEM sales were 32% of sales for the thirdquarter of 2007, compared to 39% of sales for the third quarter of 2006.

 

Sales in the third quarter of 2007 increased 14%within the United States and 15% internationally compared to sales in the thirdquarter of 2006 primarily due to the additional revenue resulting from ouracquisition of LANDesk.  During the thirdquarter of 2007, LANDesk’s revenue comprised $15.1 million of revenue in theUnited States and $12.9 million of international revenue.  Total sales within the United States were$95.6 million and $83.8 million in the third quarter of 2007 and 2006,respectively.  International sales were$66.5 million and $58.0 million in the third quarter of 2007 and 2006, respectively.  Sales within the United States were 59% ofsales in the third quarter of both 2007 and 2006.  International sales were 41% of sales in thethird quarter of both 2007 and 2006.

 

Netsales increased 26% to $445.5 million for the first nine months of 2007 from$354.3 million for the first nine months of 2006.  The increase is primarily a result of theadded revenue from the acquisitions of Cyclades late in the first quarter of2006 and LANDesk late in the third quarter of 2006.  Sales within the United States increased byapproximately 26% to $257.6 million in the first nine months of 2007 comparedto domestic sales of $203.6 million in the first nine months of 2006.  International sales increased approximately25% to $187.8 million in the first nine months of 2007 compared to internationalsales of $150.7 million in the first nine months of 2006.  Additionally, sales to our branded customersincreased 43% to $293.5 million in the first nine months of 2007 from $205.0 inthe first nine months of 2006, while sales to our OEM customers increased 2% to$152.0 million in the first nine months of 2007 from $149.3 in the first ninemonths of 2006.

 

From a divisional perspective, revenues from ourManagement Systems Division increased from $124.2 million in the third quarterof 2006 to $126.3 million in the third quarter of 2007, primarily due to thegrowth in our traditional KVM business. Our Management Systems Division is comprised of our traditional KVMproducts, our serial products, and our embedded software and 

 

14

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solutions products.  Sales by product line for our ManagementSystems Division for the three and nine month periods ended September 28, 2007and September 29, 2006 are as follows:

 
| ** **                                      | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                      | ** ** | **Sept. 28,  2007**                           | ** ** | **Sept. 29,  2006**                          | ** ** | **Sept. 28,  2007** | ** ** | **Sept. 29,  2006** | ** ** |
| Management  Systems Division net revenue:       |       |                                               |       |                                              |       |   |   |   |   |
| KVM                                             |       | $                                                  | 98,456     |                                              | $          | 91,946 |   | $ | 266,603 |   | $ | 253,417 |   |
| Serial  Management                              |       | 13,387                                             |       | 15,879                                            |       | 37,425 |   | 30,689 |   |
| Embedded  software and solutions                |       | 8,662                                              |       | 9,368                                             |       | 24,136 |   | 24,329 |   |
| Other                                           |       | 5,838                                              |       | 7,016                                             |       | 18,247 |   | 18,095 |   |
| Total Management  Systems Division net revenue: |       | $                                                  | 126,343    |                                              | $          | 124,209 |   | $ | 346,411 |   | $ | 326,530 |   |

 

The LANDesk Division contributed $28.6 million of netrevenue during the third quarter of 2007, or 17% of our net revenue.  LANDesk’s revenue and bookings are comprisedof both license-based revenue, primarily LANDesk Management Suite, andmaintenance and subscription-based revenue, LANDesk Security Suite, with thegrowth in bookings from the subscription-based revenue outpacing the growth inlicense-based revenue.  This change inmix has an impact on the revenue we recognize because subscription andmaintenance revenue is deferred and amortized over the subscription term.  Sales by product line for our LANDeskDivision for the three and nine months ended September 28, 2007 and the threeand nine months ended September 29, 2006 as follows:

 
| ** **                     | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                     | ** ** | **Sept. 28,  2007**                           | ** ** | **Sept. 29,  2006**                          | ** ** | **Sept. 28,  2007** | ** ** | **Sept. 29,  2006** | ** ** |
| LANDesk Division  net revenue: |       |                                               |       |                                              |       |   |   |   |   |
| Licenses and  royalties        |       | $                                                  | 16,741     |                                              | 10,257     |   | 46,912 |   | 10,257 |   |
| Maintenance and  services      |       | 11,907                                             |       | 3,265                                             |       | 33,153 |   | 3,265 |   |
| Total LANDesk  net revenue     |       | $                                                  | 28,648     |                                              | 13,522     |   | 80,065 |   | 13,522 |   |

 

*Grossprofit.* Gross profit is affected by a variety of factors:including the ratio of sales among our distribution channels, as OEM salestypically have lower gross margins than our branded sales; absorption of fixedcosts as sales levels fluctuate; product mix; raw material costs; labor costs;new product introductions by us and by our competitors; royalty revenue; saleslevels of our software products, which tend to have higher gross margins thanour hardware products; and our outsourcing of manufacturing and assemblyservices. Gross profit increased to $103.6 million, or 63.9% of sales, in thethird quarter of 2007 compared to $89.0 million, or 62.8% of sales, in thethird quarter of 2006 primarily due to the contribution from our LANDeskacquisition, which was acquired on August 31, 2006.  The increase in gross profit wasdisproportionately higher than the 14% increase in revenue due to the impact ofLANDesk software and maintenance revenue, which has a substantially highergross profit than that experienced by the rest of Avocent.  Gross margin from LANDesk software andmaintenance was approximately 88% in the third quarter of 2007, much higherthan the overall margin for Avocent.  Theincrease in gross profit from the LANDesk Division was partially offset by theadditional $2.8 million included in cost of sales from amortization of otherintangible assets recorded as a result of the LANDesk acquisition related tointernally developed software for resale. Gross profit increased from $216.4 million, or 61.1% of sales, in thefirst nine months of 2006 compared to $279.7 million, or 62.8% of sales, in thefirst nine months of 2007 for the same reasons as the increase in gross profitfor the quarter ended September 28, 2007.

 

*Researchand development expenses.* Research and development expenses were $22.8 million, or 14.0% of netsales, in the third quarter of 2007 compared to $16.0 million, or 11.3% of netsales, in the third quarter of 2006.  Theincrease in the amount spent on research and development was primarily due tothe additional costs from the LANDesk acquisition, including costs related tothe integration of the Avocent and LANDesk software platforms.  As a result of the timing of the acquisition,our LANDesk division recorded $6.4 million of research and development expensefor the third quarter of 2007 compared to $1.7 million in the third quarter of2006.

 

Research and developmentexpenses for the first nine months of 2007 increased to $64.8 million from$43.5 million for the first nine months of 2006 primarily due the additionalcosts from the Cyclades and LANDesk acquisitions.  LANDesk recorded $18.1 million of researchand development expenses in the first nine months of 2007 compared to $1.7million in the third quarter of 2006.  Asa result of the timing of the LANDesk acquisition on August 31, 2006, werecorded only one month of research and development expenses in the thirdquarter of 2006.  Additionally, theamount of stock-based compensation expensed in the first nine months of 2007,$4.4 million, was higher compared to 2006, $2.2 million as a result of thetiming of grants made in the second quarter of 2006 and additional grants madein 2007 to cover our expanded employee base following the Cyclades and LANDeskacquisitions in 2006.  As a percentage ofnet sales, year-to-date research and development expenses increased to 14.6% inthe first nine months of 2007 from 12.3% in the first nine months of 2006.

 

15

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*Acquiredin-process research and development expense.*Acquisitionrelated expenses in the first nine months of 2006 were comprised of thenon-recurring write-off of $2.1 million of in-process research anddevelopment expense in the first quarter of 2006 related to the acquisition ofCyclades and $18.6 million of similar charges in the third quarter of 2006 forthe acquisition of LANDesk There were no such charges in the first nine monthsof 2007.

 

***Selling, general and administrative expenses.***Selling, general andadministrative expenses were $52.8 million, or 32.6% of net sales, for thethird quarter of 2007 compared to $38.3 million, or 27.0% of net sales, for thethird quarter of 2006. The increase in selling, general and administrativeexpenses was attributed to increased headcount and other costs attributable tothe addition of LANDesk, which recorded $17.9 million of selling, general andadministrative expenses in the third quarter of 2007 compared to $5.1 millionin the third quarter of 2006.As a result of the timing of theLANDesk acquisition on August 31, 2006, we recorded only one month of selling,general and administrative expenses in the third quarter of 2006. Selling,general and administrative expenses were $153.9 million, or 34.6% of net sales,for the first nine months of 2007 compared to $94.4 million, or 26.6% of netsales, for the first nine months of 2006. Again, the increase in selling,general and administrative expenses was attributed to increased headcount andother costs attributable to the addition of LANDesk, which recorded $50.5million of selling, general and administrative expenses in the first ninemonths of 2007 compared to $5.1 million in the first nine months of 2006.

** **

***Amortization of intangible assets***. Amortization of $7.6 million inthe third quarter of 2007 included the amortization of the identifiableintangible assets created as a result of the acquisitions of OSA, SonicMobility, Cyclades, and LANDesk. Amortization of $6.6 million in the thirdquarter of 2006 included primarily the amortization of the identifiableintangible assets created as a result of the acquisitions OSA, Sonic Mobilityand Cyclades, but did include one month’s amortization for LANDesk. Amortizationof $24.1 million in the first nine months of 2007 included the amortization ofthe identifiable intangible assets created as a result of the acquisitions ofOSA, Sonic Mobility, Cyclades, and LANDesk. Amortization of $13.8 million inthe first nine months of 2006 included primarily the amortization of the identifiableintangible assets created as a result of the acquisitions of OSA, SonicMobility, Cyclades, and one month of LANDesk. The increase in amortizationexpense relates primarily to amortization expense related to the intangibleassets recorded in the acquisitions of Cyclades and LANDesk.

** **

*Stock-BasedCompensation.*We record compensation expense in eachline of our condensed consolidated financial statements based on the departmentin which an employee works. Stock-based compensation increased from $4.6million in the third quarter of 2006 to $6.3 million in the third quarter of2007. Stock-based compensation increased from $8.2 million for the nine monthsended 2006 to $15.1 million for the nine months ended 2007. The increase forboth the quarter and nine months to date was due primarily to the addition ofLANDesk employees who were granted retention awards in September 2006 andadditional awards to directors, officers, and employees granted during thesecond quarter of 2007. Stock-based compensation was recorded among thecomponents of our income statement for the three and nine months endedSeptember 28, 2007 and September 29, 2006 as follows:

 
| ** **                           | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|--------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **Sept. 28,  2007**                           | ** ** | **Sept. 29,  2006**                          | ** ** | **Sept. 28,  2007** | ** ** | **Sept. 29,  2006** | ** ** |
| Stock–Based  Compensation:      |       |                                               |       |                                              |       |   |   |   |   |
| Cost of Sales                        |       | $                                                  | 373        |                                              | $          | 289 |   | $ | 853 |   | $ | 502 |   |
| Research and  development            |       | 1,916                                              |       | 1,109                                             |       | 4,422 |   | 2,172 |   |
| Selling, general  and administrative |       | 4,021                                              |       | 3,197                                             |       | 9,799 |   | 5,484 |   |
| Total  stock-based compensation      |       | $                                                  | 6,310      |                                              | $          | 4,595 |   | $ | 15,074 |   | $ | 8,158 |   |

 

*Net investment income**.***Net******investment income decreased to $1.1million in the third quarter of 2007 compared to $1.6 million in the thirdquarter of 2006. The decrease in net investment income in the third quarter of2007 was the result of lower cash and investments as a result of funding thecash component of approximately $200 million of the LANDesk acquisition in thethird quarter of 2006, as well as funding the purchase of common stock underour stock repurchase program. Net******investmentincome decreased to $2.9 million in the first nine months of 2007 as comparedto $6.8 million in the first nine months of 2006. The decrease in investmentincome in the first nine of 2007 was also the result of lower cash andinvestments as a result of funding the purchase of Cyclades late in the firstquarter of 2006 and the cash component of the LANDesk acquisition in the thirdquarter of 2006, purchases of common stock under our stock repurchase program,and repayments of our line of credit.

 

*Net realized investment gains (losses).*Netrealized investment losses were zero in third quarter of 2007 and $199,000 inthe third quarter of 2006. For the first nine months, net losses were $226,000in 2006 and zero in 2007.

 

*Interest expense.*Interestexpense was $1.9 million and $6.4 million in the third quarter and first ninemonths of 2007, respectively. Interest expense was $1.0 million and $1.2million in the third quarter and first nine months of 2006, respectively. Interestexpense results from borrowings under our $250 million unsecured line of creditobtained in the second quarter of 2006, which 

 

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we used to finance aportion of the LANDesk acquisition and share repurchases.

 

*Other income (expense), net.*Netother income improved from an expense of $133,000 in the third quarter of 2006to income of $207,000 in the third quarter of 2007. Net other expense decreasedfrom an expense of $361,000 in the first nine months of 2006 to an expense of$95,000 in the first nine months of 2007.

 

*Provision (benefit) for income taxes.*Theeffective tax rate in the third quarter of 2007 was 18.9% compared to 69.8% inthe third quarter of 2006. The income tax provision was $3.7 million for thethird quarter of 2007, compared to a provision of $5.9 million in the thirdquarter of 2006. The effective tax rate for the first nine months of 2007 was4.1% compared to an effective tax rate of 35.9% for the first nine months of2006. The provision for income taxes was $1.4 million for the first nine monthsof 2007, compared to a provision of $16.3 million for the first nine months of2006. As discussed in Note 10 to the consolidated financial statements, thedecrease in the effective tax rate was primarily due to the recognition of a$6.5 million tax benefit attributable to the LANDesk acquisition for previouslyexpensed in-process R&D of $18.6 million. The tax benefit resulted fromelections made in the second quarter of 2007 under Internal Revenue CodeSection 338(g). Deferred tax liabilities have also been adjusted as a result ofthese elections. We adopted FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes, an interpretation of FASB Statement No. 109” onJanuary 1, 2007. As a result of adopting this FASB Interpretation, we recordedan increase to reserves for uncertain tax positions of $2.9 million.  Thisincrease was recorded as an increase to the January 1, 2007 accumulated deficitbalance.

 

*Netincome.*Net income for the third quarter of 2007 was $16.1million compared to $2.6 million for the third quarter of 2006, as a result ofthe factors detailed in the above discussion. Net income, as a percentage ofsales for the third quarter of 2007, was 10.4% compared to 1.8% for the thirdquarter of 2006. Net income for the first nine months of 2007 was $31.9 millioncompared to $29.1 million for the first nine months of 2006, as a result of thefactors detailed in the above discussion. Net income, as a percentage of salesfor the first nine months of 2007, was 7.2% compared to 8.2% for the first ninemonths of 2006.

 

**Liquidity and Capital Resources**

 

As of September 28, 2007, our principal sources ofliquidity consisted of $121 million in cash, cash equivalents, and investments.We also have a $250 million unsecured five year revolving bank line of creditthat is available for general corporate purposes. The line of credit currentlybears an interest rate of LIBOR plus 70 basis points. We reduced theoutstanding balance of our line of credit by $55.0 million during the firstnine months of 2007, resulting in a balance of $95 million outstanding underthe line of credit as of September 28, 2007. We classify the entire obligationas long-term as it carries a five-year term and has no required repaymentschedule. We expect to repay the borrowings with future cash flows fromoperations or potential future capital raising activities.

 

Our operating activities generated cash of $98.9 million in the first nine months of 2007, compared to approximately $52.7 million in the first nine months of 2006. The improvement in cash flow in the first nine months of 2007 was primarily the result of increases in accounts receivable collections during the second and third quarters of 2007, a decline in inventory during the second and third quarters of 2007 and an increase in cash earnings. Our accounts receivable decreased $11.2 million from December 31, 2006 to September 28, 2007 as a result of improved cash collections. In addition to the decline in our accounts receivable balance, our days sales outstanding (DSO) improved to 65 days at the end of the third quarter of 2007 from approximately 70 days from the year ended December 31, 2006. DSO improvement is also a direct result of improved collections during the first nine months of 2007. Adding LANDesk customer balances to our accounts receivable, which tend to have longer payment terms than legacy Avocent balances, has caused our DSO’s to increase. However, LANDesk DSO improved from approximately 135 days at the end of 2007 to 79 days at the end of the third quarter of 2007. Excluding our LANDesk Division, our DSO was approximately 62 days at the end of the third quarter of 2007 and was 57 days at the end of 2007.

 

Inventories decreased $10.8 million from December 31, 2006 to September 28, 2007. Our operations group worked to reduce our inventories in the first nine months of 2007, especially during the second and third quarters. As a result our inventory turns improved to 6.8 in the third quarter of 2007, from 5.2 for the quarter ended December 31, 2006. A decline in accrued compensation due to the payment of 2006 annual bonuses partially offset the decline in accounts receivable and inventories impact to cash flow from operations for the first nine months of 2007.

 

In the ordinary course ofour business, we may at any point in time have a significant amount ofcontractual commitments not yet recognized in our financial statements. Thesecommitments relate primarily to our need to schedule the purchase of inventoriesin advance of the related forecasted sales to customers. We have longer leadtimes for the products we purchase from suppliers based in Asia than those forour U.S. based and European suppliers. Our actual contractual commitments aretypically limited to products needed for one to three months of forecastedsales. The liabilities for these inventory purchases along with the relatedinventory assets are typically recognized upon our receipt of the products. Wealso have at any point in time a variety of short term contractual commitmentsfor services such as advertising, marketing, accounting, legal, and researchand development activities. The liabilities for 

 

17

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these services and therelated expenses are typically recognized upon our receipt of the relatedservices. As of September 28, 2007, we had approximately $32.8 million of suchpurchase commitments. None of our expected purchase commitments requirespayment beyond the next year. .

 

We may use a portion of our cash and investments orour line of credit for strategic acquisitions of technologies and companiesthat we believe will enhance and complement our existing technologies and helpincrease our sales.

 

We repurchased 887,000 shares of our common stock fora total cost of approximately $26.5 million during first nine months of 2007under the stock repurchase program approved by our Board of Directors. Duringthe first quarter of 2007, our Board approved the repurchase of up to anadditional 2.0 million shares under our share repurchase program. To date, ourBoard has approved a total of 12.0 million shares to be repurchased under thisprogram. As of September 28, 2007, we had the authority from our Board torepurchase an additional 1.3 million shares under this program.

 

**Investments**

 

Our investments consist of corporate bonds, municipalbonds, commercial paper, and mortgage 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 periodically review our investment portfolio forinvestments considered to have sustained an other-than-temporary decline invalue. Upon review of our investment portfolio as of September 28, 2007, noinvestments were considered to have sustained an other-than-temporary decline,and no charge was recorded in the first nine months of 2007.

 

**Recently Issued Accounting Standards andRegulatory Standards**

 

We adopted FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes, an interpretation of FASB Statement No. 109” onJanuary 1, 2007. As a result of adopting this FASB Interpretation, we recordedan increase to reserves for uncertain tax positions of $2.9 million.  Thisincrease was recorded as an increase to the January 1, 2007 accumulated deficitbalance.  As of September 28, 2007 we had total reserves for uncertain taxpositions related to gross unrecognized tax benefits of $10.1 million of which$9.0 million, if recognized, would affect the effective tax rate.  Werecognize potential accrued interest and penalties related to unrecognized taxbenefits from our global operations within income tax expense. As of September28, 2007, we had accrued interest expense related to the unrecognized taxbenefits of approximately $2.8 million.  (*seeNote 10 in the notes to the condensed consolidated financial statements in PartI, Item 1*).”

 

**Item 3. Quantitative andQualitative 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 ourinvestment portfolio to preserve principal and liquidity while maximizing thereturn on our investment portfolio through the investment of available funds. Wediversify our investment portfolio by investing in a variety of highly-rated investment-gradesecurities and through the use of different investment managers. Our investmentsecurities portfolio is primarily invested in securities with maturities (orinterest rate resets) of two years or less with at least an investment graderating to minimize interest rate and credit risk as well as to provide for animmediate source of funds. Market risk, calculated as the potential change infair value in our investment portfolio resulting from a hypothetical 10% changein interest rates, was not material at September 28, 2007. We generally holdinvestment securities until maturity.

 

We also face interest rate risk on our bank line ofcredit which currently bears interest at a variable rate of LIBOR plus 70 basispoints. We have partially hedged this exposure to interest rate risk with aninterest rate swap, which currently has a remaining notional amount of $95million, through a well-established financial institution.

 

We also face foreign currency exchange rate risk tothe extent that the value of certain foreign currencies relative to the U.S.dollar affects our financial results. Our international operations transact aportion of our business in currencies other than the U.S. dollar, predominantlythe euro, and changes in exchange rates may positively or negatively affect ourrevenue, gross margins, operating expenses, and retained earnings since thesetransactions are reported by us in U.S. dollars. We occasionally purchaseforeign currency forwards aimed at limiting the impact of currency fluctuations.These instruments provide only limited protection against currency exchangerisks, and there can be no assurance that such an approach will be successful,especially if a significant and sudden decline occurs in the value of localcurrencies. As of September 28, 2007, we had four open forward contracts withan approximate fair value of $(1,200).

 

18

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**Item 4. Controls and Procedures.**

 

(a) *Evaluation of disclosure controls and procedures.*Basedon their evaluation as of September 28, 2007, our Chief Executive Officer andChief Financial Officer have concluded that our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934) are effective.

 

(b) *Changes in internal control over financial reporting*.There were no changes in our internal controls over financial reporting duringthe quarter ended September 28, 2007 that materially affected or is reasonablylikely to materially affect, our internal controls over financial reporting. However,during the third quarter of 2007, we integrated most of LANDesk ERP elementsinto our ERP system. We believe this integration will improve our internalcontrols over financial reporting by having most of our processes integratedinto one ERP system.

 

### **PART II — OTHERINFORMATION**

### ** **

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

 

In March 2006, TFS Electronic Manufacturing Services,Inc. (“TFS”) filed a Third-Party Complaint and an Objection to Claim of AvocentCorporation with the United States Bankruptcy Court, District of Arizona. As aresult of the complaint, an adversary proceeding has been commencedagainst us in the TFS bankruptcy case in an effort to disallow our claim in itsentirety. TFS also seeks damages in an undetermined amount for our allegedbreach of contract, negligence, negligent misrepresentations, breaches ofwarranty, 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, and the imposition of joint and severalliability as to us and a named co-defendant, TopSearch Printed Circuits (HK),Ltd. (“TopSearch”). The matter has been consolidated with a separate matterbetween TFS and TopSearch pending in the United States District Court for theDistrict of Arizona, for purposes of discovery through pre-trial. A Mediationsession was held on October 3, 2007 and concluded without resolution. Discoverycontinues to be underway. We intend to vigorously defend our positions.

 

In January 2007, we filed a complaint for patentinfringement in the United States District Court for the Western District ofWashington against Aten Technology, Inc., Aten International Co., Ltd, BelkinCorporation, Rose Electronics and its general partners, and TrippeManufacturing Company. The defendants have filed counterclaims allegingnon-infringement, unenforceability, and invalidity, and discovery is currentlyunderway. In May 2007, we entered into a Settlement and License Agreement withTrippe Manufacturing, and dismissed Trippe from the lawsuit.

 

In March 2007, KBM Enterprises, formerly acontract manufacturer for us, filed a complaint against us in the CircuitCourt of Madison County, Alabama, seeking $9.5 million for costsallegedly incurred by KBM in its manufacturing efforts on our behalf. We havefiled an answer and counterclaims against KBM and one of its principals, and weintend to vigorously defend our positions. Discovery is currently underway.

 

In April 2007, we filed a complaint for declaratoryjudgment against Aten International Co., Ltd. in the United States DistrictCourt for the Northern District of Alabama. We are seeking a declaratoryjudgment that two patents owned by Aten and asserted against Avocent areinvalid and that certain of products alleged by Aten to infringe do notinfringe these patents. In August 2007, Aten’s motion to dismiss for lack ofpersonal jurisdiction was granted, and we have appealed that ruling to theFederal Circuit Court of Appeals.

 

**Item 1A. Risk Factors.**

 

*THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKINGSTATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE OUR FUTUREACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS QUARTERLYREPORT. THESE RISKS AND UNCERTAINTIES INCLUDING THE FOLLOWING:*

 

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

 

We acquired LANDesk Group Limited (“LANDesk”) in thethird quarter of 2006. This acquisition represents a departure from our coreproducts and technologies and our entry into a new market (systems managementsoftware products and services) in which we 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’scompetitors have substantially greater financial, customer support, technicaland marketing resources, larger customer bases, longer operating histories,greater name recognition, and more established relationships in the industrythan LANDesk has, and we may not have the resources or expertise to competesuccessfully with them in the future.

 

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The LANDesk acquisition may divert the attention ofmanagement and other personnel from our core business operations, which mayadversely affect our financial performance in one or more quarters. LANDeskpresents us with new and different issues regarding revenue recognition, channelmanagement, and collection of existing or new receivables, any of which couldhave a material adverse effect on our business, financial condition, andresults of operations. We will need to expand and improve our internal systems,including our management information systems, 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. Theacquisition and integration of LANDesk and its software products and serviceswill require significant time, expense, and resources and subject us to theacquisition risks detailed below as we move into this new market. Any failureto successfully integrate and operate LANDesk could thus materially andadversely affect our result of operations, cash flows, and financial position.

 

**We have acquired, and expect to continue toacquire, technologies, and companies and these acquisitions could disrupt ourbusiness or expose us to other risks.**

 

A key component of our engineering and productdevelopment strategy and our future growth is the investment in or the acquisitionof technologies and companies, including our acquisitions of CycladesCorporation and LANDesk Group Limited in 2006. We intend to continue to executeour strategy through the acquisition of technologies or companies or throughinvestments in complementary companies, products, personnel, or technologies,and it is likely we will complete such acquisitions or investments in thefuture. These acquisitions 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 company’s customers, distributors, resellers, suppliers, orother partners;

 

•                                          Delaysor difficulties and the attendant expense in evaluating, coordinating, andcombining administrative, manufacturing, research and development and otheroperations, facilities, and relationships with third parties in accordance withlocal laws and other obligations while maintaining adequate standards, controlsand procedures, including financial controls and controls over informationsystems;

 

•                                          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, including theassumption 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

 

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

 

Our failure to manage these risks and challenges couldmaterially harm our business, financial condition, and results of operations. Inaddition, if we do not successfully address these challenges in a timelymanner, we may not fully realize all of the anticipated benefits or synergieson which the value of a transaction was based. Future transactions could causeour financial results to differ from expectations of market analysts orinvestors for any given quarter.

 

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

 

The markets for our products and technologies arehighly fragmented, rapidly evolving, and intensely competitive, and we expectthis competition to continue and increase.  Aggressive competition fromboth hardware and software products and technologies could lengthen thecustomer evaluation process and result in price reductions and loss of sales,which would materially harm our business.  Our business is becomingincreasingly sensitive to the introduction of new products and technologies(such as virtualization), price changes, and marketing efforts by numerous andvaried competitors.  Accordingly, our future success will be highly dependentupon our timely completion and introduction of new products and technologiesand features at competitive prices and performance levels that address theevolving needs of our customers.  We continue to experience aggressiveprice competition and increased customer sensitivity to product prices, andpricing and margin pressures are likely to increase in the future. Because of this competition, we may have to continue to lower the prices ofmany of our products and technologies or offer greater functionality within ourproducts to deliver greater value to customers to stay competitive, while atthe same time trying to maintain or improve our revenue and gross margin. Because our business model is based on providing innovative and high quality products,we may 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 for sales of switching systems andextension products with companies such as Raritan Computer, Rose Electronics,Minicom Advanced Systems, Aten, Belkin, Lantronix, and Digital V6.  Theseproducts also face competition from software providers (such as Microsoft,Computer Associates, Tivoli, Symantec, Novell, and BMC Software), who may beable to offer software products competitive with our hardware products at amuch lower cost or even bundled for free, and from server manufacturers(including our OEM customers), who are able to offer their competitivetechnologies or products at the time of the server sale.  Thesecompetitive software and hardware products address many of the problems ourswitching systems and technologies, extension products, and remote accessproducts are designed to address.

 

We compete for sales of our systems managementproducts with companies such as Microsoft, Computer Associates, BMC Software,Novell, and Symantec, many of whom have greater financial, technical, andmarketing resources, a larger customer base, a longer operating history,greater name recognition, and more established relationships in the industrythan we do, and may offer their own or third party competitive software productsat a lower cost or bundled for free with their other products.  Microsoft,in particular, has delivered competitive systems management products andannounced its intention to continue to 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 and potential competitors may be able torespond more quickly to new or emerging technologies or products and to changesin customer requirements or to devote greater resources to the research,development, promotion, sale, and support of their products and technologiesthan we do.  In addition, current and potential competitors haveestablished or may establish cooperative relationships among themselves or withthird parties that expand or enhance the ability of their products andtechnologies to address the needs of our current and prospectivecustomers.  Some of these competitors can also bundle hardware, software,and services together, and offer a more complete set of hardware products andservices 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 our customers, such as Dell,Hewlett-Packard, IBM, Symantec, and Microsoft, presently offer competitivehardware and/or software products and technologies that address many of theproblems our products and technologies address.  These customers coulddecide to manufacture or enhance their own switching, IPMI or other embeddedtechnologies, or systems management or security products, or offer products ortechnologies supplied by competitors.  Companies with hardwaremanufacturing experience or network management products, many of which aresubstantially larger than we are and have significantly more financialresources than we do, also offer products or technologies that compete withus.  Established companies with hardware manufacturing or networkmanagement experience (such as Intel, Cisco, or EMC) could also offer newproducts, new technologies (such as virtualization), or 

 

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new solutions thatcompete with, or reduce the demand for, our products and technologies.

 

There has been consolidation in the markets in whichwe compete, which we believe will continue and could lead to increased pricecompetition and other forms of competition as companies attempt to maintain orextend their market positions in the rapidly changing IT industry. In addition,we may face competition in the future from large established companies or fromemerging companies that have not previously entered the market or that do notcurrently have products that directly compete with our products. This couldlead to more variability in our operating results due to lengthening of thecustomer evaluation process and/or the loss of business to these competitors,which may adversely affect our business, financial condition, and results ofoperations.

 

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

 

The process of developing or acquiring new productsand technologies and enhancing existing products and technologies is complex,costly, and uncertain, and any failure by us to anticipate customers’ changing needsand emerging technological trends accurately could significantly harm ourmarket share and results of operations.  We must make long-terminvestments, develop or obtain appropriate intellectual property, and commitsignificant resources before knowing whether our predictions will accuratelyreflect customer demand for our products and services.  After we develop aproduct, we must then accurately forecast volumes and configurations that meetcustomer requirements, manufacture appropriate hardware volumes quickly and atlow cost and develop cost-effective software solutions, and train our salesforce and resellers.  Any delay in the development, production, marketingof, or training for new products or technologies could result in our not beingamong the first to market, which could further harm our competitive position.

 

Sales of switching, extension, and remote accessproducts and technologies are characterized by rapid technological advances,frequent new product and technological introductions and enhancements, andsignificant price competition.  If we do not keep pace with these changes,we will lose customers, and our business will be adversely affected.  Theintroduction of products or technologies incorporating superior alternatives suchas virtualization hardware and software, other switching software, theemergence of new industry standards, or changes in pricing structure couldrender our existing products and technologies and those under developmentobsolete or unmarketable.  New technologies offered by us or ourcompetitors could compete with our existing products at a lower price, whichcould reduce our revenue.

 

Our hardware products combine components, such asprinted circuit boards, connectors, semiconductors, memory, cable assemblies,power supplies and enclosures that are manufactured by other companies and aregenerally available to competitors and potential competitors.  Oursoftware products combine software or content from third parties, such as opensource software or technology, drivers, security, or anti-virus information,which may also be generally available to our competitors and potentialcompetitors.  Our future success will depend in large part upon continuedinnovative application of commercially available components and third partysoftware or technology, and continued enhancements to our proprietary hardware,software, firmware, and other technologies, the expansion and enhancement ofexisting products and technologies, and our development and introduction of newproducts and technologies that address changing customer needs on acost-effective and timely basis.  If we fail to respond on a timely basisto technological developments, changes in industry standards, customerrequirements, competitive products, product localization, or softwareinnovations, we will lose customers, and our business will be greatlyharmed.  Similar results could occur if we experience significant delaysin the development or introduction of new products or technologies.

 

Due to our significant reliance on OEM relationships,our hardware development efforts may often be focused on developing newproducts, technologies, or enhancements for OEM customers.  As a result,our OEM relationships may negatively affect our ability to develop new and enhancedproducts and technologies for our non-OEM customers.  Moreover, these newproducts, technologies, or enhancements for OEM customers may not be availableto, or readily marketable to, other customers without significant modificationand delay.  The expansion, termination, or significant disruption of ourrelationship with certain OEMs or other customers for whom we devotesignificant product development resources is likely to result in lostopportunities with respect to the development of products, technologies, orenhancements for our other customers.

 

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

 

Our future success depends in part upon our ability toprotect proprietary rights in our products and technologies.  We seek toprotect our intellectual property rights by invoking the benefits of thepatent, trademark, copyright, trade secret, and unfair competition laws of theUnited States and other countries and protections provided by confidentialityand nondisclosure agreements and other legal agreements.  These laws andpractices, however, afford only limited protection.  There can be noassurance that the steps we have taken to protect our intellectual propertyrights, or that the steps we take in the future, will be adequate to prevent ordetect misappropriation of our intellectual property or technologies or thatour competitors will not independently develop proprietary or othertechnologies that are substantially equivalent or superior to our products ortechnologies. In addition, our proprietary 

 

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information may bemisused or improperly disclosed by third parties entrusted with thisinformation.

 

The U.S. Patent and Trademark Office has issuedseveral patents to us for various aspects of our products.  We havevarious corresponding patent applications pending under the provisions of thePatent Cooperation Treaty, which permits the filing of corresponding foreignpatent applications in numerous foreign countries within a limited timeperiod.  We also have other United States and foreign patent applicationspending.  There can be no assurance that any additional patents will beissued from any of those pending applications or that any patents will beissued in any additional countries where our products can be sold.  Claimsallowed in our patents or in any pending patent applications may not be ofsufficient scope or strength for, or provide meaningful protection or anycommercial advantage to us or such claims may not be upheld ifchallenged.  Also, competitors may develop their own intellectual propertyor technologies, obtain their own patents, or challenge the validity of, or beable to design around, our patents.  The laws of certain foreign countriesin which our products are or may be developed, manufactured, or sold(particularly certain countries in Asia) may not protect our products orintellectual property rights to the same extent as do the laws of the UnitedStates and thus increase the likelihood of piracy of our technologies andproducts.

 

We have, in the past, filed complaints for patentinfringement against a number of companies, and we may initiate claims orlitigation against other third parties for infringement of proprietary rightsor to establish the validity of proprietary rights.  Similarly, ourcompetitors or other third parties may initiate claims or litigation against usalleging infringement of their proprietary rights or improper use of theirintellectual property, and from time to time, third parties notify us that ourproducts may infringe their intellectual property rights, which regardless ofmerit, requires our time and resources to evaluate and respond. Existinglitigation, and any other litigation relating to intellectual property to whichwe become a party, is subject to numerous risks and uncertainties, includingthe risk of counterclaims or other litigation against us, and we may not besuccessful in any such litigation.  Litigation is expensive, and theexisting litigation or any other litigation by or against us could result insignificant additional expense, divert the efforts of technical and managementpersonnel, whether or not such litigation results in a favorable determination,harm our relationships with existing customers, and deter future customers frompurchasing or licensing our products.  In the event of an adverse resultin any such litigation, we could be required to pay substantial damages,suspend or cease the development, manufacture, use, marketing, and sale of anyinfringing products, expend significant resources to redesign products ordevelop non-infringing technology, discontinue the use of certain processes, orobtain licenses to the infringing technology.  There can be no assurancethat we would be successful in such development or that such licenses would beavailable on reasonable terms, or at all, and any such development or licensecould require us to expend substantial time and other resources.  In theevent that any third party makes a successful claim against us, or ourcustomers, and a license is not made available on commercially reasonableterms, our business, financial condition, and results of operations could beadversely affected. In addition, any dispute involving our intellectualproperty could result in our customers, distributors, or resellers becominginvolved in the litigation, which could trigger indemnification obligations incertain of our sales, license, or service agreements.

 

The IT industry is characterized by vigorous pursuitand protection of intellectual property rights or positions, which has resultedin significant and often protracted and expensive litigation.  We have inthe past been, and we may from time to time in the future be, a party inproceedings alleging infringement of intellectual property rights owned bythird parties.  If necessary or desirable, we may seek licenses under suchintellectual property rights.  However, licenses may not be offered onterms acceptable to us, or at all.  The failure to obtain a license from athird party for technology used by us could cause us to incur substantialliabilities and to suspend or cease the manufacture of products requiring suchtechnology.  Additionally, current or future competitors could obtainpatents that may prevent us from developing or selling our products.

 

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

 

We have in the past experienced substantialfluctuations in revenue, bookings, and operating results, on a quarterly and anannual basis, and we expect these fluctuations will continue in thefuture.  Our operating results will be affected by a number 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 

 

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in the mix of revenue attributable to higher-marginproducts as opposed to lower-margin sales or services;

 

•                                          Changesin demand for our products;

 

•                                          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 operating results will continue to be affected byseasonal trends, by general conditions in the IT market, and by generaleconomic conditions.  We have experienced, and we expect to continue toexperience, some degree of seasonality due to customer buying cycles.  Webelieve that the third and fourth quarters will generally have higher net saleslevels due to customer budgeting and procurement cycles, which may depress netsales in other quarters.  In addition, European sales are often weakerduring the summer months.  In the past, revenue in our fourth quarter ofeach year has typically been higher than revenue in prior quarters for theyear, and we typically see a sequential decline in revenue from the fourthquarter of a year to the first quarter of the following year.  While it isdifficult to predict revenue in any quarter, we expect that this pattern willcontinue in the future.  Many of the factors that create and affect seasonaltrends are beyond our control.

 

Our quarterly sales have also reflected a pattern inwhich a disproportionate percentage of each quarter’s total sales occur towardthe end of the quarter, and this trend has become more pronounced in recentperiods. 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 predicted demandfor 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 impact inventorylevels and results of operations in a manner that is disproportionate to thenumber of days in the quarter affected. In addition, accounting requirementsassociated with satisfying the various elements necessary to recognize softwarerevenue may result in significant fluctuations in our quarterly results.

 

In order to remain competitive and provide ourincreasingly sophisticated customers with more options, we have made and expectto continue to make new software purchasing and licensing options available toour customers. These options may result in an increase in contracts wheresoftware revenue is deferred or cash is received over time as opposed torecognition of revenue or payment at or about the time of the purchase orlicense.

 

We believe that quarter-to-quarter comparisons of ourhistorical financial results are not meaningful indicators of our futureoperating results, and you should not rely on them as an indication of ourfuture performance.  If our quarterly operating results fail to meet theexpectations of equity research analysts, the price of our common stock couldbe negatively affected.

 

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

 

Gross margins may vary or decline from period-to-perioddepending on a number of factors, including:

 

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

 

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

 

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

 

•                                          Rawmaterials, freight, and labor costs;

 

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

 

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

 

We expect that our gross margins may vary and maydecline in the future primarily due to the factors listed above and toincreased competition and the introduction of new products and technologiesthat may affect product prices and demand for our products.

 

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

 

A substantial portion of our sales is concentratedamong a limited number of OEM customers.  Sales to theseOEMs represented approximately 40% of net sales in 2006, 48% of net salesin 2005, and 45% of net sales in 2004.  Sales to Hewlett-Packardrepresented approximately 14% of our net sales in 2006, 20% of our net sales in2005, and 23% of our net sales in 2004.  Sales to Dell representapproximately 14% of net sales in 2006, 15% of our net sales in 2005, and 12%of our net sales in 2004.

 

We have experienced, and we expect to continue toexperience, period-to-period variability in sales to these OEM customers. Any cancellation, rescheduling, or reduction of orders by OEM customers in thefuture could materially adversely affect our operating results.  Althoughour OEM customers typically place orders for products up to several monthsprior to scheduled shipment dates, these orders are subject to cancellation.

 

Our OEM business is 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 reduced marketingof 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 risks could have a material adverseeffect on our business, financial condition, and results of operations. We have experienced, and expect to continue to experience, pricing pressuresand significant variability in orders from our OEM customers, which may in thefuture have a material adverse effect on our quarterly sales and operatingresults.

 

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The loss of one or more large OEM customers wouldmaterially harm our business.  While we have contracts with some of ourexisting OEM customers, none of our OEM customers is obligated to purchaseproducts from us except pursuant to binding purchase orders. Consequently, any OEM customer could cease doing business with us at anytime.  Our dependence upon a few OEMs also results 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, OEM customers have longer paymentcycles that increase the likelihood of aged or problem accounts receivable.

 

We use multiple warehouses for many of our OEMcustomers to fulfill their hardware orders under a just-in-time inventorymanagement system, which requires us to maintain sufficient inventory levels ofour hardware products at each of these warehouses to satisfy our OEMsanticipated customer demand, and we generally recognize revenue only when theseOEM customers take possession of our hardware products.  We are requiredto plan production, order components, and undertake our manufacturingactivities prior to the time that these orders become firm or the products areaccepted.  In addition, our OEM customers have requested, and are likelyto continue to request from time to time, that we delay shipment dates orcancel orders for hardware products that are subject to firm orders.  As aresult, at any time we may be holding a significant amount of OEM-brandedhardware products in inventory, and our sales to OEMs for future quartersare difficult to predict.  The inability to accurately predict the timingand volume of hardware orders for our OEM customers during any given quartercould adversely affect operating results for that quarter and, potentially, forfuture quarters.  If we underestimate sales, we may not be able to fillorders on a timely basis.  This could cause customer dissatisfaction andloss of future business.  If we overestimate sales, we may experienceincreased costs from inventory storage, waste, and obsolescence.

 

**The sales cycle for our softwareproducts is unpredictable, making it difficult to forecast operating resultsfor any given period.**

 

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

 

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

 

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

 

•                                          Concernsabout the future or performance of our company; and

 

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

 

For large opportunities, especially forenterprise-wide sales, the sales cycle is often significantly longer than ouraverage sales cycle. In addition, these large opportunities are more difficultto forecast, and if we do not correctly forecast the timing in a given period,the amount of revenue we recognize in a period could be lower than we expect,which could negatively affect our operating results for the then current periodand future periods over which revenue would have been recognized. In addition,the terms and conditions of the legal agreements for these large opportunitiesare often based on our customers’ purchase agreements and may contain termsthat are generally less favorable to us than our standard terms and conditions.As a result, revenue recognition may be delayed.

 

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

 

Our LANDesk Division has historically derived, andplans to continue to derive, a significant portion of our total softwarerevenue from existing customers who purchase additional products or annualmaintenance or upgrade protection. We depend on our installed base of softwarecustomers for future revenue from the purchase of annual software upgradeprotection or maintenance services. As we introduce new software products, ourcurrent customers may not require or desire the functionality of our newproducts and may choose not to license these products or renew their agreementsfor maintenance or upgrade protection. If our customers do not purchaseadditional products or increased numbers of products already in use, or renewannual software upgrade protection or maintenance services, our ability to increaseor maintain revenue levels could be limited to only new customers.

 

Maintenance revenue related to the licensing of oursoftware products is a significant part of our current and future operatingrevenue. In general, maintenance fees increase with the increase in the use ofour software. Accordingly, we receive higher maintenance fees with new licenseagreements and as existing customers install more of our software products onadditional systems. Due to increased discounting for larger sales opportunities,maintenance fees on a per unit basis for such large deals can be lower thanaverage. In addition, customers are generally provided reduced annualmaintenance percentages for entering into long-term maintenance agreements. Declinesin our license bookings, increases in long-term maintenance agreements,customers electing to 

 

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migrate to competitiveproducts or find alternatives to our products, and/or increased discountingcould lead to reduced software maintenance revenue and reduced gross margins.

 

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

 

A substantial portion of our sales consists of salesof our branded products to a limited number of resellers anddistributors.  Sales to resellers and distributors representedapproximately 56% of net sales in 2006, 48% of net sales in 2005, and 52% ofnet sales in 2004.  The loss of significant revenue opportunities withthese resellers and distributors could negatively impact our results ofoperations. In addition, many of these customers also have or distributecompeting products. If resellers and distributors elect to increase themarketing of competing products or reduced marketing of our products, ourability to grow our business will be negatively impacted and will impair one ofour substantial revenue sources.

 

Our reseller and distributor business is subject tomany 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 risks could have a material adverseeffect on our business, financial condition, and results of operations. We have experienced, and expect to continue to experience, pricing pressuresand significant variability in orders from our resellers and distributors,which may in the future have a material adverse effect on our quarterly salesand operating results.

 

The loss of one or more large reseller anddistributors could materially harm our business.  While we have resellerand distributor agreements, none of our resellers or distributors are obligatedto purchase products from us.  Consequently, any reseller or distributorcould cease doing business with us at any time.  Our dependence upon a fewresellers and distributors could result in a significant concentration ofcredit risk, thus a substantial portion of our trade receivables outstandingfrom time to time may be concentrated among a limited number ofcustomers.  In addition, the inability to accurately forecast the timingand 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 timely basis. This could cause customer dissatisfaction and loss of future business.  Ifwe overestimate sales, we will experience increased costs from inventorystorage, waste, and obsolescence.

 

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

 

We rely on distributors and resellers, value addedresellers, known as “VARs” (including LANDesk VARs who are also referred to as “ExpertService Providers” or “ESPs”), and systems integrators for the distribution andsale of our branded hardware and software products.  Our strategycontemplates the expansion of our distributor and reseller network bothdomestically and internationally, particularly in Asia, and an increase in thenumber of customers licensing our products through these expanded channels. Our future success will depend in part on our ability to attract, train,and motivate new distributors and resellers and expand our relationships withcurrent distributors and resellers.  We may not be successful in expandingour distributor and reseller relationships.  We will be required to investsignificant additional resources in order to expand these relationships, andthe cost of this investment may exceed the margins generated from this investment.Conducting business through indirect sales channels presents a number of risks,including:

 

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•                                          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 our distribution and reseller channels,we will also need to expand our sales organization and invest substantialresources 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 ourhardware products often have rights of return, and in the future, these returnsfrom our existing or any new distributors and resellers may have a materialadverse effect on our business, financial condition, and results ofoperations.  Our agreements with our current distributors and resellersare generally nonexclusive and may be terminated on short notice by eitherparty without cause, and any new distributor or reseller agreements are likelyto contain similar provisions.  Distributors and resellers are notobligated to purchase products from us and frequently offer products fromseveral different companies, including competitors’ products, and distributorsand resellers may give higher priority to the sale of our competitors’products.  A reduction in sales efforts or efficiency by our distributorsor resellers could lead to a reduction in our sales and could materiallyadversely affect our business, financial condition, and results of operations.

 

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

 

The principal components of our hardware products areelectronic components, power supplies, semiconductors, memory, cableassemblies, line filters, enclosures, and printed circuit boards, all of whichare purchased from outside vendors.  We generally buy components under purchaseorders and generally do not have long-term agreements with our suppliers. Also, we generally do not maintain large inventories of components.  Anytermination of, or significant disruption of, our relationships with thesuppliers of our product components may prevent us from filling customer ordersin a timely manner which could result in customer dissatisfaction and lostsales.

 

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

 

We have limited ability to control quality issues(particularly with respect to faulty components manufactured by third parties),and we depend upon suppliers to deliver components that are free from defects,competitive in functionality and cost, and in compliance with specificationsand delivery schedules.  Disruption in supply, a significant increase inthe cost of one or more components, failure of a third party supplier to remaincompetitive in functionality or price, or the failure of a supplier to complywith any of our procurement needs could delay or interrupt our ability tomanufacture and deliver our products to customers on a timely basis, therebydelaying our revenue recognition and adversely affecting our business,financial condition, and results of operations.

 

We rely on third party manufacturers for subassemblyof products and for final assembly, quality assurance, and testing of some ofour products.  These outsourcing arrangements and any future outsourcingarrangements involve numerous risks, including the economic and financialviability of these manufacturers, reduced control over product quality,delivery schedules, manufacturing yields, and costs.  Moreover, althougharrangements with such manufacturers may contain provisions for warrantyobligations on the part of such manufacturers, we are primarily responsible toour customers for warranty obligations.

 

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

 

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We typically offer a thirty day unconditionalmoney-back guarantee on our appliance products sold in North America.  Wealso offer warranties for parts and service on all our hardware products,ranging from one to three years (and, in the case of some of our Equinoxbranded products, five years).  Although our historical return experiencehas not been significant, our returns may increase in the future.  Anincrease in returns would have an adverse effect on our sales and couldnegatively affect our financial results.

 

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

 

In the future, we may, as a result of competitivepressures or customer demands, change our warranty policies or our warrantyterms to provide coverage that is greater in scope and duration than thecoverage we currently offer.  If we were to increase our warrantycoverage, our risk of warranty claims, and therefore our warranty expense andreserves, would likely increase.

 

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

 

Continued growth of our sales is likely to beaccompanied by increasing demands on customer service operations.  As aresult of our commitment to a high level of customer service, we will need toinvest significant resources in the maintenance and improvement of our customerservice resources.  Any failure to maintain adequate customer servicecould cause customer dissatisfaction, result in reduced sales of products and,accordingly, materially adversely affect our business, financial condition, andresults of operations.

 

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

 

We are working to develop, integrate, and expand ourinternational distribution and reseller networks in an effort to increaseinternational sales of switching, extension, remote access, systems managementand security software, and other products.  We may not be successful indeveloping or expanding the international distribution and reseller network orin marketing and selling products in foreign markets, particularly Asia. If the revenue generated by our international sales is not adequate to recoverthe expense of establishing, expanding, and maintaining an internationaldistribution and reseller network, our business, financial condition, and resultsof operations could be materially adversely affected.  If internationalsales become a more significant component of net sales, our business couldbecome more vulnerable to the risks inherent in doing business on aninternational level, including:

 

•              Difficulties in managing foreigndistributors 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;

 

•                                          Exportrestrictions, tariffs, and other trade barriers;

 

•                                          Fluctuationsin currency exchange rates; and

 

•                                          Potentiallyadverse tax consequences and political instability.

 

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

 

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

 

We are a global company with sales, manufacturing, andresearch and development efforts around the 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 Conduct or other corporate policies due toinconsistent laws, interpretations, and/or application of corporate standardsin foreign countries;

 

•                                          Increasedfinancial accounting and reporting burdens and complexities; and

 

•                                          Theneed to localize our products.

 

The factors described above also could disrupt ourproduct development and manufacturing, key suppliers, and OEMs and resellerslocated outside of the United States.  For example, we rely onmanufacturers in Asia and Europe for the assembly and manufacture of many ofour hardware products, and we conduct substantial software development andtesting operations in China. Accordingly, we are directly affected by economic,political, and military conditions in China. Any interruption or curtailment oftrade between China and its present trading partners could materially adverselyaffect our product development, product releases, support, business, operatingresults, and financial condition.

 

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Continued or increased international politicalinstability, evidenced by the threat or occurrence of terrorist attacks,enhanced national security measures in the United States, sustained militaryaction or other conflicts, or strained international relations may impair ourability to do business, increase our costs and adversely affect our stock price.Increased international instability may negatively impact our ability to obtainadequate insurance at reasonable rates or require us to take extra securityprecautions for our domestic and international operations.

 

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

 

Currently, a majority of our international business isconducted in U.S. dollars.  However, as we expand our internationaloperations, it is likely that our international business, particularly ourbranded businesses, will increasingly be conducted in foreign currencies. Fluctuations in the value of foreign currencies relative to the U.S. dollarhave caused, and are expected to increasingly cause, currency transaction gainsand losses.  In addition, currency fluctuations could also affect ourreported results expressed in U.S. dollars. While we attempt to hedge ourforeign currency exposure, we cannot predict the effect of exchange rate fluctuationsupon future quarterly and annual operating results, and we may experiencecurrency losses in the future.

 

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

 

Our software products are designed for use withspecific third party platforms, systems, and applications. We believe thebreadth of our integration with such platforms, systems and applications is asignificant competitive advantage. Any significant change in these third partyproducts could result in the loss of interoperability or compatibility with ourproducts, making our products less attractive, increasing our research anddevelopment costs in order to modify our products, license new solutions, ordevelop new products, and potentially harming our future revenue. Our failureto anticipate, manage and adapt to these risks could result in significantdelays in our product releases, changes in our product roadmaps, loss ofcurrent customers for whom the lost compatibility is an issue, and damage toour operating results.

 

**Our software products include thirdparty content or code upon which we rely for the interoperability, integration,development, or updates of our products, and disruption of our access to suchcode or content could delay product releases, inhibit our compatibility withthird party products, and harm our business.**

 

The principal components of our software products areproprietary code and content. We do, however, rely on some third party code orcontent, 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 thirdparty code or content presents 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 with thirdparty code and content and we must depend on our own research and developmentpersonnel to evaluate and select third party code that we believe is of themost 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 significant termination of a third party license,change in third party license provisions, increase in the cost of suchthird-party code or content, failure of a code or content provider to remaincompetitive in functionality, or defect in or quality issue with third partycode could delay or interrupt our ability to develop and deliver softwareproducts to customers on a timely basis. This could delay our revenuerecognition and adversely affect our business, financial condition, and resultsof operations and possibly expose us to claims under license agreements withour customers. Our failure to anticipate, manage, and adapt to these riskscould 

 

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result in significantdelays in our products releases, changes in our product roadmaps, and damage toour operating results.

 

**Software errors or bugs, and possibleproduct liability claims related to such errors or bugs, could result inincreased costs, damage to our reputation, and loss of market share.**

 

Our software products are generally large andintricate programs. As a result, our current software products, updates,upgrades or future products may contain errors, failures, or “bugs,” some ofwhich may not become known until after the product has been released by us foruse by customers. While we routinely test our products for such errors andidentify and correct bugs through our customer support group, these problemsare inevitable. Any significant errors may result in, among other things, loss of,or delay in, the market acceptance or our products, lost revenue and sales ofour products, reallocation of, or increases in, development and customersupport resources, impairment to our reputation, loss of future renewal ormaintenance revenue, and increased service and warranty costs. Errors couldalso result in significant delays in the release of updates, upgrades, or newproducts while such errors are corrected. Moreover, because our productsprimarily support other systems and applications, any software errors or bugsin these other systems or applications may affect the performance of oursoftware, and it may be difficult or impossible to determine where the errorsreside. As a result, product errors, failures, or bugs could result insignificant harm to our business and have a material adverse effect on ourresults of operations.

 

We may be subject to legal actions or claims fordamages related to product errors which could, whether or not successful,increase costs and distract our management and our development and supportteams and could harm our business, result in unexpected expenses and damage ourreputation. Our license agreements with our customers typically containprovisions designed to limit exposure to potential product liability claims,and our standard agreements in many jurisdictions also provide that we will notbe liable for indirect or consequential damages caused by the failure of ourproducts. In certain jurisdictions, however, warranty and limitation ofliability provisions are not effective.

 

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

 

“Open source” software is software that is made widelyavailable by its authors or other third parties and is often licensed on an “asis” for a nominal fee or, in some cases, at no charge. We have incorporatedsome open source software into our products, allowing us to enhance certainsolutions without incurring substantial additional research and developmentcosts. While we have not experienced any material problems as a result of ouruse of open source software, use of open source software entails significantrisks 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 have established processes to help minimize theserisks to the extent within our control, including a review process forscreening requests from our development organizations for the use of opensource, but we cannot be sure that all open source software or technology issubmitted for approval prior to use in our products or that all use is incompliance with our corporate policies. These risks, if not eliminated, couldnegatively affect our business.

 

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

 

We are greatly dependent on the ability to retain keymanagement, sales, and technical personnel, and our future success is highlydependent upon the personal efforts of our management, sales, and technicalpersonnel and other key employees.  The loss of services of key personnel,including those who recently joined us a result of the Cyclades and LANDeskacquisitions, could have a material adverse effect on our business, financialcondition, and results of operations.  We have attempted to mitigate theserisks by offering key Cyclades and LANDesk employees retention bonuses (payableonly if they continue employment with us for specified 

 

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periods) and equityawards, but there is the risk that we could nevertheless lose key management,sales, and technical employees.

 

We have historically used stock options and arecurrently using restricted stock units as a key component in our executive andemployee compensation programs in order to align employees’ interests with theinterests of our stockholders, encourage employee retention, and providecompetitive compensation packages.  Many of our employee stock options arefully vested.  This could affect our ability to retain presentemployees.  In addition, we are now required to record a charge toearnings for employee stock option grants and other equity incentives. Moreover, applicable stock exchange listing standards relating to obtainingstockholder approval of equity compensation plans could make it more difficultor expensive for us to grant options to employees in the future.  As aresult, we may incur increased compensation costs, change our equitycompensation strategy, or find it difficult to attract, retain, and motivateemployees, any of which could materially adversely affect our business.

 

As we expand our international operations, we will berequired to recruit and retain experienced management, sales and technicalpersonnel in our international offices, and we expect that the identification,recruitment, training and retention of such personnel will require significantmanagement time and effort and resources. Competition for employees with theskills required, particularly engineering and other technical personnel, isintense, 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.

 

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

 

For the last several years, we have experienced rapidrevenue and customer growth and expansion in the number of employees, productofferings, customers, operating locations, and suppliers.  In addition, wehave acquired a number of companies in the same time period.  This growthand these acquisitions have resulted in increased responsibilities and placedsignificant strain on our managerial, operational, and financial resources andresulted in new and increased responsibilities for management personnel. There can be no assurance that our management, personnel, systems, procedures,and controls are, or will be, adequate to support our existing and futureoperations or that we will continue to grow. If we fail to recruit and retainsufficient and qualified managerial, operational, or financial personnel or toimplement or maintain internal systems that enable us to effectively manage ourgrowing business and operations worldwide, our financial results in any givenperiod may be adversely affected and our business and financial condition couldbe materially harmed.

 

Our ability to effectively manage during changingeconomic conditions will require us to continue to implement and improve ouroperational, financial, and information systems and internal controls and willlikely require additional management personnel.  In addition, we believethat we must continue to develop greater engineering, financial, marketing,sales, and customer service capabilities in order to develop new products andtechnologies, secure new customers, and effectively serve the evolving needs ofpresent and future customers.  We may not be successful in strengtheningthese capabilities.  Without adequate management, engineering, financial,product development, marketing, sales, and customer service capabilities, ourability to effectively manage during changing economic conditions, expand and enhanceour product lines, further penetrate existing markets, and develop new marketswill be significantly limited.  If we are unable to effectively manageduring changing economic conditions, our business, financial condition, andresults of operations could be materially adversely affected.

 

Because our business and operating results depend to asignificant extent on the general conditions in the server market, any adversechange in the server market due to adverse economic conditions, decliningcapital spending levels, or other factors could have a material adverse effecton our business, financial condition, and results of operations.  Inaddition, we continue to see industry-wide initiatives by OEMs and bydistributors and resellers of our hardware products to reduce their inventoriesand to shorten their lead times, thereby reducing early commitments to firmorders by our major OEM and our distributor and reseller customers.

 

**Our lineof credit could adversely affect us and our operations.**

 

In the second quarter of 2006, we obtained a$250,000,000 unsecured, five-year, revolving, bank line of credit, and we usedborrowings under this line of credit to fund a portion of the LANDeskacquisition and the purchase of our shares under our stock repurchase program. Interestexpense on borrowings and additional future borrowings under the line of creditcould adversely affect our future net income, margins, expenses, and financialconditions 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;

 

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•              Increasing our vulnerability toeconomic downturns in our industry;

 

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

 

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

 

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

 

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

 

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

 

The line of credit contains affirmative and negativecovenants, including limitations on our ability to (i) make distributions,investments, and other payments unless we satisfy certain financial tests orother criteria, (ii) incur additional indebtedness, and (iii) makeacquisitions and capital expenditures. All of these restrictions could affectour ability to operate our business and may limit our ability to take advantageof potential business opportunities as they arise. The failure to comply withthese covenants could result in an event of default which, if not cured orwaived, could have a material adverse effect on us.

 

Our ability to comply with these provisions of ourline of credit may be affected by changes in the economic or businessconditions or other events beyond our control. If we do not comply with thesecovenants and restrictions, we could be in default under our line of credit,and our debt, together with accrued interest, could then be declaredimmediately due and payable. There can be no assurance that we will be able toobtain sufficient funds to enable us to repay or refinance our debt obligationson commercially reasonable terms or at all. We also face interest rate risk onour bank line of credit which currently bears interest at a variable rate ofLIBOR plus 70 basis points. We have partially hedged this exposure to interestrate risk with an interest rate swap, which has a remaining notional amount of$95 million, through a well established financial institution.

 

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

 

We are subject to income taxes in both the UnitedStates and various foreign jurisdictions, and our domestic and internationaltax liabilities are subject to the allocation of expenses in differentjurisdictions.  Our effective tax rates could be adversely affected bychanges in the mix of earnings in countries with differing statutory tax rates,in the valuation of deferred tax assets and liabilities, in tax laws, or bymaterial audit assessments, which could affect our profitability.  In addition,the amount of income taxes we pay is subject to audit in various jurisdictions,and a material assessment by a governing tax authority could affect ourprofitability.

 

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

 

Section 404 of the Sarbanes-Oxley Act of 2002 requiresthat we implement and maintain adequate internal systems and effective internalcontrols over financial reporting and information systems. We have not yetcompleted our review and assessment of the internal systems and controls overthe LANDesk financial reporting and information systems, and we have untilDecember 31, 2007 to do so. The absence of such controls could have a materialadverse effect on our business, financial condition, and results of operations.In addition, correction of any “significant deficiencies” or “materialweaknesses” (as defined under PCAOB guidelines) could require additionalremedial measures including hiring additional personnel which could be costlyand time-consuming. If a significant deficiency or material weakness exists asof a future period year-end (including a material weakness identified prior toyear-end for which there is an insufficient period of time to evaluate andconfirm the effectiveness of the corrections or related new procedures), ourmanagement and our auditors will be unable to report favorably as to theeffectiveness of our control over financial reporting or information systems. Thiscould result in a loss of investor confidence in the accuracy and completenessof our financial reports and our management, which could result in a decline ofour stock price, damage to our business reputation, and potential litigation.

 

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

 

Based on our interpretation of current accountingstandards, we believe we have properly reported 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.

 

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

 

Some of our operations use substances regulated undervarious federal, state, and international laws governing the environment,including those governing the discharge of pollutants into the air and water,the management and disposal of hazardous substances and wastes, and the cleanupof contaminated sites.  Many of our products are subject to variousfederal, state, and international laws governing chemical substances inproducts, including those regulating the manufacture and distribution ofchemical substances and those restricting the presence of certain substances inelectronics products.  We could incur substantial costs, including cleanupcosts, fines, civil or criminal sanctions, third party property damage, orpersonal injury claims if we were to violate or become liable under environmentallaws or if our products become non-compliant with environmental laws.  Wealso face increasing complexity in our product design and procurementoperations as we adjust to new and future requirements relating to thematerials composition of our products, including the restrictions on lead andcertain other substances that will apply to specified electronics products puton the market in the European Union as of July 1, 2006 (Restriction ofHazardous Substances Directive) and similar legislation currently proposed inChina and other countries.  The ultimate costs under environmental lawsand the timing of these costs are difficult to predict, and liability undersome environmental laws relating to contaminated sites can be imposed retroactivelyand on a joint and several basis.

 

We could also face significant costs and liabilitiesin connection with product take-back legislation.  The European Union hasfinalized the Waste Electrical and Electronic Equipment Directive (WEEE), whichmakes producers of electrical goods, including computers and peripherals,financially responsible for specified collection, recycling, treatment, anddisposal of past and future covered products.  This deadline to enact andimplement the directive by individual European Union governments generally wasAugust 13, 2004, although extensions were granted to some countries (suchlegislation, together with the directive, the “WEEE Legislation”), andproducers are financially responsible 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.

 

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

 

Provisions in our charter documents could discouragepotential acquisition proposals and could delay or prevent a change in controltransaction that stockholders may favor.  These provisions could have theeffect of discouraging others from making tender offers for shares, and as aresult, these provisions may prevent the market price of our common stock fromreflecting the effects of actual or rumored takeover attempts and may preventstockholders from reselling their shares at or above the price at which theypurchased their shares.  These provisions may also prevent changes inmanagement that stockholders may favor.  Our charter documents do notpermit stockholders to act by written consent, limit the ability ofstockholders to call a stockholders meeting, and provide for a classified boardof directors, which means stockholders can only elect, or remove, a limitednumber of directors in any given year.  Furthermore, our Board ofDirectors has the authority to issue up to five million shares of preferredstock in one or more series.  The Board of Directors can fix the price,rights, preferences, privileges, and restrictions of such preferred stockwithout any further vote or action by our stockholders.  The issuance ofshares of preferred stock may delay or prevent a change in control transactionwithout further action by our stockholders.

 

In addition, Delaware law may inhibit potentialacquisition bids for us.  Delaware law prevents certain Delawarecorporations, including Avocent, from engaging, under certain circumstances, ina business combination with any interested stockholder for three yearsfollowing the date that such stockholder became an interested stockholder.

 

**Item 2.****           Unregistered Sales of Equity Securities andUse of Proceeds.**

 

In 2004, our Board of Directors approved a stockrepurchase program whereby we may purchase shares of our common stock. OurBoard has approved a total of 12.0 million shares to be repurchased under thisprogram, including 2.0 million additional shares approved by our Board inFebruary 2007. The plan has no expiration date. Details of purchases madeduring the first nine months of 2007 are as follows:

 

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| **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      |                                                                                                                      |       |                                                                                   |       |   |
|                                       |       |                                                                              |       |                                                                             |       |                                                                                                                      |       |                                                                                   |       |
| March 31, 2007 —  April 27, 2007      |       | 100,000                                                                           |       | $                                                                                | 24.93      |                                                                                                                      | 10,400,000 |                                                                                   | 1,600,000  |   |
| April 28, 2007 —  May 25, 2007        |       | —                                                                            |       | $                                                                                | —     |                                                                                                                      | 10,400,000 |                                                                                   | 1,600,000  |   |
| May 26, 2007 —  June 29, 2007         |       | —                                                                            |       | $                                                                                | —     |                                                                                                                      | 10,400,000 |                                                                                   | 1,600,000  |   |
| Quarter ended  June 29, 2007               |       | 100,000                                                                           |       | $                                                                                | 24.93      |                                                                                                                      |       |                                                                                   |       |   |
|                                       |       |                                                                              |       |                                                                             |       |                                                                                                                      |       |                                                                                   |       |
| June 30, 2007 —  July 27, 2007        |       | 200,000                                                                           |       | $                                                                                | 29.11      |                                                                                                                      | 10,600,000 |                                                                                   | 1,400,000  |   |
| July 28, 2007 —  August 24, 2007      |       | 100,000                                                                           |       | $                                                                                | 27.16      |                                                                                                                      | 10,700,000 |                                                                                   | 1,300,000  |   |
| August 25, 2007  — September 28, 2007 |       | —                                                                            |       | $                                                                                | —     |                                                                                                                      | 10,700,000 |                                                                                   | 1,300,000  |   |
| Quarter ended  September 28, 2007          |       | 300,000                                                                           |       | $                                                                                | 28.46      |                                                                                                                      |       |                                                                                   |       |   |
| Nine months  ended September 28, 2007      |       | 886,267                                                                           |       | $                                                                                | 29.87      |                                                                                                                      |       |                                                                                   |       |   |

 

Approximately 104,000shares were withheld as payment for employee payroll withholding taxes at therelease of vested restricted stock units in the first nine months of 2007 (*see note 3 to the financial statements*). The104,000 shares were considered as treasury shares; however, these treasuryshares were considered immediately retired and are not considered in the tableabove.

 

**Item 4.****           Submissionof Matters to a Vote of Security Holders.**

 

OnJuly 26, 2007, we held our Annual Meeting of Stockholders. The matters voted onat the meeting and the results of these votes are as follows:

 

1.             Election of Class II Directors.

 
| ** **             | ** ** | **Votes for** | ** ** | **Votes Withheld** | ** ** |
|------------------------|------------|--------------------|------------|-------------------------|------------|
| 1. William H.  McAleer |       | 42,541,190         |       | 764,408                 |       |
| 2. David P.  Vieau     |       | 42,252,125         |       | 1,053,473               |       |
| 3. Doyle C.  Weeks     |       | 41,651,753         |       | 1,653,845               |       |

 

2.             Ratify PricewaterhouseCoopers LLPas independent auditors for year ended December 31, 2007.

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Votes Abstained** | ** ** |
|--------------------|------------|------------------------|------------|--------------------------|------------|
| 43,171,248         |       | 124,960                |       | 9,390                    |       |

 

**Item 6.    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. |
|       |       |                                                                                                                                                                                      |
| **99.14**  | ** ** | **Amended and Restated Bylaws of Avocent Corporation**                                                                                                                                    |

 

ITEMS 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

 

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### **SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   |              | AVOCENT CORPORATION                                             |   |
|--------|-------------------|-----------------------------------------------------------------|--------|
|   |              | (Registrant)                                                    |
|   |              |                                                            |
|   |              |                                                            |
| Date:  | November  5, 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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