Tableof Contents

 

 

 

**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 June 27, 2008 or** |
|                                                      |   |   |
| **o**                                                     | ** ** | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |

 

**For thetransition period from           to**

 

**Commissionfile number: 000-30575**

 

**AVOCENT CORPORATION**

(Exact Name ofRegistrant as Specified in Its Charter)

 

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

 

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

 

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

 

xYes  oNo

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filer x |   | Accelerated  filer o |   | Non-accelerated  filer o |   | Smaller  reporting company o |
|----------------------------|--------|----------------------|--------|--------------------------|--------|------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct): Yes  o    No  ý

 

As of July 31,2008, the number of outstanding shares of the Registrant’s Common Stock was 44,795,253.

 

 

 

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**AVOCENTCORPORATION**

**FORM 10-Q**

**June 27,2008**

 

**INDEX**

 
| ** **   | ** **            | **Page(s)**                                                                                                          |
|--------------|-----------------------|----------------------------------------------------------------------------------------------------------------------|
| ** **   | ** **            | ** **                                                                                                           |
| Part I  | Financial Information |                                                                                                                 |
|         |                  |                                                                                                                 |
|         | Item 1.               | Financial Statements (unaudited)                                                                                     |   |
|         |                  |                                                                                                                 |   |
|         |                  | Consolidated  Statements of Income for the Three and Six Months Ended June 27, 2008  and June 29, 2007     | 3 |
|         |                  |                                                                                                                 |   |
|         |                  | Consolidated Balance Sheets at  June 27, 2008 and December 31, 2007                                        | 4 |
|         |                  |                                                                                                                 |   |
|         |                  | Condensed  Consolidated Statements of Cash Flows for the Six Months Ended June 27,  2008 and June 29, 2007 | 5 |
|         |                  |                                                                                                                 |   |
|         |                  | Notes to Condensed Consolidated Financial Statements                                                                 | 6-15 |
|         |                  |                                                                                                                 |   |
|         | Item 2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          | 16-25 |
|         |                  |                                                                                                                 |   |
|         | Item 3.               | Quantitative  and Qualitative Disclosures about Market Risks                                                         | 26 |
|         |                  |                                                                                                                 |   |
|         | Item 4.               | Controls and  Procedures                                                                                             | 26 |
|         |                  |                                                                                                                 |
| Part II | Other Information     |                                                                                                                 |
|         |                  |                                                                                                                 |
|         | Item 1.               | Legal Proceedings                                                                                                    | 26 |
|         |                  |                                                                                                                 |   |
|         | Item 1A.              | Risk Factors                                                                                                         | 27 |
|         |                  |                                                                                                                 |   |
|         | Item 2.               | Unregistered  Sales of Equity Securities and Use of Proceeds                                                         | 44 |
|         |                  |                                                                                                                 |   |
|         | Item 4.               | Submission  of Matters to a Vote of Security Holders                                                                 | 44 |
|         |                  |                                                                                                                 |   |
|         | Item 6.               | Exhibits                                                                                                             | 44 |
|         |                  |
| Signature    | 45                    |

 

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**PART I —FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

**AVOCENT CORPORATION**

**CONSOLIDATED STATEMENTS OF INCOME**

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

** **
| ** **                                                                                                                                                                                                                         | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                         | ** ** | **June 27,**                                  | ** ** | **June 29,**                                | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| ** **                                                                                                                                                                                                                         | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales:                                                                                                                                                                                                                         | * *   | * *                                           | * *   | * *                                         | * *   | * * | * * | * * | * * |
| Products and  services                                                                                                                                                                                                             |       | $                                                  | 133,184    |                                             | $          | 125,407 |   | $ | 250,766 |   | $ | 238,983 |   |
| Licenses and  royalties                                                                                                                                                                                                            |       | 25,998                                             |       | 24,818                                           |       | 49,815 |   | 44,393 |   |
| Total net sales                                                                                                                                                                                                                    |       | 159,182                                            |       | 150,225                                          |       | 300,581 |   | 283,376 |   |
|                                                                                                                                                                                                                               |       |                                               |       |                                             |       |   |   |   |   |
| Cost of sales:                                                                                                                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Products and services                                                                                                                                                                                                              |       | 55,857                                             |       | 51,778                                           |       | 102,654 |   | 100,872 |   |
| Licenses and  royalties                                                                                                                                                                                                            |       | 668                                                |       | 598                                              |       | 1,369 |   | 957 |   |
| Amortization of  intangibles related to licenses and royalties                                                                                                                                                                     |       | 2,768                                              |       | 2,767                                            |       | 5,535 |   | 5,450 |   |
| Total cost of sales (including stock compensation of $257 and $500  for the three and six months ended June 27, 2008; $301 and $480 for the  three and six months ended June 29, 2007)                                   |       | 59,293                                             |       | 55,143                                           |       | 109,558 |   | 107,279 |   |
|                                                                                                                                                                                                                               |       |                                               |       |                                             |       |   |   |   |   |
| Gross profit                                                                                                                                                                                                                       |       | 99,889                                             |       | 95,082                                           |       | 191,023 |   | 176,097 |   |
|                                                                                                                                                                                                                               |       |                                               |       |                                             |       |   |   |   |   |
| Research and development expenses (including stock compensation  of $1,340 and $2,355 for the three and six months ended June 27, 2008;  $1,391 and $2,506 for the three and six months ended June 29, 2007)             |       | 24,361                                             |       | 21,189                                           |       | 47,728 |   | 42,070 |   |
| Selling, general and administrative expenses (including stock  compensation of $2,622 and $5,302 for the three and six months ended  June 27, 2008; $3,411 and $5,779 for the three and six months ended  June 29, 2007) |       | 57,445                                             |       | 52,442                                           |       | 112,564 |   | 101,102 |   |
| Restructuring and retirement expenses (including stock  compensation of $1,904 and $2,519 for the three and six months ended  June 27, 2008)                                                                                  |       | 4,730                                              |       | —                                           |       | 7,701 |   | — |   |
| Amortization of  intangible assets                                                                                                                                                                                                 |       | 7,617                                              |       | 7,581                                            |       | 15,152 |   | 16,543 |   |
| Total operating  expenses                                                                                                                                                                                                          |       | 94,153                                             |       | 81,212                                           |       | 183,145 |   | 159,715 |   |
|                                                                                                                                                                                                                               |       |                                               |       |                                             |       |   |   |   |   |
| Income from  operations                                                                                                                                                                                                            |       | 5,736                                              |       | 13,870                                           |       | 7,878 |   | 16,382 |   |
|                                                                                                                                                                                                                               |       |                                               |       |                                             |       |   |   |   |   |
| Net investment  income                                                                                                                                                                                                             |       | 671                                                |       | 904                                              |       | 1,568 |   | 1,783 |   |
| Interest expense                                                                                                                                                                                                                   |       | (1,810                                             | )          | (2,268                                           | )          | (3,647 | ) | (4,502 | ) |
| Other income  (expense), net                                                                                                                                                                                                       |       | (95                                                | )          | 15                                               |       | 360 |   | (302 | ) |
|                                                                                                                                                                                                                               |       |                                               |       |                                             |       |   |   |   |   |
| Income before  provision (benefit) for income taxes                                                                                                                                                                                |       | 4,502                                              |       | 12,521                                           |       | 6,159 |   | 13,361 |   |
| Provision  (benefit) for income taxes                                                                                                                                                                                              |       | 1,059                                              |       | (2,479                                           | )          | 1,985 |   | (2,385 | ) |
|                                                                                                                                                                                                                               |       |                                               |       |                                             |       |   |   |   |   |
| Net income                                                                                                                                                                                                                         |       | $                                                  | 3,443      |                                             | $          | 15,000 |   | $ | 4,174 |   | $ | 15,746 |   |
|                                                                                                                                                                                                                               |       |                                               |       |                                             |       |   |   |   |   |
| Earnings per  share:                                                                                                                                                                                                               |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                                                                                                                                                                                              |       | $                                                  | 0.08       |                                             | $          | 0.30 |   | $ | 0.09 |   | $ | 0.31 |   |
| Diluted                                                                                                                                                                                                                            |       | $                                                  | 0.08       |                                             | $          | 0.29 |   | $ | 0.09 |   | $ | 0.31 |   |
| Weighted average  shares used in computing earnings per share:                                                                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                                                                                                                                                                                              |       | 44,731                                             |       | 50,476                                           |       | 45,469 |   | 50,607 |   |
| Diluted                                                                                                                                                                                                                            |       | 45,378                                             |       | 51,158                                           |       | 46,126 |   | 51,457 |   |

 

See notesaccompanying these condensed consolidated financial statements.

 

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**AVOCENTCORPORATION**

**CONSOLIDATED BALANCE SHEET**

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

 
| ** **                                                                                                                                                                                                               | ** ** | **June 27,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                               | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                          |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                               |       | $                       | 116,933    |                        | $          | 105,183 |   |
| Investments  maturing within one year                                                                                                                                                                                    |       | —                  |       | 5,943                       |       |
| Accounts  receivable, less allowance for doubtful accounts of $2,496 and $2,481 at  June 27, 2008 and December 31, 2007, respectively                                                                          |       | 111,087                 |       | 109,851                     |       |
| Other  receivables                                                                                                                                                                                                       |       | 10,076                  |       | 10,799                      |       |
| Inventories                                                                                                                                                                                                              |       | 27,926                  |       | 30,103                      |       |
| Other current  assets                                                                                                                                                                                                    |       | 4,500                   |       | 4,399                       |       |
| Deferred tax  assets, net                                                                                                                                                                                                |       | 2,079                   |       | 5,928                       |       |
| Total current  assets                                                                                                                                                                                                    |       | 272,601                 |       | 272,206                     |       |
|                                                                                                                                                                                                                     |       |                    |       |                        |       |
| Property and  equipment, net                                                                                                                                                                                             |       | 36,991                  |       | 37,298                      |       |
| Goodwill                                                                                                                                                                                                                 |       | 584,949                 |       | 584,949                     |       |
| Other intangible  assets, net                                                                                                                                                                                            |       | 148,535                 |       | 167,982                     |       |
| Deferred tax  asset, non-current                                                                                                                                                                                         |       | 21,574                  |       | 13,297                      |       |
| Other assets                                                                                                                                                                                                             |       | 2,484                   |       | 2,701                       |       |
| Total assets                                                                                                                                                                                                             |       | $                       | 1,067,134  |                        | $          | 1,078,433 |   |
|                                                                                                                                                                                                                     |       |                    |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                            | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                                                                    |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                                                                         |       | $                       | 19,227     |                        | $          | 20,031 |   |
| Accrued wages  and commissions                                                                                                                                                                                           |       | 28,269                  |       | 25,072                      |       |
| Accrued  liabilities                                                                                                                                                                                                     |       | 32,586                  |       | 30,630                      |       |
| Income taxes  payable                                                                                                                                                                                                    |       | 11,811                  |       | 14,950                      |       |
| Deferred  revenue, current                                                                                                                                                                                               |       | 59,057                  |       | 54,738                      |       |
| Total current  liabilities                                                                                                                                                                                               |       | 150,950                 |       | 145,421                     |       |
|                                                                                                                                                                                                                     |       |                    |       |                        |       |
| Unsecured bank  line of credit                                                                                                                                                                                           |       | 130,000                 |       | 95,000                      |       |
| Deferred  revenue, non-current                                                                                                                                                                                           |       | 10,021                  |       | 11,325                      |       |
| Other  non-current liabilities                                                                                                                                                                                           |       | 338                     |       | 1,025                       |       |
| Total  liabilities                                                                                                                                                                                                       |       | 291,309                 |       | 252,771                     |       |
|                                                                                                                                                                                                                     |       |                    |       |                        |       |
| Commitments and  contingencies*(see Note 12)*                                                                                                                                                                            |       |                    |       |                        |       |
|                                                                                                                                                                                                                     |       |                    |       |                        |       |
| 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; June 27, 2008  —54,375 shares issued and 44,748 outstanding; December 31, 2007 — 53,910  shares issued and 48,283 outstanding; |       | 54                      |       | 54                          |       |
| Additional  paid-in capital                                                                                                                                                                                              |       | 1,216,299               |       | 1,208,674                   |       |
| Accumulated  other comprehensive income                                                                                                                                                                                  |       | 4,943                   |       | 2,130                       |       |
| Accumulated  deficit                                                                                                                                                                                                     |       | (214,545                | )          | (218,719                    | )          |
| Treasury stock,  at cost; June 27, 2008 — 9,627 shares; December 31, 2007 — 5,627  shares;                                                                                                           |       | (230,926                | )          | (166,477                    | )          |
| Total  stockholders’ equity                                                                                                                                                                                         |       | 775,825                 |       | 825,662                     |       |
|                                                                                                                                                                                                                     |       |                    |       |                        |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                         |       | $                       | 1,067,134  |                        | $          | 1,078,433 |   |

 

See notesaccompanying these condensed consolidated financial statements.

 

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**AVOCENTCORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited, inthousands)

 
| ** **                                                                         | ** ** | **For the six months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                         | ** ** | **June 27,**                                | ** ** | **June 29,** | ** ** |
| ** **                                                                         | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                             | * *   | * *                                         | * *   | * * | * * |
| Net income                                                                         |       | $                                                | 4,174      |   | $ | 15,746 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                             |       |   |   |
| Depreciation                                                                       |       | 4,890                                            |       | 4,730 |   |
| Amortization of  intangible assets                                                 |       | 21,033                                           |       | 22,208 |   |
| Stock-based  compensation                                                          |       | 10,671                                           |       | 8,765 |   |
| Amortization of  premiums (discounts) on investments                               |       | —                                           |       | (143 | ) |
| Net loss on  disposition of property and equipment                                 |       | 428                                              |       | 222 |   |
| Excess tax benefit from stock-based  compensation                                  |       | (9                                               | )          | (848 | ) |
| Changes in  operating assets and liabilities:                                      |       |                                             |       |   |   |
| Accounts  receivable, net                                                          |       | (1,367                                           | )          | 16,113 |   |
| Inventories                                                                        |       | 2,396                                            |       | 9,559 |   |
| Other assets                                                                       |       | 1,324                                            |       | 499 |   |
| Accounts payable                                                                   |       | (899                                             | )          | (1,498 | ) |
| Accrued wages  and commissions                                                     |       | 3,197                                            |       | (4,685 | ) |
| Accrued other  liabilities and deferred revenue                                    |       | 846                                              |       | (955 | ) |
| Income taxes,  current and deferred                                                |       | (7,807                                           | )          | (12,254 | ) |
| Net cash  provided by operating activities                                         |       | 38,877                                           |       | 57,459 |   |
| ** **                                                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Cash flows from  investing activities:                                             |       |                                             |       |   |   |
| Purchase of  other intangible assets                                               |       | (1,921                                           | )          | (3,425 | ) |
| Purchases of  property and equipment                                               |       | (5,011                                           | )          | (4,868 | ) |
| Purchases of  investments                                                          |       | —                                           |       | (50,681 | ) |
| Maturities and  proceeds from sales of investments                                 |       | 5,942                                            |       | 60,085 |   |
| Net cash  provided by (used-in) investing activities                               |       | (990                                             | )          | 1,111 |   |
| ** **                                                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Cash flows from  financing activities:                                             | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Borrowings  (repayments) under unsecured line of credit, net                       |       | 35,000                                           |       | (35,000 | ) |
| Proceeds from  employee stock option exercises                                     |       | 633                                              |       | 3,533 |   |
| Excess tax benefit from stock-based  compensation                                  |       | 9                                                |       | 848 |   |
| Purchases of  treasury stock                                                       |       | (64,449                                          | )          | (17,931 | ) |
| Net cash used in  financing activities                                             |       | (28,807                                          | )          | (48,550 | ) |
|                                                                               |       |                                             |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                      |       | 2,670                                            |       | 122 |   |
|                                                                               |       |                                             |       |   |   |
| Net increase in  cash and cash equivalents                                         |       | 11,750                                           |       | 10,142 |   |
| Cash and cash  equivalents at beginning of period                                  |       | 105,183                                          |       | 81,301 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                | 116,933    |   | $ | 91,443 |   |

 

See notesaccompanying these condensed consolidated financial statements.

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

(Unaudited, inthousands, except share data)

 

Note 1.          Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in conformity with accounting principles generally acceptedin the United States and reflect all adjustments consisting of normal recurringadjustments which, in the opinion of management, are necessary for a fairstatement of the results for the periods shown. The results of operations for these periods are not necessarilyindicative of the results expected for the full fiscal year nor for any futureperiod.  The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting period.  Actual results could differ from thoseestimates and assumptions.

 

The accompanying unaudited condensed consolidated financial statementsshould be read in conjunction with the audited consolidated financialstatements and the related notes contained in our Annual Report on Form 10-Kfor the year ended December 31, 2007, which is on file with the Securitiesand Exchange Commission and is available at our website, www.avocent.com. Theconsolidated balance sheet presented in the accompanying condensed consolidatedfinancial statements for December 31, 2007, was derived from the auditedfinancial statements filed in our 10-K for the period ended December 31,2007, but does not include all disclosures required by accounting principlesgenerally accepted in the United States of America.

 

We report our annual 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.  Beginning January 1, 2009 we will switchto reporting our quarterly periods based on three calendar months per quarter.

 

Our financial statements are consolidated and include the accounts ofAvocent Corporation and our wholly owned subsidiaries.  All significant inter-company transactionsand balances have been eliminated in consolidation.

 

Note 2.          Inventories

 

Inventoriesconsisted of the following at:

 
| ** **      | ** ** | **June 27, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **      | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| Raw materials   |       | $                           | 598        |                            | $          | 1,394 |   |
| Work-in-process |       | 377                         |       | 1,058                           |       |
| Finished goods  |       | 26,951                      |       | 27,651                          |       |
| Inventories     |       | $                           | 27,926     |                            | $          | 30,103 |   |

 

Inventories above have been reduced by reserves forexcess and obsolete inventories of $7,288 and $7,328 as of June 27, 2008and December 31, 2007, respectively.

 

Note 3.          Equity and TreasuryStock

 

We issued commonstock as a result of stock option exercise activity during the three and sixmonths ended June 27, 2008 and June 29, 2007 as follows:

 
| ** **              | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|-------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **              | ** ** | **June 27,  2008**                            | ** ** | **June 29,  2007**                          | ** ** | **June 27, 2008** | ** ** | **June 29,  2007** | ** ** |
|                    |       |                                               |       |                                             |       |   |   |   |   |
| Stock option  exercises |       | 47,000                                             |       | 50,000                                           |       | 64,000 |   | 186,000 |   |

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

(Unaudited, inthousands, except share data)

 

We issued commonstock as a result of restricted stock unit (RSU) vesting activity during thethree and six months ended June 27, 2008 and June 29, 2007 asfollows:

 
| ** **               | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|--------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **June 27,  2008**                            | ** ** | **June 29,  2007**                          | ** ** | **June 27,  2008** | ** ** | **June 29,  2007** | ** ** |
| Net RSUs issued          |       |                                               |       |                                             |       |   |   |   |   |
| RSU’s vested        |       | 24,000                                             |       | 19,000                                           |       | 569,000 |   | 349,000 |   |
| Shares withheld  for tax |       | (9,000                                             | )          | (7,000                                           | )          | (168,000 | ) | (104,000 | ) |
| Net RSUs issued          |       | 15,000                                             |       | 12,000                                           |       | 401,000 |   | 245,000 |   |

 

Share repurchaseactivity during the three and six months ended June 27, 2008 and June 29,2007 was as follows:

 
| ** **          | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|---------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **          | ** ** | **June 27,  2008**                            | ** ** | **June 29,  2007**                          | ** ** | **June 27, 2008** | ** ** | **June 29,  2007** | ** ** |
|                |       |                                               |       |                                             |       |   |   |   |   |
| Shares  repurchased |       | 88,000                                             |       | 100,000                                          |       | 4,000,000 |   | 587,000 |   |

 

RSUsgranted — During the first six months of 2008, our Compensation Committeeapproved the grant of 728,000 time-based and 426,000 market condition-based orperformance conditioned-based restricted stock units to our employees, officersand directors (*see note 15*).

 

RSUsaccelerated — During the three and six months ended June 27, 2008, weaccelerated 131,000 and 163,000 RSUs, respectively, in relation to ourrestructuring program (see Note 13).

 

Note 4.          Accumulated OtherComprehensive Income

 

Werecord unrealized gains and losses on our foreign currency translationadjustments, unrealized gains and losses on derivatives accounting for as cashflow hedges, and unrealized holding gains or losses on our available-for-salesecurities, net of tax, as accumulated other comprehensive income, which isincluded as a separate component of stockholders’ equity.  Comprehensive income for the six months endedJune 27, 2008 and June 29, 2007 is as follows:

 
| ** **                               | ** ** | **Six months ended** | ** ** |
|------------------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **June 27,   2008**  | ** ** | **June 29,   2007** | ** ** |
|                                     |       |                           |       |   |   |
| Net income                               |       | $                              | 4,174      |   | $ | 15,746 |   |
| Unrealized gains  on investments         |       | —                         |       | 73 |   |
| Unrealized gains  on cash flow hedges    |       | 446                            |       | 355 |   |
| Foreign currency  translation adjustment |       | 2,367                          |       | 190 |   |
| Total  comprehensive income              |       | $                              | 6,987      |   | $ | 16,364 |   |

 

Asof June 27, 2008 and December 31, 2007, total accumulated othercomprehensive income was $4,943 and $2,130, respectively.

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

(Unaudited, inthousands, except share data)

 

Note 5.          Earnings Per Share (*share data in thousands*)

 
| ** **                                                           | ** ** | **Income (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per-Share  Amount** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **            | ** ** |
| **For the  three months ended June 27, 2008**                   |       |                        |       |                      |       |                  |       |
| **Basic  EPS**                                                       |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders                         |       | $                           | 3,443      |                      | 44,731     |                  | $          | 0.08 |   |
| **Effect  of Dilutive Securities**                                   |       |                        |       |                      |       |                  |       |
| Stock options  and unvested restricted stock awards                  |       | —                      |       | 647                       |       | —                |       |
| **Diluted  EPS**                                                     |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders and assumed conversions |       | $                           | 3,443      |                      | 45,378     |                  | $          | 0.08 |   |
|                                                                 |       |                        |       |                      |       |                  |       |
| **For the  three months ended June 29, 2007**                   |       |                        |       |                      |       |                  |       |
| **Basic  EPS**                                                       |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders                         |       | $                           | 15,000     |                      | 50,476     |                  | $          | 0.30 |   |
| **Effect  of Dilutive Securities**                                   |       |                        |       |                      |       |                  |       |
| Stock options  and unvested restricted stock awards                  |       | —                      |       | 682                       |       | —                |       |
| **Diluted  EPS**                                                     |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders and assumed conversions |       | $                           | 15,000     |                      | 51,158     |                  | $          | 0.29 |   |
|                                                                 |       |                        |       |                      |       |                  |       |
| **For the  six months ended June 27, 2008**                     |       |                        |       |                      |       |                  |       |
| **Basic  EPS**                                                       |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders                         |       | $                           | 4,174      |                      | 45,469     |                  | $          | 0.09 |   |
| **Effect  of Dilutive Securities**                                   |       |                        |       |                      |       |                  |       |
| Stock options  and unvested restricted stock awards                  |       | —                      |       | 657                       |       | —                |       |
| **Diluted  EPS**                                                     |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders and assumed conversions |       | $                           | 4,174      |                      | 46,126     |                  | $          | 0.09 |   |
|                                                                 |       |                        |       |                      |       |                  |       |
| **For the  six months ended June 29, 2007**                     |       |                        |       |                      |       |                  |       |
| **Basic  EPS**                                                       |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders                         |       | $                           | 15,746     |                      | 50,607     |                  | $          | 0.31 |   |
| **Effect  of Dilutive Securities**                                   |       |                        |       |                      |       |                  |       |
| Stock options  and unvested restricted stock awards                  |       | —                      |       | 850                       |       | —                |       |
| **Diluted  EPS**                                                     |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders and assumed conversions |       | $                           | 15,746     |                      | 51,457     |                  | $          | 0.31 |   |

 

Anti-dilutive options to purchase commonstock outstanding and anti-dilutive RSUs were excluded from the calculationsabove. Anti-dilutive options and anti-dilutive RSUs totaled 4,451 and 4,169 forthe three and six months ended June 27, 2008, respectively.  Anti-dilutive options and anti-dilutive RSUstotaled 2,203 and 2,207 for the three and six months ended June 29, 2007,respectively.

 

Note 6.          SegmentReporting

 

In the first quarter of 2008, we dissolved our Desktops SolutionsBusiness Unit (DS) and transferred some of its personnel and a portion of itstechnology into Management Systems.  DS’results were previously reported within our Other Business Units segment.  The related revenue and expenses of DS hasnot been material to our consolidated results, and this business unit wasdissolved rather than being merged into another business unit.  Accordingly, we will continue to reporthistorical results for DS within our Other Business Units segment.  In addition, no goodwill was allocated to thisbusiness unit and all related intangible assets were fully amortized prior tothe dissolution of the business unit. Accordingly, there was no relatedwrite-off of goodwill or write-down of intangible assets as a result of thedissolution of this business unit. Costs associated with the dissolution of DSare included in retirement and restructuring expenses for the first quarter of2008 (see Note 13).

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

(Unaudited, inthousands, except share data)

 

We evaluate theperformance of our segments based on revenue and operating income, which is calculatedbefore corporate and unallocated costs, amortization of intangibles, acquiredin-process research and development expense, and stock compensation costs.  We do not track or use assets by segment as ameasure of performance, therefore, we have not presented assets bysegment.  The following is a presentationof information for our two reportable segments, Management Systems and LANDesk:

** **
| ** **                                                         | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                         | ** ** | **June 27,  2008**                            | ** ** | **June 29,  2007**                          | ** ** | **June 27,  2008** | ** ** | **June 29,  2007** | ** ** |
| Net revenue:                                                       |       |                                               |       |                                             |       |   |   |   |   |
| Management  Systems                                                |       | $                                                  | 121,664    |                                             | $          | 114,964 |   | $ | 229,395 |   | $ | 220,068 |   |
| LANDesk                                                            |       | 31,842                                             |       | 27,563                                           |       | 61,035 |   | 51,417 |   |
| Other business  units                                              |       | 4,918                                              |       | 6,035                                            |       | 8,617 |   | 10,259 |   |
| Corporate and  unallocated                                         |       | 758                                                |       | 2,158                                            |       | 1,534 |   | 2,908 |   |
| Amortization of  fair value adjustment to LANDesk deferred revenue |       | —                                             |       | (495                                             | )          | — |   | (1,276 | ) |
| Total net  revenue                                                 |       | $                                                  | 159,182    |                                             | $          | 150,225 |   | $ | 300,581 |   | $ | 283,376 |   |

** **
| ** **                                                         | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                         | ** ** | **June 27,  2008**                            | ** ** | **June 29,  2007**                          | ** ** | **June 27,  2008** | ** ** | **June 29,  2007** | ** ** |
| Operating income  (loss):                                          |       |                                               |       |                                             |       |   |   |   |   |
| Management  Systems                                                |       | $                                                  | 29,141     |                                             | $          | 34,588 |   | $ | 56,324 |   | $ | 60,499 |   |
| LANDesk                                                            |       | 3,931                                              |       | 1,117                                            |       | 4,541 |   | 581 |   |
| Other business  units                                              |       | (535                                               | )          | (2,073                                           | )          | (1,607 | ) | (5,223 | ) |
| Corporate and  unallocated costs                                   |       | (7,302                                             | )          | (3,804                                           | )          | (14,668 | ) | (7,418 | ) |
| Amortization of  fair value adjustment to LANDesk deferred revenue |       | —                                             |       | (495                                             | )          | — |   | (1,276 | ) |
| Amortization of  intangibles and other expenses                    |       | (10,550                                            | )          | (10,360                                          | )          | (20,854 | ) | (22,017 | ) |
| Restructuring  and retirement expenses                             |       | (2,826                                             | )          | —                                           |       | (5,182 | ) | — |   |
| Stock-based  compensation expense                                  |       | (6,123                                             | )          | (5,103                                           | )          | (10,676 | ) | (8,764 | ) |
| Total income  from operations                                      |       | $                                                  | 5,736      |                                             | $          | 13,870 |   | $ | 7,878 |   | $ | 16,382 |   |
|                                                               |       |                                               |       |                                             |       |   |   |   |   |
| Other expense                                                      |       | (1,234                                             | )          | (1,349                                           | )          | (1,719 | ) | (3,021 | ) |
| Income before  provision (benefit) for income taxes                |       | 4,502                                              |       | 12,521                                           |       | 6,159 |   | 13,361 |   |

** **

Sales by product line forManagement Systems and LANDesk for the three and six months ended June 27,2008 and June 29, 2007 are as follows:

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

(Unaudited, inthousands, except share data)

 
| ** **                            | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|---------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                            | ** ** | **June 27,  2008**                            | ** ** | **June 29,  2007**                          | ** ** | **June 27,  2008** | ** ** | **June 29,  2007** | ** ** |
| Management  Systems net revenue:      |       |                                               |       |                                             |       |   |   |   |   |
| KVM                                   |       | $                                                  | 92,323     |                                             | $          | 87,459 |   | $ | 171,249 |   | $ | 168,147 |   |
| Serial  management                    |       | 13,336                                             |       | 12,752                                           |       | 26,055 |   | 24,038 |   |
| Embedded  software and solutions      |       | 8,405                                              |       | 7,897                                            |       | 16,752 |   | 15,474 |   |
| Other                                 |       | 7,600                                              |       | 6,856                                            |       | 15,339 |   | 12,409 |   |
| Total Management  Systems net revenue |       | $                                                  | 121,664    |                                             | $          | 114,964 |   | $ | 229,395 |   | $ | 220,068 |   |

 
| ** **                 | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|----------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                 | ** ** | **June 27,  2008**                            | ** ** | **June 29,  2007**                          | ** ** | **June 27,  2008** | ** ** | **June 29,**

**2007** | ** ** |
| LANDesk net  revenue:      | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Licenses and  royalties    |       | $                                                  | 18,785     |                                             | $          | 16,800 |   | $ | 35,827 |   | $ | 30,171 |   |
| Maintenance and  services  |       | 13,057                                             |       | 10,763                                           |       | 25,208 |   | 21,246 |   |
| Total LANDesk  net revenue |       | $                                                  | 31,842     |                                             | $          | 27,563 |   | $ | 61,035 |   | $ | 51,417 |   |

 

We sell ourproducts internationally to customers in several countries; however no foreigncountry accounted for more than 10% of sales in the first half of 2008 or 2007.

 

Followingis a presentation of long-lived tangible assets by geography as of June 27,2008 and December 31, 2007:

 
| ** **                   | ** ** | **June 27,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Long-lived  tangible assets: |       |                    |       |                        |       |
| United States                |       | $                       | 26,027     |                        | $          | 26,266 |   |
| International                |       | 10,964                  |       | 11,032                      |       |
| Total                        |       | $                       | 36,991     |                        | $          | 37,298 |   |

 

**Note 7.**   Forward Contracts and Interest Rate Swap

** **

We use forward contracts to reduce our foreigncurrency exposure related to the net cash flows from our internationaloperations.  The majority of thesecontracts are short-term contracts (three months or less) and aremarked-to-market each quarter and included in trade payables, with theoffsetting gain or loss included in other income (expense) in the accompanyingconsolidated statements of income.  As ofJune 27, 2008, we had 3 open forward contracts with an approximate fairvalue of $2.  As of December 31,2007, we had three open forward contracts with an approximate fair value of $8.

 

Asof  June 27, 2008 we have twointerest rate swaps, which are recorded on our balance sheet.  In 2006, we entered into an interest rateswap agreement with a notional amount of $125,000.  The notional amount of the interest rate swapwas $40,000 as of June 27, 2008.   The swap was effective on August 31, 2006 and terminates on December 31,2008.  The swap calls for us to make fixed rate payments of 5.42% over theterm of the hedge and to receive floating rate payments based on LIBOR(matching the LIBOR rate in the line of credit above) from thecounter-party.   On May 1, 2008, weentered into an interest rate swap agreement with a notional amount of$80,000.  The notional amount of theinterest rate swap was $80,000 as of June 27, 2008.  The swap was effective on May 1, 2008and terminates on December 31, 2009.  The swap calls for us to makefixed rate payments of 3.05% over the term of the hedge and to receive floatingrate payments based on LIBOR (matching the LIBOR rate in the line of creditabove) from the counter-party.

 

Theobjective of the rate swap agreements is to provide a hedge against risingLIBOR interest rates that would have a negative effect on our cash flows due tochanges in interest rates on the line of credit. We anticipate that thesehedges will be settled upon maturity and are being accounted for as a cash flowhedges.  The interest rate swaps arerecorded at fair value each reporting period with the changes in the fair valueof the hedge that take place through the date of maturity recorded inaccumulated other comprehensive income (OCI).

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

(Unaudited, inthousands, except share data)

 

At June 27,2008, we recorded a net unrealized gain on the interest rate swaps, net of tax,of $446 in accumulated OCI. There was no significant ineffectiveness in thefirst half of 2008, and we anticipate no significant ineffectiveness throughoutthe remainder of 2008.

 

**Note 8.**          Goodwill and Other IntangibleAssets

** **

**Other intangibleassets subject to amortization were as follows:**

** **
| ** **                                | ** ** | **June 27, 2008**  | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Carrying**

**Amounts** | ** ** | **Accumulated  Amortization** | ** ** |
|                                      |       |                         |       |                            |       |   |   |   |   |
| Developed  technology                     |       | $                            | 56,840     |                            | $          | 23,119 |   | $ | 56,840 |   | $ | 17,292 |   |
| Internally  developed software for resale |       | 21,900                       |       | 6,692                           |       | 21,900 |   | 4,867 |   |
| Patents and  trademarks                   |       | 30,586                       |       | 8,723                           |       | 30,670 |   | 6,590 |   |
| Customer base  and certifications         |       | 99,745                       |       | 33,321                          |       | 99,878 |   | 25,496 |   |
| Maintenance  contracts                    |       | 9,600                        |       | 3,520                           |       | 9,600 |   | 2,560 |   |
| Non-compete  agreements                   |       | 10,200                       |       | 6,803                           |       | 10,624 |   | 5,432 |   |
| Other                                     |       | 3,830                        |       | 1,988                           |       | 2,310 |   | 1,603 |   |
|                                      |       | $                            | 232,701    |                            | $          | 84,166 |   | $ | 231,822 |   | $ | 63,840 |   |

** **

**For the threemonths ended June 27, 2008 and June 29, 2007, amortization expensefor other intangible assets was $10,579 and $10,461, respectively.  For the six months ended June 27, 2008and June 29, 2007, amortization expense for other intangible assets was$21,033 and $22,208, respectively.  Theapproximate estimated annual amortization for other intangibles is as follows:**

** **
| **Years ending December 31:** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2008, remainder                              |       | $          | 21,853     |   |
| 2009                                         |       | $          | 38,057     |   |
| 2010                                         |       | $          | 34,754     |   |
| 2011                                         |       | $          | 26,572     |   |
| 2012                                         |       | $          | 17,412     |   |
| Thereafter                                   |       | $          | 9,887      |   |

 

We evaluategoodwill for impairment in the fourth quarter of each fiscal year, unlesscircumstances dictate measurement at an interim date.

 

**Note 9.**         Product Warranties and DeferredRevenue

** **

We include anaccrued liability for warranty returns in our balance sheet within accruedcurrent liabilities. The activity within the liability for warranty returns forthe six months ended June 27, 2008 is as follows:

 
| Balance,  January 1, 2008                            |   | $      | 1,854  |   |
|-----------------------------------------------------------|--------|--------|--------|--------|
| Accruals for  product warranties issued during the period |   | 4,523  |   |
| Settlements made  during the period                       |   | (4,459 | )      |
| Balance,  June 27, 2008                              |   | $      | 1,918  |   |

 

**Deferred revenue related to ourextended warranty program for hardware products was $5,670 at June 27,2008 and $5,388 at December 31, 2007. We recorded earned revenue**from theamortization of deferred revenue related to extended warranties of $1,962during the six months ended June 27, 2008. In addition, we recorded new extended warranties of $2,244 during thesix months ended June 27, 2008.

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

(Unaudited, inthousands, except share data)

 

We defer revenuefor subscription, service and maintenance contracts until earned, which isgenerally over the term of the contract or when services are performed. As of June 27,2008, deferred revenue was $63,395, of which approximately $61,730 related toLANDesk.  As of December 31, 2007,deferred revenue was $60,647, of which approximately $59,078 related toLANDesk.

 

Note 10. Income Taxes

 

The effective taxrate in the second quarter of 2008 was a provision of 23.5% compared to abenefit of 19.8% in the second quarter of 2007. The provision for income taxes was $1,100 for the second quarter of2008, compared to a benefit of $2,500 in the second quarter of 2007.  The effective tax rate for the first sixmonths of 2008 was a provision of 32.2% compared to a benefit of 17.8% for thefirst six months of 2007.  The provisionfor income taxes was an expense of $1,985 for the first six months of 2008,compared to a benefit of $2,385 for the first six months of 2007.  The increase in the effective tax rate wasprimarily the result of the change in the amount and mix of our pre-tax bookincome and a tax benefit recognized during the second quarter of 2007associated with in-process R&D previously charged to book expense.

 

During the secondquarter of 2007, we made certain elections under the Internal Revenue Code Sec.338(g) related to the LANDesk acquisition in August 2006.  As aresult of making these elections, the acquisition was treated for U.S. taxpurposes as an asset acquisition where we stepped up the tax basis in assetsand liabilities previously recognized in the purchase accounting.  We hadpreviously accounted for this acquisition as a qualified stock purchase, withcarryover tax basis in the assets and liabilities recorded.  Ourpreliminary purchase price allocation was based upon the initial structure ofthe transaction and did not take into consideration the tax impacts shouldthose elections be made within the required time period, including the taximpacts associated with the amount assigned to in-process R&D that wascharged to expense at acquisition.  During the second quarter of 2007, wereconsidered the measurement of deferred taxes related to this businesscombination to take into consideration the tax impacts of the electionsmade.  As a result, we adjusted the deferred tax accounts with the offsetreducing the amount of goodwill previously recognized from thistransaction.  In addition, we recognized a tax benefit of $6,500 duringthe quarter ended June 29, 2007 to take into consideration the tax impactsassociated with the in-process R&D previously charged to expense on a grossbasis at acquisition.

 

As of June 27,2008, we had total reserves for uncertain tax positions related to grossunrecognized tax benefits of $5,541, of which $3,779, if recognized, wouldaffect our effective tax rate.  Werecognize potential accrued interest and penalties related to unrecognized taxbenefits from our global operations within income tax expense. We recorded $416of such expenses during the first six months of 2008.  As of June 27, 2008, we had accruedinterest payable related to the unrecognized tax benefits of $850.

 

We conductbusiness globally, and as a result our subsidiaries file income tax returns inthe U.S. federal jurisdiction and various state and foreign jurisdictions.  In the normal course of business we aresubject to examinations by taxing authorities throughout the world includingthe U.S.  With few exceptions, we are nolonger subject to U.S. federal, state, and local, and non-U.S. income tax examinationsfor tax years prior to 2004.

 

The InternalRevenue Service (IRS) commenced an examination in 2006 of our U.S. income taxreturns for 2004 and 2005.  During thefirst quarter of 2008, the IRS proposed certain adjustments relating primarilyto transfer pricing, increasing our tax liabilities for those periods.  We reached a negotiated settlement with theIRS related to those adjustments resulting in an additional tax payment of$6,600, which we had accrued prior to 2008 and was paid during the firstquarter of 2008.   A payment for interestof $1,430, which we had previously accrued, associated with the additional taxliability was paid during the second quarter of 2008.

 

Note 11. Fair ValueMeasurements

 

In September 2006, the FASB issued SFAS No. 157,“*Fair Value Measurements,*” (SFAS 157),which is effective for fiscal years beginning after November 15, 2007 andfor interim periods within those years. This statement defines fair value,establishes a framework for measuring fair value, and expands the relateddisclosure requirements. This statement applies under other accountingpronouncements that require or permit fair value measurements. The statementindicates, among other things, that a fair value measurement assumes that thetransaction to sell an asset or transfer a liability occurs in the principalmarket for the asset or liability or, in the absence of a principal market, themost advantageous market for the asset or liability. SFAS 157 defines fairvalue based upon an exit price model. We adopted SFAS 157 as of January 1,2008, with the exception of the application of the statement to nonfinancialassets and nonfinancial liabilities. Nonfinancial assets and nonfinancialliabilities for which we have not applied the provisions of SFAS 157 includethose measured at fair value in goodwill impairment testing, indefinite livedintangible assets measured at fair value for impairment testing, and thoseinitially measured at fair value in a business combination.

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

(Unaudited, inthousands, except share data)

 

Relative to SFAS 157, the FASB issued FASB StaffPositions (FSP) 157-1 and 157-2. FSP 157-1 amends SFAS 157 to exclude SFAS No. 13,“*Accounting for Leases*,” (SFAS 13) andits related interpretive accounting pronouncements that address leasingtransactions, while FSP 157-2 delays the effective date of the application ofSFAS 157 to fiscal years beginning after November 15, 2008 for allnonfinancial assets and nonfinancial liabilities that are recognized ordisclosed at fair value in the financial statements on a nonrecurringbasis.   We are currently evaluatingthese FSP’s, but do not believe they will have a material impact on ourfinancial statements.

 

SFAS 157 establishes a valuation hierarchy fordisclosure of the inputs to valuation used to measure fair value. Thishierarchy prioritizes the inputs into three broad levels as follows. Level 1inputs are quoted prices (unadjusted) in active markets for identical assets orliabilities. Level 2 inputs are quoted prices for similar assets andliabilities in active markets or inputs that are observable for the asset orliability, either directly or indirectly through market corroboration, forsubstantially the full term of the financial instrument. Level 3 inputs areunobservable inputs based on our own assumptions used to measure assets andliabilities at fair value. A financial asset or liability’s classificationwithin the hierarchy is determined based on the lowest level input that issignificant to the fair value measurement.

 

The following table provides the assets andliabilities carried at fair value measured on a recurring basis as of June 27,2008:

 
| ** **              | ** ** | ** **                                               | ** ** | **Fair value measurements at June 27, 2008** | ** ** |
|-------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **              | ** ** | **Total  Carrying  Value at  March 28,  2008** | ** ** | **Quoted  prices in  active  markets  (Level 1)**                | ** ** | **Significant  other  observable  inputs  (Level 2)** | ** ** | **Significant  unobservable  inputs  (Level 3)** | ** ** |
|                    |       |                                                     |       |                                                                       |       |   |   |   |   |
| Derivative  liabilities |       | $                                                        | 306        |                                                                       | $          | — |   | $ | 306 |   | $ | — |   |
|                         |            |                                                          |            |                                                                            |            |  |  |  |  |  |  |  |  |

 

The fair market value of “over-the-counter”derivatives is measured at fair value using expected cash flows over the lifeof the trade.  The fair value measurementis prepared  using the closing mid-marketrate/price environment on June 27, 2008, using proprietary models,available market data and reasonable assumptions.  These fair value measurements are classifiedwithin Level 2 of the valuation hierarchy.

 

Note 12.  Legal Matters

 

In January 2007, we filed a complaint forpatent infringement in the United States District Court for the WesternDistrict of Washington against Aten Technology, Inc., Aten InternationalCo., Ltd, Belkin Corporation, Rose Electronics and its general partners, andTrippe Manufacturing Company.  Thedefendants filed counterclaims alleging non-infringement, unenforceability, andinvalidity.  In May 2007, we enteredinto a Settlement and License Agreement with Trippe Manufacturing, anddismissed Trippe from the lawsuit.  In October 2007,the District Court stayed the action pending a re-examination of our patents bythe Patent and Trademark Office.  Thatre-examination is currently underway.

 

In January 2008, Avocent Redmond Corp. filed acomplaint for unauthorized use of patented inventions against the United Statesgovernment in the United States Court of Federal Claims.  The complaintalleges that the United States government accepted products manufactured andsold by Rose Electronics that are covered by patents held by AvocentRedmond.  The United States has answered and Rose Electronics has moved tointervene.

 

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. Discovery is currently underway.

 

In April 2007,we filed a complaint for declaratory judgment against Aten International Co.,Ltd. in the United States District Court for the Northern District ofAlabama.  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 of personal jurisdiction was granted, and wehave appealed that ruling to the Federal Circuit Court of Appeals.  Oral arguments were held in February 2008.

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

(Unaudited, inthousands, except share data)

 

In November 2007,Gemini IP, LLC filed a complaint for patent infringement in the United StatesDistrict Court for the Eastern District of Texas, Sherman Division, againstAvocent Corporation and our subsidiary LANDesk Software, Inc.  The complaint alleges infringement of aGemini patent through the sales of a LANDesk product.  The complaint seeks injunctive relief,damages, attorneys’ fees, and costs. Avocent Corporation was dismissed from the lawsuit in January 2008,and we have made a claim for indemnification against the LANDesk escrowaccount.  In April 2008, theDistrict Court stayed the action pending a review of the Gemini Patent by thePatent and Trademark Office.

 

We acquiredLANDesk Group Limited, a privately-held company, in August 2006, and theacquisition agreements provided for total initial consideration ofapproximately $407 million and a potential earn-out payment to the formershareholders of LANDesk of up to $60 million if LANDesk achieved specifiedrevenue targets for the full year of 2006.  Based on LANDesk’s 2006revenue results, we concluded that LANDesk did not achieve the minimum revenuetarget required to cause any earn-out payment and that no earn-out was earnedor payable.  Accordingly, we did not pay, and have not accrued for, anyearn-out payment.  The Shareholder Representative for the formershareholders of LANDesk has instituted the arbitration procedure describedin the acquisition agreements and is challenging our conclusion that no earn-outwas earned or payable. We are in the process of preparing for that arbitrationproceeding.

 

We intend tovigorously defend each of these matters, but the outcome of any claim,litigation, or proceeding is always inherently uncertain.  Based on the facts and circumstancescurrently known to us, we believe that resolution of the foregoing matterswill not materially affect our operations, financial condition, or cash flows.

 

**Note 13. Restructuring Program**

 

During the secondquarter of 2008, we approved a series of restructuring actions.  These actions are designed to enhancecompetitiveness, improve efficiency, and reduce our overall coststructure.  The restructuring costs alongwith costs associated with our former CEO retirement incurred in the firstquarter of 2008, have been separately identified as “Restructuring andretirement expenses” within our operating expenses.  Restructuring and retirement expenses includeseverance charges incurred for certain workforce reductions, costs associatedwith the reduction of certain research and development investments, costassociated with the integration of marketing functions, costs of shifting ourAsian support operations from Shannon, Ireland to Singapore, and the costsassociated with the relocation of certain functions from our Redmond,Washington facility to Huntsville, Alabama. Restructuring and retirement charges also include the retirement costsfor our former CEO in the first quarter of 2008.  

 

We recorded $4,730and $7,701 for the three and six months ended June 27, 2008, respectively,primarily within Management Systems. These costs include stock compensation costs of $1,904 and $2,519 forthe three and six months ended June 27, 2008, respectively (see note 3).  The balance of these costs relate toseverance charges and other costs settled in cash.  As of June 27, 2008 we had accruedapproximately $3,400 related to severance costs, which was included in accruedwages and commissions in our consolidated balance sheet.   Excluding stock compensation costs, weexpect to record an additional $7,000 to $8,000 over the second half of 2008,primarily within Management Systems and LANDesk.  We expect all significant restructuring coststo be recognized over the remainder of 2008.

 

**Note 14. Recently Issued Accounting Pronouncements**

** **

In September 2006, the FASB issued SFAS No. 157,“*Fair Value Measurements”* (SFAS 157). SeeNote 11 for additional discussion.

 

In February 2007, the FASB issued SFAS No. 159,“*The Fair Value Option for Financial Assetsand Financial Liabilities — Including an amendment of FASB Statement No. 115”*(SFAS 159).  SFAS No. 159permits an entity to elect fair value as the initial and subsequent measurementattribute for many financial assets and liabilities.  Entities electing the fair value option wouldbe required to recognize changes in fair value in earnings.  Entities electing the fair value option arerequired to distinguish, on the face of the statement of financial position,the fair value of assets and liabilities for which the fair value option hasbeen elected and similar assets and liabilities measured using anothermeasurement attribute.  SFAS 159 iseffective for fiscal years beginning after November 15, 2007.  The adjustment to reflect the differencebetween the fair value and the carrying amount would be accounted for as acumulative-effect adjustment to retained earnings as of the date of initialadoption.  We have adopted SFAS 159 andhave elected not to measure any additional financial instruments or other itemsat fair value.

 

In December 2007, the FASB issued SFAS No. 141(R),“*Business Combinations”*(SFAS 141(R)), which replaces SFAS 141.  SFAS 141(R) revises the principlesand requirements for how an acquirer in a business combination recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any controlling interest; recognizes and measures thegoodwill acquired in the business combination or a gain from a bargainpurchase; and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination.  SFAS 141(R) isto be applied prospectively to business combinations for which the acquisitiondate is on or after an entity’s fiscal year that begins after December 15,2008.  The application of SFAS 141(R) willresult in a significant change in accounting for future acquisitions after theeffective date.

 

In March 2008,the FASB issued SFAS No. 161, “*Disclosures aboutDerivative Instruments and Hedging Activities*” (SFAS No. 161).SFAS No. 161 requires companies with derivative instruments to discloseinformation that would enable financial statement users to understand how andwhy a company uses derivative instruments, how derivative instruments andrelated hedged items are accounted for under SFAS No. 133, “*Accounting for Derivative Instruments and Hedging Activities*,”(SFAS No. 133) and how derivative instruments and related hedged itemsaffect a company’s financial position, financial performance and cash flows.The new requirements apply to derivative instruments and non-derivativeinstruments that are designated and qualify as hedging instruments and relatedhedged items accounted for under SFAS 133. SFAS 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008; however, early application is encouraged. We are currently evaluating the impact of SFAS 161, but do not expectits adoption to have a material impact on our financial statements.

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

(Unaudited, inthousands, except share data)

 

In April 2008, theFASB issued FASB Staff Position No. 142-3, “Determination of the UsefulLives of Intangible Assets”, which amends the factors that should be consideredin developing renewal or extension assumptions used to determine the usefullife of an intangible asset.  Thisinterpretation is effective for financial statements issued for fiscal yearsbeginning after December 15, 2008 and interim periods within those years.  We are currently evaluating the impact ofthis staff position, but do not expect its adoption to have a material impacton our financial statements.

 

Note 15. SubsequentEvents

 

**Acquisitions -** During fiscal July 2008, we acquiredTouchpaper Group Limited, a privately held provider of IT business managementsolutions with approximately 200 employees based in Woking, U.K., forapproximately £23 million (approximately $45 million). Touchpaper hadrevenues of approximately £17.5 million (approximately $34 million) in2007.  Touchpaper will be integrated intoour LANDesk business unit segment and its operating results will be includedwith LANDesk beginning in the third quarter of 2008.

 

During fiscal July 2008 we also acquired certain assets andliabilities of Ergo 2000, Inc., a privately held provider of rack-mountedLCD consoles with 35 employees based in Fullerton, California, forapproximately $27.5 million. Ergo 2000 had revenues of approximately$33 million in 2007.  Ergo’sproducts will be integrated into the Management Systems business unit as partof that unit’s overall product offering and related operating results will beincluded with Management Systems beginning in the third quarter of 2008.

 

These acquisitions were funded through cash on hand and our line ofcredit.  We have begun to prepare thepurchase price allocations of these acquisitions and anticipate a significantamount of the purchase price will be allocated to other intangibles assets andgoodwill.  We expect to provide adetailed preliminary purchase price allocation with our third quarter results.

 

**CreditFacility -**In July 2008, we increased our debt capacityby $90 million with an addition to our credit facility.  The addition is a 3 year term loan (balancedue June 2011) with a variable rate similar to our line of credit. Theaddition to our credit facility will provide extra capacity and providestrategic flexibility. We plan to reduce our revolving line of credit by $90million with the proceeds from the term loan.

 

**Potential divesture -**Werecently announced our intention to sell the majority of our emergingConnectivity and Control business unit. We have divided this entrepreneurial business unit into its threeproduct lines, the Equinox branded serial business, the Broadcast business andthe Pro Audio Visual business.  We arefolding our Broadcast product line into Management Systems and intend to sellthe remaining two parts of this business.

 

**RSU awards -**Subsequent to June 27,2008 our Compensation Committee approved the grant of 125,000 time-based and100,000 market condition-based RSUs (with a maximum award of up to 125,000market-condition-based RSUs) to our new CEO. Our Compensation Committee also approved 74,000 market conditioned-basedRSUs to certain executive officers.

 

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**Item 2.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

 

*THE INFORMATION IN THIS ITEM 2**“MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”**AND IN OTHER PARTS OF THIS FORM 10-QCONTAINS 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 ITRELATED SPENDING TRENDS; STATEMENTS REGARDING OUR PRODUCT DEVELOPMENTACTIVITIES, OUR PRODUCT PLATFORMS, AND OUR ABILITY TO GROW OUR BUSINESS;STATEMENTS REGARDING FUTURE ACQUISITIONS; STATEMENTS ABOUT THE SALE OF OURCONNECTIVITY AND CONTROL BUSINESS UNIT; STATEMENTS REGARDING OUR ANTICIPATED FUTUREGROSS MARGINS, RESEARCH AND DEVELOPMENT EXPENSES, AND SELLING, GENERAL ANDADMINISTRATIVE EXPENSES. STATEMENTS ABOUT OUR MANAGEMENT TRANSITIONAL ANDRESTRUCTURING EFFORTS; STATEMENTS ABOUT FUTURE BORROWINGS UNDER OUR CREDITFACILITIES AND THE INTEREST ON AND REPAYMENT OF THESE BORROWINGS; ANDSTATEMENTS REGARDING THE OUTCOME OF, AND OUR LEGAL COSTS FOR, PATENT AND OTHERLEGAL CLAIMS, LITIGATION, AND PROCEEDINGS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS ANDUNCERTAINTIES THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROMTHOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS.  FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCEINCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN PART II, ITEM 1A “RISKFACTORS.”*

 

**Overview**

 

AvocentCorporation designs, manufactures, licenses, and sells software and hardwareproducts and technologies that provide connectivity and centralized managementof information technology (IT) infrastructure. We (meaning Avocent and its wholly-owned subsidiaries) provide connectivityand systems management, endpoint security, and service management products andtechnologies that centralize control of servers, desktop computers, serialdevices, wireless devices, mobile devices, and network appliances, thusincreasing the efficiency of IT resources. Server manufacturers resell private-labeled Avocent KVM (keyboard,video, and mouse) switches and embedded software and hardware technology intheir systems, and companies large and small depend on our software and hardwareproducts and technologies for managing their growing IT infrastructure.

 

For a more completedescription of our products, technologies and markets, please refer to our Form 10-K,which was filed on February 21, 2008.

 

Most of our revenue isderived from sales through our reseller and distributor network, sales to alimited number of OEMs (who purchase our switching systems on a private-labelor branded basis for integration and sale with their own products), and salesto a limited number of direct customers. Sales to our branded customersaccounted for 67% of sales in the first six months of 2008 and 65% of sales inthe first six months of 2007.  Sales toour OEM customers accounted for 33% of sales in the first six months of 2008and 35% of sales in the first six months of 2007.  We do not have contracts with many of ourbranded customers, and in general, our OEM and branded business customers areobligated to purchase products from us only pursuant to binding purchaseorders.  The loss of, or material declinein orders from, these customers would have a material adverse effect on ourbusiness, financial condition, results of operations, and cash flows.  Our top five customers include both OEM andbranded customers, and accounted for 48% and 53% of sales in the first sixmonths of 2008 and 2007, respectively.

 

We sell products toresellers, distributors, end-users, and OEMs in the United States, Canada,Europe, and Asia as well as in other foreign markets.  Sales within the United States accounted forapproximately 55% and 57% of first six months sales in 2008 and 2007,respectively.  No foreign countryaccounted for more than 10% of sales in the first half of 2008 or 2007.

 

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

 

We experience significantprice competition in the market for all of our products, and we expect thatpricing pressures will continue in the future. In addition, general economic conditions are not predictable, and weexpect our revenue growth rate to fluctuate in relation to economic conditionsand IT related spending trends.

 

**Many of our executive officers anddirectors are vested in significant amounts of options to purchase shares ofour common stock and RSUs.  Theseofficers and directors have informed us that they have sold, and may selladditional, shares of our common stock to provide liquidity and diversify theirportfolios.  During the first and secondquarters of 2008, our Board of Directors granted both time-based and marketcondition-based restricted stock units (RSUs) with two and three year vesting.Awards with similar terms were also granted in the second quarter of 2007.**

 

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In the first quarter of2008, we discontinued our Desktop Solutions business unit and transferred someof its personnel and a portion of its technology into Management Systems.  We believe our remaining business units allowus to focus on new technology and growth opportunities and to add product andshareholder value in the future.  Webelieve this structure enhances customer service, speeds delivery of productsto market and better focuses our research, development, and marketingresources.   We recently announced ourintention to sell the majority of our emerging Connectivity and Controlbusiness unit.  We have divided thisentrepreneurial business unit into its three product lines, the Equinox brandedserial business, the Broadcast business and the Pro Audio Visual business.  We are folding our Broadcast product lineinto Management Systems and intend to sell the remaining two parts of thisbusiness.

 

**Our largest business unit, ManagementSystems, comprised 76% of our consolidated net revenue in the first half of2008 and 78% in the first half of 2007. LANDesk contributed 20% of net revenue to the first half of 2008 and 18%in the first half of 2007.  Our otherbusiness units and unallocated revenue comprised the remaining percentage ofour consolidated net revenue in 2008 and 2007. See Note 6 in the notes to the condensed c**onsolidatedfinancial statementscontained in Part I, Item 1 of this document.

** **

**Resultsof Operations**

 

The followingtable sets forth, for the periods indicated, selected statement of income dataexpressed as a percentage of net sales:

** **
| ** **                                          | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **June 27,  2008**          | ** ** | **June 29,  2007**        | ** ** | **June 27,  2008** | ** ** | **June 29,  2007** | ** ** |
| Net sales                                           |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                       |       | 37.2                             |       | 36.7                           |       | 36.4 |   | 37.9 |   |
| Gross profit                                        |       | 62.8                             |       | 63.3                           |       | 63.6 |   | 62.1 |   |
| Operating  expenses:                                |       |                             |       |                           |       |   |   |   |   |
| Research and  development expenses                  |       | 15.3                             |       | 14.1                           |       | 15.9 |   | 14.8 |   |
| Selling, general  and administrative expenses       |       | 36.1                             |       | 34.9                           |       | 37.4 |   | 35.7 |   |
| Restructuring  and retirement expenses              |       | 3.0                              |       | —                         |       | 2.6 |   | — |   |
| Amortization of  intangible assets                  |       | 4.8                              |       | 5.1                            |       | 5.0 |   | 5.8 |   |
| Total operating  expenses                           |       | 59.2                             |       | 54.1                           |       | 60.9 |   | 56.3 |   |
|                                                |       |                             |       |                           |       |   |   |   |   |
| Income from  operations                             |       | 3.6                              |       | 9.2                            |       | 2.7 |   | 5.8 |   |
|                                                |       |                             |       |                           |       |   |   |   |   |
| Net investment  income                              |       | 0.4                              |       | 0.6                            |       | 0.5 |   | 0.6 |   |
| Interest expense                                    |       | (1.1                             | )          | (1.5                           | )          | (1.2 | ) | (1.6 | ) |
| Other income  (expense), net                        |       | (0.1                             | )          | —                         |       | 0.1 |   | (0.1 | ) |
| Income before provision  (benefit) for income taxes |       | 2.8                              |       | 8.3                            |       | 2.1 |   | 4.7 |   |
| Provision  (benefit) for income taxes               |       | 0.6                              |       | (1.7                           | )          | 0.7 |   | (0.9 | ) |
| Net income                                          |       | 2.2                              | %          | 10.0                           | %          | 1.4 | % | 5.6 | % |

 

*Net sales.*  Our net sales consist of sales of KVM consoleswitching systems, digital connectivity products and technologies, softwarelicenses and subscriptions, support and maintenance agreements, serialconnectivity devices, wireless extension products, IPMI, extension, remoteaccess and management products and technologies, and royalties from licensingour intellectual property.

 
| ** **                                           | ** ** | **For the three months ended** | ** ** | ** **           | ** ** | **For the six months ended** | ** ** | ** **           | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------|------------|--------------------------------------------------|------------|----------------------|------------|
| **(dollars presented in 000’s)** | ** ** | **June 27,  2008**                            | ** ** | **% of  Sales** | ** ** | **June 29,  2007**                          | ** ** | **% of  Sales** | ** ** | **June 27,  2008** | ** ** | **% of  Sales** | ** ** | **June 29,  2007** | ** ** | **% of  Sales** | ** ** |
| Net revenue, customer  distribution                  |       |                                               |       |                 |       |                                             |       |                 |       |   |   |   |   |   |   |   |   |
| Branded                                              |       | $                                                  | 106,871    |                 | 67         | %                                                | $          | 98,754               |       | 66 | % | $ | 200,534 |   | 67 | % | $ | 183,798 |   | 65 | % |
| OEM                                                  |       | 52,311                                             |       | 33                   | %          | 51,471                                           |       | 34                   | %          | 100,047 |   | 33 | % | 99,578 |   | 35 | % |
| Total net  revenue                                   |       | $                                                  | 159,182    |                 | 100        | %                                                | $          | 150,225              |       | 100 | % | $ | 300,581 |   | 100 | % | $ | 283,376 |   | 100 | % |

 

The 6% growth in sales from the second quarter of 2007compared to the second quarter of 2008 was primarily the result of increasedbranded sales across our geographic regions. Branded sales grew approximately 8% in the second quarter of 2008 fromthe second quarter of 2007.  Our OEMsales increased approximately 2% from the second quarter of 2007.   Our branded and OEM businesses were strongin EMEA and Asia during the second quarter of 2008. We attribute the strengthin our foreign markets partly to the relative strength of their economies ascompared to the U.S. economy and to the recent investment we’ve made by openinga new Asian headquarters in Singapore. Net sales increased 6% from the first six months of 2007 compared to thefirst six months of 2008 for similar reasons as that experienced in the secondquarter of 2008.

 

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| ** **                                                         | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| **(dollars presented in 000’s)**               | ** ** | **June 27,  2008**                            | ** ** | **June 29,  2007**                          | ** ** | **June 27,  2008** | ** ** | **June 29,  2007** | ** ** |
| Net revenue:                                                       |       |                                               |       |                                             |       |   |   |   |   |
| Management  Systems                                                |       | $                                                  | 121,664    |                                             | $          | 114,964 |   | $ | 229,395 |   | $ | 220,068 |   |
| LANDesk                                                            |       | 31,842                                             |       | 27,563                                           |       | 61,035 |   | 51,417 |   |
| Other business  units                                              |       | 4,918                                              |       | 6,035                                            |       | 8,617 |   | 10,259 |   |
| Corporate and  unallocated                                         |       | 758                                                |       | 2,158                                            |       | 1,534 |   | 2,908 |   |
| Amortization of  fair value adjustment to LANDesk deferred revenue |       | —                                             |       | (495                                             | )          | — |   | (1,276 | ) |
| Total net  revenue                                                 |       | $                                                  | 159,182    |                                             | $          | 150,225 |   | $ | 300,581 |   | $ | 283,376 |   |

 

Our Management Systems business unit includes ourtraditional KVM products, our serial products and our embedded software andsolutions products.  Management Systemssales increased approximately 6% in the second quarter 2008 compared to thesecond quarter of 2007, and experienced improvements across all primary revenuegroups, led by growth in KVM sales.  OurKVM products sales benefited from increased sales of certain secure switchproducts.  Sales by product line forManagement Systems for the three and six months ended June 27, 2008 and June 29,2007 are as follows:

 
| ** **                                           | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| **(dollars presented in 000’s)** | ** ** | **June 27,  2008**                            | ** ** | **June 29,**

**2007**                      | ** ** | **June 27,  2008** | ** ** | **June 29,  2007** | ** ** |
| Management  Systems net revenue:                     |       |                                               |       |                                             |       |   |   |   |   |
| KVM                                                  |       | $                                                  | 92,323     |                                             | $          | 87,459 |   | $ | 171,249 |   | $ | 168,147 |   |
| Serial  Management                                   |       | 13,336                                             |       | 12,752                                           |       | 26,055 |   | 24,038 |   |
| Embedded  software and solutions                     |       | 8,405                                              |       | 7,897                                            |       | 16,752 |   | 15,474 |   |
| Other                                                |       | 7,600                                              |       | 6,856                                            |       | 15,339 |   | 12,409 |   |
| Total Management  Systems net revenue                |       | $                                                  | 121,664    |                                             | $          | 114,964 |   | $ | 229,395 |   | $ | 220,068 |   |

 

LANDesk revenue andbookings are comprised of license-based revenue, primarily from the LANDeskManagement Suite (LDMS) product, and subscription-based revenue, primarilyfrom the LANDesk Security Suite and LANDesk Patch Manager products andfrom maintenance and support agreements related to LANDesk ManagementSuite.  Compared to the first quarter of2007, LANDesk revenues increased 16% during the second quarter of 2008.  LDMS products revenue grew to $17.8 millionin the second quarter of 2008 from $15.5 million in the second quarter of 2007,while security products revenue grew to $7.6 million in the second quarter of2008 from $6.1 million in the second quarter of 2007.  The growth in subscription and maintenancerevenue also results in an increase to deferred revenue recorded on the balancesheet.  Deferred revenue increased to$69.1 million at June 27, 2008 from $66.1 million at December 31,2007.  Sales for LANDesk for the threeand six months ended June 27, 2008 and June 29, 2007 are as follows:

 
| ** **                                           | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| **(dollars presented in 000’s)** | ** ** | **June 27,  2008**                            | ** ** | **June 29,  2007**                          | ** ** | **June 27,  2008** | ** ** | **June 29,  2007** | ** ** |
| LANDesk net  revenue:                                | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Licenses and  royalties                              |       | $                                                  | 18,785     |                                             | $          | 16,800 |   | $ | 35,827 |   | $ | 30,171 |   |
| Maintenance and  services                            |       | 13,057                                             |       | 10,763                                           |       | 25,208 |   | 21,246 |   |
| Total LANDesk  net revenue                           |       | $                                                  | 31,842     |                                             | $          | 27,563 |   | $ | 61,035 |   | $ | 51,417 |   |

 

For the second quarter,consolidated international sales grew 16% in 2008 compared to 2007, while saleswithin the United States declined less than 2% in 2008 compared to 2007.  As mentioned previously, our OEM and brandedbusinesses were strong in EMEA and Asia, however only our branded business wasup in North America.  The growthexperienced in our North America branded business was not sufficient to offsetthe declines in our North America OEM business.

 
| ** **                                           | ** ** | **For the three months ended** | ** ** | ** **           | ** ** | **For the six months ended** | ** ** | ** **           | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------|------------|--------------------------------------------------|------------|----------------------|------------|
| **(dollars presented in 000’s)** | ** ** | **June 27,  2008**                            | ** ** | **% of  Sales** | ** ** | **June 29,  2007**                          | ** ** | **% of  Sales** | ** ** | **June 27,  2008** | ** ** | **% of  Sales** | ** ** | **June 29,  2007** | ** ** | **% of  Sales** | ** ** |
| Net revenue,  geographic region                      |       |                                               |       |                 |       |                                             |       |                 |       |   |   |   |   |   |   |   |   |
| United States                                        |       | $                                                  | 87,149     |                 | 55         | %                                                | $          | 88,256               |       | 59 | % | $ | 161,367 |   | 54 | % | $ | 162,053 |   | 57 | % |
| International                                        |       | 72,033                                             |       | 45                   | %          | 61,969                                           |       | 41                   | %          | 139,214 |   | 46 | % | 121,323 |   | 43 | % |
| Total net  revenue                                   |       | $                                                  | 159,182    |                 | 100        | %                                                | $          | 150,225              |       | 100 | % | $ | 300,581 |   | 100 | % | $ | 283,376 |   | 100 | % |

 

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*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 and component costs; labor costs;new product introductions by us and by our competitors; increasing sales of oursoftware products which tend to have higher gross margins; and our outsourcingof manufacturing and assembly services.

 
| *** ***                                                       | ** ** | **For the three months ended** | ** ** | ** **        | ** ** | **For the six months ended** | ** ** | ** **        | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|-------------------|------------|--------------------------------------------------|------------|-------------------|------------|
| **(dollars presented in 000’s)**                              | ** ** | **June 27,  2008**                            | ** ** | **Gross  Margin** | ** ** | **June 29,  2007**                          | ** ** | **Gross  Margin** | ** ** | **June 27,  2008** | ** ** | **Gross  Margin** | ** ** | **June 29,  2007** | ** ** | **Gross  Margin** | ** ** |
| Management  Systems                                                |       | $                                                  | 72,316     |              | 59.4       | %                                                | $          | 70,490            |       | 61.3 | % | $ | 138,831 |   | 60.5 | % | $ | 132,160 |   | 60.1 | % |
| LANDesk                                                            |       | 27,854                                             |       | 87.5              | %          | 24,152                                           |       | 87.6              | %          | 53,193 |   | 87.2 | % | 45,117 |   | 87.7 | % |
| Other business  units                                              |       | 1,989                                              |       | 40.4              | %          | 1,856                                            |       | 30.8              | %          | 3,536 |   | 41.0 | % | 3,148 |   | 30.7 | % |
| Corporate and unallocated                                          |       | 755                                                |       |              |       | 2,147                                            |       |              |       | 1,498 |   |   |   | 2,878 |   |   |   |
| Stock-based  compensation                                          |       | (257                                               | )          |              |       | (301                                             | )          |              |       | (500 | ) |   |   | (480 | ) |   |   |
| Intangible  amortization – LANDesk software                   |       | (2,768                                             | )          |              |       | (2,767                                           | )          |              |       | (5,535 | ) |   |   | (5,450 | ) |   |   |
| Amortization of  fair value adjustment to LANDesk deferred revenue |       | —                                             |       |              |       | (495                                             | )          |              |       | — |   |   |   | (1,276 | ) |   |   |
| Gross profit and  margin                                           |       | $                                                  | 99,889     |              | 62.8       | %                                                | $          | 95,082            |       | 63.3 | % | $ | 191,023 |   | 63.6 | % | $ | 176,097 |   | 62.1 | % |

 

The decline ingross margin during the second quarter of 2008 resulted from a change inproduct mix within Management Systems, price reductions on certain older analogproducts and decreased royalty payments. Management Systems experienced increased sales for certain secure switchproducts during the second quarter of 2008. This product carries lower margins than our other Management Systemsproducts; therefore the sales increase directly impacted our margins for thesecond quarter of 2008. Royalty payments, included within Corporate and unallocated,declined almost $1.4 million in the second quarter of 2008 as a result of acatch-up payment made in the second quarter of 2007 from one of our patentlicensees.  As royalties have noassociated cost of sales, the decrease in revenue in the second quarter of 2008directly affected our gross margins.  Forthe six months ended June 27, 2008 compared to the six months ended June 29,2007, our gross profit and margin improved as a result of significantly higherrevenues, especially within our LANDesk business which carries significantlyhigher gross margins.

 

*Operatingexpenses.*

 
| ** **                                    | ** ** | **For the three months ended** | ** ** | ** **           | ** ** | **For the six months ended** | ** ** | ** **           | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------|------------|----------------------|------------|--------------------------------------------------|------------|----------------------|------------|
| **(dollars  presented in 000’s)**        | ** ** | **June 27,  2008**                            | ** ** | **% of  Sales** | ** ** | **June 29,  2007**                          | ** ** | **% of  Sales** | ** ** | **June 27,  2008** | ** ** | **% of  Sales** | ** ** | **June 29,  2007** | ** ** | **% of  Sales** | ** ** |
| Research and  development expenses            |       | $                                                  | 24,361     |                 | 15.3       | %                                                | $          | 21,189               |       | 14.1 | % | $ | 47,728 |   | 15.9 | % | $ | 42,070 |   | 14.8 | % |
| Selling, general  and administrative expenses |       | 57,445                                             |       | 36.1                 | %          | 52,442                                           |       | 34.9                 | %          | 112,564 |   | 37.4 | % | 101,102 |   | 35.7 | % |
| Restructuring  and retirement expenses        |       | 4,730                                              |       | 3.0                  | %          | —                                           |       |                 |       | 7,701 |   | 2.6 | % | — |   |   |   |
| Amortization of  intangible assets            |       | 7,617                                              |       | 4.8                  | %          | 7,581                                            |       | 5.1                  | %          | 15,152 |   | 5.0 | % | 16,543 |   | 5.8 | % |
|                                          |       | $                                                  | 94,153     |                 | 59.2       | %                                                | $          | 81,212               |       | 54.1 | % | $ | 183,145 |   | 60.9 | % | $ | 159,715 |   | 56.3 | % |

 

*Research and development expenses.*  Research and development expenses includecompensation for engineers, support personnel, outside contracted services, andmaterials costs, all of which are expensed as incurred.  R&D increased 15% in the second quarterof 2008 from the second quarter of 2007. Costs related to salaries and contractedservices increased approximately $2.3 million in the second quarter of 2008compared to the second quarter of 2007. The increase in these R&D expensesis primarily attributable to the impact of our continued investment in targetedintegrated R&D projects, including Avocent Management Platform, real-timevisualization and power management, which leverage technology from bothManagement Systems and LANDesk.  R&Dincreased 13% from the first six months of 2007 compared to the first sixmonths of 2008 for similar reasons as that experienced in the second quarter of2008. We believe that the timely development of innovative products andenhancements to existing products is essential to maintaining our competitiveposition, and we will continue to make significant investments in research anddevelopment.

 

*Selling, general and administrative expenses.*  Selling, general and administrative expensesinclude personnel, materials, services and other related costs foradministration, finance, information systems, human resources, sales andmarketing and general management, rent, utilities, legal and accountingexpenses, bad debts, advertising, promotional material, trade show expenses,and related travel costs.  Selling, generaland administrative expenses increased 10% in the second quarter of 2008 fromthe second quarter 

 

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of 2007. Theincrease in selling, general and administrative expenses was primarilyattributed to increased target marketing and trade show expenses, as well assales commissions resulting from increased sales for the period. Compared tothe second quarter of 2007, advertising and promotion expenses increasedapproximately $700,000, while commissions and bonuses increased approximately$2.2 million in the second quarter of 2008. We also experienced higherprofessional services and legal expenses during the second quarter of 2008 ascompared to the second quarter of 2007 in association with various legalcases.  Selling, general andadministrative expenses increased 11% in the first six months of 2008 from thefirst six months of 2007 for similar reasons as that experienced in the secondquarter of 2008.

 

*Restructuringand retirement expenses**. ***Restructuringexpenses for the second quarter of 2008 relate to severance charges incurredfor certain workforce reductions related to the reduction in certain researchand development investments, the integration of marketing functions, shifting ourAsian support operations from Shannon, Ireland to Singapore, and the relocationof certain functions from our Redmond, Washington facility to Huntsville,Alabama. In addition to the second quarter charges, restructuring andretirement charges for the first six months of 2008 includes the retirementcosts for our former CEO of $2.2 million.

 

***Amortizationof intangible assets***.  Amortization of$7.6 million in the second quarter of 2008 and $15.2 million in the first sixmonths of 2008 included the amortization of intangible assets created as aresult of the acquisitions of Sonic Mobility, Cyclades, and LANDesk.  Amortization of $7.6 million in the secondquarter of 2007 and $16.5 million in the first six months of 2007 included theamortization of the identifiable intangible assets created as a result of theacquisitions of OSA, Sonic Mobility, Cyclades, and LANDesk.  The decrease in amortization for the sixmonth period expense relates primarily to fully amortizing certain intangibleassets in 2007 recorded in relation to the OSA acquisition in 2004.

** **

*Stock-based compensation. *We allocatestock-based compensation expense based on the department in which an employeeworks.  Stock compensation expenses byincome statement classification for the three and six months ended June 27,2008 and June 29, 2007 were as follows:

 
| ** **                                           | ** ** | **For the three months ended** | ** ** | ** **           | ** ** | **For the six months ended** | ** ** | ** **           | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------|------------|--------------------------------------------------|------------|----------------------|------------|
| **(dollars presented in 000’s)** | ** ** | **June 27,  2008**                            | ** ** | **% of  Sales** | ** ** | **June 29,  2007**                          | ** ** | **% of  Sales** | ** ** | **June 27,  2008** | ** ** | **% of  Sales** | ** ** | **June 29,**

**2007** | ** ** | **% of  Sales** | ** ** |
|                                                 |       |                                               |       |                 |       |                                             |       |                 |       |   |   |   |   |   |   |   |   |
| Cost of sales                                        |       | $                                                  | 257        |                 |       |                                             | $          | 301                  |       |   |   | $ | 500 |   |   |   | $ | 480 |   |   |   |
| Research and  development expense                    |       | 1,340                                              |       |                 |       | 1,391                                            |       |                 |       | 2,355 |   |   |   | 2,506 |   |   |   |
| Selling, general  and administrative expense         |       | 2,622                                              |       |                 |       | 3,411                                            |       |                 |       | 5,302 |   |   |   | 5,779 |   |   |   |
| Restructuring  and retirement expense                |       | 1,904                                              |       |                 |       | —                                           |       |                 |       | 2,519 |   |   |   |   |   |   |   |
|                                                 |       | $                                                  | 6,123      |                 | 3.8        | %                                                | $          | 5,103                |       | 3.4 | % | $ | 10,676 |   | 3.6 | % | $ | 8,765 |   | 3.1 | % |

 

Stock-based compensation increased 20% inthe second quarter 2008 from the second quarter 2007 primarily as a result ofcharges associated with the accelerated vesting for certain RSU’s and otherequity related charges associated with restructuring actions taken in thesecond quarter of 2008, disclosed separately above.  We accelerated 131,000 RSUs during the secondquarter 2008 and 163,000 RSUs during the first half of 2008.  Stock-based compensation increased 22% in thefirst half of 2008 from the first half of 2007 due to the same reasons as thosefor the second quarter as well as recording charges associated with theaccelerated vesting for certain RSUs and other equity related charges for theretirement of our former CEO taken in the first quarter of 2008.

 

*Netinvestment income**.** *Net******investmentincome decreased to $671,000 in the second quarter of 2008 as compared to$904,000 in the second quarter of 2007. Net investment income decreased to $1.6 million in the first six monthsof 2008 as compared to $1.8 million in the first six months of 2007.

 

*Interestexpense.*Interest expense results from borrowings under our$250 million unsecured line of credit obtained in the second quarter of 2006,which we used to finance a portion of the LANDesk acquisition and sharerepurchases. Interest expense declined to $1.8 million in the second quarter2008, compared to $2.3 million in the second quarter of 2007 due to loweraverage borrowings and lower interest rates on our line of credit.  Interest expense declined to $3.6 million inthe first six months of 2008, compared to $4.5 million in the first six monthsof 2007 for similar reasons.  The balanceon our line of credit increased to $130 million as of June 27, 2008compared to $115 million as of June 29, 2007.   However we made a large principal paymentlate in the second quarter of 2007. Therefore interest expense was higher in2007 than would be expected by the lower debt balance at the end of the secondquarter of 2007.

 

*Other income (expense), net.*  Other income (expense), net declined slightlyfrom income of $15,000 in the second quarter of 2007 to expense of $95,000 inthe second quarter of 2008.  Net otherincome (expense) improved from an expense of $302,000 in the first six monthsof 2007 to income of $360,000 in the first six months of 2008.

 

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*Provision (benefit) for income taxes.* The effective tax rate in the second quarter of 2008 was a provision of23.5% compared to a benefit of 19.8% in the second quarter of 2007.  The provision for income taxes was $1.1million for the second quarter of 2008, compared to a benefit of $2.5 millionin the second quarter of 2007.  Theeffective tax rate in the first half of 2008 was a provision of 32.2% comparedto a benefit of 17.8% in the first half of 2007.  The provision for income taxes was $2 millionfor the first half of 2008, compared to a benefit of $2.4 million in the firsthalf of 2007.  As discussed in Note 10 tothe consolidated financial statements, the increase in the effective tax ratewas primarily the result of the change in the amount and mix of our pre-taxbook income and a tax benefit recognized during the second quarter of 2007associated with in-process R&D previously charged to book expense.  We adopted FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”on January 1, 2007.  As of June 27,2008, we had total reserves for uncertain tax positions related to grossunrecognized tax benefits of $5.5 million of which $3.8 million, if recognized,would affect our effective tax rate.

 

*Netincome.*  Net income for the second quarter of 2008 was$3.4 million compared to $15.0 million for the second quarter of 2007, as aresult of the factors detailed in the above discussion.  Net income, as a percentage of sales for thesecond quarter of 2008 was 2.2%, compared to 10.0% for the second quarter of2007.  Net income for the first sixmonths of 2008 was $4.2 million compared to $15.7 million for the first sixmonths of 2007, as a result of the factors detailed in the abovediscussion.  Net income, as a percentageof sales for the first six months of 2008 was 1.4%, compared to 5.6% for thefirst six months of 2007.

 

**Liquidity and Capital Resources**

 

As of June 27, 2008, our principal sources ofliquidity consisted of $117 million in cash and cash equivalents and a $120million available balance from our $250 million unsecured five year revolvingbank line of credit that is available for general corporate purposes.  In the third quarter of 2008 we increased ourdebt capacity by $90 million with an addition to our credit facility.  The addition was a 3 year term loan (balancedue June 2011) with a variable rate similar to our line of credit. Theaddition to our credit facility will give us extra capacity and providestrategic flexibility. We plan to reduce our line of credit by $90 million withthe proceeds from the term loan.  Ourtotal debt was $165 million under both facilities as of July 31, 2008.

 

The line of credit and term loan contain affirmative andnegative covenants, including limitations on our ability to (i) makedistributions, investments, and other payments unless we satisfy certainfinancial tests or other criteria, (ii) incur additional indebtedness, (iii) restructureour subsidiaries, and (iv) make acquisitions and capitalexpenditures.  All of these restrictionscould affect our ability to operate our business and may limit our ability totake advantage of potential business opportunities as they arise.  The failure to comply with these covenantscould result in an event of default which, if not cured or waived, could have amaterial adverse effect on us.

 

We used borrowings under the line of credit in July 2008to fund the acquisitions of Touchpaper and Ergo 2000.  In the future we may acquire othertechnologies or companies that we believe will enhance and/or complement ourexisting products and technologies and increase our sales.  The line of credit and term loan currentlybear an interest rate of LIBOR plus 125 basis points.  There was $130 million outstanding under theline of credit as of June 27, 2008. We classify the entire obligation as long-term as it carries a five yearterm and has no payment schedule.  Weexpect to repay the borrowings from future cash flows from operations.  A summary of our cash flows is as follows:

 
| ** **                                           | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|
| **(dollars presented in 000’s)** | ** ** | **June 27,  2008**        | ** ** | **June 29,  2007** | ** ** |
| Total cash  provided by (used in):                   |       |                           |       |   |   |
| Operating  activities                                |       | $                              | 38,877     |   | $ | 57,459 |   |
| Investing  activities                                |       | (990                           | )          | 1,111 |   |
| Financing  activities                                |       | (28,807                        | )          | (48,550 | ) |
| Effect of  exchange rate changes on cash             |       | 2,670                          |       | 122 |   |
| Increase in cash  and cash equivalents               |       | $                              | 11,750     |   | $ | 10,142 |   |

 

The decline in cash flows from operations in the first six months of 2008 was primarily the result of changes in accounts receivable, inventories, accrued wages and commissions and income taxes payable, which were partially offset by higher accounts receivable collections during the first six months 2007.  During the first six months of 2008, we paid approximately $8.0 million to the Internal Revenue Service related to settling previously accrued federal income tax matters.  Our accounts receivable increased $1.4 million from December 31, 2007 to June 27, 2008 as a result of increased sales in June 2008.  This increase in accounts receivable was somewhat minimized by continued improved cash collections.  Additionally, we made significant progress in collecting older balances outstanding at our LANDesk location in the first six months of 2007, resulting in a large decrease in receivables as of June 29, 2007.  Our accrued wages and commissions have increased in 2008 compared to 2007 as a direct result of improved sales for the comparable periods.

 

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Our days sales outstanding (DSO) improved to 64 days at the end of the first six months of 2008 compared to 68 days at the end of the first six months of 2007.  DSO improved as a result of higher sales in the first half of 2008 compared to the first half of 2007 and continued improvement in cash collections at each of our locations.  Inventories decreased almost $2.0 million from December 31, 2007 to June 27, 2008.  Our inventory turns improved significantly to 7.6 at June 27, 2008 compared to 6.0 at June 27 2007.  The improvement in 2008 was due to higher sales volume experienced in the first half of 2008 combined with our lower inventory balance as of June 27, 2008.

 

Our investing activities used $1.0 million of cashflow in the first half of 2008.  Weconverted matured investments to cash in the first half of 2008 to purchaseproperty and equipment and invest in other intangible assets.  Our investing activities provided $1.1million of cash flow in the first half of 2007 which included $51 million ofcash payments for investment purchases.

 

Our financing activities used the cash provided byoperations, as well as additional borrowings, to repurchase approximately 4million shares of our common stock during the first half of 2008 at a costtotaling $64 million.  These treasuryshares were purchased through various brokers under the stock repurchaseprogram approved by our Board of Directors. As of June 27, 2008 we have approximately 2.3 million sharesavailable for purchase under the program.

 

During the second quarter2008, we approved a series of restructuring activities. As of June 27, 2008, wehad accrued approximately $3.4 million related to severance costs andexpect to record an additional $7 million to $8 million of severancecosts over the second half of 2008. We expect all significant costs to berecognized over the remainder of 2008.

 

**Off-BalanceSheet Arrangements and Contractual Obligations**

 

In the ordinary course of our business, we may at anypoint in time have a significant amount of contractual commitments not yetrecognized in our financial statements. These commitments relate primarily to our need to schedule the purchaseof inventories in advance of the related forecasted sales to customers.  We have longer lead times for the products wepurchase from suppliers based in Asia than those for our U.S. based andEuropean based suppliers.  Our actualcontractual commitments are typically limited to products needed for one tothree months of forecasted sales.  Theliabilities for these inventory purchases, along with the related inventoryassets are typically recognized upon our receipt of the products.  We also have, at any point in time, a varietyof short term contractual commitments for services such as advertising,marketing, accounting, legal, and research and development activities.  The liabilities for these services and therelated expenses are typically recognized upon our receipt of the relatedservices.  In our 2007 Form 10-K, wedisclosed our off-balance sheet arrangements and contractual obligations. At June 27,2008, there have been no material changes to these off-balance sheetarrangements outside the ordinary course of business.  Our line of credit balance increased to $130million at June 27, 2008 from $95 million at December 31, 2007.  The increase in our level of borrowings, ifsustained at the higher level, will result in higher interest payments infuture periods.

 

**Non-GAAP Operational Measures**

 

To supplement our consolidated financialstatements presented in accordance with GAAP, we present investors with certainnon-GAAP operational measures which we use internally to manage our businesses,including net sales, gross profit, operating expenses, and the resultingoperating income, income before taxes, operational net income, and operationalearnings per share, all of which primarily exclude the effects of amortizationand depreciation related to purchase accounting adjustments, stock-basedcompensation, certain restructuring and retirement costs, and acquiredin-process research and development expenses. These operational measures also include the amortization of the fairvalue adjustment to LANDesk deferred revenue related to the purchase accountingadjustment to reduce deferred revenue at the acquisition of LANDesk.  Specifically, we use the following non-GAAPmeasures:

 
| ** **                                           | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **Non-GAAP Operational Measures**          | ** ** | **June 27, 2008**      | ** ** | **June 29, 2007**    | ** ** | **June 27, 2008** | ** ** | **June 29. 2007** | ** ** |
| **(dollars presented in 000’s)** | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operational net  sales                               |       | $                                | 159,182    |                           | $          | 150,720 |   | $ | 300,581 |   | $ | 284,652 |   |
| Operational  gross profit                            |       | $                                | 102,914    |                           | $          | 98,645 |   | $ | 197,058 |   | $ | 183,303 |   |
| Operational  operating income                        |       | $                                | 25,235     |                           | $          | 29,828 |   | $ | 44,590 |   | $ | 48,439 |   |
| Operational net  income                              |       | $                                | 18,387     |                           | $          | 21,134 |   | $ | 32,851 |   | $ | 33,846 |   |
| Operational  diluted earnings per share              |       | $                                | 0.41       |                           | $          | 0.41 |   | $ | 0.71 |   | $ | 0.66 |   |

 

·                                          Thenon-GAAP net sales operational measure consists of net sales increased by thepro-forma amortization of deferred revenue of LANDesk at the date ofacquisition which was reduced to estimated fair value pursuant to purchaseaccounting under GAAP.  This deferredrevenue was completely amortized on a pro forma basis as of the third quarterof 2007.

 

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·                                          Thenon-GAAP gross profit operational measure consists of the non-GAAP net salesoperational measure described above, less cost of sales excluding the impact ofstock-based compensation and amortization related to purchase accountingadjustments as they relate to cost of sales.

 

·                                          Thenon-GAAP operating expense operational measure consists of GAAP operatingexpenses, excluding the impact of stock-based compensation, restructuringcharges and amortization related to purchase accounting adjustments as theyrelate to the particular operating expense.

 

·                                          Thenon-GAAP operating income operational measure consists of GAAP operating incomeadjusted for the non-GAAP operational measures described above.

 

·                                          Thenon-GAAP net income operational measure consists of GAAP net income, adjustedby the non-GAAP operational measures described above and the tax effects ofthese non-GAAP operational measures.

 

·                                          Thenon-GAAP earnings per share operational measure is calculated by dividing thenon-GAAP net income operational measure described above by GAAP weightedaverage basic and diluted shares outstanding.

 

We provide the followingreconciliations between GAAP and our operational measures:

 
| ** **                                         | ** ** | **GAAP**      | ** ** | ** **       | ** ** | **Purchase**    | ** ** | **Restructuring**       | ** ** | **Non-GAAP**    | ** ** |
|----------------------------------------------------|------------|---------------|------------|------------------|------------|-----------------|------------|-------------------------|------------|-----------------|------------|
| ** **                                         | ** ** | **Financial** | ** ** | **Stock-based**  | ** ** | **Accounting**  | ** ** | **and Retirement** | ** ** | **Operational** | ** ** |
| ** **                                         | ** ** | **Measures**  | ** ** | **Compensation** | ** ** | **Adjustments** | ** ** | **Expenses**            | ** ** | **Measures**    | ** ** |
| **For the  three months ended June 27, 2008** |       |          |       |             |       |            |       |                    |       |            |       |
| Operational net  sales                             |       | $             | 159,182    |             | —     |            | —     |                    | —     |            | $          | 159,182 |   |
| Operational  gross profit                          |       | $             | 99,889     |             | 257        |            | 2,768      |                    | —     |            | $          | 102,914 |   |
| Operational  operating income                      |       | $             | 5,736      |             | 6,123      |            | 10,550     |                    | 2,826      |            | $          | 25,235 |   |
| Operational net  income                            |       | $             | 3,443      |             | 4,691      |            | 8,088      |                    | 2,165      |            | $          | 18,387 |   |
| Operational  diluted earnings per share            |       | $             | 0.08       |             | 0.10       |            | 0.18       |                    | 0.05       |            | $          | 0.41 |   |
|                                               |       |          |       |             |       |            |       |                    |       |            |       |
| **For the  three months ended June 29, 2007** |       |          |       |             |       |            |       |                    |       |            |       |
| Operational net  sales                             |       | $             | 150,225    |             |       |            | 495        |                    | —     |            | $          | 150,720 |   |
| Operational  gross profit                          |       | $             | 95,082     |             | 301        |            | 3,262      |                    | —     |            | $          | 98,645 |   |
| Operational  operating income                      |       | $             | 13,870     |             | 5,103      |            | 10,855     |                    | —     |            | $          | 29,828 |   |
| Operational net  income                            |       | $             | 15,000     |             | 3,875      |            | 2,259      |                    | —     |            | $          | 21,134 |   |
| Operational  diluted earnings per share            |       | $             | 0.29       |             | 0.08       |            | 0.04       |                    | —     |            | $          | 0.41 |   |
|                                               |       |          |       |             |       |            |       |                    |       |            |       |
| **For the  six months ended June 27, 2008**   |       |          |       |             |       |            |       |                    |       |            |       |
| Operational net  sales                             |       | $             | 300,581    |             | —     |            | —     |                    | —     |            | $          | 300,581 |   |
| Operational  gross profit                          |       | $             | 191,023    |             | 500        |            | 5,535      |                    | —     |            | $          | 197,058 |   |
| Operational  operating income                      |       | $             | 7,878      |             | 10,676     |            | 20,854     |                    | 5,182      |            | $          | 44,590 |   |
| Operational net  income                            |       | $             | 4,174      |             | 8,181      |            | 16,525     |                    | 3,971      |            | $          | 32,851 |   |
| Operational  diluted earnings per share            |       | $             | 0.09       |             | 0.18       |            | 0.36       |                    | 0.08       |            | $          | 0.71 |   |
|                                               |       |          |       |             |       |            |       |                    |       |            |       |
| **For the  six months ended June 29, 2007**   |       |          |       |             |       |            |       |                    |       |            |       |
| Operational net  sales                             |       | $             | 283,376    |             |       |            | 1,276      |                    | —     |            | $          | 284,652 |   |
| Operational  gross profit                          |       | $             | 176,097    |             | 480        |            | 6,726      |                    | —     |            | $          | 183,303 |   |
| Operational  operating income                      |       | $             | 16,382     |             | 8,764      |            | 23,293     |                    | —     |            | $          | 48,439 |   |
| Operational net  income                            |       | $             | 15,746     |             | 6,531      |            | 11,569     |                    | —     |            | $          | 33,846 |   |
| Operational  diluted earnings per share            |       | $             | 0.31       |             | 0.13       |            | 0.22       |                    | —     |            | $          | 0.66 |   |

 

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We believe that excluding depreciation andamortization associated with purchase accounting adjustments as well as the taximpact of certain purchase accounting elections for prior acquisitions providesmeaningful supplemental information and an alternative presentation useful toinvestors’ understanding our core operating results and trends betweenperiods.  Not only are these depreciationand amortization and tax impact adjustments based on amounts assigned inpurchase accounting, that may have little bearing on present or futurereplacement costs, but they also are based on management’s estimates ofremaining useful lives.

 

Similarly, we believe that excluding stock-basedcompensation and restructuring and retirement expenses provides meaningfulsupplemental information and an alternative presentation useful to investors’understanding of our core operating results and trends, especially whencomparing those results on a consistent basis to results for previous periodsand anticipated results for future periods.

 

We also believe that, in excluding stock-basedcompensation and restructuring and retirement expenses and depreciation andamortization associated with purchase accounting adjustments (together with therelated tax effects), our non-GAAP financial measures provide investors withtransparency into the information and basis used by management and our Board ofDirectors to measure and forecast our results of operations, to compare on aconsistent basis our results of operations for the current period to that ofprior periods, to compare our results of operations on a more consistent basisagainst that of other companies in making financial and operating decisions,and to establish targets for management incentive compensation.

 

These non-GAAP operational measures havehistorically been used as key performance metrics by our senior management asthey evaluate both the performance of the consolidated financial results aswell as those of individual business segments. These non-GAAP operational measures are reviewed individually as well asin total in measuring our performance against internal and external expectationsfor the period and the expectations for such key non-GAAP operational measuresare the basis for any financial guidance provided by management for futureperiods.  We believe that the use of eachof these non-GAAP financial measures provides enhanced consistency andcomparability with our past financial reports, and also facilitates comparisonswith other companies in our industry, many of which use similar non-GAAPfinancial measures to supplement their GAAP results.  We provide thisinformation to investors to enable them to perform additional analyses of past,present and future operating performance, compare us to other companies, andevaluate our ongoing financial operations.

 

We believe that each of these operationalmeasures is useful to investors in their assessment of our operatingperformance and the valuation of our company.  Adjusted net sales, grossprofit, operating expenses and income, operational income before taxes,operational net income, and operational earnings per share are significantmeasures used by management for:

 

·                                          Reportingour financial results and forecasts to our Board of Directors;

 

·                                          Evaluatingthe operating performance of our company;

 

·                                          Managingand comparing performance internally across our businesses and externallyagainst our peers; and

 

·                                          Establishinginternal operating targets.

 

These non-GAAP operational measures, includingnet sales, gross profit, operating income, operational net income, andoperational earnings per share are used by us as broad measures of financialperformance that encompass our operating performance, cash, capital structure,investment management, and income tax planning effectiveness.  Theseoperational measures are not calculated in accordance with GAAP, and should beconsidered supplemental to, and not as a substitute for, or superior to,financial measures calculated in accordance with GAAP.  These operationalmeasures have limitations in that they do not reflect all of the costs orreductions to revenues associated with the operations of our business asdetermined in accordance with GAAP.  Inaddition, these operational measures may not be comparable to non-GAAPfinancial measures reported by other companies.  As a result, one shouldnot consider these measures in isolation or as a substitute for analysis of ourresults as reported under GAAP.  We compensate for these limitations byanalyzing current and future results on a GAAP basis as well as a non-GAAPbasis, prominently disclosing GAAP results and providing reconciliations fromGAAP results to non-GAAP operational measures.  We expect to continue toincur expenses similar to the non-GAAP adjustments described above, and theexclusion or inclusion of these items from our non-GAAP financial measuresshould not be construed as an inference that these costs are unusual or infrequent.  Some of the limitations in relying on ournon-GAAP financial measures are:

 

·                                          Thenon-GAAP net sales operational measure is a measure which we have defined forinternal and investor purposes.  Afurther limitation associated with this measure is that it includes certainrevenues and the related impact on non-GAAP gross profit, operating income,income before taxes, net income, and earnings per share operational measuresthat impact our GAAP based measures.

 

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·                                          Thenon-GAAP gross profit, operating income, net income, and earnings per shareoperational measures are limited in that they do not include the impact ofstock-based compensation expense or specific costs and benefits associated withcertain purchase accounting adjustments or restructuring and retirement costs.

 

We compensate for these limitations byprominently disclosing the reported GAAP results and providing investors withreconciliations from GAAP to the non-GAAP measures in the financial tables above.

 

**RecentlyIssued Accounting Standards and Regulatory Standards**

 

In September 2006, the FASB issued SFAS No. 157,“*Fair Value Measurements”* (SFAS 157),which clarifies that fair value estimates should be based on the assumptionsmarket participants would use when pricing an asset or liability andestablishes a fair value hierarchy that prioritizes the information used todevelop those assumptions.  Under SFAS157, fair value measurements would be separately disclosed by level within thefair value hierarchy.  SFAS 157 iseffective for fiscal years beginning after November 15, 2007.  On February 12, 2008, the FASB delayedthe effective date of SFAS 157 for nonfinancial assets and liabilities, exceptfor items that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually), to fiscal years beginningafter November 15, 2008.  We adoptedSFAS 157 as of January 1, 2008, with the exception of the application ofthe statement to nonfinancial assets and nonfinancial liabilities. Refer toNote 11 to the Condensed Consolidated Financial Statements for additionaldiscussion on fair value measurements.

 

In February 2007, the FASB issued SFAS No. 159,“*The Fair Value Option for Financial Assetsand Financial Liabilities — Including an amendment of FASB Statement No. 115”*(SFAS 159).  SFAS 159 permits anentity to elect fair value as the initial and subsequent measurement attributefor many financial assets and liabilities. Entities electing the fair value option would be required to recognizechanges in fair value in earnings. Entities electing the fair value option are required to distinguish, onthe face of the statement of financial position, the fair value of assets andliabilities for which the fair value option has been elected and similar assetsand liabilities measured using another measurement attribute.  SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007. The adjustment to reflect the difference between the fair value and thecarrying amount would be accounted for as a cumulative-effect adjustment toretained earnings as of the date of initial adoption.  We have adopted SFAS 159 and have elected notto measure any additional financial instruments or other items at fair value.

 

In December 2007, the FASB issued SFAS No. 141(R),“*Business Combinations”*(SFAS 141(R)), which replaces SFAS 141.  SFAS 141(R) establishes principlesand requirements for how an acquirer in a business combination recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any controlling interest; recognizes and measures thegoodwill acquired in the business combination or a gain from a bargainpurchase; and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination.  SFAS 141(R) isto be applied prospectively to business combinations for which the acquisitiondate is on or after an entity’s fiscal year that begins after December 15,2008.  We will assess the impact ofSFAS 141(R) on future acquisitions, however the application of SFAS141(R) will result in a significant change in accounting for any suchfuture acquisitions after the effective date.

 

In March 2008, the FASB issued SFAS No. 161,“*Disclosures about Derivative Instruments andHedging Activities*” (SFAS 161). SFAS 161 requires companies withderivative instruments to disclose information that would enable financialstatement users to understand how and why a company uses derivativeinstruments, how derivative instruments and related hedged items are accountedfor under SFAS No. 133, “*Accounting for DerivativeInstruments and Hedging Activities*,” (SFAS 133) and how derivativeinstruments and related hedged items affect a company’s financial position,financial performance and cash flows. The new requirements apply to derivativeinstruments and non-derivative instruments that are designated and qualify ashedging instruments and related hedged items accounted for under SFAS 133. SFAS161 is effective for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008. We are currently evaluating theimpact of SFAS 161, but do not expect its adoption to have a material impact onour financial statements.

 

In April 2008, the FASB issued FASB Staff PositionNo. 142-3, “Determination of the Useful Lives of Intangible Assets”, whichamends the factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of an intangible asset.  This interpretation is effective forfinancial statements issued for fiscal years beginning after December 15,2008 and interim periods within those years. We are currently evaluating the impact of this staff position, but donot expect its adoption to have a material impact on our financial statements.

 

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**Updatesto Critical Accounting Estimates**

 

As discussed below and in Note 11 to the CondensedConsolidated Financial Statements, we have adopted SFAS 157 as of January 1,2008, with the exception of the application of the statement to nonfinancialassets and nonfinancial liabilities, the deferral of which was permitted underFSP 157-2. Other than this change, there have been no significant changes inour critical accounting estimates during the first half of 2008.

 

Substantially all of our financial assets andliabilities are measured at fair value based upon Level 2 inputs, as definedunder SFAS 157. The fair value measurement is prepared using the closingmid-market rate/price environment on June 27, 2008, using proprietarymodels, available market data, and reasonable assumptions.

 

**Item 3.**  **Quantitative and Qualitative Disclosures About Market Risk.**

 

Our primary market risk is the interest rate risk onour bank line of credit and term loan, which currently bear interest at avariable rate of LIBOR plus 125 basis points. We have partially hedged this exposure to interest rate risk withinterest rate swaps, which have a collective remaining notional amount of $120million as of June 27, 2008, through a well established financialinstitution.

 

We also face foreigncurrency exchange rate risk to the extent that the value of certain foreigncurrencies relative to the U.S. dollar affects our financial results.  Our international operations transact asignificant portion of our business in currencies other than the U.S. dollar,predominantly the euro, and changes in exchange rates may positively ornegatively affect our revenue, gross margins, operating expenses, and retainedearnings since these transactions are reported by us in U.S. dollars.  We occasionally purchase foreign currencyforwards aimed at limiting the impact of currency fluctuations.  These instruments provide only limitedprotection against currency exchange risks, and there can be no assurance thatsuch an approach will be successful, especially if a significant and suddendecline occurs in the value of local currencies.  As of June 27, 2008, we had three openforward contracts with an approximate fair value of $2,000.

 

**Item 4.** **Controls and Procedures.**

 

(a) *Evaluationof disclosure controls and procedures.*    Based on their evaluation as of June 27,2008, our Chief Executive Officer and Chief Financial Officer have concludedthat our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) are effective.

 

(b) *Changes ininternal control over financial reporting*.    There were no changes in our internalcontrols over financial reporting during the quarter ended June 27, 2008that materially affected or are reasonably likely to materially affect, ourinternal controls over financial reporting.

 

### **PART II —OTHER INFORMATION**

### ** **

**Item 1.    Legal Proceedings.**

 

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 filed counterclaims allegingnon-infringement, unenforceability, and invalidity.  In May 2007, we entered into aSettlement and License Agreement with Trippe Manufacturing, and dismissedTrippe from the lawsuit.  In October 2007,the District Court stayed the action pending a re-examination of our patents bythe Patent and Trademark Office.  Thatre-examination is currently underway.

 

In January 2008,Avocent Redmond Corp. filed a complaint for unauthorized use of patentedinventions against the United States government in the United States Court ofFederal Claims.  The complaint alleges that the United States governmentaccepted products manufactured and sold by Rose Electronics that are covered bypatents held by Avocent Redmond.  The United States has answered and RoseElectronics has moved to intervene.

 

In March 2007,KBM Enterprises, formerly a contract manufacturer forAvocent, filed a complaint against us in the Circuit Court of MadisonCounty, Alabama, seeking $9.5 million for costs allegedly incurred byKBM in its manufacturing efforts on behalf of Avocent.  We have filed an answer and counterclaimsagainst KBM and one of its principals. Discovery is currently underway.

 

In April 2007, we filed a complaint fordeclaratory judgment against Aten International Co., Ltd. in the United StatesDistrict Court for the Northern District of Alabama.  We are seeking a declaratory judgment thattwo patents owned by Aten and asserted against us are invalid and that certainof products alleged by Aten to infringe do not infringe these patents.  In August 2007, Aten’s motion to dismissfor lack of personal jurisdiction was granted, and we have appealed that rulingto the Federal Circuit Court of Appeals. Oral arguments were held in February 2008.

 

In November 2007, Gemini IP, LLC filed acomplaint for patent infringement in the United States District Court for theEastern District of Texas, Sherman Division, against Avocent Corporation andour subsidiary LANDesk Software, Inc. The complaint alleges infringement of a Gemini patent through the salesof a LANDesk product.  The complaintseeks injunctive relief, damages, attorneys’ fees, and costs.  Avocent Corporation was dismissed from thelawsuit in January 2008, and we have made a claim for indemnificationagainst the LANDesk escrow account.  In April 2008,the District Court stayed the action pending a review of the Gemini Patent bythe Patent and Trademark Office.

 

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We acquired LANDesk Group Limited, a privately-heldcompany, in August 2006, and the acquisition agreements provided for totalinitial consideration of approximately $407 million and a potential earn-outpayment to the former shareholders of LANDesk of up to $60 million if LANDeskachieved specified revenue targets for the full year of 2006.  Based onLANDesk’s 2006 revenue results, we concluded that LANDesk did not achieve theminimum revenue target required to cause any earn-out payment and that noearn-out was earned or payable.  Accordingly, we did not pay, and have notaccrued for, any earn-out payment.  The Shareholder Representative for theformer shareholders of LANDesk has instituted the arbitration proceduredescribed in the acquisition agreements and is challenging our conclusion thatno earn-out was earned or payable.  Weare in the process of preparing for that arbitration proceeding.

 

**Item 1A.  Risk Factors.**

 

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

 

**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 theacquisition of technologies and companies. We intend to continue to execute our strategy through the acquisition oftechnologies or companies or through investments in complementary companies,products, personnel, or technologies, and it is likely we will complete suchacquisitions or investments in the future. These acquisitions and investments involve many risks and factorsoutside our control, including the following:

 

·                                          Difficulty integrating the acquiredcompany’s personnel, distribution channels, products, product roadmaps,technologies, systems, processes, and operations, including productdevelopment, product delivery, order management, and information systems;

 

·                                          Difficulty in conforming the acquiredcompany’s financial policies and practices to our policies and practices and inimplementing and maintaining adequate internal systems and controls over thefinancial reporting and information systems of the acquired company;

 

·                                          Diversion of management’s attention anddisruption of our current business and the challenges associated with managingthe resulting larger company following any acquisition;

 

·                                          Difficulty in combining product andtechnology offerings and entering into new markets (such as software) orgeographical areas in which we have no or limited direct experience and whereour competitors may have stronger market positions;

 

·                                          Loss of management, sales, technical, orother key personnel (at either Avocent or in the acquired company) or the lossof customers, distributors, resellers, vendors, or other business relationshipsas a result of the acquisition;

 

·                                          Revenue from the acquired company notmeeting our expectation, and the potential loss of the acquired company’scustomers, distributors, resellers, suppliers, or other partners;

 

·                                          Delays or difficulties and the attendantexpense in evaluating, coordinating, and combining administrative,manufacturing, research and development and other operations, facilities, and relationshipswith third parties in accordance with local laws and other obligations whilemaintaining adequate standards, controls and procedures, including financialcontrols and controls over information systems;

 

·                                          Difficulty in completing projects associatedwith acquired in-process research and development;

 

·                                          Incurring amortization expense related tocertain intangible assets and recording goodwill and non-amortizable assetsthat will be subject to impairment testing and possible impairment charges;

 

·                                          Dilution of existing stockholders as aresult of issuing equity securities, including the assumption of any stockoptions or other stock awards to employees issued by the acquired company;

 

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·                                          Overpayment for any acquisition orinvestment or unanticipated costs or liabilities;

 

·                                          Assumption of liabilities of the acquiredcompany, including any potential intellectual property infringement claims orother litigation and any unrecorded tax obligations; and

 

·                                          Incurring substantial write-offs,restructuring charges, interest expense, amortization, and transactionalexpenses.

 

Our integration plans and indemnification and escrowagreements might fail to adequately mitigate these risks and factors, and ourfailure to manage these risks and challenges could materially harm ourbusiness, financial condition, and results of operations.  Further, if we do not successfully addressthese challenges in a timely manner, we may not fully realize all of theanticipated benefits or synergies on which the value of a transaction wasbased.  Future transactions could causeour financial results to differ materially from expectations of market analystsor investors for any given quarter.

 

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

 

The markets for our products and technologies arehighly fragmented, rapidly evolving, and intensely competitive, and we expectthese characteristics to continue and increase.  Aggressive competitionfrom both 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 highlysensitive to the introduction of new products and technologies (such asvirtualization), price changes, and marketing efforts by numerous and variedcompetitors.  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 changingindustry trends and the evolving needs of our customers.  We continue toexperience aggressive price competition and increased customer sensitivity toproduct prices, and pricing and margin pressures are likely to increase in thefuture.  Because of this competition, we may have to continue to lower theprices of many of our products and technologies or offer greater functionalitywithin our products to deliver greater value to customers to stay competitive,while at the same time trying to maintain or improve our revenue and grossmargin.  Because our business model is based on providing innovative andhigh quality products, we may spend a proportionately greater amount onresearch and development than some of our competitors.  If we cannotproportionately decrease our cost structure on a timely basis in response tocompetitive price pressures, our gross margin and profitability could beadversely affected.  In addition, if our pricing, functionality, and otherfactors are not sufficiently competitive, or if there is an adverse reaction toour product decisions, we may lose market share in certain areas, which couldadversely affect our revenue and prospects.

 

We compete for sales of switching systems andextension products with companies such as Raritan Computer, Rose Electronics,Minicom Advanced Systems, Aten International, Belkin, Digi International, andLantronix.  These products also face competition from software providers(such as Microsoft, Computer Associates, Tivoli, Symantec, Novell, AMI, and BMCSoftware), who may be able to offer software products competitive with ourhardware products at a much lower cost or even bundled for free, and fromserver manufacturers (including our OEM customers), who are able to offer theircompetitive technologies or products at the time of the server sale. These competitive software and hardware products address many of the problemsour switching systems and technologies, extension products, and remote accessproducts are designed to address.

 

We compete for sales of our systems management andsecurity products with companies such as Microsoft, Computer Associates, BMCSoftware, Novell, and Symantec, many of whom have greater financial, technical,and marketing 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 softwareproducts at a lower cost or bundled for free with their other products. Microsoft, in particular, has delivered competitive products and announced itsintention to continue to develop competitive software.  If Microsoft is successful in deliveringsoftware products that are competitive with our products, our ability to growour software business may be limited.

 

Our 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.

 

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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 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 thefuture from large established companies or from emerging companies that havenot previously entered the market or that do not currently have products thatdirectly compete with our products.  Thiscould lead to more variability in our operating results due to lengthening ofthe customer evaluation process and/or the loss of business to thesecompetitors, which may adversely affect our business, financial condition, andresults of operations.

 

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

 

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

 

Sales 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 alternativessuch as switching software, the emergence of new industry standards such asvirtualization, or changes in pricing structure could render our existingproducts and technologies and those under development obsolete or unmarketable. New technologies offered by us or our competitors could compete with ourexisting products at a lower price, which could 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 industry trends and customerneeds on a cost-effective and timely basis.  If we fail to respond on atimely basis to technological developments, changes in industry standards,customer requirements, competitive products, product localization, or softwareinnovations, we will lose customers, and our business will be greatlyharmed.  Similar results could occur if we experience significant delaysin the development or introduction of new products or technologies.

 

Due to our 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 andenhanced products and technologies for our non-OEM customers.  Moreover,these new products, technologies, or enhancements for OEM customers may not beavailable to, or readily marketable to, other customers without significantmodification and delay.  The expansion, termination, or significantdisruption of our relationship with certain OEMs or other customers forwhom we devote significant product development resources is likely to result inlost opportunities with respect to the development of products, technologies,or enhancements for our other customers.

 

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**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 and practices,however, afford only limited protection.  There can be no assurance thatthe steps we have taken to protect our intellectual property rights, or thatthe steps we take in the future, will be adequate to prevent or detectmisappropriation of our intellectual property or technologies or that ourcompetitors will not independently develop proprietary or other technologiesthat are substantially equivalent or superior to our products ortechnologies.  In addition, our proprietaryinformation may be misused or improperly disclosed by third parties entrustedwith this information.  There also can beno assurance that our proprietary rights will not be challenged, invalidated,or avoided.

 

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 may initiate claims or litigation against otherthird parties for infringement of proprietary rights or to establish thevalidity of proprietary rights.  Similarly, our competitors or other thirdparties may initiate claims or litigation against us alleging infringement oftheir proprietary rights or improper use of their intellectual property, andfrom time to time, third parties notify us that our products may infringe theirintellectual property rights, which regardless of merit, requires our time andresources to evaluate and respond.  Existing litigation, and any other litigation relating to intellectualproperty to which we become a party, is subject to numerous risks and uncertainties,including the risk of counterclaims or other litigation against us, and we maynot be successful in any such litigation.  Dealing with adverse claims andlitigation is very expensive, and the existing litigation or any otherlitigation by or against us could result in significant additional expense,divert the efforts of technical and management personnel, whether or not suchlitigation results in a favorable determination, harm our relationships withexisting customers, and deter future customers from purchasing or licensing ourproducts.  In the event of an adverse result in any such litigation, wecould be required to pay substantial damages, suspend or cease the development,manufacture, use, marketing, and sale of any infringing products, expendsignificant resources to redesign products or develop non-infringingtechnology, discontinue the use of certain processes, or obtain licenses to theinfringing technology.  There can be no assurance that we would besuccessful in such development or that such licenses would be available on reasonableterms, or at all, and any such development or license could require us toexpend substantial time and other resources.  In the event that any thirdparty makes a successful claim against us, or our customers, and a license isnot made available on commercially reasonable terms, our business, financialcondition, and results of operations could be adversely affected.  In addition, any dispute involving ourintellectual property could result in our customers, distributors, or resellersbecoming involved in the litigation, which could trigger indemnificationobligations in certain 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 inlitigation or other proceedings alleging infringement of intellectual propertyrights owned by third parties.  If necessary or desirable, we may seeklicenses under such intellectual property rights.  However, licenses maynot be offered on terms acceptable to us, or at all.  The failure toobtain a license from a third party for technology used by us could cause us toincur substantial liabilities and to suspend or cease the manufacture ofproducts requiring such technology.  Additionally, current or futurecompetitors could obtain patents or other intellectual property rights that mayprevent us from developing or selling our products. The result of theselitigation matters is difficult to predict and an unfavorable resolution couldaffect our operating results, business, or financial condition. The resolutionof litigation involving the company may impact our operating results orfinancial condition.

 

**Ourrecently-announced restructuring may disrupt our operations and adverselyaffect our operating and financial results.**

 

In June 2008,we announced a series of actions designed to enhance competitiveness, improveour efficiency, and reduce our cost structure. We initiated workforce reduction and consolidation actions designed tointensify our focus on our growth areas and improve our operatingefficiency.  The restructuring includesactions to reduce certain research and development investments in lower growthproduct areas, integrate our marketing functions, and shift support for ourAsian operations from Shannon, Ireland, to our recently-established regionalhub in Singapore.  We are also relocatingcertain functions from Redmond, Washington to Huntsville, Alabama.  The impact of these organizationalimprovements will result in a net decrease of approximately 110 positions orapproximately 5% of our global workforce. In June 2008, we also announced that, as part of our continuedfocus on core markets, we intend to sell the portion of our entrepreneurialConnectivity and Controls business unit dedicated to our Professional 

 

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Audio Video and ourEquinox serial products.  The restructuring activities could createuncertainty and confusion among our employees, customers, and suppliers.  In addition, the restructuring activitiesmight not result in the cost savings or efficiencies we anticipate and mayresult in temporary operational inefficiencies.   As a result, these restructuring activitiescould have a material adverse effect on our business, financial condition, andresults of operations.  The factors described above also could disrupt ourproduct development, manufacturing, and sales, which would affect our financialresults.

 

**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:

 

·                                          The volume, timing, pricing, andcontractual terms of orders, particularly from OEMs, resellers, and other largecustomers, a significant portion of which tend to occur late in each quarter;

 

·                                          The timing of shipments;

 

·                                          The unpredictable nature of the salescycle for software products and the timing and completion of delivery ofsoftware products;

 

·                                          The timing of new product introductions,new technologies, and enhancements by us and by our competitors, and thepossibility that customers may defer purchases of our products in anticipationof these new products, new technologies, and enhancements;

 

·                                          Changes in or our failure to accuratelypredict product or distribution and reseller channel mixes, including changesin the mix of software licenses in which revenue is recognized upfront asopposed to subscription licenses that are deferred over time and changes in themix of revenue attributable to higher-margin products as opposed tolower-margin sales or services;

 

·                                          Changes in demand for our products andservices;

 

·                                          Changes in pricing policies or pricereductions;

 

·                                          Changes in laws, regulations, or othergovernment requirements;

 

·                                          Changes in renewal rates for softwareupgrade protection or maintenance;

 

·                                          Competition from new products,technologies, business models, and price reductions by competitors;

 

·                                          The availability and cost of supplies,components, or third-party code or content on commercially reasonable terms;

 

·                                          Compatibility or interoperability of ourproducts with third-party systems and applications;

 

·                                          Sales and marketing expenses related toentering into new markets, introducing new products, new technologies, andretaining current OEMs, resellers, and other large customers;

 

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

 

·                                          The amount and timing of operatingexpenses and capital expenditures relating to the expansion of our business andoperations; and

 

·                                          Costs associated with legal proceedings,including legal fees and any adverse judgments 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 and delaysin customer orders during unfavorable economic periods.  We believe thatthe third and fourth quarters will generally have higher net sales levels dueto customer budgeting and procurement cycles, which may depress net sales inother quarters.  In addition, European sales are often weaker during thesummer months.  In the past, we have typically seen a sequential declinein revenue from the fourth quarter of a year to the first quarter of thefollowing year, and while it is difficult to predict revenue in any quarter, weexpect that this pattern will continue in the future.  Many of the factorsthat create and affect seasonal trends are beyond our control.

 

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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 increased focus on thesoftware market continues this trend with a greater proportion of our softwarerevenue coming from software license and subscriptions booked in the last weeksor days of each quarter.  This uneven sales pattern makes prediction ofrevenue, earnings, and working capital for each financial period difficult,increases the risk of unanticipated variations in quarterly results andfinancial condition, and places pressure on our hardware inventory managementand logistics systems.  If predicted demand for hardware is substantiallygreater than orders, there will be excess inventory.  Alternatively, ifhardware orders substantially exceed predicted demand, we may not be able tofulfill all of the orders received in the last few weeks of each quarter. Other developments late in a quarter, such as a systems failure, componentpricing movements, actions or announcements from our competitors, globallogistics disruptions, or large sales opportunities not being completed whenpredicted, could adversely impact inventory levels and results of operations ina manner that is disproportionate to the number 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 products and new software purchasing and licensingoptions available to our customers. These new products and options may result in an increase in contractswhere software 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 could benegatively affected.

 

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

 

Gross margins may vary or decline fromperiod-to-period and may be adversely affected by a number of factors,including:

 

·                                          The ratio of OEM sales to branded sales,since OEM sales typically have lower gross margins than branded sales;

 

·                                          The ratio of sales through indirectchannels to direct sales, since indirect sales typically have lower grossmargins than direct sales;

 

·                                          The ratio of sales in established marketsto sales in new markets with different pricing and cost structures;

 

·                                          Changes in product mix, because sales ofsome of our products and technologies will have lower gross margins than salesof other products or technologies (e.g. our software products tend to havehigher gross margins);

 

·                                          Increased price competition;

 

·                                          Changes in product costs and salesdiscounts;

 

·                                          Changes in raw materials, freight,regulatory, certification, import or export expenses, tariffs, and labor costs;

 

·                                          Introduction of new products, services,business models, and technologies by us and by our competitors;

 

·                                          The level of and costs for third-partytechnology and code used in our software products; and

 

·                                          The level of and costs for outsourcing ofour manufacturing and assembly services for our hardware products and theimpact this can have on our inventory valuation of older 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.

 

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

 

A substantialportion of our sales consists of sales of our branded products to a limitednumber of resellers and distributors.  Sales to resellers anddistributors represented approximately 56% of net sales in 2007, 56% ofnet sales in 2006, and 48% of net sales in 2005.  The loss of significantrevenue opportunities with these resellers and distributors could negativelyimpact our results of operations.  Inaddition, many of these customers also have or distribute competingproducts.  If resellers and distributorselect to increase the marketing of competing products or reduced marketing ofour products, our ability to grow our business will be negatively impacted andwill impair one of our substantial revenue sources.

 

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

 

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

 

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

 

·                                          Difficultyin predicting sales to resellers 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 resell or increase their marketing of competingproducts or technologies or reduced marketing of our products; and

 

·                                          Changesin corporate ownership, financial condition, credit worthiness, paymentpatterns, business direction, sales compensation related to our products, orproduct mix by the resellers and distributors.

 

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

 

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

 

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

 

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

 

·                                          Difficultiesin replacing any lost or terminated distributors or resellers;

 

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

 

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·                                          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;

 

·                                          Thepossibility of damage or impairment to our market position, brands ortrademarks as a result of the actions of our distributors and resellers;

 

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

 

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

 

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

 

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

 

A substantial portion ofour sales is concentrated among a limited number of OEM customers.  Salesto these OEMs represented approximately 35% of net sales in 2007, 40% of netsales in 2006, and 48% of net sales in 2005.  Sales to Hewlett-Packardrepresented approximately 12% of net sales in 2007, 14% of our net sales in2006, and 20% of our net sales in 2005.  Sales to Dell representedapproximately 12% of net sales in 2007, 14% of net sales in 2006, and 15% ofour net sales in 2005.

 

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

 

Our OEM business issubject to many risks, including:

 

·                                          Contracttermination or reduced or delayed orders;

 

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

 

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

 

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

 

·                                          Changesin corporate ownership, financial condition, credit worthiness, paymentpatterns, business direction, sales compensation related to our products, orproduct mix by the OEMs.

 

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

 

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

 

We use multiplewarehouses for many of our OEM customers to fulfill their hardware orders undera just-in-time inventory management system, which requires us to maintainsufficient inventory levels of our hardware products at each of thesewarehouses to satisfy anticipated demand from our OEM customers, and wegenerally recognize revenue only when these OEM customers take possession ofour hardware products.  We are required to plan production, ordercomponents, and undertake our manufacturing activities prior to the time thatthese orders become firm or the products are accepted.  In addition, ourOEM customers have requested, and are likely to continue to request from timeto time, that we delay shipment dates or cancel orders for hardware productsthat are subject to firm orders.  As a result, at any time we may beholding a significant amount of OEM-branded hardware products in inventory, andour sales to OEMs for future quarters are difficult to predict.  Theinability to accurately predict the timing and volume of hardware orders forour OEM customers during any given quarter could adversely affect operatingresults for that quarter and, potentially, for future quarters.  If weunderestimate sales, we may not be able to fill orders on a timely basis. This could cause customer dissatisfaction and loss of future business.  Ifwe overestimate sales, we may experience increased costs from inventorystorage, waste, and obsolescence.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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For our softwareproducts, sales are final and we do not generally allow any returns.  We provide a 90-day limited warranty on themedia used to deliver the software, which is not applicable to electronicdownloads, and we generally provide a 90-day limited warranty that our productswill function in accordance with the user documentation.

 

In the future, we may, asa result of competitive pressures, requirements in certain geographies, orcustomer demands, change our warranty policies or our warranty terms to providecoverage that is greater in scope and duration than the coverage we currentlyoffer.  If we were to increase our warranty coverage, our risk of warrantyclaims, and therefore our warranty expense and reserves, would likely increase.

 

**Wemust meet the increased demands on customer service operations or customersatisfaction and sales could suffer.**

 

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

 

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

 

We are working todevelop, integrate, and expand our international distribution and resellernetworks in an effort to increase international sales of our products.  Wemay not be successful in developing or expanding the international distributionand reseller network or in marketing and selling products in foreign markets,particularly Asia.  If the revenue generated by our international sales isnot adequate to recover the expense of establishing, expanding, and maintainingan international distribution and reseller network, our business, financialcondition, and results of operations could be materially adverselyaffected.  If international sales become a more significant component ofnet sales, our business could become more vulnerable to the risks inherent indoing business on an international level, including:

 

·                                          Difficultiesin managing foreign distributors and resellers;

 

·                                          Longerpayment cycles and problems in collecting accounts receivable;

 

·                                          Theeffects of seasonal customer demand;

 

·                                          Differinglicense terms and conditions to meet local requirements;

 

·                                          Changesin regulatory requirements;

 

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

 

·                                          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;

 

·                                          Fluctuationsin currency exchange rates; and

 

·                                          Potentiallyadverse tax consequences and political instability.

 

The existence oroccurrence of any one or more of these factors could have a material adverseeffect on our business, financial condition, and results of operations.

 

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

 

We are a global companywith sales, manufacturing, and research and development efforts around theworld.  Sales outside the United Statesgenerate approximately half of our revenue, over half of our manufacturingtakes place outside the United States, and we have research and developmentcenters in several locations outside the United States.  Accordingly, ourbusiness, operating results, future revenue, gross margin, expenses, andfinancial condition could suffer due to a variety of international factors,including:

 

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

 

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

 

·                                          Longeraccounts receivable cycles and financial instability among customers;

 

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

 

·                                          Locallabor conditions and other regulations;

 

·                                          Differingtechnology standards or customer requirements;

 

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

 

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

 

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

 

·                                          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 describedabove also could disrupt our product development and manufacturing, keysuppliers, and OEMs and resellers located outside of the United States. For example, we rely on manufacturers in Asia and Europe for the assemblyand manufacture of many of our hardware products, and we conduct substantialsoftware development and testing operations in China and Taiwan.  Accordingly, we are directly affected byeconomic, political, and military conditions in the regions where we haveoperations, including China and Taiwan. In particular, any interruption or curtailment of trade between Chinaand its present trading partners could materially adversely affect our productdevelopment, product releases, support, business, operating results, andfinancial condition.

 

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

 

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

 

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

 

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

 

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

 

·                                          Customers’budgetary constraints, fluctuations, or uncertainty, internal acceptancerequirements, and procurement procedures;

 

·                                          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.

 

Moreover, our softwarerevenue is heavily weighted toward the end of each quarter, with as much assixty percent of LANDesk’s revenue recorded in the third month of a quarter,making it difficult to forecast operating results for any quarter or giveaccurate guidance.  For largeopportunities, especially for enterprise-wide sales, the sales cycle is oftensignificantly longer than our average sales cycle.  In addition, these large opportunities aremore difficult to forecast, and if we do not correctly forecast the timing in agiven period, the amount of revenue we recognize in a period could be higher orlower than we expect, which could significantly affect our operating resultsfor the then current period and future periods over which revenue would havebeen recognized.  In addition, the termsand conditions of the legal agreements for these large opportunities are oftenbased on our customers’ purchase agreements and may contain terms that aregenerally less favorable to us than our standard terms and conditions. As aresult, revenue recognition may be delayed or otherwise negatively affected,and if we fail to meet expectations, the price of our common stock could benegatively affected.

 

**Asignificant percentage of our software revenue is dependent on sales toexisting customers or the renewal of annual software upgrade protection ormaintenance services by existing customers.**

 

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

 

Maintenance revenuerelated to the licensing of our software products is a significant part of ourcurrent and future operating revenue.  Ingeneral, maintenance fees increase with the increase in the use of our software.  Accordingly, we receive higher maintenancefees with new license agreements and as existing customers install more of oursoftware products on additional systems. Due to increased discounting for larger sales opportunities, maintenancefees on a per unit basis for such large deals can be lower than average.  In addition, customers are generally providedannual maintenance discounts for entering into long-term maintenanceagreements.  Declines in our licensebookings, increases in long-term maintenance agreements, customers electing tomigrate to competitive products or find alternatives to our products, and/orincreased discounting could lead to reduced software maintenance revenue andreduced gross margins.

 

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

 

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

 

**Oursoftware products include licensed third-party content or code upon which werely for the interoperability, integration, development, or updates of ourproducts, and disruption of our access to such code or content could delayproduct releases, inhibit our compatibility with third-party products, and harmour business.**

 

The principal componentsof our software products are proprietary code and content.  We do, however, rely on some licensedthird-party code, content, or other intellectual property, and we expect to usesuch third-party code, content, or intellectual property in future products.Although we believe that there are usually adequate alternative sources for thethird-party technology licensed to us, any significant interruption in theavailability of these third-party software products on commercially acceptableterms or any defects in these products could delay development of futureproducts or enhancement of our future products and harm our revenue.  Use of such third-party code, content, orother intellectual property presents risks such as:

 

·                                          Ownersor licensees of third-party systems could adopt more restrictive policies orimpose unfavorable or unacceptable terms and conditions for access to theirproducts making it more difficult for us to make our products compatible withtheir products and resulting in higher research and development costs for usfor the enhancement or modification of our existing products and thedevelopment of new products;

 

·                                          Functionalityprovided by third-party code, content, or other intellectual property in ourproducts may become obsolete, defective, or incompatible with future versionsof our products, may not be adequately maintained or updated, and we may beunable to find viable alternatives or develop our own proprietary solution;

 

·                                          Quality,warranty, and support terms vary dramatically when licensing third-party code,content, or other intellectual property and we have limited ability to controlquality issues with third-party code, content, or other intellectual propertyand we must depend on our own research and development personnel to evaluateand select third-party code, content, or other intellectual property that webelieve is of the most value to our customers; and

 

·                                          Technicaldifficulties in integrating our products and third-party code, content, orother intellectual property to create a combined solution, and the risk thatcustomers will not perceive the need for such integrated solutions.

 

Any significant terminationof a third-party license, change in third-party license provisions, increase inthe cost of such third-party code, content or other intellectual property,failure of a code, content or other intellectual property provider to remaincompetitive in functionality, or defect in or a quality issue could delay orinterrupt our ability to develop and deliver software products to customers ona timely basis.  This could delay ourrevenue recognition and adversely affect our business, financial condition, andresults of operations and possibly expose us to claims under license agreementswith our customers and possibly increased litigation fees and expenses.  Our failure to anticipate, manage, and adaptto these risks could result in significant delays in our products releases,changes in our product roadmaps, and damage to our operating results.

 

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

 

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

 

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We may be subject tolegal actions or claims for damages related to product errors which could,whether or not successful, increase costs and distract our management and ourdevelopment and support teams and could harm our business, result in unexpectedexpenses and damage our reputation.  Ourlicense agreements with our customers typically contain provisions designed tolimit exposure to potential product liability claims, and, to the extentpermitted by governing law, our standard agreements in many jurisdictions alsoprovide that we will not be liable for indirect or consequential damages causedby the failure of our products.  Incertain jurisdictions, however, warranty and limitation of liability provisionsare not effective.

 

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

 

Free or “open source”software is software that is made widely available by its authors or otherthird parties and is often licensed on an “as is” basis for a nominal fee or,in some cases, at no charge.  We haveincorporated some free and open source software into our products, allowing usto enhance certain solutions without incurring substantial additional researchand development costs.  In addition, wemay use free or open source tools in the development of our products.  While we have not experienced any materialproblems as a result of our use of free or open source software, use of free oropen source software entails significant risks including:

 

·                                          Freeor open source 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 free or open source software, and that we licenseor contribute such modifications or derivative works under the terms of aparticular free or open source license or other license granting third partiescertain rights 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 processesto help minimize these risks to the extent within our control, including areview process for screening requests from our development organizations forthe use of free or open source, but we cannot be sure that all free or opensource software, technology, or tools are submitted for approval prior to usein our products or in the development of our products or that all use is incompliance with our corporate policies. These risks, if not eliminated, couldnegatively affect our ability to sell and license our products and couldmaterially impact our business.

 

**Executiveofficers and other key personnel may depart, which could adversely affect ourresults of operations and harm our ability to grow the business.**

 

We are greatly dependenton the ability to retain key management, sales, and technical personnel, andour future success is highly dependent upon the personal efforts of ourmanagement, sales, and technical personnel and other key employees.  Theloss of services of key personnel could have a material adverse effect on ourbusiness, financial condition, and results of operations.  We haveattempted to mitigate these risks by offering key employees retention bonuses(payable only if they continue employment with us for specified periods) and equityawards that vest over time, but there is the risk that we could neverthelesslose key management, sales, and technical employees.

 

We have historically usedstock options and are currently using restricted stock units, including bothtime-based,  performance-based and marketconditioned-based shares, as a key component in our executive and employeecompensation programs in order to align employees’ interests with the interestsof our stockholders, encourage employee retention, and provide competitivecompensation packages.  Many of our employee stock options are fullyvested, but most of these outstanding and vested options are currentlyunderwater.  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 make equity awards to employees in the future.  Asa result, 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.

 

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

 

In addition, for the lastseveral years, we have acquired several companies and these acquisitions haveresulted in increased responsibilities and placed significant strain on ourmanagerial, operational, and financial resources and resulted in new andincreased responsibilities for management personnel.  There can be noassurance that our management, personnel, systems, procedures, and controlsare, or will be, adequate to support our existing and future operations or thatwe will continue to grow.  If we fail torecruit and retain sufficient and qualified managerial, operational, orfinancial personnel or to implement or maintain internal systems that enable usto effectively manage our growing business and operations worldwide, ourfinancial results in any given period may be adversely affected and ourbusiness and financial condition could be materially harmed.

 

**Ourmanagement changes may disrupt our business or affect our profitability.**

 

In January 2008,John R. Cooper, our Chief Executive Officer and the Chairman of the Board ofDirectors at that time, announced his resignation, effective March 31,2008.  Edwin L. Harper, one of ourDirectors, was elected as Chairman of our Board of Directors effective in January 2008and as Interim Chief Executive Officers effective April 1, 2008.  Our Board of Directors electedMichael J. Borman as our new Chief Executive Officer and a member ofour Board of Directors, effective July 15, 2008.  The transition to a new chief executiveofficer could create uncertainty and confusion among our employees, customers,and stockholders.  In addition, the search process to select Mr. Bormanmay have adversely affected or delayed customer purchase decisions or decisionsabout the strategic direction of our business and raised concerns among ouremployees, customers, and stockholders, all of which could affect our sales,profitability, or results of operations.

 

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

 

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

 

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

 

**Our line of credit or term loancould adversely affect us and our operations.**

 

In the second quarter of2006, we obtained a $250 million unsecured, five-year, revolving, bank line ofcredit, and we used borrowings under this line of credit to fund a portion ofthe LANDesk acquisition and the purchase of our shares under ourrecently-expanded stock repurchase program. In July 2008, we amended the line of credit and borrowed anadditional $90 million under a three-year term note.  We may increase this bank debt or seek otherbank debt in the future.  The balance onour line of credit was $130 million as of June 27, 2008.  Interest expense on borrowings under the termloan and additional future borrowings under the line of credit could adverselyaffect our future net income, margins, expenses, and financial conditions by:

 

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

 

·                                          Increasingour vulnerability to economic downturns in our industry;

 

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

 

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

 

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

 

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

 

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

 

The line of credit and term loan contain affirmativeand negative covenants, including limitations on our ability to (i) makedistributions, investments, and other payments unless we satisfy certainfinancial tests or other criteria, (ii) incur additional indebtedness, (iii) restructureour subsidiaries, and (iv) make acquisitions and capitalexpenditures.  All of these restrictionscould affect our ability to operate our business and may limit our ability totake advantage of potential business opportunities as they arise.  The failure to comply with these covenantscould result in an event of default which, if not cured or waived, could have amaterial adverse effect on us.

 

Our ability to complywith these provisions of our line of credit and term loan may be affected bychanges in the economic or business conditions or other events beyond ourcontrol.  If we do not comply with thesecovenants and restrictions, we could be in default under our line of creditand/or the term loan, and our debt, together with accrued interest, could thenbe declared immediately due and payable. There can be no assurance that we will be able to obtain sufficient fundsto enable us to repay or refinance our debt obligations on commerciallyreasonable terms or at all.  We also faceinterest rate risk on our bank line of credit and term loan which currentlybears interest at a variable rate of LIBOR plus 70 basis points.  We have partially hedged this exposure tointerest rate risk with an interest rate swap, which has a remaining notionalamount of $40 million, through a well established financial institution.

 

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

 

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

 

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

 

Section 404 of theSarbanes-Oxley Act of 2002 requires that we implement and maintain adequateinternal systems and effective internal controls over financial reporting andinformation systems.  The absence of suchcontrols could have a material adverse effect on our business, financialcondition, and results of operations.  Inaddition, correction of any “significant deficiencies” or “material weaknesses”(as defined under PCAOB guidelines) could require additional remedial measuresincluding hiring additional personnel, which could be costly andtime-consuming.  If a significantdeficiency or material weakness exists at any year-end (including a materialweakness identified prior to year-end for which there is an insufficient periodof time to evaluate and confirm the effectiveness of the corrections or relatednew procedures), our management and our auditors will be unable to reportfavorably as to the effectiveness of our control over financial reporting orinformation systems.  This could resultin a loss of investor confidence in the accuracy and completeness of ourfinancial reports and our management, which could result in a decline of ourstock price, damage to our business reputation, and potential litigation.

 

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

 

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

 

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

 

Some of our operationsuse substances regulated under various federal, state, and international lawsgoverning the environment, including those governing the discharge ofpollutants into the air and water, the management and disposal of hazardoussubstances and wastes, and the cleanup of contaminated sites.  Many of ourproducts are subject to various federal, state, and international lawsgoverning chemical substances in products, including those regulating themanufacture and distribution of chemical substances and those restricting thepresence of certain substances in electronics products.  We could incursubstantial costs, including cleanup costs, fines, civil or criminal sanctions,third-party property damage, or personal injury claims if we were to violate orbecome liable under environmental laws or if our products become non-compliantwith environmental laws.  We also face increasing complexity in ourproduct design and procurement operations as we adjust to new and futurerequirements relating to the materials composition of our products, includingthe restrictions on lead and certain other substances that will apply tospecified electronics products put on the market in the European Union as of July 1,2006 (Restriction of Hazardous Substances Directive) and similar legislation 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 facesignificant costs and liabilities in connection with product take-backlegislation.  The European Union has finalized the Waste Electrical andElectronic Equipment Directive (WEEE), which makes producers of electricalgoods, including computers and peripherals, financially responsible forspecified collection, recycling, treatment, and disposal of past and futurecovered products.  This deadline to enact and implement the directive byindividual European Union governments generally was August 13, 2004,although extensions were granted to some countries (such legislation, togetherwith the directive, the “WEEE Legislation”), and producers are financiallyresponsible under the WEEE Legislation beginning in August 2005. Similar legislation has been or may be enacted in other geographies, includingin the United States and Japan, the cumulative impact of which could besignificant for us.  We have incurred some costs and will continue toincur costs under the WEEE legislation but the amount and timing of these costsare difficult to predict.

 

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

 

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

 

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

 

**Ourstock price may be volatile.**

 

Our stock has experiencedsignificant volatility in price, in particular whenever there has been adifference between our actual financial results and the published expectationsof analysts.  We have also experiencedchanges in our stock price as a result of speculation in the press or investmentcommunity about our strategic position, financial position, results ofoperations, business, or significant transactions or acquisitions.  The stock market in general has experiencedprice and volume fluctuations that have negatively affected the market price ofmany publicly-held companies in ways seemingly unrelated to the actualoperating performance of these companies. These factors, as well as generaleconomic and political conditions and the announcement of proposed andcompleted acquisitions or other significant transactions, or any difficultiesassociated with such transactions, by us or our current or potentialcompetitors, may materially adversely affect the market price of our commonstock in the future. Additionally, volatility, lack of positive performance inour stock price or changes to our overall compensation program including ourstock incentive program may adversely affect our ability to retain keyemployees, virtually all of whom are compensated, in part, based on theperformance of our stock price.

 

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**Item2.****           UnregisteredSales of Equity Securities and Use of Proceeds.**

 

In 2004 our Boardof Directors approved a stock repurchase program whereby we may purchase sharesof our common stock.  Our Board hasapproved a total of 19 million shares to be repurchased under this program,including 4 million additional shares approved by our Board in January 2008.  The plan has no expiration date.  Details of purchases made during the threeand six months ended June 27, 2008 are as follows:

 
| **Period:**                                          | ** ** | **Total Number of  Shares Purchased  During the Period** | ** ** | **Average Price Paid  Per Share for Period  Presented** | ** ** | **Total Cumulative  Number of  Shares Purchased as  Part of Publicly  Announced Plan** | ** ** | **Maximum  Number of  Shares  Remaining to  Purchase Under  the  Plan** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
|                                                 |       |                                                                              |       |                                                                             |       |                                                                                                                      |       |                                                                                   |       |
| January 1,  2008 — January 25, 2008   |       | 1,587,575                                                                         |       | $                                                                                | 15.59      |                                                                                                                      | 14,287,575 |                                                                                   | 4,712,425  |   |
| January 26,  2008 — February 22, 2008 |       | 1,462,425                                                                         |       | $                                                                                | 16.56      |                                                                                                                      | 15,750,000 |                                                                                   | 3,250,000  |   |
| February 23,  2008 — March 28, 2008   |       | 862,300                                                                           |       | $                                                                                | 16.22      |                                                                                                                      | 16,612,300 |                                                                                   | 2,387,700  |   |
| Quarter ended  March 28, 2008                   |       | 3,912,300                                                                         |       | $                                                                                | 16.09      |                                                                                                                      |       |                                                                                   |       |   |
| March 29,  2008 — April 25, 2008      |       | 87,700                                                                            |       | $                                                                                | 17.02      |                                                                                                                      | 16,700,000 |                                                                                   | 2,300,000  |   |
| April 26,  2008 — May 23, 2008        |       | —                                                                            |       | —                                                                           |       | 16,700,000                                                                                                                |       | 2,300,000                                                                              |       |
| May 24,  2008 —June 27, 2008          |       | —                                                                            |       | —                                                                           |       | 16,700,000                                                                                                                |       | 2,300,000                                                                              |       |
| Quarter ended  June 27, 2008                    |       | 87,700                                                                            |       | $                                                                                | 17.02      |                                                                                                                      |       |                                                                                   |       |   |
| Six Months ended  June 27, 2008                 |       | 4,000,000                                                                         |       | $                                                                                | 16.11      |                                                                                                                      |       |                                                                                   |       |   |

 

Approximately168,000 shares were withheld as payment for employee payroll withholding taxesat the release of vested restricted stock units in the first half of 2008 (*see Note 3 to our condensed consolidated financialstatements contained in Part I, Item 1 of this quarterly report*).  The 168,000 shares were considered to betreasury shares; however, these treasury shares were immediately retired andare not considered in the table above.

 

**Item 4.****           Submission of Mattersto a Vote of Security Holders.**

 

On June 12, 2008, we held our Annual Meeting ofStockholders.  The matters voted on atthe meeting and the results of these votes are as follows:

 

1.                                             Election of Class IIDirectors.

 
| ** **              | ** ** | **Votes for** | ** ** | **Votes Withheld** | ** ** |
|-------------------------|------------|--------------------|------------|-------------------------|------------|
| 1. Harold D.  Copperman |       | 39,656,514         |       | 1,558,652               |       |
| 2. Edwin L.  Harper     |       | 40,074,849         |       | 1,140,317               |       |

 

2.                                             RatifyPricewaterhouseCoopers LLP as independent auditors for year ended December 31,2008.

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Votes Abstained** | ** ** |
|---------------|------------|-------------------|------------|---------------------|------------|
| 40,719,953    |       | 484,631           |       | 10,582              |       |

 

**Item6.****           Exhibits.**

 

(a) Exhibits

 
| ** ** | **10.13**  | **Form of  Avocent Corporation Indemnification Agreement for Directors and Officers.**                                                                                                             |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                         |
| ** ** | **10.19**  | **Avocent  corporation 2008 Inducement Plan and Forms there to (Incorporated by  reference to the Form 8-K/A by Registration August 4, 2008).**                                                    |
| ** ** | ** ** | ** **                                                                                                                                                                                         |
| ** ** | **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. |
|       |       |                                                                                                                                                                                               |
|       | 99.19      | Employment and Noncompetition Agreement dated July 14, 2008, by  and among Avocent Corporation, Avocent Huntsville Corp., and Michael J.  Borman.                                             |
|       |       |                                                                                                                                                                                               |
|       | 99.20      | First Amendment to Credit Agreement dated July  2008, by and among  Avocent Corporation, the Guarantors party thereto, the Lenders party thereto,  and Regions Bank.                          |

 

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

 

### **SIGNATURE**

### ** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   |                      | AVOCENT CORPORATION                                             |
|--------|---------------------------|-----------------------------------------------------------------|
|   |                      | (Registrant)                                                    |
|   |                      |                                                            |
|   |                      |                                                            |
|   | Date: August 6, 2008 | /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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