** **

**U.S. SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

# **FORM 10-Q**

# ** **

| **(Mark One)**                                                                                                                                                  | ** ** | ** **                                                                                    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                            |       |                                                                                          |
| **ý**                                                                                                                                                      | ** ** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|                                                                                                                                                            |       |                                                                                          |
| **For the quarterly period ended June  30, 2006 or**                                                                                                            |
|                                                                                                                                                            |       |                                                                                          |
| **o**                                                                                                                                                           | ** ** | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                            |       |                                                                                          |
| **For the transition period from             to          ** |
|                                                                                                                                                            |       |                                                                                          |
| **Commission file number: 000-30575**                                                                                                                           |

 

**AVOCENTCORPORATION**

(Exact Name of Registrantas Specified in Its Charter)

 

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

 

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

 

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

 

xYes  oNo

 

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

 

Large Accelerated filer x                                  AcceleratedFiler o                                             Non- Acceleratedfiler o

 

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

 

As of August 1, 2006, the number ofoutstanding shares of the Registrant’s Common Stock was 44,043,704.

 

 

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**AVOCENT CORPORATION**

**FORM 10-Q**

**June 30, 2006**

 

**INDEX**

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

 

2

----

 

**PART I—FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**AVOCENTCORPORATION CONSOLIDATED STATEMENTS OF INCOME**

(Unaudited, in thousands,except per share data)

 
| ** **                                                     | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                     | ** ** | **June 30,**                                  | ** ** | **July 1,**                                 | ** ** | **June 30,** | ** ** | **July 1,** | ** ** |
| ** **                                                     | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                     | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                      |       | $                                                  | 118,005    |                                             | $          | 89,538 |   | $ | 212,517 |   | $ | 166,343 |   |
| Cost of sales                                                  |       | 46,595                                             |       | 36,711                                           |       | 85,150 |   | 69,934 |   |
| Gross profit                                                   |       | 71,410                                             |       | 52,827                                           |       | 127,367 |   | 96,409 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Research and  development expenses                             |       | 14,321                                             |       | 14,388                                           |       | 27,530 |   | 28,855 |   |
| Acquired  in-process research and development expense          |       | —                                             |       | —                                           |       | 2,100 |   | — |   |
| Selling, general  and administrative expenses                  |       | 32,718                                             |       | 24,025                                           |       | 56,102 |   | 46,305 |   |
| Cyclades  integration expenses                                 |       | 2,269                                              |       | —                                           |       | 2,269 |   | — |   |
| Amortization of  intangible assets                             |       | 4,901                                              |       | 6,623                                            |       | 7,252 |   | 13,245 |   |
| Total operating  expenses                                      |       | 54,209                                             |       | 45,036                                           |       | 95,253 |   | 88,405 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Income from  operations                                        |       | 17,201                                             |       | 7,791                                            |       | 32,114 |   | 8,004 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Income from  settlement of lawsuit                             |       | —                                             |       | 5,000                                            |       | — |   | 5,000 |   |
| Net investment  income                                         |       | 2,114                                              |       | 2,260                                            |       | 5,205 |   | 4,316 |   |
| Net realized  investment gains (losses)                        |       | 2                                                  |       | (206                                             | )          | (53 | ) | (383 | ) |
| Interest expense                                               |       | (137                                               | )          | —                                           |       | (146 | ) | — |   |
| Other expense,  net                                            |       | (200                                               | )          | (115                                             | )          | (211 | ) | (54 | ) |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Income before  income taxes                                    |       | 18,980                                             |       | 14,730                                           |       | 36,909 |   | 16,883 |   |
| Provision for  income taxes                                    |       | 5,399                                              |       | 3,631                                            |       | 10,395 |   | 3,950 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Net income (1)                                                 |       | $                                                  | 13,581     |                                             | $          | 11,099 |   | $ | 26,514 |   | $ | 12,933 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Earnings per  share:                                           |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                          |       | $                                                  | 0.28       |                                             | $          | 0.22 |   | $ | 0.55 |   | $ | 0.26 |   |
| Diluted                                                        |       | $                                                  | 0.28       |                                             | $          | 0.22 |   | $ | 0.54 |   | $ | 0.25 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Weighted average  shares used in computing earnings per share: |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                          |       | 47,943                                             |       | 49,475                                           |       | 48,515 |   | 49,859 |   |
| Diluted                                                        |       | 48,709                                             |       | 50,417                                           |       | 49,336 |   | 50,819 |   |

 

----

(1) Net income for the three andsix months ended June 30, 2006 includes stock-based compensation expense underSFAS 123R related to stock-based compensation of $1,753 and $2,332,respectively, net of tax. Net income for the three and six months ended July 1,2005 included stock-based compensation expense related to the amortization ofdeferred compensation recorded as a result of assumed options from theacquisition of OSA Technologies Inc of $510 and $1,019, respectively. See Note13 to the Condensed Consolidated Financial Statements for more information.

 

See notes accompanyingthese condensed consolidated financial statements.

 

3

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**AVOCENT CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

(Unaudited, in thousands,except per share data)

 
| ** **                                                                                                                                                                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                           | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                                           | ** ** | ** **        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                           |       |              |       |                  |       |
| Current assets:                                                                                                                                                                                      |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                           |       | $                 | 80,691     |                  | $          | 66,425 |   |
| Investments  maturing within one year                                                                                                                                                                |       | 82,763            |       | 227,478               |       |
| Accounts  receivable, net                                                                                                                                                                            |       | 78,399            |       | 68,712                |       |
| Inventories, net                                                                                                                                                                                     |       | 31,849            |       | 21,178                |       |
| Other current  assets                                                                                                                                                                                |       | 12,303            |       | 10,524                |       |
| Deferred tax  assets, net                                                                                                                                                                            |       | 6,331             |       | 4,054                 |       |
| Total current  assets                                                                                                                                                                                |       | 292,336           |       | 398,371               |       |
| Investments                                                                                                                                                                                          |       | 30,335            |       | 51,939                |       |
| Property and  equipment, net                                                                                                                                                                         |       | 37,954            |       | 36,801                |       |
| Goodwill                                                                                                                                                                                             |       | 331,545           |       | 269,992               |       |
| Other intangible  assets, net                                                                                                                                                                        |       | 53,761            |       | 15,763                |       |
| Other assets                                                                                                                                                                                         |       | 2,430             |       | 885                   |       |
| Total assets                                                                                                                                                                                         |       | $                 | 748,361    |                  | $          | 773,751 |   |
|                                                                                                                                                                                                 |       |              |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                       |       |              |       |                  |       |
| Current  liabilities:                                                                                                                                                                                |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                     |       | $                 | 18,915     |                  | $          | 13,069 |   |
| Accrued wages  and commissions                                                                                                                                                                       |       | 13,354            |       | 10,500                |       |
| Accrued  liabilities                                                                                                                                                                                 |       | 23,327            |       | 17,206                |       |
| Income taxes  payable                                                                                                                                                                                |       | 10,188            |       | 11,270                |       |
| Other current  liabilities                                                                                                                                                                           |       | 4,251             |       | 1,702                 |       |
| Total current  liabilities                                                                                                                                                                           |       | 70,035            |       | 53,747                |       |
|                                                                                                                                                                                                 |       |              |       |                  |       |
| Note payable                                                                                                                                                                                         |       | 12,005            |       | —                |       |
| Deferred tax  liabilities, net                                                                                                                                                                       |       | 16,147            |       | 2,564                 |       |
| Other  non-current liabilities                                                                                                                                                                       |       | 2,186             |       | 2,118                 |       |
| Total  liabilities                                                                                                                                                                                   |       | 100,373           |       | 58,429                |       |
|                                                                                                                                                                                                 |       |              |       |                  |       |
| Commitments and  contingencies (see Note 12)                                                                                                                                                         |       |              |       |                  |       |
|                                                                                                                                                                                                 |       |              |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                          |       |              |       |                  |       |
| Preferred stock,  $0.001 par value; 5,000 shares authorized, no shares issued and outstanding  as of June 30, 2006 and December 31, 2005, respectively                                               |       | —            |       | —                |       |
| Common stock,  $0.001 par value; 200,000 shares authorized, June 30, 2006 – 52,599 shares  issued and 45,036 outstanding; December 31, 2005 – 51,612 shares issued and  48,837 outstanding |       | 53                |       | 52                    |       |
| Additional  paid-in capital                                                                                                                                                                          |       | 1,132,893         |       | 1,104,899             |       |
| Accumulated  other comprehensive loss                                                                                                                                                                |       | (85               | )          | (497                  | )          |
| Accumulated  deficit                                                                                                                                                                                 |       | (280,989          | )          | (307,503              | )          |
| Treasury stock,  at cost; June 30, 2006 – 7,563 shares; December 31, 2005 – 2,775 shares                                                                                                   |       | (203,884          | )          | (81,629               | )          |
| Total  stockholders’ equity                                                                                                                                                                     |       | 647,988           |       | 715,322               |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                     |       | $                 | 748,361    |                  | $          | 773,751 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

4

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**AVOCENT CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited, in thousands)

 
| ** **                                                                         | ** **   | **For the six months ended** | ** **   |
|------------------------------------------------------------------------------------|--------------|--------------------------------------------------|--------------|
| ** **                                                                         | ** **   | **June 30,**                                | ** **   | **July 1,** | ** ** |
| ** **                                                                         | ** **   | **2006**                                         | ** **   | **2005** | ** ** |
| *** ***                                                                       | *** *** | *** ***                                     | *** *** | *** *** | *** *** |
| Cash flows from  operating activities:                                             | * *     | * *                                         | * *     | * * | * * |
| Net income                                                                         |         | $                                                | 26,514       |   | $ | 12,933 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |         |                                             |         |   |   |
| Depreciation                                                                       |         | 3,974                                            |         | 3,278 |   |
| Amortization of  intangible assets                                                 |         | 7,252                                            |         | 13,245 |   |
| Stock-based  compensation                                                          |         | 3,563                                            |         | 1,019 |   |
| Acquired  in-process research and development expenses                             |         | 2,100                                            |         | — |   |
| Amortization of  premiums on investments                                           |         | 100                                              |         | 650 |   |
| Net loss on  sales of investments                                                  |         | 53                                               |         | 383 |   |
| Income tax  benefit from exercise of stock options (see Note 13)                   |         | —                                           |         | 2,131 |   |
| Excess tax  benefit from stock-based compensation (see Note 13)                    |         | (3,845                                           | )            | — |   |
| Changes in  operating assets and liabilities (net of effects of acquisition):      |         |                                             |         |   |   |
| Accounts  receivable, net                                                          |         | (387                                             | )            | 7,863 |   |
| Inventories, net                                                                   |         | (3,415                                           | )            | (1,575 | ) |
| Other assets                                                                       |         | (3,765                                           | )            | (2,636 | ) |
| Accounts payable                                                                   |         | (5,971                                           | )            | (2,625 | ) |
| Accrued wages  and commissions                                                     |         | 2,456                                            |         | (2,229 | ) |
| Accrued  liabilities (1)                                                           |         | 5,180                                            |         | 3,193 |   |
| Income taxes,  current and deferred                                                |         | (2,228                                           | )            | (4,323 | ) |
| Net cash  provided by operating activities                                         |         | 31,581                                           |         | 31,307 |   |
| ** **                                                                         | ** **   | ** **                                       | ** **   | ** ** | ** ** |
| Cash flows from  investing activities:                                             |         |                                             |         |   |   |
| Purchase of  Cyclades, net of cash received                                        |         | (91,568                                          | )            | — |   |
| Purchase of  other intangibles                                                     |         | (2,699                                           | )            | — |   |
| Purchases of  property and equipment                                               |         | (3,157                                           | )            | (2,603 | ) |
| Purchases of  investments                                                          |         | (128,420                                         | )            | (135,947 | ) |
| Maturities and  proceeds from sales of investments                                 |         | 294,719                                          |         | 142,429 |   |
| Net cash  provided by investing activities                                         |         | 68,875                                           |         | 3,879 |   |
| ** **                                                                         | ** **   | ** **                                       | ** **   | ** ** | ** ** |
| Cash flows from  financing activities:                                             | ** **   | ** **                                       | ** **   | ** ** | ** ** |
| Repayment of  debt assumed in acquisition                                          |         | (1,715                                           | )            | — |   |
| Borrowings under  unsecured line of credit                                         |         | 12,005                                           |         | — |   |
| Payment of  financing costs                                                        |         | (2,005                                           | )            | — |   |
| Proceeds from  employee stock option exercises                                     |         | 20,587                                           |         | 6,440 |   |
| Excess tax benefit from stock-based  compensation (see Note 13)                    |         | 3,845                                            |         | — |   |
| Proceeds from  employee stock purchase plan                                        |         | —                                           |         | 2,108 |   |
| Purchases of  treasury stock (2)                                                   |         | (119,186                                         | )            | (50,270 | ) |
| Net cash used in  financing activities                                             |         | (86,469                                          | )            | (41,722 | ) |
|                                                                               |         |                                             |         |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                      |         | 279                                              |         | (122 | ) |
|                                                                               |         |                                             |         |   |   |
| Net increase  (decrease) in cash and cash equivalents                              |         | 14,266                                           |         | (6,658 | ) |
| Cash and cash  equivalents at beginning of period                                  |         | 66,425                                           |         | 44,724 |   |
| Cash and cash  equivalents at end of period                                        |         | $                                                | 80,691       |   | $ | 38,066 |   |

 

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(1)   – $4,750 included in accrued liabilitiesrelated to the purchase of certain tangible and intangible assets of anexisting product line.

 

(2)   – We repurchased 122 shares of our commonstock at a cost of $3,069 at the end of the second quarter of 2006. Thetransaction settled at the beginning of our third quarter of 2006.

 

See notes accompanyingthese condensed consolidated financial statements.

 

5

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**AVOCENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited, in thousands,except per share data)

 

Note 1.   Basis of Presentation

 

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

 

The accompanyingunaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and the relatednotes contained in our Annual Report on Form 10-K for the year ended December31, 2005, which is on file with the Securities and Exchange Commission and isavailable at our website, www.avocent.com. The balance sheet presented in theaccompanying financial statements for December 31, 2005, was derived from theaudited financial statements filed in our 10-K for the period ended December31, 2005, but does not include all disclosures required by accountingprinciples generally accepted in the United States of America.

 

We report ourannual results based on years ending December 31. We report our quarterly resultsfor the first three interim periods based on 13 week periods ending on Fridaysand for the fourth interim period ending on December 31.

 

Our financialstatements are consolidated and include the accounts of Avocent Corporation andour wholly owned subsidiaries. All significant inter-company transactions andbalances have been eliminated in consolidation.

 

Note 2.   Inventories

 

Inventories consisted ofthe following at:

 
| ** **       | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **       | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| Raw materials    |       | $                           | 5,323      |                            | $          | 3,625 |   |
| Work-in-process  |       | 2,993                       |       | 173                             |       |
| Finished goods   |       | 23,533                      |       | 17,380                          |       |
| Inventories, net |       | $                           | 31,849     |                            | $          | 21,178 |   |

 

Inventoriesabove have been reduced by reserves for excess and obsolete inventories of$7,208 and $4,558 as of June 30, 2006 and December 31, 2005, respectively. Theincrease in inventories since December 31, 2005 includes inventories addedthrough the Cyclades acquisition (see Note 8).

 

Note 3.   Stock Options andTreasury Stock

 

Stock option exercises —Shares of our common stock issued as a result of option exercises totaled 72shares during the quarter ended June 30, 2006 and 66 shares during the quarterended July 1, 2005. Total proceeds received from these option exercises were$1,388 for the quarter ended June 30, 2006 and $484 for the quarter ended July1, 2005. Shares of our common stock issued as a result of option exercisestotaled 987 shares during the six months ended June 30, 2006 and 380 sharesduring the six months ended July 1, 2005. Total proceeds received from theseoption exercises were $20,587 for the six months ended June 30, 2006 and $6,440for the six months ended July 1, 2005. Additionally, common stock issued underour Employee Stock Purchase Plan totaled 87 shares during the six months endedJuly 1, 2005. Total proceeds received from the shares issued under the ESPPwere $2,108 for the six months ended July 1, 2005. There were no shares issuedunder the ESPP for the quarter or six months ended June 30, 2006 following thesuspension of the ESPP by our Board of Directors in 2005.

 

Stock repurchases —During the second quarter of 2006 our Board of Directors approved an additional6,000 shares of stock for repurchase under our repurchase program. We mayrepurchase a total of 10,000 shares under the program. We repurchased 3,963shares of our common stock during the quarter ended June 30, 2006 at a costtotaling $95,303. We 

 

6

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repurchased 4,788 shares of our common stock duringthe six months ended June 30, 2006 at a cost totaling $122,255. We repurchased1,075 shares of our common stock during the quarter ended July 1, 2005 at acost totaling $28,408. We repurchased 1,775 shares of our common stock duringthe six months ended July 1, 2005 at a cost totaling $50,270. These treasuryshares were purchased on the open market through various brokers under thestock repurchase plan approved by our Board of Directors. As of June 30, 2006,we have repurchased 7,563 shares under the plan since the initial approval ofthe plan in 2004.

 

Note 4.   Accumulated OtherComprehensive Income (Loss)

 

We record unrealized gains and losseson our foreign currency translation adjustments and unrealized holding gains orlosses on our available-for-sale securities, net of tax, as accumulated othercomprehensive income (loss), which is included as a separate component ofstockholders’ equity. Comprehensive income in the first six months of 2006 of$26,926 consists of $26,514 of net income, $133 of unrealized gains oninvestments (net of deferred income taxes) and $279 of foreign currencytranslation adjustments. Comprehensive income for the first six months of 2005of $12,429 consists of $12,933 of net income, $242 of unrealized losses oninvestments (net of deferred income taxes) and $262 of foreign currencytranslation adjustments. As of June 30, 2006 and December 31, 2005, totalaccumulated other comprehensive income (loss) was $(85) and $(497),respectively.

 

Note 5.   Earnings Per Share

 
| ** **                                                           | ** ** | **Income  (Numerator)** | ** ** | **Shares   (Denominator)** | ** ** | **Per-Share   Amount** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|------------------------|------------|
| ** **                                                           | ** ** | ** **              | ** ** | ** **                 | ** ** | ** **             | ** ** |
| **For the  three months ended June 30, 2006**                        |       |                    |       |                       |       |                   |       |
| **Basic  EPS**                                                       |       |                    |       |                       |       |                   |       |
| Net income  available to common stockholders                         |       | $                       | 13,581     |                       | 47,943     |                   | $          | 0.28 |   |
| **Effect  of Dilutive Securities**                                   |       |                    |       |                       |       |                   |       |
| Stock options  and restricted stock awards                           |       | —                  |       | 766                        |       | —                 |       |
| **Diluted  EPS**                                                     |       |                    |       |                       |       |                   |       |
| Net income  available to common stockholders and assumed conversions |       | $                       | 13,581     |                       | 48,709     |                   | $          | 0.28 |   |
|                                                                 |       |                    |       |                       |       |                   |       |
| **For the  three months ended July 1, 2005**                         |       |                    |       |                       |       |                   |       |
| **Basic  EPS**                                                       |       |                    |       |                       |       |                   |       |
| Net income  available to common stockholders                         |       | $                       | 11,099     |                       | 49,475     |                   | $          | 0.22 |   |
| **Effect  of Dilutive Securities**                                   |       |                    |       |                       |       |                   |       |
| Stock options                                                        |       | —                  |       | 942                        |       | —                 |       |
| **Diluted  EPS**                                                     |       |                    |       |                       |       |                   |       |
| Net income  available to common stockholders and assumed conversions |       | $                       | 11,099     |                       | 50,417     |                   | $          | 0.22 |   |
|                                                                 |       |                    |       |                       |       |                   |       |
| **For the  six months ended June 30, 2006**                          |       |                    |       |                       |       |                   |       |
| **Basic  EPS**                                                       |       |                    |       |                       |       |                   |       |
| Net income  available to common stockholders                         |       | $                       | 26,514     |                       | 48,515     |                   | $          | 0.26 |   |
| **Effect  of Dilutive Securities**                                   |       |                    |       |                       |       |                   |       |
| Stock options  and restricted stock awards                           |       | —                  |       | 822                        |       | —                 |       |
| **Diluted  EPS**                                                     |       |                    |       |                       |       |                   |       |
| Net income  available to common stockholders and assumed conversions |       | $                       | 26,514     |                       | 49,336     |                   | $          | 0.25 |   |
| ** **                                                           | ** ** | ** **              | ** ** | ** **                 | ** ** | ** **             | ** ** |
| **For the  six months ended July 1, 2005**                           |       |                    |       |                       |       |                   |       |
| **Basic  EPS**                                                       |       |                    |       |                       |       |                   |       |
| Net income  available to common stockholders                         |       | $                       | 12,933     |                       | 49,859     |                   | $          | 0.26 |   |
| **Effect  of Dilutive Securities**                                   |       |                    |       |                       |       |                   |       |
| Stock options                                                        |       | —                  |       | 960                        |       | —                 |       |
| **Diluted  EPS**                                                     |       |                    |       |                       |       |                   |       |
| Net income  available to common stockholders and assumed conversions |       | $                       | 12,933     |                       | 50,819     |                   | $          | 0.25 |   |

 

7

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Anti-dilutive options topurchase common stock outstanding were excluded from the calculationsabove.  Anti-dilutive options totaled2,382 and 2,381 for the three and six months ended June 30, 2006,respectively.  Anti-dilutive optionstotaled 2,634 and 2,636 for the three and six months ended July 1, 2005,respectively.  

 

Note 6.   Segment Reporting

 

In prior years, wereported our operations as a single reportable segment. However, in the firstquarter of 2006, we reorganized our business into five divisions:

 

•      The Management Systems Division, whichincludes our branded and OEM KVM, serial console, power control and managementappliance businesses;

•      The Embedded Software and SolutionsDivision, which focuses on developing and marketing embedded systems andsoftware including IPMI and embedded KVM technologies primarily for our OEMcustomers;

•      The Connectivity and Control Division,which focuses on expanding the markets for Avocent’s serial and wirelessproducts;

•      The Desktop Solutions Division, which willfocus on developing new products to facilitate client blade deployments; and

•      The Mobile Technologies Division, whichincludes mobile device management and secure wireless systems administration.

 

The reorganizationincluded reconfiguring our systems and defining new cost centers and operatingmeasures to track performance of the divisions and to use as a basis for ourchief operating decision maker to manage and allocate resources. As a result ofthis change in reportable segments, we have retroactively adjusted the segmentinformation previously disclosed for the quarter and six months ended July 1,2005 to conform to the current segment disclosures.

 

We evaluate theperformance of our segments based on revenue and operating profit, whichexcludes corporate and unallocated costs, amortization of intangibles, andacquired in-process research and development expense. We do not track or useassets by segment as a measure of performance and, therefore, we have notpresented assets by segment.

 
| ** **                       | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|----------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | **June 30,  2006**             | ** ** | **July 1,  2005**            | ** ** | **June 30,  2006** | ** ** | **July 1,  2005** | ** ** |
| Net revenue:                     |       |                           |       |                         |       |   |   |   |   |
| Management  Systems              |       | $                              | 102,995    |                         | $          | 79,804 |   | $ | 187,360 |   | $ | 149,644 |   |
| Embedded  Software and Solutions |       | 8,828                          |       | 4,928                        |       | 14,961 |   | 8,708 |   |
| Other business  units            |       | 5,251                          |       | 3,775                        |       | 8,272 |   | 6,960 |   |
| Corporate and  unallocated       |       | 931                            |       | 1,031                        |       | 1,924 |   | 1,031 |   |
| Total net revenue                |       | $                              | 118,005    |                         | $          | 89,538 |   | $ | 212,517 |   | $ | 166,343 |   |

 
| ** **                                            | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                            | ** ** | **June 30,  2006**             | ** ** | **July 1,  2005**            | ** ** | **June 30,  2006** | ** ** | **July 1,  2005** | ** ** |
| Operating income  (loss):                             | ** ** | ** **                     | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Management  Systems                                   |       | $                              | 26,920     |                         | $          | 21,181 |   | $ | 51,636 |   | $ | 37,104 |   |
| Embedded  Software and Solutions                      |       | 3,090                          |       | 484                          |       | 4,493 |   | (95 | ) |
| Other business  units                                 |       | (3,019                         | )          | (3,858                       | )          | (6,779 | ) | (8,973 | ) |
| Corporate and unallocated  costs                      |       | (4,737                         | )          | (3,237                       | )          | (7,582 | ) | (6,472 | ) |
| Amortization of  intangibles and other expenses       |       | (5,053                         | )          | (6,779                       | )          | (7,554 | ) | (13,560 | ) |
| Acquired  in-process research and development expense |       | —                         |       | —                       |       | (2,100 | ) | — |   |
| Total income  from operations                         |       | $                              | 17,201     |                         | $          | 7,791 |   | $ | 32,114 |   | $ | 8,004 |   |
|                                                  |       |                           |       |                         |       |   |   |   |   |
| Other income                                          |       | 1,779                          |       | 6,939                        |       | 4,795 |   | 8,879 |   |
| Income before  provision for income taxes             |       | 18,980                         |       | 14,730                       |       | 36,909 |   | 16,883 |   |

** **

Revenue and operatingincome for our Management Systems division includes the operating results ofCyclades from the date of the acquisition (*see Note 8*).

 

Additionally, ourmanagement analyzes our revenue by product line, primarily our traditional KVMproducts and our

 

8

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serial management products, which are mainly comprisedof products from the Cyclades acquisition. Sales by product line for the threeand six months ended June 30, 2006 and July 1, 2005 are as follows:

 
| ** **          | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|---------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **          | ** ** | **June 30,  2006**             | ** ** | **July 1,  2005**            | ** ** | **June 30,  2006** | ** ** | **July 1,  2005** | ** ** |
| Net revenue:        |       |                           |       |                         |       |   |   |   |   |
| KVM                 |       | $                              | 83,806     |                         | $          | 75,486 |   | $ | 161,797 |   | $ | 141,144 |   |
| Serial  Management  |       | 13,817                         |       | 732                          |       | 14,810 |   | 1,857 |   |
| Other               |       | 20,382                         |       | 13,320                       |       | 35,910 |   | 23,342 |   |
| Total net  revenue: |       | $                              | 118,005    |                         | $          | 89,538 |   | $ | 212,517 |   | $ | 166,343 |   |

 

We sell our productsinternationally to customers in several countries, however no foreign countryaccounted for more than 10% of sales in the first six months of 2006 or 2005.

 

**As of June 30, 2006, long-lived assetstotaled $423,260, which includes $399,428 held in the U.S. and $23,832 heldoutside of the U.S. As of December 31, 2005, long-lived assets totaled$322,556, which includes $305,286 held in the U.S. and $17,270 held outside ofthe U.S.**

** **

**Note 7.   Forward Contracts**

** **

We occasionally use forward contracts to reduce aportion of our foreign currency exposure related to the net cash flows from ourinternational operations. The majority of these contracts are short-termcontracts (three months or less) and are marked-to-market each quarter andincluded in trade payables, with the offsetting gain or loss included in otherincome (expense) in the accompanying consolidated statements of income. As ofJune 30, 2006, and December 31, 2005, we had one open forward contract with anapproximate fair value of $(9).

 

**Note 8.   Acquisitionof Cyclades Corporation**

** **

OnMarch 30, 2006, we acquired Cyclades Corporation, a privately-held companybased in Fremont, California, with additional operations in Sao Paulo, Braziland Munich, Germany.  Cyclades employs approximately 325 people in 19locations around the world. The Cyclades product lines include serial, KVM andpower management products. The acquisition of Cyclades will enhance ourposition in the Linux server and networking infrastructure management marketprovides complementary products to our product lines, and allows us to provideour customers a more integrated platform for managing their IT infrastructure.The results of Cyclades’ operations have been included in the consolidatedfinancial statements since the date of acquisition.

 

The acquisitionwas recorded under the purchase method of accounting, and the purchase pricewas allocated based on the fair value of the assets acquired and liabilitiesassumed. In accordance with generally accepted accounting principles, purchasedresearch and development costs allocated to patented and patent-pendingtechnology were capitalized and will be amortized over the respective estimateduseful lives. The remaining amounts of purchased research and development wereexpensed upon the closing of the transaction. The goodwill recorded as a resultof the acquisition will not be amortized but will be included in our annualreview of goodwill for impairment. Additionally, amortization of the otherintangible assets acquired and the goodwill recorded is not tax deductible. Asummary of the total purchase consideration, excluding cash received, is asfollows:

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

 

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

 

9

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The purchase consideration was allocated, on apreliminary basis, to the estimated fair values of the assets acquired andliabilities assumed, as follows:

 
| ** **                           | ** ** | **Purchase  Price  Allocation** | ** ** | **Amortization  Period** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|--------------------------|------------|
| ** **                           | ** ** | ** **                      | ** ** | ** **               | ** ** |
| Tangible assets                      |       | $                               | 23,996     |                     | —     |   |
| In-process  research and development |       | 2,100                           |       | —                   |       |
| Developed  technology                |       | 19,000                          |       | 5 years                  |       |
| Customer base                        |       | 12,100                          |       | 5 years                  |       |
| Trademarks                           |       | 3,100                           |       | 5 years                  |       |
| Non-compete  agreements              |       | 4,100                           |       | 3 years                  |       |
| Goodwill                             |       | 61,371                          |       | —                   |       |
| Deferred taxes                       |       | (14,860                         | )          | —                   |       |
| Assumed  liabilities                 |       | (16,931                         | )          | —                   |       |
|                                 |       |                            |       |                     |       |
|                                 |       | $                               | 93,976     |                     |       |   |

 

A $15,000 escrow accountwill be open for 21 months for indemnifiable events specified in theacquisition agreements.

 

The $2,100 in fair value of all of the in-processresearch and development (“IPR&D”) received in the acquisition wasdetermined using a form of the discounted cash flow method known as themulti-period excess earnings method. These amounts were deemed to be forparticular research and development projects that have no alternative futureuses and were therefore expensed rather than capitalized at the time ofpurchase.

 

Cyclades in-process research and developmentactivities consisted of the development of its KVM/net 3.0 product line and itsPM 45 product lines. KVM/Net 3.0 is thenext generation KVM over IP technology that leverages DSP processing technologyand software-based compression algorithms. PM45 is an intelligent powerdistribution unit that provides high current on a 3-phase main power source. Itis anticipated that the products will be completed during late 2006. Theseprojects were still in process at the end of the second quarter of 2006.

 

The new generations of products under development areprojected to sell through sales channels and to customers that aresubstantially the same as current and historical sales channels and customers.Pricing and margins will not differ significantly from historical pricing andmargins. Revenue for the projects under development was projected through 2015.Net income attributable to IPR&D was calculated by applying Cycladesprojected gross, operating, and net profit margins to IPR&D revenue, whileconsidering Avocent’s historical results and industry prospects. These productshave estimated economic lives of up to 10 years. The discount rate used to valueIPR&D was 28%.

 

**Pro Forma Financial Information -**The following unaudited pro forma summary combines theresults of operations of Avocent and Cyclades as if the acquisitions hadoccurred at the beginning of each period presented. Certain adjustments have beenmade to reflect the impact of the purchase transactions. These pro formaresults have been prepared for comparative purposes only and do not purport tobe indicative of what would have occurred had the acquisitions been made at thebeginning of 2005, or of results which may occur in the future.

 
| ** **               | ** ** | **Six Months Ended,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **June 30, 2006**     | ** ** | **July 1, 2005** | ** ** |
|                     |       |                  |       |   |   |
| Net sales                |       | $                     | 226,517    |   | $ | 193,141 |   |
| Net income               |       | $                     | 28,059     |   | $ | 12,696 |   |
| Income per basic share   |       | $                     | 0.58       |   | $ | 0.26 |   |
| Income per diluted share |       | $                     | 0.57       |   | $ | 0.25 |   |

** **

**The above amounts exclude acquiredin-process research and development expense of $2,100 related to the Cyclades**

 

10

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**acquisition.**

** **

**Note 9.   Goodwill andOther Intangible Assets**

** **

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

** **
| ** **                        | ** ** | **June 30, 2006**  | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** |
|                              |       |                         |       |                            |       |   |   |   |   |
| Developed  technology             |       | $                            | 33,820     |                            | $          | 11,620 |   | $ | 14,820 |   | $ | 8,293 |   |
| Patents and  trademarks           |       | 11,536                       |       | 5,301                           |       | 9,174 |   | 4,959 |   |
| Customer base  and certifications |       | 21,627                       |       | 3,273                           |       | 4,870 |   | 1,719 |   |
| Non-compete  agreements           |       | 6,620                        |       | 2,022                           |       | 2,520 |   | 1,289 |   |
| Licenses                          |       | 4,124                        |       | 1,750                           |       | 1,814 |   | 1,175 |   |
|                              |       | $                            | 77,727     |                            | $          | 23,966 |   | $ | 33,198 |   | $ | 17,435 |   |

** **

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

** **

**During the second quarter of2006, we acquired an existing customer base from a distributor in Australia forapproximately $1,308. We recorded approximately $1,002 in other intangibleassets which is subject to future amortization.**

** **

**For the three months ended June 30, 2006and July 1, 2005, amortization expense for other intangible assets was $4,901and $6,623, respectively. For the six months ended June 30, 2006 and July 1,2005, amortization expense for other intangible assets was $7,252 and $13,245,respectively. The approximate estimated annual amortization for otherintangibles is as follows:**

** **

| **Years ending December 31:** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2006, remainder                              |       | $          | 10,141     |   |
| 2007                                         |       | $          | 14,353     |   |
| 2008                                         |       | $          | 12,353     |   |
| 2009                                         |       | $          | 8,864      |   |
| 2010                                         |       | $          | 7,140      |   |
| Thereafter                                   |       | $          | 910        |   |

** **

**For the six months ended June 30, 2006,we recorded $61,371 of goodwill related to the Cyclades Corporation acquisitionand $181 of additional goodwill related to a prior acquisition.**

** **

**Note10. Product Warranties**

** **

The activity within the liability for warranty returnsfor the six months ended June 30, 2006:

 

| Balance, January  1, 2006                                 |   | $      | 2,536  |   |
|-----------------------------------------------------------|--------|--------|--------|--------|
|                                                      |   |   |   |
| Accruals for  product warranties issued during the period |   | 119    |   |
| Assumed on  acquisition of Cyclades                       |   | 180    |   |
|                                                      |   |   |   |
| Settlements made  during the period                       |   | (217   | )      |
|                                                      |   |   |   |
| Balance, June  30, 2006                                   |   | $      | 2,618  |   |

 

Deferred revenue relatedto our extended warranty program was $2,143 as of June 30, 2006. We recordedearned revenue from the amortization of deferred revenue related to extendedwarranties of $548 for the six months ended June 30, 

 

11

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2006. In addition, we recorded deferred revenue fornew extended warranties of $769 during the six months ended June 30, 2006.

 

Note 11. Effective Tax Rate

 

The effective tax rate inthe first six months of 2006 was approximately 28.2%, compared to an effectivetax rate of approximately 23.4% in the first six months of 2005.  Theprovision for income taxes was approximately $10,395 for the first sixmonths of 2006, compared to $3,950 in the first six months of 2005. Theincrease in provision for income taxes was partly the result of the change inmix of our pre-tax profit among our U.S. and international companies. Additionally, the Irish statutory tax rate on manufactured goods increased from10% to 12.5% on January 1, 2006. The U.S. Research and Development credit alsohas expired, and as of June 30, 2006, this credit has not yet been reinstatedby Congress. Finally, the Cyclades purchase included In-process Research andDevelopment, which was immediately expensed upon the purchase. This item has notax basis, and therefore, increased the effective tax rate for the six monthsended June 30, 2006.

 

The amount of incometaxes we pay is subject to audits by federal, state, and foreign authorities,and can result in proposed assessments. We have reserves for taxes andassociated interest that may become payable in future years as a result ofaudits by tax authorities. Although we believe that the positions taken onpreviously filed tax returns are appropriate, we have nevertheless establishedtax and interest reserves in recognition that various tax authorities maychallenge the positions taken by us resulting in additional liabilities andinterest. The tax reserves are reviewed as circumstances warrant and adjustedas events occur that affect our potential liability for additional taxes, suchas lapsing of applicable statutes of limitations, conclusions of tax audits,additional exposure based on current calculations, identification of newissues, release of administrative guidance, or rendering of a court decisionaffecting a particular tax issue.

 

Additionally, in July2006, the Financial Accounting Standards Board (FASB) released FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109” (FIN 48).  FIN 48 clarifies theaccounting and reporting for uncertainties in income tax law.  ThisInterpretation prescribes a comprehensive model for the financial statementrecognition, measurement, presentation and disclosure of uncertain taxpositions taken or expected to be taken in income tax returns.  We willadopt this Interpretation in the first quarter of 2007.  The cumulativeeffects, if any, of applying this Interpretation will be recorded as anadjustment to retained earnings as of the beginning of the period of adoption. We have commenced the process of evaluating the expected effect of FIN 48on our consolidated financial statements and are currently not yet in aposition to determine such effects.

 

Note 12. Legal Proceedings

 

In October 2003, Avocentfiled a complaint for patent infringement in the United States District Courtfor the Northern District of Alabama against ClearCube Technology, Inc. TheClearCube complaint seeks injunctive relief, damages, attorneys’ fees, andcosts under two of the Companies patents. ClearCube has filed counterclaimsalleging non-infringement, unenforceability, invalidity, and misuse of theAvocent patents. A Markman hearing on claims construction was held in February2006, and the court has ruled on a number of pre-trial motions. A trial isexpected in the third quarter of 2006.

 

On March 14, 2006, TFSElectronic Manufacturing Services, Inc. filed a Third-Party Complaint and anObjection to Claim of Avocent Corporation with the United States BankruptcyCourt, District of Arizona. As a result of the complaint,an adversary proceeding has been commenced against Avocent in the TFSbankruptcy case in an effort to disallow Avocent’s claim in its entirety. TFSalso seeks damages in an undetermined amount for Avocent’s alleged breach ofcontract, negligence, negligent misrepresentations, breaches of warranty,unjust enrichment, disparagement of TFS’ business, and quantum merit. TFS isseeking recovery of actual damages, punitive damages, attorneys’ fees, pre- andpost-judgment interest, costs, and the imposition of joint and severalliability as to Avocent and a named co-defendant, TopSearch Printed Circuits(HK), Ltd. Avocent has moved to dismiss all claims, and discovery is under way.

 

**Note 13. Stock Based Compensation**

** **

On January 1, 2006, we adopted SFAS 123(revised 2004), *Share-Based Payment*,(“SFAS 123R”) , which requires the measurement and recognition of compensationexpense for all share-based payment awards made to employees and directors,including grants of employee stock options, based on estimated fair values.SFAS 123R supersedes SFAS No. 123 

 

12

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*Accounting for Stock Based Compensation*  and Accounting Principles Board OpinionNo. 25, *Accounting for Stock Issued toEmployees*(“APB No. 25”), which we previously applied, forperiods beginning before fiscal 2006. In March 2005, the Securities andExchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB107”) relating to SFAS 123R. We have applied the provisions of SAB 107 in ouradoption of SFAS 123R.

 

We adopted SFAS 123R using the modifiedprospective transition method, which requires the application of the accountingstandard as of January 1, 2006, the first day of our fiscal 2006 year. Ourconsolidated statements of income for the three and six months ended June 30,2006 reflect the impact of SFAS 123R. In accordance with the modified prospectivetransition method, our consolidated statements of income for prior periods havenot been retroactively adjusted to reflect the impact of SFAS 123R. New awardsare valued and accounted for prospectively upon adoption. Prior outstandingstock option awards that were not fully vested as of January 1, 2006 will berecognized as compensation expense in our consolidated statements of incomeover their remaining requisite service periods.

 

Prior to the adoption of SFAS 123R, we recordedthe intrinsic value of stock-based compensation as expense, in accordance withAPB No. 25, as allowed under SFAS No. 123, *Accounting for Stock-based Compensation Expense*(“SFAS123”). Under the intrinsic value method, no stock-based compensation expensehad been recorded in our consolidated statements of income prior toJanuary 1, 2006, other than as related to deferred compensation recordedas a result of options assumed upon acquisitions, because the exercise price ofour stock options granted equaled the fair market value of the underlying stockat the date of grant. In our pro forma disclosures required under SFAS 123, weaccounted for forfeitures as they occurred.

 

SFAS 123R requires companies to estimate thefair value of share-based payment awards on the date of grant using an optionpricing model for stock options or using the current share price for awards ofrestricted stock units. The value of the portion of the award that isultimately expected to vest will be recognized as expense over the requisiteservice periods in our consolidated statements of income. Stock-basedcompensation expense recognized in our consolidated statements of income forthe first six months of 2006 includes compensation expense for stock-basedpayment awards granted prior to, but not yet vested as of, January 1, 2006based on the grant date fair value estimated in accordance with the pro formaprovisions of SFAS 123, and compensation expense for the stock-based paymentawards granted subsequent to December 31, 2005 based on the grant datefair value estimated in accordance with the provisions of SFAS 123R.Compensation expense for all stock-based payment awards is recognized using theratable single-option approach. Stock-based compensation expense recognized inour consolidated statements of income for the first six months of 2006 is basedon awards ultimately expected to vest; therefore, the expense has been reducedfor estimated forfeitures. SFAS 123R requires forfeitures to be estimated atthe time of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates.

 

We use the Black-Scholes option pricing model(the “Black-Scholes Model”) for the purpose of determining the estimated fairvalue of stock options on the date of grant under SFAS 123R. The Black-ScholesModel requires the input of certain assumptions that involve judgment. Becauseour employee stock options have characteristics significantly different fromthose of traded options, and because changes in the input assumptions canmaterially affect the fair value estimate, existing models may not providereliable measures of fair value of our employee stock options. We will continueto assess the assumptions and methodologies used to calculate estimated fairvalue of stock-based compensation. If circumstances change, and additional databecomes available over time, we may change our assumptions and methodologies,which may materially impact our fair value determination.

 

We have elected to adopt the alternativetransition method, as permitted by Financial Accounting Standards Board(“FASB”) Staff Position No. FAS 123R-3, *TransitionElection Related to Accounting for the Tax Effects of Share-Based PaymentAwards,*to calculate the tax effects of stock-based compensationpursuant to SFAS 123R for those employee awards that were outstanding uponadoption of SFAS 123R. The alternative transition method allows the use ofsimplified methods to calculate the beginning capital-in-excess-of-par poolrelated to the tax effects of employee stock-based compensation and todetermine the subsequent impact of the tax effects of employee stock-basedcompensation awards on the capital-in-excess-of-par pool and the consolidatedstatements of cash flows. Prior to the adoption of SFAS 123R, we reported alltax benefits resulting from the exercise of stock options as operating cashflows in the consolidated statements of cash flows. SFAS 123R requires cashflows resulting from the tax deductions in excess of the related compensationcost recognized in the financial statements (excess tax benefits) to beclassified as financing cash flows. In accordance with SFAS 123R, excess taxbenefits recognized in periods after the adoption date have been classified asfinancing cash flows. Excess tax benefits recognized in periods prior to theadoption date are classified as operating cash flows. The income tax benefitsfrom stock option exercises 

 

13

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totaledapproximately $150 and $227 for the three months ended June 30, 2006 and July1, 2005, respectively. The income tax benefits from stock option exercisestotaled approximately $3,845 and $2,131 for the six months ended June 30, 2006and July 1, 2005, respectively.

 

*StockOption Program Descriptions*

 

We have stock option plans coveringsubstantially all of our employees and directors. Avocent assumed the stockoption plans and the related underlying options of Apex and Cybex at the mergereffective July 1, 2000, of Equinox at the acquisition effectiveJanuary 3, 2001, of 2C at the acquisition effective August 20, 2002,and of OSA at the acquisition effective April 6, 2004. No additionaloptions have been or will be granted under these pre-existing plans. Purchaseprices for common stock subject to options issued under the assumed plansgenerally approximate the fair market value of the related shares at the dateof grant. Generally, options vest over three to four years and typically expire10 years from the grant date.

 

Prior to the June 2005 shareholderapproval of the 2005 Avocent Corporation Equity Incentive Plan (the 2005 Plan),we had adopted four stock option plans, the 2000 Stock Option Plan (the 2000Plan), the 2000 Transition Nonstatutory Stock Option Plan (the TransitionPlan), the Avocent Corporation 2003 Stock Option Plan (the 2003 Plan), and theAvocent Corporation 2003 Inducement Plan (the Inducement Plan). The 2000 StockOption Plan and the 2003 Plan each provided for nonqualified and incentivestock options for officers, directors, and employees. The 2000 Transition planprovided for nonqualified and incentive stock options for employees and theInducement Plan provided for nonqualified and incentive stock options for newemployees. Options under these four plans generally expire 10 years from thedate of grant. The Purchase price for common stock subject to options issuedunder these plans was the fair market value of the related shares at the dateof grant and these options typically vest over two to four years.

 

As approved by ourstockholders, the 2005 Plan authorized a total of 2,500 shares of common stockfor issuance, plus (i) any shares remaining available for issuance underthe previous stock option plans up to a maximum of 1,187 shares and(ii) any shares subject to any outstanding options under our stock optionplans that subsequently expire unexercised.  New options may no longer begranted under the former plans. The 2005 Plan allows for options, restrictedstock, restricted stock units, stock appreciation rights, performance shares,performance units, deferred stock units, and dividend equivalents, and optionsgranted under the 2005 Plan may be either incentive stock options ornonqualified stock options.  Nonqualified stock options, restricted stock,restricted stock units, performance shares, performance units, stock appreciationrights, deferred stock units, and dividend equivalents may be granted under the2005 Plan to our directors, employees, or consultants, but  incentive stock options may be granted onlyto our employees.  Options may not be granted at less than the fair marketvalue on date of grant and may not have a term of greater than 10 years. We issue new shares to satisfy stock optionsexercised. During the second quarter of 2006, our stockholders approvedan additional 2,250 shares of common stock for issuance under the 2005 Plan.

 

Any shares subject torestricted stock, performance shares, or restricted stock units with a pershare price less than the fair market value of our common stock on the date ofthe Award will be counted against the authorized share reserve as two sharesfor every one share subject to the Award, and if any such shares are returnedto the 2005 Plan, such shares will be counted as two shares.  If an Awardexpires or becomes un-exercisable without having been exercised in full (or, withrespect to restricted stock, performance shares, or restricted stock units, isforfeited to or repurchased by Avocent), the unpurchased shares (or, for Awardsother than options and stock appreciation rights, the forfeited or repurchasedshares) will become available for future Awards. Shares of restricted stock,performance shares or restricted stock units that are repurchased by Avocent atthe fair market value on the date of the original Award, or are forfeited tous, will become available for future grant under the 2005 Plan.  Sharesused to pay the exercise price of an option will not become available forfuture Awards, and shares used to satisfy tax withholding obligations will alsonot become available for future Awards under the 2005 Plan.  To the extenta 2005 Plan Award is paid out in cash rather than stock, such cash payment willnot reduce the number of shares available for issuance under the 2005Plan.  Any payout of dividend equivalents or performance units, becausethey are payable only in cash, will not reduce the number of shares availablefor issuance under the 2005 Plan.  Likewise, any forfeiture of dividendequivalents or performance units will not increase the number of sharesavailable for issuance under the 2005 Plan. In the first six months of 2006, wegranted both stock options and restricted stock units under the 2005 Plan.

 

The following schedule summarizes the stockoption activity in our stock-based compensation plans for the six months endedJune 30, 2006:

 

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| ** **                                   | ** ** | **Number of  Options** | ** ** | **Range of  Exercise Prices** | ** ** | **Weighted Avg.  Exercise Price** | ** ** | **Vesting  Provisions** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|-------------------------|------------|
| Options  outstanding, December 31, 2005 |       | 6,417                       |       | $0.11– $70.94                      |       | $                                           | 32.00      |                    | Various    |   |
|                                         |       |                        |       |                                    |       |                                        |       |                    |       |
| Options granted                              |       | 60                          |       | $22.77 – $34.64                    |       | $                                           | 31.14      |                    | Various    |   |
| Options  cancelled/forfeited                 |       | (106                        | )          | $1.31– $69.63                      |       | $                                           | 35.67      |                    | Various    |   |
| Options  exercised                           |       | (987                        | )          | $0.11– $31.00                      |       | $                                           | 20.86      |                    | Various    |   |
|                                         |       |                        |       |                                    |       |                                        |       |                    |       |
| Options  outstanding, June 30, 2006          |       | 5,384                       |       | $1.31– $70.94                      |       | $                                           | 33.96      |                    | Various    |   |

 

The total pretaxintrinsic value of options exercised during the six months ended June 30, 2006was $11,847.

 

The following table summarizes information aboutstock options outstanding at June 30, 2006:

* *
| **Range of Exercise  Prices** | ** ** | **Number  Outstanding** | ** ** | **Weighted Avg.  Remaining  Contractual  Life** | ** ** | **Intrinsic  Value** | ** ** | **Weighted  Avg.  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Avg.  Exercise  Price** | ** ** | **Intrinsic  Value** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|------------------------------------------------------|------------|----------------------|------------|-------------------------------------|------------|-------------------------|------------|-------------------------------------|------------|----------------------|------------|
| $0.11 - $9.48                           |       | 85                      |       | 4.79                                                 |       | $                    | 1,881      |                                | $          | 4.02                    |       | 76                                  |       | $                    | 4.33       |   | $ | 1,663 |   |
| $10.46 - $20.00                         |       | 211                     |       | 4.62                                                 |       | 2,250                |       | 15.58                               |       | 200                     |       | 15.57                               |       | 2,131                |       |
| $20.33 – $29.95                    |       | 2,736                   |       | 6.48                                                 |       | 4,513                |       | 25.07                               |       | 2,715                   |       | 25.08                               |       | 4,473                |       |
| $30.02 - $44.25                         |       | 893                     |       | 7.62                                                 |       | —               |       | 38.10                               |       | 827                     |       | 38.64                               |       | —               |       |
| $46.19 - $70.94                         |       | 1,459                   |       | 4.22                                                 |       | —               |       | 52.46                               |       | 1,459                   |       | 52.46                               |       | —               |       |
|                                    |       |                    |       |                                                 |       |                 |       |                                |       |                    |       |                                |       |                 |       |
|                                    |       | 5,384                   |       | 5.96                                                 |       | $                    | 8,644      |                                | $          | 33.96                   |       | 5,276                               |       | $                    | 34.12      |   | $ | 8,267 |   |

 

The aggregate intrinsicvalue in the preceding table represents the total pretax intrinsic value, basedon our closing price of $26.25 as of June 30, 2006, which would have beenreceived by option holders had all option holders exercised their options onthat date. The total number of in-the-money options exercisable as of June 30,2006 was 1,832. As of December 31, 2005, 6,248 options were exercisable and theweighted average exercise price was $32.33.

 

*Restricted Stock Units*

 

Our 2005 Plan permitsthe granting of restricted stock units to eligible employees and directors atthe fair market value of our common stock at the date of grant. Awards duringthe first six months of 2006 typically become fully vested over two or threeyear periods. Restricted stock units are payable in shares of our common stockupon vesting.

 

The following tablepresents a summary of the activity in our nonvested restricted stock unitsduring the six months ended June 30, 2006:

 

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| ** **                                  | ** ** | **Number of  Stock Units** | ** ** | **Weighted-Average  Grant-Date  Fair Value** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|---------------------------------------------------|------------|
| **Nonvested  stock units**                  | ** ** | ** **                           | ** ** | ** **                                        | ** ** |
|                                        |       |                                 |       |                                              |       |
| Nonvested stock  units at December 31, 2005 |       | —                               |       | —                                            |       |
| Granted                                     |       | 873                                  |       | $                                                 | 28.51      |   |
| Vested                                      |       | —                               |       | —                                            |       |
| Forfeited                                   |       | (17                                  | )          | 31.19                                             |       |
|                                        |       |                                 |       |                                              |       |
| Nonvested stock  units at June 30, 2006     |       | 856                                  |       | $                                                 | 28.45      |   |

 

As of June 30, 2006,there was approximately $22,221 of total unrecognized compensation cost relatedto nonvested share-based compensation arrangements granted under the 2005 Plan.Thatcost is expected to be recognized over an estimated weighted averageamortization period of 2.4 years.

 

*Performance – Based RestrictedStock Units*

 

Certain restrictedstock units contain both service and performance conditions that affect thequantity of awards that will vest. Performance-based restricted stock unitsbegin vesting upon the completion of a specified service period and theachievement of certain performance targets (which can include individual andcompany measures) and are converted into shares of our common stock uponvesting, typically over a three year period. The fair value is based on themarket price of our common stock on the grant date and assumes that the targetpayout level will be achieved. Compensation cost is adjusted in future periodsfor subsequent changes in the expected outcome of the performance relatedconditions until the vesting date. All performance-based restricted stock unitactivity is included in the nonvested stock unit table of activity above.

 

*Valuation and ExpenseInformation*

 

The following table summarizes stock-basedcompensation expense related to employee stock options and restricted stockunits under SFAS 123R for the three and six months ended June 30, 2006, whichwas allocated as follows:

 
| ** **                                                       | ** ** | **Three months  ended** | ** ** | **Six months  ended** | ** ** |
|------------------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|
|                                                             |       |                         |       |                       |       |
| Cost of sales                                                    |       | $                            | 164        |                       | $          | 214 |   |
|                                                             |       |                         |       |                       |       |
| Research and  development                                        |       | 762                          |       | 1,063                      |       |
| Selling, general  and administrative                             |       | 1,796                        |       | 2,286                      |       |
|                                                             |       |                         |       |                       |       |
| Stock-based  compensation expense included in operating expenses |       | 2,558                        |       | 3,349                      |       |
|                                                             |       |                         |       |                       |       |
| Total  stock-based compensation expense                          |       | 2,722                        |       | 3,563                      |       |
| Tax benefit                                                      |       | (969                         | )          | (1,231                     | )          |
|                                                             |       |                         |       |                       |       |
| Total  stock-based compensation expense, net of tax              |       | $                            | 1,753      |                       | $          | 2,332 |   |

 

For the three and six months ended July 1, 2005,we recorded stock compensation expense of $510 and $1,019, respectively,related to the amortization of deferred compensation recorded as a result ofassumed options from the acquisition of OSA Technologies Inc.

 

The table below illustrates the effect on netincome and earnings per share as if we had applied the fair-value recognitionprovisions of SFAS 123 to all of our stock-based compensation awards forperiods prior to the adoption of SFAS 123R.

 

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| ** **                                                                                                                              | ** ** | **Three months  Ended** | ** ** | **Six months  ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                              | ** ** | **July 1, 2005**   | ** ** | **July 1, 2005** | ** ** |
| Net income — as  reported                                                                                                          |       | $                            | 11,099     |                       | $          | 12,993 |   |
| Add: Stock-based  employee compensation expense included in reported net income, net of related  tax effects                            |       | 510                          |       | 1,019                      |       |
| Deduct: Total  stock based employee compensation expense determined under fair value method  for all awards, net of related tax effects |       | 7,717                        |       | 12,643                     |       |
| Net income — pro  forma                                                                                                            |       | $                            | 3,892      |                       | $          | 1,369 |   |
|                                                                                                                                    |       |                         |       |                       |       |
| Basic earnings  per share — as reported                                                                                            |       | $                            | 0.22       |                       | $          | 0.26 |   |
| Basic earnings  per share — pro forma                                                                                              |       | $                            | 0.08       |                       | $          | 0.03 |   |
| Diluted earnings  per share — as reported                                                                                          |       | $                            | 0.22       |                       | $          | 0.25 |   |
| Diluted earnings  per share — pro forma                                                                                            |       | $                            | 0.08       |                       | $          | 0.03 |   |

** **

As of January 1, 2006, total pre-taxcompensation cost related to non-vested stock options not yet recognized wasapproximately $1,900, which is expected to be recognized over the next 18months using the ratable single-option approach. Of this amount, we expensed$841 in the first quarter of 2006. As a result of granting additional options,as well as granting restricted stock units and performance-based restrictedstock units during the second quarter of 2006, stock-based compensationincreased to $2,722 in the second quarter of 2006. Excluding the effect offuture grants, we expect to record stock based compensation expense ofapproximately $3,800 in the third quarter of 2006 and $3,700 in the fourthquarter of 2006.

 

We estimate the fair value of options using theBlack-Scholes Model. This model requires the input of assumptions regarding anumber of complex and subjective variables that will usually have a significantimpact on the fair value estimate. These variables include, but are not limitedto, the volatility of our stock price and employee exercise behaviors. Theassumptions and variables used for the current period grants were developedbased on SFAS 123R and SEC guidance contained in SAB 107. The weighted-averageestimated fair value of stock options granted to employees during the sixmonths ended June 30, 2006 was $13.20 per share using the Black-Scholes Modelwith the following weighted-average assumptions:

 

| Expected  volatility      |   | 44.26  | %      |
|---------------------------|--------|--------|--------|
| Risk-free  interest rate  |   | 4.85   | %      |
| Expected  dividend yield  |   | — |   |
| Expected life  (in years) |   | 4.38   |   |

 

We based our estimate of expected volatility forthe six months ended June 30, 2006 on the sequential historical daily tradingdata of our common stock for a period equal to the expected life of the optionsgranted. The selection of the historical volatility approach was based onavailable data indicating our historical volatility is as equallyrepresentative of our future stock price trends as is implied volatility.

 

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

 

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

 

Stock-based compensation expense recognized inour consolidated statements of income for the six months ended June 30, 2006 isbased on options and stock units ultimately expected to vest, and has beenreduced for estimated forfeitures. These estimates were based upon historicalexperience.

 

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We have used third-party analyses to assist indeveloping some of the assumptions used in our Black-Scholes Model. We willcontinue to assess the assumptions and methodologies used to calculateestimated fair value of stock-based compensation. If circumstances change, andadditional data becomes available over time, we may change our assumptions andmethodologies, which may materially impact our fair value determination.

 

*ProForma Information Under SFAS 123 for Periods Prior to January 1, 2006*

 

The weighted-average estimated value of stockoptions granted to employees and directors during the six months ended July 1,2005 was $6.83 per share using the Black-Scholes model with the followingweighted-average assumptions:

 

| Expected  volatility      |   | 45.24  | %      |
|---------------------------|--------|--------|--------|
| Risk-free  interest rate  |   | 3.58   | %      |
| Expected  dividend yield  |   | — |   |
| Expected life  (in years) |   | 1.72   |   |

 

During the second quarter of 2005, we grantedover 300 options which vested on December 31, 2005, which reduced the weightedaverage expected life of options granted during the six months ended July 1,2005.

 

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

 

**Note 14. Line of Credit**

** **

During the second quarterof 2006, we obtained a $250,000 unsecured, five-year revolving bank line ofcredit. The line of credit carries certain financial covenants including aminimum interest coverage ratio and a maximum total leverage ratio. We plan touse borrowings under the line of credit to fund a portion of the LANDeskacquisition (see Note 15) and the purchase of shares under our expanded stockrepurchase program (see Note 3). The line of credit bears an initial interestrate of LIBOR plus 112.5 basis points and carries no set principal repaymentschedule. Direct costs incurred from securing the line of credit arecapitalized and amortized over the term of the agreement. There wasapproximately $12,005 outstanding under the line of credit as of June 30, 2006.

 

**Note 15. LANDesk Group Ltd Acquisition**

** **

In April 2006, weannounced the signing of a definitive agreement to acquire LANDesk GroupLimited, a privately-held company based in Salt Lake City, Utah.  LANDeskemploys approximately 500 people, located primarily in the United States,Europe and Asia. The LANDesk product lines include software for the centralizedmanagement and protection of information technology assets. The agreementprovides for total consideration of approximately $416,000, including $200,000in stock, $200,000 in cash and approximately $16,000 in intrinsic value ofassumed options. The transaction value may be increased by up to $60,000 incash if LANDesk meets certain revenue growth targets specified in theagreement. An escrow account with $60,000 of the stock consideration forindemnifiable events specified in the acquisition agreements will be open for18 months. We expect to close this transaction in late August 2006.

 

**Note 16. Cyclades Integration Expenses**

** **

**We recorded $2,269 of costs associatedwith the integration of Cyclades people, processes and products into Avocent inthe second quarter of 2006. These costs also include severance accrualsresulting from the headcount reductions associated with duplicate positionseliminated in Cyclades or Avocent during the second quarter. We expectadditional integration costs and severance accruals in the third quarter of2006 totaling $800 to $900.**

** **

**Note 17. Subsequent Event**

** **

During the period from July 1, 2006 throughAugust 1, 2006, we repurchased 999 additional shares of our common stock on theopen market under our Board approved stock repurchase program, for a total costof $25,070.

 

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** **

**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

** **

*THE INFORMATION IN THISITEM 2**“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS”**CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTSRELATING TO OUR FUTURE BUSINESS PROSPECTS AND ECONOMIC CONDITIONS IN GENERAL;STATEMENTS REGARDING OUR ABILITY TO PREDICT FUTURE SALES AND MANAGE INVENTORYLEVELS; STATEMENTS REGARDING PRICING PRESSURE; STATEMENTS REGARDING THEFLUCTUATION OF OUR REVENUE GROWTH IN RELATION TO ECONOMIC CONDITIONS AND ITRELATED SPENDING TRENDS; STATEMENTS REGARDING INCREASED SALES OF OUR DIGITALPRODUCTS AND EMBEDDED SOLUTIONS AND THEIR ABILITY TO OFFSET PRICE DECLINES ANDCOMPETITIVE FACTORS; STATEMENTS REGARDING OUR REVENUE, GROSS MARGINS, OURRESEARCH AND DEVELOPMENT EXPENSES, SELLING, GENERAL AND ADMINISTRATIVEEXPENSES, AMORTIZATION EXPENSES AND INVESTMENT INCOME IN THE THIRD QUARTER OF2006; STOCK COMPENSATION EXPENSES IN THE THIRD AND FOURTH QUARTERS OF 2006;STATEMENTS REGARDING OUR LEGAL COSTS FOR PATENT AND OTHER LITIGATION MATTERS;STATEMENTS REGARDING THE CLOSING OF THE LANDESK ACQUISITION AND BORROWINGSUNDER OUR LINE OF CREDIT; AND STATEMENTS REGARDING FUTURE PURCHASES OF STOCKUNDER OUR STOCK REPURCHASE PROGRAM. THESE FORWARD-LOOKING STATEMENTS ARESUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE OUR ACTUAL RESULTSTO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS.FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TOTHOSE DISCUSSED IN ITEM 1A “RISK FACTORS.”*

 

**Overview**

 

Avocent designs, manufactures, licenses, and sellsproducts and technologies that provide connectivity and centralized managementof information technology (IT) infrastructure. We (meaning Avocent and itswholly-owned subsidiaries) provide connectivity and management products andtechnologies that centralize control of servers, desktop computers, serialdevices, wireless devices, mobile devices, and network appliances, thusincreasing the efficiency of IT personnel. Server manufacturers resell private-labeledAvocent KVM (keyboard, video, and mouse) switches and embedded technology intheir systems, and companies large and small utilize our products andtechnologies for managing their growing IT infrastructure.

 

For a description of our products, technologies andmarkets, please refer to our Form 10-K, which was filed on March 6, 2006.

 

We have agreed to acquire LANDesk Group Limited, aprivately held company in Salt Lake City, Utah, which will significantly expandour product lines to include software for the centralized management andprotection of information technology assets. We expect to close thisacquisition in the third quarter of 2006. (See Note 15 to the consolidatedfinancial statements.)

 

A substantial portion of our revenue is derived fromsales to major server OEMs who purchase our switching systems on aprivate-label or branded basis for integration and sale with their ownproducts, sales through our reseller and distributor network, and sales to alimited number of direct customers. Sales to our OEM customers accounted for44% of sales in the first six months of 2006 and 50% of sales in the first sixmonths of 2005. Sales to our branded customers accounted for 56% of sales inthe first six months of 2006 and 50% of sales in the first six months of 2005.We do not have contracts with many of our branded customers, and in general,our OEM and branded business customers are obligated to purchase products fromus only pursuant to binding purchase orders. The loss of, or material decline inorders from, these customers would have a material adverse effect on ourbusiness, financial condition, results of operations, and cash flows. Our topfive customers include both OEM and branded customers, and accounted for 60% ofsales in the first six months of 2006 and 62% of sales in the first six monthsof 2005.

 

We sell products to dealers, end-users, and OEMs inthe United States, Canada, Europe, and Asia as well as in other foreignmarkets. Sales within the United States accounted for approximately 56% of thefirst six months of sales in 2006 and 2005. Sales outside of the United Statesaccounted for 44% of the first six months of sales in 2006 and 2005. No singleforeign country accounted for more than 10% of sales in 2006 or in 2005.

 

In prior years, we have reported our operations as asingle operating segment. However, in the first quarter of 2006, we organizedour business into five divisions:

 

•      The Management Systems Division, whichincludes our branded and OEM KVM, serial console, power control and managementappliance businesses;

 

•      The Embedded Software and SolutionsDivision, which focuses on developing and marketing embedded systems andsoftware including IPMI and embedded KVM technologies primarily for our OEMcustomers;

 

•      The Connectivity and Control Division,which focuses on expanding the markets for Avocent’s serial and wirelessproducts;

 

•      The Desktop Solutions Division, which willfocus on developing new products to facilitate client blade deployments; and

 

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•      The Mobile Technologies Division, whichincludes mobile device management and secure wireless systems administration.

 

LANDesk will become a new division once the acquisition is completed.

 

Our Management SystemsDivision accounted for 88% of sales in the first six months of 2006 and 90% ofsales in the first six months of 2005. Our Embedded Software and SolutionsDivision accounted for 7% of sales in the first six months of 2006 and 5% ofsales in the first six months of 2005.

 

With continued industry-wide initiatives to reduce allchannel inventories and to shorten lead times, trends with our major customersare, generally, to reduce the number of weeks 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 continue to experiencesignificant price competition in the market for all of our products, and weexpect that pricing pressures will continue in the future. In addition, generaleconomic conditions are not predictable, and we expect our revenue growth rateto fluctuate in relation to economic conditions and IT related spending trends.Depending on future general economic conditions and other factors, our revenuecould decline in the future.

 

Many of our executiveofficers and directors are vested in significant amounts of options to purchaseshares of our common stock and continue to vest in additional shares on aregular basis. These officers and directors have informed us that they havesold, and may sell additional, shares of our common stock to provide liquidityand diversify their portfolios. In April 2006, our Board of Directors approvedapproximately 875,000 restricted and performance stock awards to our executiveofficers, directors and other employees. These awards will vest over two orthree years and in some cases are subject to the achievement of certainperformance goals.

 

****Our Board of Directors recentlyapproved stock ownership guidelines for our directors and senior corporateofficers. Under these ownership guidelines, the non-executive members of ourBoard of Directors are expected to own Avocent stock with a value equal to atleast their annual Board retainer, our Chief Executive Officer are expected toown Avocent stock with a value equal to at least three times his base salary,our President and Chief Operating Officer are expected to own Avocent stockwith a value equal to at least one and one-half times his base salary, and ourother senior officers are expected to own Avocent stock with a value equal toat least the officer’s base salary. These ownership levels are to be achievedover a period of time by requiring the director or the officer to retain asignificant portion of any restricted stock award until such time as therequired minimum ownership level is reached.****

 

**Results of Operations**

 

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

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **June 30,   2006**    | ** ** | **July 1,  2005**         | ** ** | **June 30,  2006** | ** ** | **July 1,  2005** | ** ** |
| Net sales                                              |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                          |       | 39.5                             |       | 41.0                           |       | 40.1 |   | 42.0 |   |
| Gross profit                                           |       | 60.5                             |       | 59.0                           |       | 59.9 |   | 58.0 |   |
| Operating  expenses:                                   |       |                             |       |                           |       |   |   |   |   |
| Research and  development expenses                     |       | 12.1                             |       | 16.1                           |       | 13.0 |   | 17.3 |   |
| Acquired  in-process research and development expenses |       | —                           |       | —                         |       | 1.0 |   | — |   |
| Selling, general  and administrative expenses          |       | 27.7                             |       | 26.8                           |       | 26.4 |   | 27.8 |   |
| Cyclades  integration expenses                         |       | 1.9                              |       | —                         |       | 1.0 |   | — |   |
| Amortization of  intangible assets                     |       | 4.2                              |       | 7.4                            |       | 3.4 |   | 8.0 |   |
| Total operating  expenses                              |       | 45.9                             |       | 50.3                           |       | 44.8 |   | 53.1 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Income from  operations                                |       | 14.6                             |       | 8.7                            |       | 15.1 |   | 4.9 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Income from  settlement of a lawsuit                   |       | —                           |       | 5.6                            |       | — |   | 3.0 |   |
| Net investment  income                                 |       | 1.8                              |       | 2.5                            |       | 2.4 |   | 2.6 |   |
| Net realized  investment losses                        |       | —                           |       | (0.2                           | )          | — |   | (0.2 | ) |
| Interest expense                                       |       | (.01                             | )          | —                         |       | — |   | — |   |
| Other income  (expense), net                           |       | (0.2                             | )          | (0.1                           | )          | (0.1 | ) | (0.1 | ) |
| Income before  provision for income taxes              |       | 16.1                             |       | 16.5                           |       | 17.4 |   | 10.2 |   |
| Provision for  income taxes                            |       | 4.6                              |       | 4.1                            |       | 4.9 |   | 2.4 |   |
| Net income                                             |       | 11.5                             | %          | 12.4                           | %          | 12.5 | % | 7.8 | % |

 

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*Net sales.*Net salesincreased 32% to $118.0 million for the second quarter of 2006 from $89.5million for the second quarter of 2005. The strong increase in sales resultedfrom both the contribution of revenue from our Cyclades acquisition, completedduring the first quarter of 2006, and the strength in our core products. Revenuesfrom our traditional KVM products increased to $83.8 million in the secondquarter of 2006 from $75.5 million in the second quarter of 2005. Additionally,revenues from our serial management products, consisting mostly of our Cycladesproducts, increased to $13.8 million in the second quarter of 2006 from$732,000 in the second quarter of 2005. Branded sales increased 54% from $45.8million in the second quarter of 2005 to $70.6 million in the second quarter of2006. As a percentage of sales, branded revenue accounted for 60% of sales inthe second quarter of 2006 and 51% of revenue in the second quarter of 2005. OEMsales grew 8% from $43.7 million in the second quarter of 2005 to $47.4 millionin the second quarter of 2006. OEM sales were 40% of sales for the secondquarter of 2006, compared to 49% of sales for the second quarter of 2005. Salesof our digital products represented 57% of our revenue in the second quarter of2006, compared to 53% of our revenue in the second quarter of 2005.

 

From a divisional perspective, revenues fromboth our Management Systems Division, which comprises our traditional KVMbusiness and also includes revenue from Cyclades, and our Embedded Software andSolutions Division, which includes our embedded KVM and IPMI solutions and theAgilent product line acquired in the first quarter of 2006, increased from thesecond quarter of 2005 to the second quarter of 2006. Revenue from theManagement Systems Division increased to $103.0 million in the second quarterof 2006 from $79.8 million in the second quarter of 2005 and accounted for 87%or our revenue in the second quarter of 2006 and 89% of our revenue in thesecond quarter of 2005. Revenue from our Embedded Software and SolutionsDivision increased to $8.8 million in the second quarter of 2006 from $4.9million in the second quarter of 2005 and accounted for 7% of our revenue inthe second quarter of 2006 and 6% of our revenue in the second quarter of 2005.The increase in revenue can be attributed primarily to the increasedcontribution of the embedded KVM solutions as adoption of these platforms byour OEM customers increases and to the Agilent product line which was acquiredlate in the first quarter of 2006.

 

Sales within the United States improved 28%to $67.3 million in the second quarter of 2006 from $52.8 million in the secondquarter of 2005, due to increases in both branded and OEM sales. Internationalsales increased 38%, to $50.7 million in the second quarter of 2006 from $36.8million in the second quarter of 2005, primarily as a result of increased OEMsales in Asia and improved branded sales in Europe and Asia. Sales within theUnited States were 57% of sales in the second quarter of 2006, compared to 59%of sales for the second quarter of 2005. International sales were 43% of salesin the second quarter of 2006 and 41% of sales for the second quarter of 2005.

 

Net sales increased 28% to $212.5 million forthe first six months of 2006 from $166.3 million for the first six months of2005. The increase is primarily a result of the issues related to the revenueshortfall early in 2005 and the added revenue from the acquisition of Cycladescompleted in the first quarter of 2006. Sales within the United Statesincreased by approximately 29% to $119.7 million in the first six months of2006 from $92.8 million in the first six months of 2005. International salesincreased approximately 26% to $92.8 million in the first six months of 2005from $73.6 million in the first six months of 2005. Additionally, sales to ourbranded customers increased 44% to $118.6 million in the first six months of2006 from $82.5 in the first six months of 2005, while sales to our OEMcustomers increased 12% to $93.9 million in the first six months of 2006 from$83.8 in the first six months of 2005.

 

In recent years, we have experienced asequential increase in revenues from the second quarter to the third quarterprimarily as a result of trends in IT spending for this period, as companiestend to purchase additional servers and other IT equipment in the second halfof the calendar year. Generally, we believe the tone of our business ispositive and industry analysts continue to forecast growth in IT spending andserver shipments on a year-over-year basis. Accordingly, for the third quarterof 2006, we expect revenue to be in the $125 to $130 million range, excludingthe acquisition of LANDesk.

 

*Gross profit.*Grossprofit is affected by a variety of factors, including the ratio of sales amongour distribution channels, as OEM sales have lower gross margins than ourbranded sales; absorption of fixed costs as sales levels fluctuate; productmix, raw materials, and labor costs; new product introductions by us and by ourcompetitors; and the level of our outsourcing of manufacturing and assemblyservices. Gross profit increased to 60.5% in the second quarter 2006 comparedto 59.0% in the second quarter of 2005. The primary reason for the improvedmargins in 2006 relates to the effect of higher revenue in the second quarterof 2006 as compared to the second quarter of 2005. The increased revenue bettercovered the fixed costs related to procurement, warehousing, and shipping. Additionally,the Cyclades products are sold through our branded channel and, as a result,have a higher gross margin. Increased sales of our digital solutions, which aresold through our Management Systems Division, positively affected our marginsin the second quarter of 2006 as compared to the second quarter of 2005,because our digital solutions carry higher margins than our analog solutions. Increasedsales by our Embedded Software and Solutions Division in the second quarter of2006 as compared to the second quarter of 2005 also had a positive impact onmargins as these products have higher margins than our traditional KVM products.Gross margin increased to 59.9% for the first six months of 2006 from 58.0% forthe first six months of 2005, primarily as a result of the higher digital,embedded, and Cyclades revenues for the first half of 2006.

 

We believe continued strong sales of ourdigital products and higher revenues from our embedded solutions in the thirdquarter of

 

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2006 will have a positive affect on our gross margin. We expect thecombination of these factors to offset price declines, the ongoing costsexpected from complying with new environmental regulations and competitivefactors in the third quarter of 2006. Accordingly, we expect gross margins tobe in the 60% range in the third quarter of 2006, excluding the acquisition ofLANDesk.

 

*Research and development expenses.*Researchand development expenses were $14.3 million, or 12.1% of sales, in the secondquarter of 2006 compared to $14.4 million, or 16.1% of net sales, in the secondquarter of 2005. The slight decrease in the amount spent on research anddevelopment is primarily due to the savings we experienced from the researchand development site closings and consolidation of projects completed during2005, which largely offset the full quarter’s impact related to the additionalcosts from the  Cyclades acquisition. Researchand development expenses for the first six months of 2006 decreased to $27.5million from $28.9 million for the first six months of 2005 primarily due tothe reduced headcount and other savings related to these site closings. As apercentage of net sales, year-to-date research and development expensesdecreased to 13.0% from 17.3%.

 

We believe that the timely development of innovativeproducts and enhancements to existing products is essential to maintaining ourcompetitive position, and we will continue to make significant investments inresearch and development. As highlighted above, we implemented plans during thesecond half of 2005 to contain the growth in legacy Avocent spending. However,we will continue to incur research and development expense from our Cycladesacquisition, including severance accruals and retention bonuses related to theintegration of research and development teams. We believe these factors willresult in research and development expenses in the range of $14.5 to $15million for the third quarter of 2006, excluding the acquisition of LANDesk.

 

*Acquired in-process research and developmentexpense.*Acquisition related expenses recorded in thefirst quarter of  2006 were comprisedsolely of the non-recurring write-off of $2.1 million of in-processresearch and development expense related to the acquisition of Cyclades. Therewere no such charges in 2005.

 

***Selling,general and administrative expenses.***Selling, general andadministrative expenses were $32.7 million, or 27.7% of net sales, for thesecond quarter of 2006 compared to $24.0 million, or 26.8% of net sales, forthe second quarter of 2005. As we expected, we experienced higher costs as aresult of a full quarter of Cyclades selling, general and administrativeexpenses as well as higher legal fees associated with protecting ourintellectual property rights, particularly as we approach the trial in theClearCube case. We also had increases in advertising and promotion costs duringthe second quarter of 2006 to support our newer products and to promote theaddition of Cyclades products. Year-to-date selling, general, andadministrative expenses increased to $56.1 million, or 26.4% of net sales for2006, from $46.3 million, or 27.8% of year-to-date net sales in 2005, as aresult of the factors mentioned above.

** **

**We will continue our work to integratethe Cyclades sales forces, marketing efforts, and administrative functionsduring the third quarter of 2006. Additionally, legal costs are expected torise in the third quarter of 2006 related to our ongoing efforts to protect ourintellectual property as the ClearCube case is scheduled for trial during thethird quarter of 2006. As a result of these factors, we expect selling, generaland administrative expenses to be in the range of $31 to $32 million in thethird quarter of 2006, excluding the acquisition of LANDesk.**

** **

***Cycladesintegration expenses***. We recorded $2.3 million of expenses, or 1.9% of sales,in the second quarter of 2006 related to costs associated with the integrationof Cyclades people, processes, and products into Avocent. These costs alsoinclude severance accruals resulting from the headcount reductions associatedwith duplicate positions eliminated during the second quarter. We expectadditional integration costs and severance accruals in the third quarter of2006 totaling $800,000 to $900,000. There were no such charges incurred during2005.

** **

***Amortizationof intangible assets***. Amortization of $4.9 million in the second quarter of2006 was primarily comprised of the amortization of the identifiable intangibleassets created as a result of the acquisitions of 2C, Soronti, Crystal Link,OSA, Sonic Mobility, and Cyclades. Amortization of $6.6 million in the secondquarter of 2005 was primarily comprised of the amortization of the identifiableintangible assets created as a result of the merger transaction between Apexand Cybex and the acquisitions of Equinox, 2C, Soronti, Crystal Link, OSA, andSonic Mobility. The decrease in amortization expense relates primarily torecording no amortization expense for developed technology or patents andtrademarks recorded on the merger of Apex and Cybex, as these assets had anestimated life of five years and were fully amortized at the end of the secondquarter of 2005. Amortization expense decreased from $13.2 million in the firstsix months of 2005 to $7.3 million in the first six months of 2006 as a result ofthe factors mentioned above. We expect amortization of intangibles to beapproximately $5.0 million in the third quarter of 2006, consistent with thesecond quarter of 2006, excluding the acquisition of LANDesk.

** **

*Stock Compensation.*We adopted SFAS123 (revised 2004), *Share-Based Payment,* on January 1,2006 and as a result record stock compensation expense forall share-based payment awards made to employees and directors, includinggrants of employee stock options, restricted stock units, and performance-basedrestricted stock units, based on estimated fair values. Thecompensation expense is recorded in each line of our condensed consolidatedfinancial statements based on the department in which an employee works. Forthe second quarter of 2006, we expensed $2.7 million of stock-basedcompensation: $164,000 was recorded in cost of

 

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goodssold, $762,000 was recorded in research and development expense and $1.8million was recorded in selling, general and administrative expenses. For thefirst six months of 2006, we expensed $3.6 million of stock based compensation;$214,000 was recorded in cost of goods sold, $1.1 million was recorded inresearch and development expense and $2.3 million was recorded in selling,general and administrative expense.

 

For options and restricted stock units outstanding as of June 30,2006, we expect to record stock-based compensation expense ofapproximately $3.8 million in the third quarter of 2006 and $3.7 million in thefourth quarter of 2006, excluding the acquisition of LANDesk.We believe equity based compensation is an important part of our totalcompensation package and is needed to attract and retain key employees.

 

*Income from settlement of lawsuit**.***The $5 million of income from thesettlement of lawsuit in the second quarter and six months to date of 2005 iscomprised entirely of the payment received in May 2005 as a result of thesettled patent infringement lawsuit brought by Avocent against RaritanComputer Inc. The terms of the settlement called for an initial payment of$5 million, related to past product sales by Raritan and settlement of thelawsuit. There was no such income in 2006, although we continue to receivequarterly royalties from Raritan based on Raritan’s current period sales undera licensing agreement.

 

*Net investment income**.***Net******investment income decreased to $2.1million in the second quarter of 2006 as compared to $2.3 million in the firstquarter of 2005. The decrease in investment income in the second quarter of2006 was the result of lower cash and investments as a result of funding thepurchase of Cyclades in the first quarter of 2006 and the investment of theremaining funds in shorter term investments in order to have cash on hand tofund the cash component of the LANDesk acquisition as well as fund the purchaseof treasury shares under our stock buyback program. For the year, net******investment income increased to $5.2million in the first six months of 2006 as compared to $4.3 million in thefirst six months of 2005. We expect our investment income to decrease in thethird quarter of 2006 due to lower cash and investments resulting from fundingour share repurchases in the second quarter of 2006 and funding the purchase ofLANDesk and our continuing share repurchases in the third quarter of 2006.

 

*Net realized investment losses.*Netrealized investment losses decreased from $206,000 in the second quarter of2005 to a gain of $2,000 in the second quarter of 2006. For the year, netrealized investment losses decreased from $383,000 in the first six months of2005 to $53,000 in first six months of 2006.

 

*Interest expense.*Interestexpense was $137,000 in the second quarter of 2006 and $146,000 for the firstsix months of 2006. There were no such expenses in 2005. Interest expenserelates to interest on our borrowings under our $250 million unsecured line ofcredit.

 

*Other income (expense), net.*Netother income (expense) increased from an expense of $115,000 in the secondquarter of 2005 to an expense of $200,000 in the second quarter of 2006. Forthe year, net other income (expense) increased from expense of $54,000 in thefirst six months of 2005 to an expense of $211,000 in the first six months of2006.

 

*Provision for income taxes.*Theeffective tax rate in the second quarter of 2006 was approximately 28.4%,compared to an effective tax rate of approximately 24.7% in the second quarterof 2005. The provision for income taxes was approximately $5.4 million forthe second quarter of 2006, compared to $3.6 million in the second quarter of2005. The effective tax rate in the first six months of 2006 was approximately28.2% compared to an effective tax rate of approximately 23.4% in the first sixmonths of 2005. The provision for income taxes was approximately$10,395 for the first six months of 2006, compared to $3,950 in the firstsix months of 2005. The increase in provision for income taxes was partly theresult of the change in mix of our pre-tax profit among our U.S. andinternational companies. Additionally, the Irish statutory tax rate onmanufactured goods increased from 10% to 12.5% on January 1, 2006. TheU.S. Research and Development credit also has expired, and as of June 30,2006, this credit has not yet been reinstated by Congress. Finally, the Cycladespurchase included In-process Research and Development which was immediatelyexpensed upon the purchase. This item has no tax basis and, therefore,increased the effective tax rate for the quarter.

 

*Net income.*Netincome for the second quarter of 2006 was $13.6 million compared to $11.1million for the second quarter of 2005, as a result of the factors detailed inthe above discussion. Net income, as a percentage of sales for the secondquarter of 2006, was 11.5% compared to 12.4% for the second quarter of 2005. Forthe year, net income for the first six months of 2006 was $26.5 millioncompared to $12.9 million for the first six months of 2005, also as a result ofthe factors detailed in the above discussion. Net income, as a percentage ofsales for the first six months of 2006, was 12.5% compared to 7.8% for thefirst six months of 2005.

 

**Liquidity and Capital Resources**

 

As of June 30, 2006, our principalsources of liquidity consisted of $194 million in cash, cash equivalents, andinvestments. We also have a $250 million unsecured five year revolving bankline of credit. We plan to use borrowings under the line of credit to fund thepurchase of LANDesk and the purchase of shares under our expanded stockrepurchase program. The line of credit bears an initial

 

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interest rate of LIBOR plus 112.5 basis points. There was approximately$12 million outstanding under the line of credit as of June 30, 2006. Weexpect to repay the borrowings from future cash flows from operations.

 

Our operating activities generated cash of $31.6million in the first six months of 2006, compared to approximately $31.3million in the first six months of 2005. The slight increase in cash providedby operations is the result of several offsetting factors. We experienced animprovement in earnings from $12.9 million in the first six months of 2005 to$26.5 million the first six months of 2006, which provided a strong increase tocash from operations. However, an increase to inventories during the first sixmonths of 2006 served to partially offset the improved earnings. Inventoriesincreased $3.4 million from December 31, 2005 to June 30, 2006,which excludes the impact of $7.0 million of inventory received in theacquisition of Cyclades during the first quarter. The increase in inventory wasprimarily the result of adding inventory related to the planned transition ofCyclades manufacturing to our contract manufacturers and in anticipation ofexpected higher sales. Accordingly, as a result of the increased inventories,our inventory turns decreased to 5.9 in the first six months of 2006 from 6.4for the first six months of 2005. Although our sales volume increasedsubstantially, our receivables balance remained relatively constant from December 31,2005 to June 30, 2006. Excluding the impact of over $10 million ofreceivables received at the acquisition of Cyclades, our receivables increased$387,000 from December 31, 2005 to June 30, 2006. DSOs increased toapproximately 60 days for the second quarter of 2006 compared to 54 days forthe second quarter of 2005, and was on target with our goal of 60 days. DSOsincreased as a result of the increased proportion of sales that occurred latein the second quarter of 2006. A decline in accounts payable and an increase inother assets also affected cash flow from operations for the second quarter of2006. The tax benefit from stock-based compensation wasreported in cash flow from operations in the first six months of 2005, but as aresult of SFAS 123R, is now reported in financing activities, and affected cashflow from operations for the first six months of 2006.

 

In the ordinary course of our business, we may atany point in time have a significant amount of contractual commitments not yetrecognized in our financial statements. These commitments relate primarily toour need to schedule the purchase of inventories in advance of the relatedforecasted sales to customers. We have longer lead times for the products wepurchase from suppliers based in Asia than those for our U.S. based andEuropean suppliers. Our actual contractual commitments are typically limited toproducts needed for one to three months of forecasted sales. The liabilitiesfor these inventory purchases along with the related inventory assets aretypically recognized upon our receipt of the products. We also have at anypoint in time a variety of short term contractual commitments for services suchas advertising, marketing, accounting, legal, and research and developmentactivities. The liabilities for these services and the related expenses aretypically recognized upon our receipt of the related services. As of June 30,2006, we had approximately $31.9 million of such purchase commitments. None ofour expected purchase commitments requires payment beyond the next year.

 

During the second quarter of 2006, our Boardof Directors approved an additional 6.0 million shares of stock for repurchaseunder our stock repurchase program, and we may repurchase a total of 10.0million shares under the program. We repurchased 4.0 million shares of ourcommon stock during the quarter ended June 30, 2006 at a cost totaling$95.3 million. We repurchased 4.8 million shares of our common stock during thesix months ended June 30, 2006 at a cost totaling $122.3 million. Thesetreasury shares were purchased on the open market through various brokers underthe stock repurchase program approved by our Board of Directors. As of June 30,2006, we have repurchased 7.6 million shares under the program since theinitial approval of the program in 2004. We may repurchase an additional2.4 million shares under this program and expect to repurchase shares from timeto time, particularly to offset dilution from equity compensation awards and tooffset the shares being issued in the LANDesk acquisition.

 

**Investments**

 

Our investments consist of corporate bonds,municipal bonds, commercial paper, mortgage backed securities guaranteed byU.S. government agencies, and common stock. We classify our debt and equitysecurities as available-for-sale securities and report them at fair value, withunrealized gains and losses excluded from earnings and reported as a separatecomponent of stockholders’ equity. We periodically review our investmentportfolio for investments considered to have sustained an other-than-temporarydecline in value. Upon review of our investment portfolio as of June 30,2006, no investments were considered to have sustained an other-than-temporarydecline, and no charge was recorded in the second quarter of 2006.

 

**Certain Transactions**

 

***Acquisition of Cyclades Corporation***

** **

On March 30, 2006, we acquired CycladesCorporation, a privately-held company based in Fremont, California, forapproximately $90 million in cash plus an additional $2 million in transactioncosts. Cyclades also has operations in Sao Paolo, Brazil and Munich, Germany,and employs approximately 350 people in 19 locations around the world. TheCyclades product lines include serial and power management products. Theacquisition of Cyclades will enhance our position in the Linux server andnetworking infrastructure management market and provides complementary productsto our product lines allowing us to provide our customers a more integratedplatform for managing their IT infrastructure. Cyclades had unauditedrevenues of approximately $60 million in 2005 

 

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and unaudited operating profit of approximately $2 million in 2005. Theresults of Cyclades’ operations have been included in the consolidatedfinancial statements since the date of acquisition.

 

**The acquisition was recorded under thepurchase method of accounting, and the purchase price was allocated based onthe fair value of the assets acquired and liabilities assumed. In accordance withgenerally accepted accounting principles, purchased research and developmentcosts allocated to patent-pending technology were capitalized and will beamortized over the respective estimated useful lives. The remaining amounts ofpurchased research and development were expensed upon the closing of thetransaction. The goodwill recorded as result of the acquisition will not beamortized but will be included in our annual review of goodwill for impairment.Additionally, the goodwill recorded is not tax deductible.**

** **

***Announced Acquisition of LANDesk Group Limited***

** **

**In April 2006, we announced thesigning of a definitive agreement to acquire LANDesk Group Limited, aprivately-held company based Salt Lake City, Utah. LANDesk employsapproximately 500 people, located primarily in the United States, Europe, andAsia. The LANDesk product lines include software for the centralized managementand protection of information technology assets. The agreement provides fortotal consideration of approximately $416 million, including $200 million instock, $200 million in cash, and approximately $16 million in intrinsic valueof assumed options. The transaction value may be increased by up to $60million in cash if LANDesk meets certain financial targets specified in theagreement. An escrow account with $60 million of the stock consideration willbe held for indemnifiable claims for 18 months. We expect to close thistransaction in the third quarter of 2006. LANDesk had revenues ofapproximately  $84 million in 2005 andoperating profit of approximately $7 million in 2005.**

** **

**Recently Issued Accounting Standards andRegulatory Standards**

 

In July 2006, the Financial AccountingStandards Board (FASB) released FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”(FIN 48). FIN 48 clarifies the accounting and reporting for uncertainties inincome tax law. This Interpretation prescribes a comprehensive model for thefinancial statement recognition, measurement, presentation and disclosure ofuncertain tax positions taken or expected to be taken in income tax returns. Wewill adopt this Interpretation in the first quarter of 2007. The cumulativeeffects, if any, of applying this Interpretation will be recorded as an adjustmentto retained earnings as of the beginning of the period of adoption. We havecommenced the process of evaluating the expected effect of FIN 48 on ourconsolidated financial statements and are currently not yet in a position todetermine such effects.

 

**Item 3. Quantitative and QualitativeDisclosures About Market Risk.**

 

Our primary market risk is the potential lossarising from increases in interest rates, which could have an adverse impact onthe fair value of our investment securities. Our investment policy is to manageour investment portfolio to preserve principal and liquidity while maximizingthe return on our investment portfolio through the investment of availablefunds. We diversify our investment portfolio by investing in a variety ofhighly-rated investment-grade securities and through the use of differentinvestment managers. Our investment securities portfolio is primarily investedin securities with maturities (or interest rate resets) of two years or lesswith at least an investment grade rating to minimize interest rate and creditrisk as well as to provide for an immediate source of funds. Market risk,calculated as the potential change in fair value in our investment portfolioresulting from a hypothetical 10% change in interest rates, was not material atJune 30, 2006. We generally hold investment securities until maturity.

 

We also face interest rate risk on our bankline of credit which currently bears interest at a variable rate of LIBOR plus112.5 basis points. We are considering hedging this interest rate risk with aninterest rate swap.

 

We also face foreign currency exchange raterisk to the extent that the value of certain foreign currencies relative to theU.S. dollar affects our financial results. Our international operations transacta portion of our business in currencies other than the U.S. dollar,predominantly the euro, and changes in exchange rates may positively ornegatively affect our revenues, gross margins, operating expenses, and retainedearnings since these transactions are reported by us in U.S. dollars. Weoccasionally purchase foreign currency forwards aimed at limiting the impact ofcurrency fluctuations. These instruments provide only limited protectionagainst currency exchange risks, and there can be no assurance that such anapproach will be successful, especially if a significant and sudden declineoccurs in the value of local currencies. As of June 30, 2006, we had oneopen forward contract with an approximate fair value of ($9,000).

 

**Item 4. Controls and Procedures.**

 

(a) *Evaluationof disclosure controls and procedures.*Based on their evaluation asof June 30, 2006, our Chief Executive Officer and Chief Financial Officerhave concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) are effective toensure that information required to be disclosed by us in reports

 

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that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms.

 

(b) *Changesin internal control over financial reporting*. There were no changesin our internal controls over financial reporting during the quarter ended June 30,2006 that materially affected or are reasonably likely to materially affect,our internal controls over financial reporting except for our acquisition ofCyclades Corporation at the end of our first quarter of 2006. We have begun theintegration of Cyclades into our company and expect to continue to integratethe Cyclades processes into the Avocent processes during the remainder of 2006.

 

### **PART II— OTHER INFORMATION**

### ** **

**Item 1.****         Legal Proceedings.**

 

In October 2003, Avocent filed a complaintfor patent infringement in the United States District Court for the NorthernDistrict of Alabama against ClearCube Technology, Inc. The ClearCube complaintseeks injunctive relief, damages, attorneys’ fees, and costs under two of theCompanies patents. ClearCube has filed counterclaims alleging non-infringement,unenforceability, invalidity, and misuse of the Avocent patents. A Markmanhearing on claims construction was held in February 2006, and the court hasruled on a number of pre-trial motions. A trial is expected in the thirdquarter of 2006.

 

On March 14, 2006, TFS ElectronicManufacturing Services, Inc. filed a Third-Party Complaint and anObjection to Claim of Avocent Corporation with the United States BankruptcyCourt, District of Arizona. As a result of the complaint,an adversary proceeding has been commenced against Avocent in the TFSbankruptcy case in an effort to disallow Avocent’s claim in its entirety. TFSalso seeks damages in an undetermined amount for Avocent’s alleged breach of contract,negligence, negligent misrepresentations, breaches of warranty, unjustenrichment, disparagement of TFS’ business, and quantum merit. TFS is seekingrecovery of actual damages, punitive damages, attorneys’ fees, pre- andpost-judgment interest, costs, and the imposition of joint and severalliability as to Avocent and a named co-defendant, TopSearch Printed Circuits(HK), Ltd. Avocent has moved to dismiss all claims, and discovery is under way.

 

**Item 1A. Risk Factors.**

 

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

 

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

 

We have signed a definitive agreement toacquire LANDesk Group Limited, and the LANDesk acquisition is expected to closein the third quarter of 2006.  Thisacquisition represents a departure from our core products and technologies andour entry into a new market (systems management software products and services)in which we have very limited experience. The market for systems management products is highly competitive, and weexpect competition in this market to continue and intensify.  Many of LANDesk’s competitors havesubstantially greater financial, customer support, technical and marketingresources, larger customer bases, longer operating histories, greater namerecognition, and more established relationships in the industry than LANDeskhas, and we may not have the resources or expertise to compete successfullywith them in the future.  

 

The LANDesk acquisition may divert theattention of management and other personnel from our core business operations,which may adversely affect our financial performance in one or more quarters.  We will also need to expand and improve ourinternal systems, including our management information systems, and operating,administrative, and financial systems and controls to include the LANDeskoperations.  The acquisition andintegration of LANDesk and its software products and services will requiresignificant time, expense, and resources and subject us to the acquisitionrisks detailed below as we move into this new market.  Any failure to successfully integrate andoperate LANDesk could thus have a material adverse effect on our result ofoperations, cash flows, and financial position. 

 

 

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**We have acquired, and expect to continue toacquire, technologies and companies that could disrupt our business or exposeus to other risks.**

 

A key component of our engineering andproduct development strategy is the acquisition of technologies and companies.We recently announced that we have signed a definitive agreement to acquireLANDesk Group Limited, and that transaction is expected to close in the thirdquarter of 2006. We acquired Equinox Systems Inc. in 2001, 2C Computing, Inc.in 2002, Soronti, Inc. in 2003, and Crystal Link Technologies, OSATechnologies, Inc., Sonic Mobility, Inc. in 2004, and CycladesCorporation in 2006. We intend to continue to execute our strategy through theacquisition of technologies or companies or through investments incomplementary companies, products, or technologies, and it is likely we willcomplete such acquisitions or investments in the future. These acquisitions andinvestments involve many risks, including the following:

 

•                                          Difficultyintegrating the acquired company’s personnel, products, technologies, andoperations;

 

•                                          Diversionof management’s attention;

 

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

 

•                                          Lossof key personnel;

 

•                                          Delaysor difficulties in coordinating and combining administrative, manufacturing,research and development and other operations, facilities, and relationshipswith third parties in accordance with local laws and other obligations whilemaintaining adequate standards, controls and procedures;

 

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

 

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

 

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

 

•                                          Overpaymentfor any acquisition or investment;

 

•                                          Assumptionof liabilities of the acquired company, including any potential intellectualproperty infringement claims; and

 

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

 

Our failure to manage these risks and challenges couldmaterially harm our business, financial condition, and results of operations.Further, if we do not successfully address these challenges in a timely manner,we may not fully realize all of the anticipated benefits or synergies onwhich the value of a transaction was based. Future transactions could cause ourfinancial results to differ from expectations of market analysts or investorsfor any given quarter.

 

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

 

The markets for our products and technologiesare highly fragmented and intensely competitive. Aggressive competition fromboth hardware and software products and technologies could result in pricereductions and loss of sales, which would materially harm our business. Ourbusiness is becoming increasingly sensitive to the introduction of new productsand technologies, price changes, and marketing efforts by numerous and variedcompetitors. Accordingly, our future success will be highly dependent upon ourtimely completion and introduction of new products and technologies andfeatures at competitive prices and performance levels that address the evolvingneeds of our customers. We continue to experience aggressive price competitionand increased customer sensitivity to product prices, and pricing and marginpressures are likely to increase in the future. Because of this competition, wemay have to continue to lower the prices of many of our products andtechnologies to stay competitive, while at the same time trying to maintain orimprove our revenue and gross margin. Because our business model is based onproviding innovative and high quality products, we may spend aproportionately greater amount on research and development than some of ourcompetitors. If we cannot proportionately decrease our cost structure on atimely basis in response to competitive price pressures, our gross margin andprofitability could be adversely affected. In addition, if our pricing andother factors are not sufficiently competitive, or if there is an adversereaction to our product decisions, we may lose market share in certainareas, which could adversely 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, Lantronix, and Digital V6.We also face competition from software providers (such as Microsoft, ComputerAssociates, Tivoli, and BMC Software), who may be able to offercompetitive software products at a much lower cost or even bundled for free,and from server manufacturers (including our OEM customers), who are able tooffer their competitive technologies or products at the time of the server sale.These software and hardware products address many of the problems our switchingsystems and technologies, extension products, and remote access products aredesigned to address.

 

Current and potential competitors may beable to respond more quickly to new or emerging technologies or products and tochanges in customer requirements or to devote greater resources to theresearch, development, promotion, and sale of their products and technologiesthan we do. In addition, current and potential competitors have established or may establishcooperative relationships among themselves or with third parties that enhancethe ability of their products and technologies to address the needs of ourcurrent and prospective customers. We may not be able to competesuccessfully against current and future competitors and competitive pressure may materiallyharm our business.

 

                                               Certainof our customers, such as Dell, Hewlett-Packard, IBM, and Microsoft, presentlyoffer competitive hardware and/or software products and technologies thataddress many of the problems our products and technologies address. Thesecustomers could decide to manufacture their own switching or remote accessproducts, enhance their own internally-developed switching, IPMI, or otherembedded technologies, or offer products or technologies supplied by competitors.Companies with hardware manufacturing experience or network managementproducts, many of which are substantially larger than we are and havesignificantly more financial resources than we do, also offer products ortechnologies that compete with us. Established companies with hardwaremanufacturing or network management experience (such as Intel, Cisco, or EMC)could also offer new products, new technologies, or new solutions that competewith our products and technologies.

 

**Our failure to respond to rapid technologicalchange or to introduce successful new products and technologies may resultin reduced revenue or revenue growth.**

 

The process of developing or acquiring newproducts and technologies and enhancing existing products and technologies iscomplex, costly, and uncertain, and any failure by us to anticipate customers’changing needs and emerging technological trends

 

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accurately could significantly harm our market share and results ofoperations. We must make long-term investments, develop or obtain appropriateintellectual property, and commit significant resources before knowing whetherour predictions will accurately reflect customer demand for our products andservices. After we develop a product, we must then accurately forecast volumesand configurations that meet customer requirements, manufacture appropriatevolumes quickly and at low cost, and train our sales force and resellers. Anydelay in the development, production, marketing of, or training for newproducts or technologies could result in our not being among the first tomarket, which could further harm our competitive position.

 

Sales of switching, extension, and remoteaccess products and technologies are characterized by rapid technologicaladvances, frequent new product and technological introductions andenhancements, and significant price competition. If we do not keep pace withthese changes, we will lose customers, and our business will be adverselyaffected. The introduction of products or technologies incorporating superioralternatives such as switching software, the emergence of new industrystandards, or changes in pricing structure could render our existing productsand technologies and those under development obsolete or unmarketable. Newtechnologies offered by us or our competitors could compete with our existingproducts at a lower price, which would reduce our revenue.

 

Our 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. Our futuresuccess will depend in large part upon our continued innovativeapplication of such commercially available components and continuedenhancements to our proprietary software, firmware, and other technologies, ourexpansion and enhancement of existing products and technologies, and ourdevelopment and introduction of new products and technologies that addresschanging customer needs on a cost-effective and timely basis. If we fail torespond on a timely basis to technological developments, changes in industrystandards, customer requirements, or software innovations, we will losecustomers, and our business will be greatly harmed. Similar results could occurif we experience significant delays in the development or introduction of newproducts or technologies.

 

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

 

**We are likely to experience fluctuations inoperating results.**

 

We have in the past experienced substantialfluctuations in operating results, on a quarterly and an annual basis, and weexpect these fluctuations will continue in the future. Our operating resultswill be affected by a number of factors, including, but not limited to:

 

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

 

•                                          Thetiming of shipments;

 

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

 

•                                          Changesin product or distribution channel mixes;

 

•                                          Changesin pricing policies or price reductions;

 

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

 

•                                          Theavailability and cost of supplies and components;

 

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

 

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

 

Our operating results will continue to beaffected by seasonal trends, by general conditions in the server market, and bygeneral economic conditions. We have experienced, and we expect to continue toexperience, some degree of seasonality due to customer buying cycles. Webelieve that the third and fourth quarters will generally have higher net saleslevels due to customer budgeting and procurement cycles, which may depressnet sales in other quarters. In addition, European sales are often weakerduring the summer months. In the past,revenue in our fourth quarter of each year has typically been higher thanrevenue in prior quarters for

 

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the year, and we typically seea sequential decline in revenue from the fourth quarter of a year to the firstquarter of the following year. While it is difficult to predict revenue in anyquarter, we expect that this pattern will continue in the future. Many of thefactors that create and affect seasonal trends are beyond our control.

 

Our quarterly sales have also reflected apattern in which a disproportionate percentage of each quarter’s total salesoccur toward the end of the quarter, and this trend has become more pronouncedin recent periods. This uneven sales pattern makes prediction of revenue,earnings, and working capital for each financial period difficult, increasesthe risk of unanticipated variations in quarterly results and financialcondition, and places pressure on our inventory management and logisticssystems. If predicted demand is substantially greater than orders, there willbe excess inventory. Alternatively, if orders substantially exceed predicteddemand, we may not be able to fulfill all of the orders received in thelast few weeks of each quarter. Other developments late in a quarter, such as asystems failure, component pricing movements, or global logistics disruptions,could adversely impact inventory levels and results of operations in a mannerthat is disproportionate to the number of days in the quarter affected.

 

We believe that quarter-to-quartercomparisons of our historical financial results are not meaningful indicatorsof our future operating results, and you should not rely on them as anindication of our future performance. If our quarterly operating results failto meet the expectations of equity research analysts, the price of our commonstock could be negatively affected.

 

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

 

Sales outside the United States generateapproximately half of our revenue, and over half of our manufacturing takesplace outside the United States. Accordingly, our future revenue, gross margin,expenses, and financial condition could suffer due to a variety ofinternational factors, including:

 

•                                          Ongoinginstability or changes in a country’s or region’s economic or politicalconditions, including inflation, recession, interest rate fluctuations, andactual or anticipated military or political conflicts;

 

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

 

•                                          Longeraccounts receivable cycles and financial instability among customers;

 

•                                          Taxor trade regulations and procedures and actions affecting production, pricing,and marketing of or payments for products;

 

•                                          Locallabor conditions and other regulations;

 

•                                          Differingtechnology standards or customer requirements;

 

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

 

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

 

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

 

The factors described above also coulddisrupt our product manufacturing and key suppliers located outside of theUnited States. For example, we rely on manufacturers in Asia and Europe for theassembly and manufacture of many of our products.

 

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

 

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

 

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

 

•                                          Productmix, because sales of some of our products and technologies will have lowergross margins than sales of other products or technologies;

 

•                                          Rawmaterials, freight, and labor costs;

 

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

 

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•                                          Thelevel of outsourcing of our manufacturing and assembly services.

 

We expect that our gross margins may varyand may decline in the future primarily due to the factors listed aboveand to increased competition and the introduction of new products andtechnologies that may affect product prices.

 

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

 

A substantial portion of our sales isconcentrated among a limited number of OEM customers. Sales to theseOEMs represented approximately 48% of net sales in 2005, 45% of net salesin 2004, and 46% of net sales in 2003. Sales to Hewlett-Packard representedapproximately 20% of our net sales in 2005, 23% of our net sales in 2004, and23% of our net sales in 2003. Sales to Dell represent approximately 15% of ournet sales in 2005, 12% of our net sales in 2004, and 14% of our sales in 2003.

 

We have experienced, and we expect tocontinue to experience, period-to-period variability in sales to these OEMcustomers. Any cancellation, rescheduling, or reduction of orders by OEMcustomers in the future could materially adversely affect our operating results.Although our OEM customers typically place orders for products up to severalmonths prior to scheduled shipment dates, these orders are subject tocancellation.

 

Our OEM business is subject to many risks,including:

 

•                                          Contracttermination or reduced or delayed orders;

 

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

 

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

 

•                                          Adoptionof competing products or technologies developed by third parties for the OEMsor by the OEMs’ internal development teams; and

 

•                                          Changesin corporate ownership, financial condition, business direction, or product mixby the OEMs.

 

Any of these risks could have a materialadverse effect on our business, financial condition, and results of operations.We have experienced, and expect to continue to experience, pricing pressuresand significant variability in orders from our OEM customers, which may inthe future have a material adverse effect on our quarterly sales and operatingresults.

 

The loss of one or more large OEM customerswould materially harm our business. While we have contracts with some of our existingOEM customers, none of our OEM customers is obligated to purchase products fromus except pursuant to binding purchase orders. Consequently, any OEM customercould cease doing business with us at any time. Our dependence upon a fewOEMs also results in a significant concentration of credit risk, thus asubstantial portion of our trade receivables outstanding from time to time may beconcentrated among a limited number of customers. In addition, OEM customershave longer payment cycles that increase the likelihood of aged or problemaccounts receivable.

 

We use multiple warehouses for many of ourOEM customers to fulfill their orders under a just-in-time inventory managementsystem, which requires us to maintain sufficient inventory levels of our productsat each of these warehouses to satisfy our OEMs anticipated customer demand,and we generally recognize revenue only when these OEM customers takepossession of our products. We are required to plan production, ordercomponents, and undertake our manufacturing activities prior to the time thatthese orders become firm or the products are accepted. In addition, our OEMcustomers have requested, and are likely to continue to request from time totime, that we delay shipment dates or cancel orders for products that aresubject to firm orders. As a result, at any time we may be holding asignificant amount of OEM-branded products in inventory, and our sales toOEMs for future quarters are difficult to predict. The inability toaccurately predict the timing and volume of orders for our OEM customers duringany given quarter could adversely affect operating results for that quarterand, potentially, for future quarters. If we underestimate sales, we may notbe able to fill orders on a timely basis. This could cause customerdissatisfaction and loss of future business. If we overestimate sales, we may experienceincreased costs from inventory storage, waste, and obsolescence.

 

**A substantial portion of our businessconsists of sales of branded products, and these sales are difficult toforecast. Failure to accurately forecast these sales could lead to costlyoverproduction or product shortages.**

 

A substantial portion of our sales consistsof sales of branded products. We expect these sales to increase in the future,and if we are successful in increasing branded sales as a percentage of netsales, our quarterly sales and operating results will become more dependentupon the volume and timing of branded product orders received during thequarter. Because many customers of our

 

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branded products typically place orders shortly before their requestedshipment date, revenues from branded sales are difficult to forecast. Withcontinued industry-wide initiatives by distributors and resellers to reducetheir inventories and to shorten their lead times, our major distributor andreseller customers are reducing early commitments to firm orders. Furthermore,many purchasers typically require prompt delivery of products. This results ina limited backlog of orders for these products and requires us to maintainsufficient inventory levels to satisfy anticipated customer demand. Theinability to accurately forecast the timing and volume of orders for brandedproducts during any given quarter could adversely affect operating results forsuch quarter and, potentially, for future periods. If we underestimate sales,we will not be able to fill orders on a timely basis. This could cause customerdissatisfaction and loss of future business. If we overestimate sales, we willexperience increased costs from inventory storage, waste, and obsolescence.

 

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

 

We expect to rely increasingly ondistributors and resellers, VARs, and systems integrators for the distributionand sale of our branded products. Our strategy contemplates the expansion ofour distributor and reseller network both domestically and internationally,particularly in Asia. Our future success will depend in part on ourability to attract, train, and motivate new distributors and resellers andexpand our relationships with current distributors and resellers. We may notbe successful in expanding our distributor and reseller relationships. We willbe required to invest significant additional resources in order to expand theserelationships, and the cost of this investment may exceed the marginsgenerated from this investment.

 

In addition, distributors and resellers oftenhave rights of return, and in the future, these returns from our existing orany new distributors and resellers may have a material adverse effect onour business, financial condition, and results of operations. Our agreementswith our current distributors and resellers are generally nonexclusive and may beterminated on short notice by either party without cause, and any newdistributor or reseller agreements are likely to contain similar provisions. Distributorsand resellers are not obligated to purchase products from us and frequentlyoffer products of several different manufacturers, including competitors’products, and distributors and resellers may give higher priority to thesale of our competitors’ products. A reduction in sales efforts by our distributorsor resellers could lead to a reduction in our sales and could materiallyadversely affect our business, financial condition, and results of operations.

 

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

 

We are working to develop, integrate, andexpand our international distribution networks in an effort to increaseinternational sales of switching, extension, remote access, and other products.We may not be successful in developing or expanding the internationaldistribution network or in marketing and selling products in foreign markets,particularly Asia. If the revenues generated by our international sales are notadequate to recover the expense of establishing, expanding, and maintaining aninternational distribution network, our business, financial condition, andresults of operations could be materially adversely affected. If internationalsales become a more significant component of net sales, our business couldbecome more vulnerable to the risks inherent in doing business on aninternational level, including:

 

•                                          Difficultiesin managing foreign resellers;

 

•                                          Longerpayment cycles and problems in collecting accounts receivable;

 

•                                          Theeffects of seasonal customer demand;

 

•                                          Changesin regulatory requirements;

 

•                                          Difficultiesin meeting the requirements of different international product regulations;

 

•                                          Risksrelating to the protection of our intellectual property rights;

 

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

 

•                                          Exportrestrictions, tariffs, and other trade barriers;

 

•                                          Fluctuationsin currency exchange rates; and

 

•                                          Potentiallyadverse tax consequences and political instability.

 

The existence or occurrence of any one ofthese factors could have a material adverse effect on our business, financialcondition, and results of operations.

 

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**We are dependent upon third-party suppliersand outsourced manufacturing. 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 components of our products areelectronic components, power supplies, semiconductors, memory, cableassemblies, line filters, enclosures, and printed circuit boards, all of whichare purchased from outside vendors. We generally buy components under purchaseorders and generally do not have long-term agreements with our suppliers. Also,we generally do not maintain large inventories of components. Any terminationof, or significant disruption of, our relationships with the suppliers of ourproduct components may prevent us from filling customer orders in a timelymanner which could result in customer dissatisfaction and lost sales.

 

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

 

We have limited ability to control qualityissues (particularly with respect to faulty components manufactured by thirdparities), and we depend upon suppliers to deliver components that are freefrom defects, competitive in functionality and cost, and in compliance withspecifications and delivery schedules. Disruption in supply, a significantincrease in the cost of one or more components, failure of a third partysupplier to remain competitive in functionality or price, or the failure of asupplier to comply with any of our procurement needs could delay or interruptour ability to manufacture and deliver our products to customers on a timelybasis, thereby delaying our revenue recognition and adversely affecting ourbusiness, financial condition, and results of operations.

 

We rely on third party manufacturers forsubassembly of products and for final assembly, quality assurance, and testingof some of our products. These outsourcing arrangements and any futureoutsourcing arrangements involve numerous risks, including the economic andfinancial viability of these manufacturers, reduced control over productquality, delivery schedules, manufacturing yields, and costs. Moreover,although arrangements with such manufacturers may contain provisions forwarranty obligations on the part of such manufacturers, we are primarilyresponsible to our customers for warranty obligations.

 

**Ourproducts are subject to warranty claims and returns. Increased warranty claimsor returns could harm our business.**

 

We typically offer a 30-day unconditionalmoney-back guarantee on our appliance products sold in North America. We alsooffer warranties for parts and service on all our products, ranging from one tothree years (and, in the case of some of our Equinox branded products, fiveyears). Although our historical return experience has not been significant, ourreturns may increase in the future. An increase in returns would have anadverse effect on our sales and could negatively affect our financial results. Wemay, as a result of competitive pressures or customer demands, change ourwarranty policies in the future to provide coverage that is greater in scopeand duration than the coverage we currently offer. If we were to increase ourwarranty coverage, our risk of warranty claims, and therefore our warrantyexpense and reserves, would likely increase.

 

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

 

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

 

**Executive officers and other key personnel may depart,which could adversely affect our results of operations and harm our ability togrow the business.**

 

We are greatly dependent on the ability toretain key management, sales, and technical personnel, and our future successis highly dependent upon the personal efforts of our management, sales, andtechnical personnel. The loss of services of key personnel could have amaterial adverse effect on our business, financial condition, and results ofoperations. We have historically used stock options as a key component in ourexecutive and employee compensation programs in order to align employees’interests with the interests of our stockholders, encourage employee retention,and provide competitive compensation packages. Many of our employee stockoptions either have exercise prices in excess of our stock price, which reducesthe value of the stock options to employees, or are fully vested. This couldaffect our ability to retain present employees. In addition, we are nowrequired to record a charge to earnings for employee stock option grants andother equity incentives. Moreover, applicable stock exchange listing standardsrelating to obtaining stockholder approval of equity compensation plans couldmake it more difficult or expensive for us to grant options to employees in thefuture. As a result, we may incur increased compensation costs, change ourequity compensation strategy or plans, or find it difficult to attract, retain,and motivate employees, any of which could materially adversely affect ourbusiness. Competition for employees with the skills required,

 

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particularly engineering and other technical personnel, is intense, andthere can be no assurance that we will be able to attract and retain highlyskilled employees in sufficient numbers to sustain our current business or tosupport future growth. We may need to offer additional compensation or incentivesto attract and retain these and other employees.

 

**Difficulties encountered during changingeconomic conditions could adversely affect our results of operations.**

 

For the last several years, we haveexperienced rapid revenue and customer growth and expansion in the number ofemployees, product offerings, customers, operating locations, and suppliers. Inaddition, we have acquired a number of companies in the same time period. Thisgrowth and these acquisitions have resulted in increased responsibilities andplaced significant strain on our managerial, operational, and financialresources and resulted in new and increased responsibilities for managementpersonnel. There can be no assurance that our management, personnel, systems,procedures, and controls are, or will be, adequate to support our existing andfuture operations or that we will continue to grow. If we fail to recruit andretain sufficient and qualified managerial, operational, or financial personnelor to implement or maintain internal systems that enable us to effectivelymanage our growing business and operations worldwide, our financial results inany given period may be adversely affected and our business and financialcondition could be materially harmed.

 

Our ability to effectively manage duringchanging economic conditions will require us to continue to implement andimprove our operational, financial, and information systems and internalcontrols and will likely require additional management personnel. In addition,we believe that we must continue to develop greater engineering, financial,marketing, sales, and customer service capabilities in order to develop newproducts and technologies, secure new customers, and effectively serve theevolving needs of present and future customers. We may not be successfulin strengthening these capabilities. Without adequate management, engineering,financial, product development, marketing, sales, and customer servicecapabilities, our ability to effectively manage during changing economicconditions, expand and enhance our product lines, further penetrate existingmarkets, and develop new markets will be significantly limited. If we areunable to effectively manage during changing economic conditions, our business,financial condition, and results of operations could be materially adverselyaffected.

 

Because our business and operating resultsdepend to a significant extent on the general conditions in the server market,any adverse change in the server market due to adverse economic conditions, decliningcapital spending levels, or other factors could have a material adverse effecton our business, financial condition, and results of operations. In addition,we continue to see industry-wide initiatives by OEMs and by distributors andresellers to reduce their inventories and to shorten their lead times, therebyreducing early commitments to firm orders by our major OEM and our distributorand reseller customers.

 

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

 

Our future success depends in part uponour ability to protect proprietary rights in our products. We seek to protectour intellectual property rights by invoking the benefits of the patent,trademark, copyright, trade secret, and unfair competition laws of the UnitedStates and other countries. These laws, however, afford only limited protection.There can be no assurance that the steps we have taken to protect ourintellectual property rights, or that the steps we take in the future, will beadequate to prevent misappropriation of our intellectual property ortechnologies or that our competitors will not independently develop proprietaryor other technologies that are substantially equivalent or superior to ourproducts or technologies.

 

The U.S. Patent and Trademark Office hasissued several 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 time period.We also have other United States and foreign patent applications pending. Therecan be no assurance that any additional patents will be issued from any ofthose pending applications or that any patents will be issued in any additionalcountries where our products can be sold. Claims allowed in our patents or inany pending patent applications may not be of sufficient scope or strengthfor, or provide meaningful protection or any commercial advantage to us. Also,competitors may develop their own intellectual property or technologies,obtain their own patents, or challenge the validity of, or be able to designaround, our patents. The laws of certain foreign countries in which ourproducts are or may be developed, manufactured, or sold (particularlycertain countries in Asia) may not protect our products or intellectualproperty rights to the same extent as do the laws of the United States and thusincrease the likelihood of piracy of our technologies and products.

 

In October 2003,we filed a complaint for patent infringement in the United States DistrictCourt for the Northern District of Alabama against ClearCube Technology, Inc.The ClearCube complaint seeks injunctive relief, damages, attorneys’ fees, andcosts under three Avocent patents. ClearCube has filed counterclaims allegingnon-infringement, unenforceability, invalidity, and misuse of the Avocentpatents. A Markman hearing on claims construction was held in February 2006,and the court has ruled on a number of pre-trial motions. A trial is expectedin the third quarter of 2006.

 

We may initiate claims or litigationagainst other third parties for infringement of proprietary rights or toestablish the validity of proprietary rights. Similarly, our competitors may initiateclaims or litigation against us alleging infringement of their proprietary

 

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rights or improper use of their intellectual property. Existinglitigation, and any other litigation relating to intellectual property to whichwe become a party, is subject to numerous risks and uncertainties, includingthe risk of counterclaims or other litigation against us, and we may notbe successful in any such litigation. Litigation is very expensive, and theexisting litigation or any other litigation by or against us could result insignificant additional expense and divert the efforts of technical andmanagement personnel, whether or not such litigation results in a favorabledetermination. In the event of an adverse result in any such litigation, wecould be required to pay substantial damages, suspend or cease the manufacture,use, and sale of any infringing products, expend significant resources toredesign products or develop non-infringing technology, discontinue the use ofcertain processes, or obtain licenses to the infringing technology. There canbe no assurance that we would be successful in such development or that suchlicenses would be available on reasonable terms, or at all, and any suchdevelopment or license could require us to expend substantial time and otherresources. In the event that any third party makes a successful claim againstus, or our customers, and a license is not made available on commerciallyreasonable terms, our business, financial condition, and results of operationscould be adversely affected.

 

The network server, electronics, and relatedindustries are characterized by vigorous pursuit and protection of intellectualproperty rights or positions, which has resulted in significant and oftenprotracted and expensive litigation. We have in the past been, and we may fromtime to time in the future be, a party in proceedings alleging infringement ofintellectual property rights owned by third parties. If necessary or desirable,we may seek licenses under such intellectual property rights. However,licenses may not be offered on terms acceptable to us, or at all. Thefailure to obtain a license from a third party for technology used by us couldcause us to incur substantial liabilities and to suspend or cease themanufacture of products requiring such technology. Additionally, current orfuture competitors could obtain patents that may prevent us fromdeveloping or selling our products.

 

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

 

We recently obtained a $250,000,000 unsecured,five-year, revolving, bank line of credit, and we plan to use borrowings underthis line of credit to fund a portion of the LANDesk acquisition and thepurchase of our shares under our recently-expanded stock repurchase program. Borrowingsunder the line of credit could adversely affect our future net income, margins,expenses, and financial conditions by:

 

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

 

•                                          Increasingour vulnerability to economic downturns in our industry;

 

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

 

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

 

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

 

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

 

•                                          Subjectingus to a greater risk of noncompliance with financial and other restrictivecovenants in our indebtedness.

 

The line of credit also contains 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, and(iii) make acquisitions and capital expenditures. All of theserestrictions could affect our ability to operate our business and may limitour ability to take advantage of potential business opportunities as they arise.The failure to comply with these covenants could result in an event of defaultwhich, if not cured or waived, could have a material adverse effect on us.

 

Our ability to comply with these provisions of ourline of credit may be affected by changes in the economic or businessconditions or other events beyond our control. If we do not comply with thesecovenants and restrictions, we could be in default under our line of credit,and our debt, together with accrued interest, could then be declaredimmediately due and payable. There can be no assurance that we will be able toobtain sufficient funds to enable us to repay or refinance our debt obligationson commercially reasonable terms or at all.

 

**Ourreorganization into five separate business divisions or units could disrupt ourbusiness or affect our profitability.**

 

Our reorganization into five new businessdivisions became effective in the first quarter of 2006, and LANDesk willbecome a new division once the acquisition is completed. The creation of thesefive business units was designed to streamline our operations and put vitaldecisions closer to our customers, but the allocation of our previouslyexisting business among the five divisions could confuse and distract ourcustomers, suppliers, and employees. In addition, the reorganization couldadversely affect or delay our development and introduction of new products andtechnologies, result in the loss of management, technical, or other keypersonnel, disrupt our supplier or customer relationships, jeopardize oursupplier or sales channels and our branding and marketing efforts, and increaseour administrative expense, all of which could affect our profitability.

 

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

 

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

 

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

 

Currently, a majority of our internationalbusiness is conducted in U.S. dollars. However, as we expand our internationaloperations, it is likely that international business will increasingly beconducted in foreign currencies. In particular, the introduction of the eurohas led many of our European customers to request or insist that our sales tothem be denominated in euros instead of U.S.

 

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dollars. Fluctuations in the value of foreign currencies relative tothe U.S. dollar have caused, and are expected to increasingly cause, currencytranslation gains and losses. While we attempt to hedge our foreign currencyexposure, we cannot predict the effect of exchange rate fluctuations uponfuture quarterly and annual operating results, and we may experiencecurrency losses in the future.

 

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

 

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

 

We could also face significant costs andliabilities in connection with product take-back legislation. The EuropeanUnion has finalized the Waste Electrical and Electronic Equipment Directive,which makes producers of electrical goods, including computers and peripherals,financially responsible for specified collection, recycling, treatment, anddisposal of past and future covered products. This deadline to enact andimplement the directive by individual European Union governments generally was August 13,2004, although extensions were granted to some countries (such legislation,together with the directive, the “WEEE Legislation”), and producers arefinancially responsible under the WEEE Legislation beginning in August 2005.Similar legislation has been or may be enacted in other geographies,including in the United States and Japan, the cumulative impact of which couldbe significant for us. We will incur some costs under the WEEE legislation butthe amount and timing of these costs are difficult to predict.

 

**Provisions in our charter documents and inDelaware law may discourage potential acquisition bids for us and may preventchanges in management that stockholders may favor.**

 

Provisions in our charter documents coulddiscourage potential acquisition proposals and could delay or prevent a changein control transaction that stockholders may favor. These provisions couldhave the effect of discouraging others from making tender offers for shares,and as a result, these provisions may prevent the market price of ourcommon stock from reflecting the effects of actual or rumored takeover attemptsand may prevent stockholders from reselling their shares at or above theprice at which they purchased their shares. These provisions may alsoprevent changes in management that stockholders may favor. Our charterdocuments do not permit stockholders to act by written consent, limit theability of stockholders to call a stockholders meeting, and provide for aclassified board of directors, which means stockholders can only elect, orremove, a limited number of directors in any given year. Furthermore, the boardof directors has the authority to issue up to five million shares of preferredstock in one or more series. The board of directors can fix the price, rights,preferences, privileges, and restrictions of such preferred stock without anyfurther vote or action by our stockholders. The issuance of shares of preferredstock may delay or prevent a change in control transaction without furtheraction by our stockholders.

 

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

 

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

 

In the fourth quarter of 2004 our Board ofDirectors approved a stock repurchase program whereby we may, from time totime, purchase up to 2 million shares of our common stock in the open market,in privately negotiated transactions or otherwise, at prices that we deemappropriate. On the following dates, our Board added shares to the program: On April 29,2005, 2 million shares, May 23, 2006, 3 million shares, June 20,2006, 3 million shares. Currently, a total of 10 million shares are authorizedto be repurchased. The plan has no expiration date. Details of purchases madeduring the quarters ended March 31 and June 30, 2006 are as follows:

 

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| **Period:**                                          | ** ** | **Total Number of  Shares Purchased  During the Period** | ** ** | **Average Price Paid  Per Share for Period  Presented** | ** ** | **Total Cumulative  Number of  Shares Purchased as  Part of Publicly  Announced Plan** | ** ** | **Maximum  Number of  Shares  Remaining to  Purchase Under  the  Plan** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
|                                                 |       |                                                                              |       |                                                                             |       |                                                                                                                      |       |                                                                                   |       |
| January 1,  2006 — January 31, 2006   |       | 50,000                                                                            |       | $                                                                                | 29.35      |                                                                                                                      | 2,825,000  |                                                                                   | 1,175,000  |   |
| February 1,  2006 — February 28, 2006 |       | 250,000                                                                           |       | $                                                                                | 33.59      |                                                                                                                      | 3,075,000  |                                                                                   | 925,000    |   |
| March 1,  2006 — March 31, 2006       |       | 525,000                                                                           |       | $                                                                                | 32.55      |                                                                                                                      | 3,600,000  |                                                                                   | 400,000    |   |
| Quarter  ended March 31, 2006                   |       | 825,000                                                                           |       | $                                                                                | 32.67      |                                                                                                                      |       |                                                                                   |       |   |
|                                                 |       |                                                                              |       |                                                                             |       |                                                                                                                      |       |                                                                                   |       |
| Apri1 1,  2006 — April 30, 2006            |       | —                                                                            |       | $                                                                                | —     |                                                                                                                      | 3,600,000  |                                                                                   | 400,000    |   |
| May 1,  2006 — May 31, 2006           |       | 1,169,488                                                                         |       | $                                                                                | 23.64      |                                                                                                                      | 4,769,488  |                                                                                   | 2,230,512  |   |
| June 1,  2006 — June 30, 2006         |       | 2,793,887                                                                         |       | $                                                                                | 24.22      |                                                                                                                      | 7,563,375  |                                                                                   | 2,436,625  |   |
| Quarter  ended June 30, 2006                    |       | 3,963,375                                                                         |       | $                                                                                | 24.05      |                                                                                                                      |       |                                                                                   |       |   |

 

**Item 4.****         Submission of Matters toa Vote of Security Holders.**

 

On June 15, 2006, we held our Annual Meeting ofStockholders. The matters voted on at the meeting and the results of thesevotes are as follows:

 

1.                                      Election of Class IIDirectors.

 
| ** **                             | ** ** | **Votes for** | ** ** | **Votes Withheld** | ** ** |
|----------------------------------------|------------|--------------------|------------|-------------------------|------------|
| 1. Francis  A. “Fran” Dramis |       | 45,011,890         |       | 1,241,819               |       |
| 2. Stephen  F. Thornton                |       | 42,395,685         |       | 3,858,024               |       |

 

2.                                      RatifyPricewaterhouseCoopers LLP as independent auditors for year ended December 31,2006.

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Votes Abstained** | ** ** |
|--------------------|------------|------------------------|------------|--------------------------|------------|
| 45,555,664         |       | 685,222                |       | 12,823                   |       |

 

3.                                      Approval ofamendment to 2005 Equity Incentive Plan to increase shares available forawards.

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Votes Abstained** | ** ** | **Broker non-votes** | ** ** |
|--------------------|------------|------------------------|------------|--------------------------|------------|---------------------------|------------|
| 31,263,888         |       | 11,054,353             |       | 336,460                  |       | 3,956,221                 |       |

 

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

 

(a) Exhibits

 

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

** **

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

** **

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

 

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

 

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### **SIGNATURE**

### ** **

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   |                 |   | AVOCENT CORPORATION                                             |   |
|--------|----------------------|--------|-----------------------------------------------------------------|--------|
|   |                 |   | (Registrant)                                                    |
|   |                 |   |                                                            |
|   |                 |   |                                                            |
|   |                 |   |                                                            |
| Date:  | August 4,  2006 |   | /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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