Table of Contents

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

AVOCENT CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

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

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

x Yes  o No

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

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

As of October 30, 2008, the number of outstanding shares of the Registrant’s Common Stock was 44,795,691.

Table of Contents

AVOCENT CORPORATION

FORM 10-Q

September 26, 2008

INDEX

2

Table of Contents

PART I —FINANCIAL INFORMATION

Item 1.  Financial Statements

AVOCENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except per share data)

See notes accompanying these condensed consolidated financial statements.

3

Table of Contents

AVOCENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited, in thousands, except per share data)

See notes accompanying these condensed consolidated financial statements.

4

Table of Contents

AVOCENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

See notes accompanying these condensed consolidated financial statements.

5

Table of Contents

AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

Note 1.   Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods shown.  The results of operations for these periods are not necessarily indicative of the results expected for the full fiscal year nor for any future period.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates and assumptions.

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

We report our annual results based on years ending December 31.  We report our quarterly results for the first three interim periods based on 13 week periods ending on Fridays and for the fourth interim period ending on December 31.  Beginning January 1, 2009 we will report our quarterly periods based on the calendar month end.

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

Note 2.   Inventories

Inventories consisted of the following at:

Inventories above have been reduced by reserves for excess and obsolete inventories of $7,227 and $7,328 as of September 26, 2008 and December 31, 2007, respectively.

Note 3.   Equity and Treasury Stock

We issued common stock as a result of stock option exercise activity during the three and nine months ended September 26, 2008 and September 28, 2007 as follows:

6

Table of Contents

AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

We issued common stock as a result of restricted stock unit (RSU) vesting activity during the three and nine months ended September 26, 2008 and September 28, 2007 as follows:

Share repurchase activity during the three and nine months ended September 26, 2008 and September 28, 2007 was as follows:

RSUs granted — During the first nine months of 2008, our Compensation Committee approved the grant of 963,000 time-based and 588,000 market condition-based and performance conditioned-based restricted stock units to our employees, officers and directors.

RSUs accelerated — During the three and nine months ended September 26, 2008, we accelerated 27,000 and 184,000 RSUs, respectively, in relation to our restructuring program (see note 14).

Note 4.   Accumulated Other Comprehensive Income

We record unrealized gains and losses on our foreign currency translation adjustments, unrealized gains and losses on derivatives accounted for as cash flow hedges, and unrealized holding gains or losses on our available-for-sale securities, net of tax, as accumulated other comprehensive income, which is included as a separate component of stockholders’ equity.  Comprehensive income for the nine months ended September 26, 2008 and September 28, 2007 is as follows:

As of September 26, 2008 and December 31, 2007, total accumulated other comprehensive income was $689 and $2,130, respectively.

7

Table of Contents

AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

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

Anti-dilutive options to purchase common stock outstanding and anti-dilutive RSUs were excluded from the calculations above. Anti-dilutive options and anti-dilutive RSUs totaled 3,871 and 4,074 for the three and nine months ended September 26, 2008, respectively.  Anti-dilutive options and anti-dilutive RSUs totaled 2,192 and 2,203 for the three and nine months ended September 28, 2007, respectively.

Note 6.   Segment Reporting

In the first quarter of 2008, we dissolved our Desktops Solutions Business Unit (DS) and transferred some of its personnel and a portion of its technology into Management Systems.  DS’ results were previously reported within our Other Business Units segment.  The related revenue and expenses of DS have not been material to our consolidated results, and this business unit was dissolved rather than being merged into another business unit.  Accordingly, we will continue to report historical results for DS within our Other Business Units segment.  In addition, no goodwill was allocated to this business unit

8

Table of Contents

AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

and all related intangible assets were fully amortized prior to the dissolution of the business unit. Accordingly, there was no related write-off of goodwill or write-down of intangible assets as a result of the dissolution of this business unit. Costs associated with the dissolution of DS are included in retirement and restructuring expenses for the first quarter of 2008 (see note 14).

In July 2008, we announced our intention to sell (or license the technology of) the majority of our emerging Connectivity and Control Business Unit.  We have divided this entrepreneurial business unit into its three product lines, the Equinox branded serial business, the Broadcast business and the Pro Audio Visual business.  We have folded our Broadcast product line into Management Systems and intend to sell (or license the technology of) the remaining two parts of this business.  All revenues and costs associated with the Broadcast business are included within Management Systems and historical results have been adjusted to include the Broadcast business in Management Systems.

We evaluate the performance of our segments based on revenue and operating income, which is calculated before corporate and unallocated costs, amortization of intangibles, acquired in-process research and development expense, restructuring, integration and  retirement costs, and stock compensation costs.  We do not track or use assets by segment as a measure of performance, therefore, we have not presented assets by segment.  The following is a presentation of information for our two reportable segments, Management Systems and LANDesk:

Sales by product line for Management Systems and LANDesk for the three and nine months ended September 26, 2008 and September 28, 2007 are as follows:

9

Table of Contents

AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

We sell our products internationally to customers in several countries; however no foreign country accounted for more than 10% of sales in the first nine months of 2008 or 2007.

Following is a presentation of long-lived tangible assets by geography as of September 26, 2008 and December 31, 2007:

Note 7.   Forward Contracts and Interest Rate Swap

We use forward contracts to reduce our foreign currency exposure related to the net cash flows from our international operations.  The majority of these contracts are short-term contracts (three months or less) and are marked-to-market each quarter and included in trade payables, with the offsetting gain or loss included in other income (expense) in the accompanying consolidated statements of income.  As of September 26, 2008, we had 4 open forward contracts with an approximate fair value of $(14).  As of December 31, 2007, we had three open forward contracts with an approximate fair value of $8.

As of September 26, 2008 we have two interest rate swaps, which are recorded on our balance sheet.  In 2006, we entered into an interest rate swap agreement with a notional amount of $125,000.  The notional amount of the interest rate swap was $20,000 as of September 26, 2008.    The swap was effective on August 31, 2006 and terminates on December 31, 2008.  The swap calls for us to make fixed rate payments of 5.42% over the term of the hedge and to receive floating rate payments based on LIBOR (matching the LIBOR rate in the line of credit above) from the counter-party.   On May 1, 2008, we entered into an interest rate swap agreement with a notional amount of $80,000.  The notional amount of the interest rate swap was $80,000 as of September 26, 2008.  The swap was effective on May 1, 2008 and terminates on December 31, 2009.  The swap calls for us to make fixed rate payments of 3.05% over the term of the hedge and to receive floating rate payments based on LIBOR (matching the LIBOR rate in the line of credit above) from the counter-party.

The objective of the rate swap agreements is to provide a hedge against rising LIBOR interest rates that would have a negative effect on our cash flows due to changes in interest rates on our credit agreements. We anticipate these hedges will be settled upon maturity and are being accounted for as a cash flow hedges.  The interest rate swaps are recorded at fair value

10

Table of Contents

AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

each reporting period with the changes in the fair value of the hedge that take place through the date of maturity recorded in accumulated other comprehensive income (OCI).

At September 26, 2008, we recorded a net unrealized gain on the interest rate swaps, net of tax, of $430 in accumulated OCI. There was no significant ineffectiveness in the nine months of 2008, and we anticipate no significant ineffectiveness throughout the remainder of 2008.

Note 8.   Acquisitions

Touchpaper Group Limited — On June 30, 2008, we acquired Touchpaper Group Limited, a privately-held company based in Woking, U.K. (Touchpaper).  Touchpaper employed approximately 200 people, located primarily in the UK.  We acquired Touchpaper for $45,740 in cash consideration plus assumed liabilities and acquisitions costs.   The Touchpaper product lines include software for incident management, problem management and service desk management.  We believe the acquisition of Touchpaper and its products will enhance and expand our IT Operations Management solutions and products.  The results of Touchpaper’s operations have been included in the consolidated financial statements since the date of acquisition.

The acquisition was recorded under the purchase method of accounting, and the purchase cost was allocated based on the fair value of the assets acquired and liabilities assumed.  In accordance with generally accepted accounting principles, purchased research and development costs allocated to patented and patent-pending technology were capitalized and will be amortized over the respective estimated useful lives.  The remaining amounts of purchased research and development were expensed upon the closing of the transaction.  The goodwill recorded as a result of the acquisition will not be amortized but will be allocated to our LANDesk business unit (see Note 9) and will be included in Avocent’s annual review of goodwill for impairment.  Amortization of the other intangible assets acquired and the goodwill recorded is not tax deductible. Our preliminary allocation of the purchase consideration, excluding cash received, is as follows:

We funded the acquisition through available cash and through borrowings on the line of credit.  On the closing of the Touchpaper transaction, we acquired $2,875 in cash held by Touchpaper.

The purchase consideration was allocated, on a preliminary basis, to the estimated fair values of the assets acquired and liabilities assumed, as follows:

The capitalized amounts will be amortized on a straight-line basis over the estimated life of the intangibles.  An escrow account with approximately $11,200 in cash is held for indemnifiable claims for a period of 24 months after the acquisition.

11

Table of Contents

AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

The $700 in fair value of all of the in-process research and development (“IPR&D”) received in the acquisition was determined using a form of the discounted cash flow method known as the multi-period excess earnings method.  These amounts were for particular research and development projects that have no alternative future uses and were therefore expensed rather than capitalized at the time of purchase.

Touchpaper’s in-process research and development activities consisted of the development of its ITBM Version 7.2.6 software product. This product was completed during October 2008.

The new generations of products under development are projected to sell through sales channels and to customers that are substantially the same as current and historical sales channels and customers.  Pricing and margins will not differ significantly from historical pricing and margins.  Revenue for the project under development was projected through 2017.  Net income attributable to IPR&D was calculated by applying Touchpapers’ projected gross, operating, and net profit margins to IPR&D revenue, while considering Avocent’s historical results and industry prospects.  This product has an estimated economic life of approximately 7 years.  The discount rate used to value IPR&D was 21%.

Ergo 2000, Inc. — On July 10, 2008 we acquired certain assets and assumed certain liabilities of Ergo 2000, Inc. (Ergo), a privately held provider of rack-mounted LCD consoles with approximately 35 employees based in Fullerton, California, for approximately $29,000 plus acquisition costs paid by Avocent. Ergo’s products were integrated into the Management Systems business unit as part of that unit’s overall product offering and related operating results were included in the consolidated financial statements since the date of acquisition.

The acquisition was recorded under the purchase method of accounting, and the purchase price was allocated based on the fair value of the assets acquired and liabilities assumed.  The goodwill recorded as a result of the acquisition will be allocated to our Management Systems unit and will not be amortized but will be included in our annual review of goodwill for impairment.  Amortization of the other intangible assets acquired and the goodwill recorded is tax deductible.  Our preliminary allocation of the purchase consideration, excluding cash received, is as follows:

We funded the acquisition through available cash and borrowings from our line of credit.  On the closing of the Ergo transaction, we acquired $869 in cash held by Ergo.

The purchase consideration was allocated, on a preliminary basis, to the estimated fair values of the assets acquired and liabilities assumed, as follows: