THE INFORMATION IN THIS ITEM 2 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND IN OTHER PARTS OF THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTS RELATING TO OUR FUTURE BUSINESS PROSPECTS AND ECONOMIC CONDITIONS IN GENERAL; STATEMENTS REGARDING OUR ABILITY TO PREDICT FUTURE SALES AND MANAGE INVENTORY LEVELS; STATEMENTS REGARDING PRICING PRESSURE; STATEMENTS REGARDING THE FLUCTUATION OF OUR REVENUE GROWTH IN RELATION TO ECONOMIC CONDITIONS AND IT RELATED SPENDING TRENDS; STATEMENTS REGARDING OUR PRODUCT DEVELOPMENT ACTIVITIES, OUR PRODUCT PLATFORMS, AND OUR ABILITY TO GROW OUR BUSINESS; STATEMENTS REGARDING FUTURE ACQUISITIONS; STATEMENTS ABOUT THE SALE OF OUR CONNECTIVITY AND CONTROL BUSINESS UNIT; STATEMENTS REGARDING OUR ANTICIPATED FUTURE GROSS MARGINS, RESEARCH AND DEVELOPMENT EXPENSES, AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. STATEMENTS ABOUT OUR MANAGEMENT TRANSITIONAL AND RESTRUCTURING EFFORTS; STATEMENTS ABOUT FUTURE BORROWINGS UNDER OUR CREDIT FACILITIES AND THE INTEREST ON AND REPAYMENT OF THESE BORROWINGS; AND STATEMENTS REGARDING THE OUTCOME OF, AND OUR LEGAL COSTS FOR, PATENT AND OTHER LEGAL CLAIMS, LITIGATION, AND PROCEEDINGS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN PART II, ITEM 1A "RISK FACTORS."

Overview

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

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

Most of our revenue is derived from sales through our reseller and distributor network, sales to a limited number of OEMs (who purchase our switching systems on a private-label or branded basis for integration and sale with their own products), and sales to a limited number of direct customers. Sales to our branded customers accounted for 67% of sales in the first six months of 2008 and 65% of sales in the first six months of 2007. Sales to our OEM customers accounted for 33% of sales in the first six months of 2008 and 35% of sales in the first six months of 2007. 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 from us only pursuant to binding purchase orders. The loss of, or material decline in orders from, these customers would have a material adverse effect on our business, financial condition, results of operations, and cash flows. Our top five customers include both OEM and branded customers, and accounted for 48% and 53% of sales in the first six months of 2008 and 2007, respectively.

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

With continued industry-wide initiatives to reduce all channel inventories and to shorten lead times, trends with our major customers are, 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 continue to make our future sales more difficult to predict and inventory levels more difficult to manage.

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

Many of our executive officers and directors are vested in significant amounts of options to purchase shares of our common stock and RSUs. These officers and directors have informed us that they have sold, and may sell additional, shares of our common stock to provide liquidity and diversify their portfolios. During the first and second quarters of 2008, our Board of Directors granted both time-based and market condition-based restricted stock units (RSUs) with two and three year vesting. Awards with similar terms were also granted in the second quarter of 2007.

In the first quarter of 2008, we discontinued our Desktop Solutions business unit and transferred some of its personnel and a portion of its technology into Management Systems. We believe our remaining business units allow us to focus on new technology and growth opportunities and to add product and shareholder value in the future. We believe this structure enhances customer service, speeds delivery of products to market and better focuses our research, development, and marketing resources. We recently announced our intention to sell 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 are folding our Broadcast product line into Management Systems and intend to sell the remaining two parts of this business.

Our largest business unit, Management Systems, comprised 76% of our consolidated net revenue in the first half of 2008 and 78% in the first half of 2007. LANDesk contributed 20% of net revenue to the first half of 2008 and 18% in the first half of 2007. Our other business units and unallocated revenue comprised the remaining percentage of our consolidated net revenue in 2008 and 2007. See Note 6 in the notes to the condensed consolidated financial statementscontained in Part I, Item 1 of this document.

Results of Operations



The following table sets forth, for the periods indicated, selected statement of
income data expressed as a percentage of net sales:



                                        Three months ended        Six months ended
                                       June 27,     June 29,    June 27,    June 29,
                                         2008         2007        2008        2007
Net sales                                  100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales                               37.2        36.7        36.4        37.9
Gross profit                                62.8        63.3        63.6        62.1
Operating expenses:
Research and development expenses           15.3        14.1        15.9        14.8
Selling, general and administrative
expenses                                    36.1        34.9        37.4        35.7
Restructuring and retirement
expenses                                     3.0           -         2.6           -
Amortization of intangible assets            4.8         5.1         5.0         5.8
Total operating expenses                    59.2        54.1        60.9        56.3

Income from operations                       3.6         9.2         2.7         5.8

Net investment income                        0.4         0.6         0.5         0.6
Interest expense                            (1.1 )      (1.5 )      (1.2 )      (1.6 )
Other income (expense), net                 (0.1 )         -         0.1        (0.1 )
Income before provision (benefit)
for income taxes                             2.8         8.3         2.1         4.7
Provision (benefit) for income
taxes                                        0.6        (1.7 )       0.7        (0.9 )
Net income                                   2.2 %      10.0 %       1.4 %       5.6 %

Net sales. Our net sales consist of sales of KVM console switching systems, digital connectivity products and technologies, software licenses and subscriptions, support and maintenance agreements, serial connectivity devices, wireless extension products, IPMI, extension, remote access and management products and technologies, and royalties from licensing our intellectual property.

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

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

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

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

                                           For the three months ended          For the six months ended
                                           June 27,          June 29,         June 27,         June 29,
(dollars presented in 000's)                 2008              2007             2008             2007
Management Systems net revenue:
KVM                                     $       92,323    $       87,459    $     171,249    $     168,147
Serial Management                               13,336            12,752           26,055           24,038
Embedded software and solutions                  8,405             7,897           16,752           15,474
Other                                            7,600             6,856           15,339           12,409
Total Management Systems net revenue    $      121,664    $      114,964    $     229,395    $     220,068

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

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

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

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

Gross profit. Gross profit is affected by a variety of factors, including the ratio of sales among our distribution channels, as OEM sales typically have lower gross margins than our branded sales; absorption of fixed costs as sales levels fluctuate; product mix and component costs; labor costs; new product introductions by us and by our competitors; increasing sales of our software products which tend to have higher gross margins; and our outsourcing of manufacturing and assembly services.

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

The decline in gross margin during the second quarter of 2008 resulted from a change in product mix within Management Systems, price reductions on certain older analog products and decreased royalty payments. Management Systems experienced increased sales for certain secure switch products during the second quarter of 2008. This product carries lower margins than our other Management Systems products; therefore the sales increase directly impacted our margins for the second quarter of 2008. Royalty payments, included within Corporate and unallocated, declined almost $1.4 million in the second quarter of 2008 as a result of a catch-up payment made in the second quarter of 2007 from one of our patent licensees. As royalties have no associated cost of sales, the decrease in revenue in the second quarter of 2008 directly affected our gross margins. For the six months ended June 27, 2008 compared to the six months ended June 29, 2007, our gross profit and margin improved as a result of significantly higher revenues, especially within our LANDesk business which carries significantly higher gross margins.

Operating expenses.

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

Research and development expenses. Research and development expenses include compensation for engineers, support personnel, outside contracted services, and materials costs, all of which are expensed as incurred. R&D increased 15% in the second quarter of 2008 from the second quarter of 2007. Costs related to salaries and contracted services increased approximately $2.3 million in the second quarter of 2008 compared to the second quarter of 2007. The increase in these R&D expenses is primarily attributable to the impact of our continued investment in targeted integrated R&D projects, including Avocent Management Platform, real-time visualization and power management, which leverage technology from both Management Systems and LANDesk. R&D increased 13% from the first six months of 2007 compared to the first six months of 2008 for similar reasons as that experienced in the second quarter of 2008. We believe that the timely development of innovative products and enhancements to existing products is essential to maintaining our competitive position, and we will continue to make significant investments in research and development.

Selling, general and administrative expenses. Selling, general and administrative expenses include personnel, materials, services and other related costs for administration, finance, information systems, human resources, sales and marketing and general management, rent, utilities, legal and accounting expenses, bad debts, advertising, promotional material, trade show expenses, and related travel costs. Selling, general and administrative expenses increased 10% in the second quarter of 2008 from the second quarter

of 2007. The increase in selling, general and administrative expenses was primarily attributed to increased target marketing and trade show expenses, as well as sales commissions resulting from increased sales for the period. Compared to the second quarter of 2007, advertising and promotion expenses increased approximately $700,000, while commissions and bonuses increased approximately $2.2 million in the second quarter of 2008. We also experienced higher professional services and legal expenses during the second quarter of 2008 as compared to the second quarter of 2007 in association with various legal cases. Selling, general and administrative expenses increased 11% in the first six months of 2008 from the first six months of 2007 for similar reasons as that experienced in the second quarter of 2008.

Restructuring and retirement expenses. Restructuring expenses for the second quarter of 2008 relate to severance charges incurred for certain workforce reductions related to the reduction in certain research and development investments, the integration of marketing functions, shifting our Asian support operations from Shannon, Ireland to Singapore, and the relocation of certain functions from our Redmond, Washington facility to Huntsville, Alabama. In addition to the second quarter charges, restructuring and retirement charges for the first six months of 2008 includes the retirement costs for our former CEO of $2.2 million.

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

Stock-based compensation. We allocate stock-based compensation expense based on the department in which an employee works. Stock compensation expenses by income statement classification for the three and six months ended June 27, 2008 and June 29, 2007 were as follows:

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

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

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

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

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

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

. . .