##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to  .
 Commission file number: 0-17972
 DIGI INTERNATIONAL INC.
  Delaware
    
    41-1532464(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 11001 Bren Road EastMinnetonka, Minnesota
    
    55343(Address of principal executive offices)
    
    (Zip Code)
 (952) 912-3444
 
  
 þ o
  o þ o
 o þ




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##### 



PagePART I.
    
    FINANCIAL INFORMATIONITEM 1.
    
    Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Statements of Operations for the three months and nine months ended June 30, 2007 and 2006
    
    
    3Condensed Consolidated Balance Sheets as of June 30, 2007 and September 30, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2007 and 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6ITEM 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Forward-looking Statements
    
    
    15ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    23ITEM 4.
    
    Controls and Procedures
    
    
    24PART II.
    
    OTHER INFORMATIONITEM 1.
    
    Legal Proceedings
    
    
    25ITEM 1A.
    
    Risk Factors
    
    
    25ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25ITEM 3.
    
    Defaults Upon Senior Securities
    
    
    25ITEM 4.
    
    Submission of Matters to a Vote of Securities Holders
    
    
    25ITEM 5.
    
    Other Information
    
    
    25ITEM 6.
    
    Exhibits
    
    
    25Exhibit 10(a)Exhibit 10(b)Exhibit 31(a)Exhibit 31(b)Exhibit 32
   2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three months ended June 30,
    
    
    Nine months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands, except per common share data)Net sales
    
    $
    43,527
    
    
    $
    35,860
    
    
    $
    128,193
    
    
    $
    103,616Cost of sales (exclusive of amortization of purchased
and core technology shown separately below)
    
    
    19,392
    
    
    
    15,222
    
    
    
    57,257
    
    
    
    44,126Amortization of purchased and core technology
    
    
    1,132
    
    
    
    1,171
    
    
    
    3,409
    
    
    
    3,507Gross profit
    
    
    23,003
    
    
    
    19,467
    
    
    
    67,527
    
    
    
    55,983Operating expenses:Sales and marketing
    
    
    8,517
    
    
    
    7,277
    
    
    
    25,102
    
    
    
    20,830Research and development
    
    
    6,039
    
    
    
    5,402
    
    
    
    18,079
    
    
    
    15,227General and administrative
    
    
    3,349
    
    
    
    3,037
    
    
    
    10,229
    
    
    
    10,084Total operating expenses
    
    
    17,905
    
    
    
    15,716
    
    
    
    53,410
    
    
    
    46,141Operating income
    
    
    5,098
    
    
    
    3,751
    
    
    
    14,117
    
    
    
    9,842Other income (expense):Interest income
    
    
    872
    
    
    
    685
    
    
    
    2,444
    
    
    
    1,744Interest expense
    
    
    (17
    )
    
    
    (24
    )
    
    
    (59
    )
    
    
    (92
    )Other expense
    
    
    
    
    
    
    (86
    )
    
    
    
    
    
    
    (191
    )Total other income, net
    
    
    855
    
    
    
    575
    
    
    
    2,385
    
    
    
    1,461Income before income taxes
    
    
    5,953
    
    
    
    4,326
    
    
    
    16,502
    
    
    
    11,303Income tax (benefit) provision
    
    
    (845
    )
    
    
    978
    
    
    
    2,305
    
    
    
    3,205Net income
    
    $
    6,798
    
    
    $
    3,348
    
    
    $
    14,197
    
    
    $
    8,098Net income per common share:Basic
    
    $
    0.27
    
    
    $
    0.14
    
    
    $
    0.56
    
    
    $
    0.35Diluted
    
    $
    0.26
    
    
    $
    0.14
    
    
    $
    0.55
    
    
    $
    0.34Weighted average common shares, basic
    
    
    25,294
    
    
    
    23,124
    
    
    
    25,186
    
    
    
    22,968Weighted average common shares, diluted
    
    
    26,152
    
    
    
    23,904
    
    
    
    26,032
    
    
    
    23,695
   3




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DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 June 30,
    
    
    September 30,2007
    
    
    2006ASSETS
    
    (in thousands, except share data)Current assets:Cash and cash equivalents
    
    $
    34,068
    
    
    $
    15,674Marketable securities
    
    
    43,898
    
    
    
    43,207Accounts receivable, net
    
    
    21,892
    
    
    
    20,305Inventories
    
    
    25,305
    
    
    
    21,911Other
    
    
    4,856
    
    
    
    5,528Total current assets
    
    
    130,019
    
    
    
    106,625Property, equipment and improvements, net
    
    
    19,848
    
    
    
    19,488Identifiable intangible assets, net
    
    
    25,971
    
    
    
    31,341Goodwill
    
    
    65,642
    
    
    
    65,841Other
    
    
    2,184
    
    
    
    2,026Total assets
    
    $
    243,664
    
    
    $
    225,321LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Capital lease obligations, current portion
    
    $
    375
    
    
    $
    381Accounts payable
    
    
    7,911
    
    
    
    6,748Income taxes payable
    
    
    5,445
    
    
    
    4,712Accrued expenses:Compensation
    
    
    5,523
    
    
    
    5,851Other
    
    
    3,568
    
    
    
    5,592Total current liabilities
    
    
    22,822
    
    
    
    23,284Capital lease obligations, net of current portion
    
    
    444
    
    
    
    725Net deferred tax liabilities
    
    
    5,996
    
    
    
    7,482Total liabilities
    
    
    29,262
    
    
    
    31,491Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value; 2,000,000 shares authorized;
none issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 60,000,000 shares authorized;
28,021,122 and 27,748,640 shares issued and outstanding
    
    
    280
    
    
    
    277Additional paid-in capital
    
    
    170,049
    
    
    
    164,782Retained earnings
    
    
    61,206
    
    
    
    47,009Accumulated other comprehensive income
    
    
    1,426
    
    
    
    940Treasury stock, at cost, 2,647,145 and 2,711,496 shares
    
    
    (18,559
    )
    
    
    (19,178
    )Total stockholders equity
    
    
    214,402
    
    
    
    193,830Total liabilities and stockholders equity
    
    $
    243,664
    
    
    $
    225,321
   4




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DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Nine months ended June 30,2007
    
    
    2006(in thousands)Operating activities:Net income
    
    $
    14,197
    
    
    $
    8,098Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation of property, equipment and improvements
    
    
    1,878
    
    
    
    1,949Amortization of identifiable intangible assets and other assets
    
    
    5,769
    
    
    
    5,744Excess tax benefits from stock-based compensation
    
    
    (315
    )
    
    
    (485
    )Stock-based compensation expense
    
    
    2,258
    
    
    
    1,742Deferred income taxes
    
    
    (1,612
    )
    
    
    (1,987
    )Other
    
    
    18
    
    
    
    (436
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,109
    )
    
    
    (696
    )Inventories
    
    
    (3,543
    )
    
    
    (1,068
    )Other assets
    
    
    709
    
    
    
    (293
    )Accounts payable and accrued expenses
    
    
    (903
    )
    
    
    (2,838
    )Income taxes payable
    
    
    1,328
    
    
    
    4,121Net cash provided by operating activities
    
    
    18,675
    
    
    
    13,851Investing activities:Purchase of held-to-maturity marketable securities
    
    
    (56,593
    )
    
    
    (44,836
    )Proceeds from maturities of held-to-maturity marketable securities
    
    
    55,902
    
    
    
    30,578Contingent purchase price payments related to business acquisitions
    
    
    (781
    )
    
    
    Purchase of property, equipment, improvements and certain
other intangible assets
    
    
    (2,329
    )
    
    
    (1,055
    )Proceeds from the sale of property, equipment, improvements
    
    
    17
    
    
    
    Net cash used in investing activities
    
    
    (3,784
    )
    
    
    (15,313
    )Financing activities:Payments on capital lease obligations and long-term debt
    
    
    (287
    )
    
    
    (372
    )Excess tax benefits from stock-based compensation
    
    
    315
    
    
    
    485Proceeds from stock option plan transactions
    
    
    2,433
    
    
    
    2,931Proceeds from employee stock purchase plan transactions
    
    
    954
    
    
    
    555Net cash provided by financing activities
    
    
    3,415
    
    
    
    3,599Effect of exchange rate changes on cash and cash equivalents
    
    
    88
    
    
    
    (705
    )Net increase in cash and cash equivalents
    
    
    18,394
    
    
    
    1,432Cash and cash equivalents, beginning of period
    
    
    15,674
    
    
    
    12,990Cash and cash equivalents, end of period
    
    $
    34,068
    
    
    $
    14,422
   5




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DIGI INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 1.
    
    BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
  Recently Issued Accounting Pronouncements
    6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1.
    
    BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
     Three months ended June 30,
    
    
    Nine months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Net income
    
    $
    6,798
    
    
    $
    3,348
    
    
    $
    14,197
    
    
    $
    8,098Denominator:Denominator for basic net income per common
share  weighted average shares outstanding
    
    
    25,294
    
    
    
    23,124
    
    
    
    25,186
    
    
    
    22,968Effect of dilutive securities:Employee stock options and employee
stock purchase plan
    
    
    858
    
    
    
    780
    
    
    
    846
    
    
    
    727Denominator for diluted net income per common
share  adjusted weighted average shares
    
    
    26,152
    
    
    
    23,904
    
    
    
    26,032
    
    
    
    23,695Net income per common share, basic
    
    $
    0.27
    
    
    $
    0.14
    
    
    $
    0.56
    
    
    $
    0.35Net income per common share, diluted
    
    $
    0.26
    
    
    $
    0.14
    
    
    $
    0.55
    
    
    $
    0.34
   7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   Three months ended
    
    
    Nine months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    6,798
    
    
    $
    3,348
    
    
    $
    14,197
    
    
    $
    8,098Foreign currency translation (loss) gain
    
    
    (154
    )
    
    
    85
    
    
    
    486
    
    
    
    (243
    )Comprehensive income
    
    $
    6,644
    
    
    $
    3,433
    
    
    $
    14,683
    
    
    $
    7,855
        8




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     Three months ended June 30,
    
    
    Nine months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of sales
    
    $
    33
    
    
    $
    22
    
    
    $
    100
    
    
    $
    65Sales and marketing
    
    
    254
    
    
    
    185
    
    
    
    740
    
    
    
    504Research and development
    
    
    183
    
    
    
    132
    
    
    
    514
    
    
    
    401General and administrative
    
    
    284
    
    
    
    240
    
    
    
    904
    
    
    
    772Total stock-based compensation
    
    $
    754
    
    
    $
    579
    
    
    $
    2,258
    
    
    $
    1,742
  MaxStream, Inc.
    9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
    Three months ended June 30, 2006
    
    
    Nine months ended June 30, 2006Pro forma
    
    
    As Reported
    
    
    Pro forma
    
    
    As ReportedNet sales
    
    $
    39,685
    
    
    $
    35,860
    
    
    $
    113,765
    
    
    $
    103,616Net income
    
    $
    3,435
    
    
    $
    3,348
    
    
    $
    8,106
    
    
    $
    8,098Net income per common share, basic
    
    $
    0.14
    
    
    $
    0.14
    
    
    $
    0.33
    
    
    $
    0.35Net income per common share, diluted
    
    $
    0.13
    
    
    $
    0.14
    
    
    $
    0.32
    
    
    $
    0.34
   June 30, 2007
    
    
    September 30, 2006Accounts receivable, net:Accounts receivable
    
    $
    22,373
    
    
    $
    20,800Less allowance for doubtful accounts
    
    
    481
    
    
    
    495$
    21,892
    
    
    $
    20,305Inventories:Raw materials
    
    $
    18,852
    
    
    $
    16,491Work in process
    
    
    1,665
    
    
    
    606Finished goods
    
    
    4,788
    
    
    
    4,814$
    25,305
    
    
    $
    21,911Other accrued expenses:Product warranty accrual
    
    $
    959
    
    
    $
    1,104Accrued professional fees
    
    
    624
    
    
    
    879Other accrued expenses
    
    
    1,985
    
    
    
    3,609$
    3,568
    
    
    $
    5,592
   10




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   June 30, 2007
    
    
    September 30, 2006Gross
    
    
    
    
    
    
    
    
    
    
    Grosscarrying
    
    
    Accum.
    
    
    
    
    
    
    carrying
    
    
    Accum.amount
    
    
    amort.
    
    
    Net
    
    
    amount
    
    
    amort.
    
    
    NetPurchased and core technology
    
    $
    48,064
    
    
    $
    (34,926
    )
    
    $
    13,138
    
    
    $
    48,022
    
    
    $
    (31,492
    )
    
    $
    16,530License agreements
    
    
    2,440
    
    
    
    (2,190
    )
    
    
    250
    
    
    
    2,440
    
    
    
    (1,890
    )
    
    
    550Patents and trademarks
    
    
    7,882
    
    
    
    (3,628
    )
    
    
    4,254
    
    
    
    7,608
    
    
    
    (2,837
    )
    
    
    4,771Customer maintenance contracts
    
    
    700
    
    
    
    (376
    )
    
    
    324
    
    
    
    700
    
    
    
    (324
    )
    
    
    376Customer relationships
    
    
    11,544
    
    
    
    (3,539
    )
    
    
    8,005
    
    
    
    11,470
    
    
    
    (2,356
    )
    
    
    9,114Total
    
    $
    70,630
    
    
    $
    (44,659
    )
    
    $
    25,971
    
    
    $
    70,240
    
    
    $
    (38,899
    )
    
    $
    31,341
   2007 (three months)
    
    $
    1,8842008
    
    
    5,3752009
    
    
    4,0362010
    
    
    3,6402011
    
    
    3,0702012
    
    
    2,514
  Nine months ended June 30,2007
    
    
    2006Beginning balance, October 1
    
    $
    65,841
    
    
    $
    38,675Purchase price adjustment  MaxStream
    
    
    (374
    )
    
    
    Purchase price adjustment  FS Forth
    
    
    
    
    
    
    (147
    )Foreign currency translation adjustment
    
    
    175
    
    
    
    84Ending balance, June 30
    
    $
    65,642
    
    
    $
    38,612
   11




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     Three months ended June 30,
    
    
    Nine months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Effective tax rate before impact of discrete events
    
    
    35.0
    %
    
    
    34.8
    %
    
    
    36.1
    %
    
    
    33.9
    %Impact of discrete events
    
    
    -49.2
    %
    
    
    -12.2
    %
    
    
    -22.1
    %
    
    
    -5.5
    %Effective tax rate
    
    
    -14.2
    %
    
    
    22.6
    %
    
    
    14.0
    %
    
    
    28.4
    %
   12




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   Three months ended June 30,Balance at
    
    
    Warranties
    
    
    Settlements
    
    
    Balance atApril 1
    
    
    issued
    
    
    made
    
    
    June 302007
    
    $
    1,006
    
    
    $
    176
    
    
    $
    (223
    )
    
    $
    9592006
    
    $
    1,050
    
    
    $
    160
    
    
    $
    (128
    )
    
    $
    1,082
 Nine months ended June 30,Balance at
    
    
    Warranties
    
    
    Settlements
    
    
    Balance atOctober 1
    
    
    issued (1)
    
    
    made
    
    
    June 302007
    
    $
    1,104
    
    
    $
    485
    
    
    $
    (630
    )
    
    $
    9592006
    
    $
    1,187
    
    
    $
    268
    
    
    $
    (373
    )
    
    $
    1,082
 (1)
    
    Warranties issued includes a reduction in an accrual adjustment of $132,000 and $117,000 in the
first quarter of fiscal 2007 and 2006, respectively.
   Contingent obligations
 Legal Proceedings
   13




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  In re Initial Public Offering Securities Litigation en banc
     14




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
      OVERVIEW
   15




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
   
 
 
 
 
  16




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 CONSOLIDATED RESULTS OF OPERATIONS
  Three months ended June 30,
    
    
    % increase
    
    
    Nine months ended June 30,
    
    
    % increase2007
    
    
    2006
    
    
    (decrease)
    
    
    2007
    
    
    2006
    
    
    (decrease)Net sales
    
    $
    43,527
    
    
    
    100.0
    %
    
    $
    35,860
    
    
    
    100.0
    %
    
    
    21.4
    %
    
    $
    128,193
    
    
    
    100.0
    %
    
    $
    103,616
    
    
    
    100.0
    %
    
    
    23.7
    %Cost of sales (exclusive of amortization of purchased and core technology
shown separately below)
    
    
    19,392
    
    
    
    44.6
    
    
    
    15,222
    
    
    
    42.4
    
    
    
    27.4
    
    
    
    57,257
    
    
    
    44.7
    
    
    
    44,126
    
    
    
    42.6
    
    
    
    29.8Amortization of purchased and
core technology
    
    
    1,132
    
    
    
    2.6
    
    
    
    1,171
    
    
    
    3.3
    
    
    
    (3.3
    )
    
    
    3,409
    
    
    
    2.6
    
    
    
    3,507
    
    
    
    3.4
    
    
    
    (2.8
    )Gross profit
    
    
    23,003
    
    
    
    52.8
    
    
    
    19,467
    
    
    
    54.3
    
    
    
    18.2
    
    
    
    67,527
    
    
    
    52.7
    
    
    
    55,983
    
    
    
    54.0
    
    
    
    20.6Operating expenses:Sales and marketing
    
    
    8,517
    
    
    
    19.6
    
    
    
    7,277
    
    
    
    20.3
    
    
    
    17.0
    
    
    
    25,102
    
    
    
    19.6
    
    
    
    20,830
    
    
    
    20.1
    
    
    
    20.5Research and development
    
    
    6,039
    
    
    
    13.8
    
    
    
    5,402
    
    
    
    15.1
    
    
    
    11.8
    
    
    
    18,079
    
    
    
    14.1
    
    
    
    15,227
    
    
    
    14.7
    
    
    
    18.7General and administrative
    
    
    3,349
    
    
    
    7.7
    
    
    
    3,037
    
    
    
    8.4
    
    
    
    10.3
    
    
    
    10,229
    
    
    
    8.0
    
    
    
    10,084
    
    
    
    9.7
    
    
    
    1.4Total operating expenses
    
    
    17,905
    
    
    
    41.1
    
    
    
    15,716
    
    
    
    43.8
    
    
    
    13.9
    
    
    
    53,410
    
    
    
    41.7
    
    
    
    46,141
    
    
    
    44.5
    
    
    
    15.8Operating income
    
    
    5,098
    
    
    
    11.7
    
    
    
    3,751
    
    
    
    10.5
    
    
    
    35.9
    
    
    
    14,117
    
    
    
    11.0
    
    
    
    9,842
    
    
    
    9.5
    
    
    
    43.4Total other income, net
    
    
    855
    
    
    
    2.0
    
    
    
    575
    
    
    
    1.6
    
    
    
    48.7
    
    
    
    2,385
    
    
    
    1.9
    
    
    
    1,461
    
    
    
    1.4
    
    
    
    63.2Income before income taxes
    
    
    5,953
    
    
    
    13.7
    
    
    
    4,326
    
    
    
    12.1
    
    
    
    37.6
    
    
    
    16,502
    
    
    
    12.9
    
    
    
    11,303
    
    
    
    10.9
    
    
    
    46.0Income tax (benefit) provision
    
    
    (845
    )
    
    
    (1.9
    )
    
    
    978
    
    
    
    2.8
    
    
    
    (186.4
    )
    
    
    2,305
    
    
    
    1.8
    
    
    
    3,205
    
    
    
    3.1
    
    
    
    (28.1
    )Net income
    
    $
    6,798
    
    
    
    15.6
    %
    
    $
    3,348
    
    
    
    9.3
    %
    
    
    103.0
    %
    
    $
    14,197
    
    
    
    11.1
    %
    
    $
    8,098
    
    
    
    7.8
    %
    
    
    75.3
    %
    Three months ended June 30,
    
    
    % increase
    
    
    Nine months ended June 30,
    
    
    % increase($ in thousands)
    
    2007
    
    
    2006
    
    
    (decrease)
    
    
    2007
    
    
    2006
    
    
    (decrease)Non-embedded
    
    $
    24,750
    
    
    
    56.9
    %
    
    $
    22,176
    
    
    
    61.8
    %
    
    
    11.6
    %
    
    $
    74,361
    
    
    
    58.0
    %
    
    $
    62,804
    
    
    
    60.6
    %
    
    
    18.4
    %Embedded
    
    
    18,777
    
    
    
    43.1
    
    
    
    13,684
    
    
    
    38.2
    
    
    
    37.2
    
    
    
    53,832
    
    
    
    42.0
    
    
    
    40,812
    
    
    
    39.4
    
    
    
    31.9Total net sales
    
    $
    43,527
    
    
    
    100.0
    %
    
    $
    35,860
    
    
    
    100.0
    %
    
    
    21.4
    %
    
    $
    128,193
    
    
    
    100.0
    %
    
    $
    103,616
    
    
    
    100.0
    %
    
    
    23.7
    %
 Non-Embedded
  17




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
  Embedded
     Three months ended June 30,
    
    
    increase
    
    
    Nine months ended June 30,
    
    
    increase($ in thousands)
    
    2007
    
    
    2006
    
    
    (decrease)
    
    
    2007
    
    
    2006
    
    
    (decrease)Operating expenses:Sales and marketing
    
    $
    8,517
    
    
    
    19.6
    %
    
    $
    7,277
    
    
    
    20.3
    %
    
    $
    1,240
    
    
    $
    25,102
    
    
    
    19.6
    %
    
    $
    20,830
    
    
    
    20.1
    %
    
    $
    4,272Research and development
    
    
    6,039
    
    
    
    13.8
    
    
    
    5,402
    
    
    
    15.1
    
    
    
    637
    
    
    
    18,079
    
    
    
    14.1
    
    
    
    15,227
    
    
    
    14.7
    
    
    
    2,852General and administrative
    
    
    3,349
    
    
    
    7.7
    
    
    
    3,037
    
    
    
    8.4
    
    
    
    312
    
    
    
    10,229
    
    
    
    8.0
    
    
    
    10,084
    
    
    
    9.7
    
    
    
    145Total operating expenses
    
    $
    17,905
    
    
    
    41.1
    %
    
    $
    15,716
    
    
    
    43.8
    %
    
    $
    2,189
    
    
    $
    53,410
    
    
    
    41.7
    %
    
    $
    46,141
    
    
    
    44.5
    %
    
    $
    7,269
   18




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
        19




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
       Three months ended June 30,
    
    
    Nine months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Effective tax rate before impact of discrete events
    
    
    35.0
    %
    
    
    34.8
    %
    
    
    36.1
    %
    
    
    33.9
    %Impact of discrete events
    
    
    -49.2
    %
    
    
    -12.2
    %
    
    
    -22.1
    %
    
    
    -5.5
    %Effective tax rate
    
    
    -14.2
    %
    
    
    22.6
    %
    
    
    14.0
    %
    
    
    28.4
    %
    20




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
   Consolidated Statement of Cash Flow Highlights (in thousands)
 Nine months ended June 30,2007
    
    
    2006
    
    
    ChangeOperating activities
    
    $
    18,675
    
    
    $
    13,851
    
    
    $
    4,824Investing activities
    
    
    (3,784
    )
    
    
    (15,313
    )
    
    
    11,529Financing activities
    
    
    3,415
    
    
    
    3,599
    
    
    
    (184
    )Effect of exchange rate changes on cash
and cash equivalents
    
    
    88
    
    
    
    (705
    )
    
    
    793Net increase in cash and cash equivalents
    
    $
    18,394
    
    
    $
    1,432
    
    
    $
    16,962
 Reconciliation of Net Income to Cash Inflows (Outflows) from Operating Activities (in thousands)
 Nine months ended June 30,2007
    
    
    2006
    
    
    ChangeNet income
    
    $
    14,197
    
    
    $
    8,098
    
    
    $
    6,099Deferred income taxes
    
    
    (1,612
    )
    
    
    (1,987
    )
    
    
    375Depreciation and amortization
    
    
    7,647
    
    
    
    7,693
    
    
    
    (46
    )Stock-based compensation
    
    
    2,258
    
    
    
    1,742
    
    
    
    516Excess tax benefits from stock-based compensation
    
    
    (315
    )
    
    
    (485
    )
    
    
    170Other reconciling items
    
    
    18
    
    
    
    (436
    )
    
    
    454Net income adjusted for non-cash expenses
    
    
    22,193
    
    
    
    14,625
    
    
    
    7,568Changes in working capital
    
    
    (3,518
    )
    
    
    (774
    )
    
    
    (2,744
    )Cash flows provided by operating activities
    
    $
    18,675
    
    
    $
    13,851
    
    
    $
    4,824
    21




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
      Payments due by fiscal periodLess thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    ThereafterOperating leases
    
    $
    6,193
    
    
    $
    1,974
    
    
    $
    2,231
    
    
    $
    1,279
    
    
    $
    709Capital leases
    
    
    952
    
    
    
    447
    
    
    
    505
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    7,145
    
    
    $
    2,421
    
    
    $
    2,736
    
    
    $
    1,279
    
    
    $
    709
      22




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
     
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
        23




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     
 ITEM 4. CONTROLS AND PROCEDURES
     24




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 Exhibit No.
    
    Description3(a)
    
    Restated Certificate of Incorporation of the Company, as amended (1)3(b)
    
    Amended and Restated By-Laws of the Company (2)4(a)
    
    Form of Rights Agreement, dated as of June 10, 1998 between Digi International
Inc. and Wells Fargo Bank, National Association (formerly known as Norwest Bank
Minnesota, National Association), as Rights Agent (3)4(b)
    
    Amendment dated January 26, 1999, to Share Rights Agreement, dated as of June
10, 1998 between Digi International Inc. and Wells Fargo Bank, National Association
(formerly known as Norwest Bank Minnesota, National Association), as Rights Agent
(4)10(a)
    
    Severance Agreement between the Company and Lawrence A. Kraft dated July 30,
2007*10(b)
    
    Severance Agreement between the Company and Joel K. Young dated July 30,
2007*
  25




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##### Table of Contents



PART II. OTHER INFORMATION (CONTINUED)
 ITEM 6. EXHIBITS (CONTINUED)
 31(a)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31(b)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32
    
    Section 1350 Certification
  
 (1)
    
    Incorporated by reference to Exhibit 3(a) to the Companys Form 10-K for the year ended
September 30, 1993 (File No. 0-17972)(2)
    
    Incorporated by reference to Exhibit 3(b) to the Companys Form 10-Q for the quarter ended
March 31, 2007 (File No. 0-17972)(3)
    
    Incorporated by reference to Exhibit 1 to the Companys Registration Statement on Form 8-A
dated June 24, 1998 (File No. 0-17972)(4)
    
    Incorporated by reference to Exhibit 1 to Amendment 1 to the Companys Registration Statement
on Form 8-A dated February 5, 1999 (File No. 0-17972)
  26




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##### Table of Contents



DIGI INTERNATIONAL INC.Date: August 8, 2007
    
    By:
    
    /s/ Subramanian KrishnanSubramanian KrishnanSenior Vice President, Chief Financial Officer
and Treasurer (Principal Financial and
Accounting Officer)
  27




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##### Table of Contents



Exhibit Number
    
    Document Description
    
    Form of Filing3(a)
    
    Restated Certificate of Incorporation
of the Company, as Amended (incorporated
by reference to the corresponding exhibit
number to the Companys Form 10-K for
the year ended September 30, 1993
(File No. 0-17972))
    
    Incorporated by Reference3(b)
    
    Amended and Restated By-Laws of the
Company
    
    Incorporated by Reference4(a)
    
    Form of Rights Agreement, dated as of
June 10, 1998 between Digi International Inc.
and Wells Fargo Bank, National
Association (formerly known as Norwest Bank
Minnesota, National Association), as Rights
Agent (incorporated by reference to Exhibit 1
to the Companys Registration Statement on
Form 8-A dated June 24, 1998
(File No. 0-17972))
    
    Incorporated by Reference4(b)
    
    Amendment dated January 26, 1999, to Share
Rights Agreement, dated June 10, 1998
between Digi International Inc. and Wells Fargo
Bank, National Association (formerly
known as Norwest Bank Minnesota, National
Association), as Rights Agent (incorporated
by reference to Exhibit 1 to Amendment No. 1
to the Companys Registration Statement on
Form 8-A dated February 5, 1999
(File No. 0-17972))
    
    Incorporated by Reference10(a)
    
    Severance Agreement between the Company and
Lawrence A. Kraft dated July 30, 2007
    
    Filed Electronically10(b)
    
    Severance Agreement between the Company and
Joel K. Young dated July 30, 2007
    
    Filed Electronically31(a)
    
    Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer
    
    Filed Electronically31(b)
    
    Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer
    
    Filed Electronically32
    
    Section 1350 Certification
    
    Filed Electronically
  28