##### 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: March 31, 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(State or other jurisdiction of
    
    41-1532464(I.R.S. Employerincorporation or organization)
    
    Identification Number)
 11001 Bren Road EastMinnetonka, Minnesota
    
    55343(Address of principal executive offices)
    
    (Zip Code)
 (952) 912-3444  (Registrants telephone number, including area code)
 þ o
  o þ o
 o þ




---



##### 



PagePART I. FINANCIAL INFORMATIONITEM 1. Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Statements of Operations for the three
months and six months ended March 31, 2007 and 2006
    
    
    3Condensed Consolidated Balance Sheets as of
March 31, 2007 and September 30, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for
the six months ended March 31, 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
    
    
    22ITEM 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    24ITEM 1A. Risk Factors
    
    
    24ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24ITEM 3. Defaults Upon Senior Securities
    
    
    24ITEM 4. Submission of Matters to a Vote of Securities Holders
    
    
    24ITEM 5. Other Information
    
    
    24ITEM 6. Exhibits
    
    
    25Amended and Restated By-Laws of the CompanyCertification of Chief Executive OfficerCertification of Chief Financial OfficerSection 1350 Certification
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three months ended March 31,
    
    
    Six months ended March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands, except per common share data)Net sales
    
    $
    42,855
    
    
    $
    34,380
    
    
    $
    84,666
    
    
    $
    67,756Cost of sales (exclusive of amortization of purchased
and core technology shown separately below)
    
    
    19,215
    
    
    
    14,894
    
    
    
    37,865
    
    
    
    28,904Amortization of purchased and core technology
    
    
    1,129
    
    
    
    1,168
    
    
    
    2,277
    
    
    
    2,336Gross profit
    
    
    22,511
    
    
    
    18,318
    
    
    
    44,524
    
    
    
    36,516Operating expenses:Sales and marketing
    
    
    8,427
    
    
    
    6,802
    
    
    
    16,585
    
    
    
    13,553Research and development
    
    
    6,068
    
    
    
    5,011
    
    
    
    12,040
    
    
    
    9,825General and administrative
    
    
    3,302
    
    
    
    3,293
    
    
    
    6,880
    
    
    
    7,047Total operating expenses
    
    
    17,797
    
    
    
    15,106
    
    
    
    35,505
    
    
    
    30,425Operating income
    
    
    4,714
    
    
    
    3,212
    
    
    
    9,019
    
    
    
    6,091Other income (expense):Interest income
    
    
    777
    
    
    
    643
    
    
    
    1,573
    
    
    
    1,059Interest expense
    
    
    (18
    )
    
    
    (27
    )
    
    
    (43
    )
    
    
    (68
    )Other expense
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    (105
    )Total other income, net
    
    
    759
    
    
    
    554
    
    
    
    1,530
    
    
    
    886Income before income taxes
    
    
    5,473
    
    
    
    3,766
    
    
    
    10,549
    
    
    
    6,977Income tax provision
    
    
    1,876
    
    
    
    1,199
    
    
    
    3,150
    
    
    
    2,227Net income
    
    $
    3,597
    
    
    $
    2,567
    
    
    $
    7,399
    
    
    $
    4,750Net income per common share:Basic
    
    $
    0.14
    
    
    $
    0.11
    
    
    $
    0.29
    
    
    $
    0.21Diluted
    
    $
    0.14
    
    
    $
    0.11
    
    
    $
    0.28
    
    
    $
    0.20Weighted average common shares, basic
    
    
    25,186
    
    
    
    23,001
    
    
    
    25,131
    
    
    
    22,890Weighted average common shares, diluted
    
    
    25,959
    
    
    
    23,687
    
    
    
    25,976
    
    
    
    23,609
  3




---



##### Table of Contents



DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 March 31,
    
    
    September 30,2007
    
    
    2006(in thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,186
    
    
    $
    15,674Marketable securities
    
    
    52,702
    
    
    
    43,207Accounts receivable, net
    
    
    20,772
    
    
    
    20,305Inventories
    
    
    23,472
    
    
    
    21,911Other
    
    
    4,951
    
    
    
    5,528Total current assets
    
    
    119,083
    
    
    
    106,625Property, equipment and improvements, net
    
    
    19,702
    
    
    
    19,488Identifiable intangible assets, net
    
    
    27,759
    
    
    
    31,341Goodwill
    
    
    65,610
    
    
    
    65,841Other
    
    
    2,119
    
    
    
    2,026Total assets
    
    $
    234,273
    
    
    $
    225,321LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Capital lease obligations, current portion
    
    $
    376
    
    
    $
    381Accounts payable
    
    
    5,800
    
    
    
    6,748Income taxes payable
    
    
    6,555
    
    
    
    4,712Accrued expenses:Compensation
    
    
    5,309
    
    
    
    5,851Other
    
    
    3,726
    
    
    
    5,592Total current liabilities
    
    
    21,766
    
    
    
    23,284Capital lease obligations, net of current portion
    
    
    532
    
    
    
    725Net deferred tax liabilities
    
    
    6,812
    
    
    
    7,482Total liabilities
    
    
    29,110
    
    
    
    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;
27,894,836 and 27,748,640 shares issued and outstanding
    
    
    279
    
    
    
    277Additional paid-in capital
    
    
    167,762
    
    
    
    164,782Retained earnings
    
    
    54,408
    
    
    
    47,009Accumulated other comprehensive income
    
    
    1,580
    
    
    
    940Treasury stock, at cost, 2,667,367 and 2,711,496 shares
    
    
    (18,866
    )
    
    
    (19,178
    )Total stockholders equity
    
    
    205,163
    
    
    
    193,830Total liabilities and stockholders equity
    
    $
    234,273
    
    
    $
    225,321
  4




---



##### Table of Contents



DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Six months ended March 31,2007
    
    
    2006(in thousands)Operating activities:Net income
    
    $
    7,399
    
    
    $
    4,750Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation of property, equipment and improvements
    
    
    1,263
    
    
    
    1,272Amortization of identifiable intangible assets and other assets
    
    
    3,867
    
    
    
    3,825Excess tax benefits from stock-based compensation
    
    
    (155
    )
    
    
    (406
    )Stock-based compensation expense
    
    
    1,504
    
    
    
    1,163Deferred income taxes
    
    
    (722
    )
    
    
    (1,256
    )Other
    
    
    164
    
    
    
    (533
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (162
    )
    
    
    (507
    )Inventories
    
    
    (1,737
    )
    
    
    (685
    )Other assets
    
    
    572
    
    
    
    (157
    )Accounts payable and accrued expenses
    
    
    (3,022
    )
    
    
    (2,375
    )Income taxes payable
    
    
    2,298
    
    
    
    3,004Net cash provided by operating activities
    
    
    11,269
    
    
    
    8,095Investing activities:Purchase of held-to-maturity marketable securities
    
    
    (40,387
    )
    
    
    (26,347
    )Proceeds from maturities of held-to-maturity marketable securities
    
    
    30,892
    
    
    
    19,214Contingent purchase price payments related to business acquisitions
    
    
    (781
    )
    
    
    Proceeds from the sale of property, equipment, improvements
    
    
    4
    
    
    
    Purchase of property, equipment, improvements and certain
other intangible assets
    
    
    (1,486
    )
    
    
    (894
    )Net cash used in investing activities
    
    
    (11,758
    )
    
    
    (8,027
    )Financing activities:Payments on capital lease obligations and long-term debt
    
    
    (198
    )
    
    
    (256
    )Excess tax benefits from stock-based compensation
    
    
    155
    
    
    
    406Proceeds from stock option plan transactions
    
    
    1,201
    
    
    
    2,673Proceeds from employee stock purchase plan transactions
    
    
    493
    
    
    
    359Net cash provided by financing activities
    
    
    1,651
    
    
    
    3,182Effect of exchange rate changes on cash and cash equivalents
    
    
    350
    
    
    
    (550
    )Net increase in cash and cash equivalents
    
    
    1,512
    
    
    
    2,700Cash and cash equivalents, beginning of period
    
    
    15,674
    
    
    
    12,990Cash and cash equivalents, end of period
    
    $
    17,186
    
    
    $
    15,690
  5




---



##### Table of Contents



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




---



##### Table of Contents



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 March 31,
    
    
    Six months ended March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Net income
    
    $
    3,597
    
    
    $
    2,567
    
    
    $
    7,399
    
    
    $
    4,750Denominator:Denominator for basic net income per common
share  weighted average shares outstanding
    
    
    25,186
    
    
    
    23,001
    
    
    
    25,131
    
    
    
    22,890Effect of dilutive securities:Employee stock options and employee
stock purchase plan
    
    
    773
    
    
    
    686
    
    
    
    845
    
    
    
    719Denominator for diluted net income per common
share  adjusted weighted average shares
    
    
    25,959
    
    
    
    23,687
    
    
    
    25,976
    
    
    
    23,609Net income per common share, basic
    
    $
    0.14
    
    
    $
    0.11
    
    
    $
    0.29
    
    
    $
    0.21Net income per common share, diluted
    
    $
    0.14
    
    
    $
    0.11
    
    
    $
    0.28
    
    
    $
    0.20
    7




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    3,597
    
    
    $
    2,567
    
    
    $
    7,399
    
    
    $
    4,750Foreign currency translation gain (loss)
    
    
    261
    
    
    
    (74
    )
    
    
    640
    
    
    
    (328
    )Comprehensive income
    
    $
    3,858
    
    
    $
    2,493
    
    
    $
    8,039
    
    
    $
    4,422
       8




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     Three months ended March 31,
    
    
    Six months ended March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of sales
    
    $
    36
    
    
    $
    23
    
    
    $
    67
    
    
    $
    43Sales and marketing
    
    
    267
    
    
    
    193
    
    
    
    486
    
    
    
    319Research and development
    
    
    182
    
    
    
    142
    
    
    
    331
    
    
    
    269General and administrative
    
    
    254
    
    
    
    274
    
    
    
    620
    
    
    
    532Total stock-based compensation
    
    $
    739
    
    
    $
    632
    
    
    $
    1,504
    
    
    $
    1,163
  Weighted AverageAvailable
    
    
    Options
    
    
    Exercise Price perfor Grant
    
    
    Outstanding
    
    
    Common ShareBalances, September 30, 2006
    
    
    597
    
    
    
    4,240
    
    
    $
    10.54Additional shares approved for grant
    
    
    2,500
    
    
    
    
    
    
    
    Granted
    
    
    (564
    )
    
    
    564
    
    
    
    13.29Exercised
    
    
    
    
    
    
    (146
    )
    
    
    8.21Cancelled
    
    
    49
    
    
    
    (49
    )
    
    
    11.32Balances, March 31, 2007
    
    
    2,582
    
    
    
    4,609
    
    
    $
    10.94Exercisable at March 31, 2007
    
    
    
    
    
    
    3,454
    
    
    $
    10.32
  Six months ended March 31,2007
    
    2006Risk free interest rate
    
    
    4.44% - 4.80
    %
    
    
    4.28% - 4.52
    %Expect option holding period
    
    3 - 5 years
    
    3 - 5 yearsExpected volatility
    
    
    38% - 52%
    
    
    
    50% - 60%Weighted average volatility
    
    
    48%
    
    
    
    55%Expected dividend yield
    
    
    0
    
    
    
    0
 9




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
    MaxStream, Inc.
     10




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Three months ended March 31, 2006
    
    Six months ended March 31, 2006Pro forma
    
    As Reported
    
    Pro forma
    
    As ReportedNet sales
    
    $
    37,471
    
    
    $
    34,380
    
    
    $
    74,080
    
    
    $
    67,756Net income
    
    $
    2,461
    
    
    $
    2,567
    
    
    $
    4,670
    
    
    $
    4,750Net income per common share, basic
    
    $
    0.10
    
    
    $
    0.11
    
    
    $
    0.19
    
    
    $
    0.21Net income per common share, diluted
    
    $
    0.10
    
    
    $
    0.11
    
    
    $
    0.18
    
    
    $
    0.20
   March 31, 2007
    
    
    September 30, 2006Accounts receivable, net:Accounts receivable
    
    $
    21,251
    
    
    $
    20,800Less allowance for doubtful accounts
    
    
    479
    
    
    
    495$
    20,772
    
    
    $
    20,305Inventories:Raw materials
    
    $
    17,874
    
    
    $
    16,491Work in process
    
    
    1,074
    
    
    
    606Finished goods
    
    
    4,524
    
    
    
    4,814$
    23,472
    
    
    $
    21,911Other accrued expenses:Product warranty accrual
    
    $
    1,006
    
    
    $
    1,104Accrued professional fees
    
    
    539
    
    
    
    879Other accrued expenses
    
    
    2,181
    
    
    
    3,609$
    3,726
    
    
    $
    5,592
    March 31, 2007
    
    
    September 30, 2006Gross
    
    
    
    
    
    
    
    
    
    
    Grosscarrying
    
    
    Accum.
    
    
    
    
    
    
    carrying
    
    
    Accum.amount
    
    
    amort.
    
    
    Net
    
    
    amount
    
    
    amort.
    
    
    NetPurchased and core technology
    
    $
    48,057
    
    
    $
    (33,790
    )
    
    $
    14,267
    
    
    $
    48,022
    
    
    $
    (31,492
    )
    
    $
    16,530License agreements
    
    
    2,440
    
    
    
    (2,090
    )
    
    
    350
    
    
    
    2,440
    
    
    
    (1,890
    )
    
    
    550Patents and trademarks
    
    
    7,786
    
    
    
    (3,365
    )
    
    
    4,421
    
    
    
    7,608
    
    
    
    (2,837
    )
    
    
    4,771Customer maintenance contracts
    
    
    700
    
    
    
    (359
    )
    
    
    341
    
    
    
    700
    
    
    
    (324
    )
    
    
    376Customer relationships
    
    
    11,531
    
    
    
    (3,151
    )
    
    
    8,380
    
    
    
    11,470
    
    
    
    (2,356
    )
    
    
    9,114Total
    
    $
    70,514
    
    
    $
    (42,755
    )
    
    $
    27,759
    
    
    $
    70,240
    
    
    $
    (38,899
    )
    
    $
    31,341
 11




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
    2007 (six months)
    
    $
    3,7692008
    
    
    5,3752009
    
    
    4,0362010
    
    
    3,6402011
    
    
    3,0702012
    
    
    2,514
  Six months ended March 31,2007
    
    
    2006Beginning balance, October 1
    
    $
    65,841
    
    
    $
    38,675Purchase price adjustment  MaxStream
    
    
    (374
    )
    
    
    Purchase price adjustment  FS Forth
    
    
    
    
    
    
    (147
    )Foreign currency translation adjustment
    
    
    143
    
    
    
    2Ending balance, March 31
    
    $
    65,610
    
    
    $
    38,530
    12




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     Three months ended March 31,Balance at
    
    Warranties
    
    Settlements
    
    Balance atJanuary 1
    
    issued (1)
    
    made
    
    March 312007
    
    $
    964
    
    
    $
    224
    
    
    $
    (182
    )
    
    $
    1,0062006
    
    $
    1,068
    
    
    $
    109
    
    
    $
    (127
    )
    
    $
    1,050
 Six months ended March 31,Balance at
    
    Warranties
    
    Settlements
    
    Balance atOctober 1
    
    issued (1)
    
    made
    
    March 312007
    
    $
    1,104
    
    
    $
    309
    
    
    $
    (407
    )
    
    $
    1,0062006
    
    $
    1,187
    
    
    $
    108
    
    
    $
    (245
    )
    
    $
    1,050
 
 (1)
    
    Warranties issued includes a decrease in estimate adjustment of $132,000 and $117,000 in the
first quarter of fiscal 2007 and 2006, respectively.   Contingent obligations
  Legal Proceedings
  13




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### 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 March 31,
    
    
    % increase
    
    
    Six months ended March 31,
    
    
    % increase2007
    
    
    2006
    
    
    (decrease)
    
    
    2007
    
    
    2006
    
    
    (decrease)Net sales
    
    $
    42,855
    
    
    
    100.0
    %
    
    $
    34,380
    
    
    
    100.0
    %
    
    
    24.7
    %
    
    $
    84,666
    
    
    
    100.0
    %
    
    $
    67,756
    
    
    
    100.0
    %
    
    
    25.0
    %Cost of sales (exclusive of amortiza-
tion of purchased and core technology
shown separately below)
    
    
    19,215
    
    
    
    44.9
    
    
    
    14,894
    
    
    
    43.3
    
    
    
    29.0
    
    
    
    37,865
    
    
    
    44.7
    
    
    
    28,904
    
    
    
    42.7
    
    
    
    31.0Amortization of purchased and
core technology
    
    
    1,129
    
    
    
    2.6
    
    
    
    1,168
    
    
    
    3.4
    
    
    
    (3.3
    )
    
    
    2,277
    
    
    
    2.7
    
    
    
    2,336
    
    
    
    3.5
    
    
    
    (2.5
    )Gross profit
    
    
    22,511
    
    
    
    52.5
    
    
    
    18,318
    
    
    
    53.3
    
    
    
    22.9
    
    
    
    44,524
    
    
    
    52.6
    
    
    
    36,516
    
    
    
    53.8
    
    
    
    21.9Operating expenses:Sales and marketing
    
    
    8,427
    
    
    
    19.7
    
    
    
    6,802
    
    
    
    19.8
    
    
    
    23.9
    
    
    
    16,585
    
    
    
    19.6
    
    
    
    13,553
    
    
    
    20.0
    
    
    
    22.4Research and development
    
    
    6,068
    
    
    
    14.1
    
    
    
    5,011
    
    
    
    14.6
    
    
    
    21.1
    
    
    
    12,040
    
    
    
    14.2
    
    
    
    9,825
    
    
    
    14.5
    
    
    
    22.5General and administrative
    
    
    3,302
    
    
    
    7.7
    
    
    
    3,293
    
    
    
    9.6
    
    
    
    0.3
    
    
    
    6,880
    
    
    
    8.1
    
    
    
    7,047
    
    
    
    10.4
    
    
    
    (2.4
    )Total operating expenses
    
    
    17,797
    
    
    
    41.5
    
    
    
    15,106
    
    
    
    44.0
    
    
    
    17.8
    
    
    
    35,505
    
    
    
    41.9
    
    
    
    30,425
    
    
    
    44.9
    
    
    
    16.7Operating income
    
    
    4,714
    
    
    
    11.0
    
    
    
    3,212
    
    
    
    9.3
    
    
    
    46.8
    
    
    
    9,019
    
    
    
    10.7
    
    
    
    6,091
    
    
    
    8.9
    
    
    
    48.1Interest income and other, net
    
    
    759
    
    
    
    1.8
    
    
    
    554
    
    
    
    1.7
    
    
    
    37.0
    
    
    
    1,530
    
    
    
    1.8
    
    
    
    886
    
    
    
    1.4
    
    
    
    72.7Income before income taxes
    
    
    5,473
    
    
    
    12.8
    
    
    
    3,766
    
    
    
    11.0
    
    
    
    45.3
    
    
    
    10,549
    
    
    
    12.5
    
    
    
    6,977
    
    
    
    10.3
    
    
    
    51.2Income tax provision
    
    
    1,876
    
    
    
    4.4
    
    
    
    1,199
    
    
    
    3.5
    
    
    
    56.5
    
    
    
    3,150
    
    
    
    3.8
    
    
    
    2,227
    
    
    
    3.3
    
    
    
    41.4Net income
    
    $
    3,597
    
    
    
    8.4
    %
    
    $
    2,567
    
    
    
    7.5
    %
    
    
    40.1
    %
    
    $
    7,399
    
    
    
    8.7
    %
    
    $
    4,750
    
    
    
    7.0
    %
    
    
    55.8
    %
    Three months ended March 31,
    
    
    % increase
    
    
    Six months ended March 31,
    
    
    % increase($ in thousands)
    
    2007
    
    
    2006
    
    
    (decrease)
    
    
    2007
    
    
    2006
    
    
    (decrease)Non-embedded
    
    $
    24,445
    
    
    
    57.0
    %
    
    $
    21,293
    
    
    
    61.9
    %
    
    
    14.8
    %
    
    $
    49,611
    
    
    
    58.6
    %
    
    $
    40,628
    
    
    
    60.0
    %
    
    
    22.1
    %Embedded
    
    
    18,410
    
    
    
    43.0
    
    
    
    13,087
    
    
    
    38.1
    
    
    
    40.7
    
    
    
    35,055
    
    
    
    41.4
    
    
    
    27,128
    
    
    
    40.0
    
    
    
    29.2Total net sales
    
    $
    42,855
    
    
    
    100.0
    %
    
    $
    34,380
    
    
    
    100.0
    %
    
    
    24.7
    %
    
    $
    84,666
    
    
    
    100.0
    %
    
    $
    67,756
    
    
    
    100.0
    %
    
    
    25.0
    %
 Non-Embedded
  17




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
   Embedded
         18




---



##### Table of Contents



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




---



##### Table of Contents



ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
           20




---



##### Table of Contents



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
    
    $
    6,380
    
    
    $
    2,141
    
    
    $
    2,297
    
    
    $
    1,249
    
    
    $
    693Capital leases
    
    
    1,064
    
    
    
    448
    
    
    
    616
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    7,444
    
    
    $
    2,589
    
    
    $
    2,913
    
    
    $
    1,249
    
    
    $
    693
      21




---



##### 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
         22




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
    23




---



##### 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
  a)
    
    The following individuals designated by our Board of Directors as nominees for
director were elected for a three-year term, with voting as follows:
 Nominee
    
    Total Votes For
    
    Withhold AuthorityGuy C. Jackson
    
    
    17,084,727
    
    
    
    1,208,654Ahmed Nawaz
    
    
    18,111,747
    
    
    
    181,634
 b)
    
    Proposal to approve the Digi International Inc. 2000 Omnibus Stock Plan, as
Amended and Restated as of November 27, 2006. The proposal passed on a vote of
12,648,703 in favor, 2,838,400 against, 28,802 abstentions and 2,777,476 broker
non-votes.c)
    
    Proposal to approve the Digi International Inc. Employee Stock Purchase Plan, as
Amended and Restated as of November 27, 2006. The proposal passed on a vote of
14,847,833 in favor, 646,568 against, 21,504 abstentions and 2,777,476 broker non-votes.d)
    
    Proposal to ratify the appointment of PricewaterhouseCoopers LLP as our
independent registered public accounting firm for the fiscal year ended September 30,
2007. The proposal passed on a vote of 18,096,178 in favor, 170,512 against, 26,691
abstentions and no broker non-votes.
 
 ITEM 5. OTHER INFORMATION
  24




---



##### Table of Contents



PART II. 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 Company4(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 (2)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
(3)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 1 to the Companys Registration Statement on Form 8-A
dated June 24, 1998 (File No. 0-17972)(3)
    
    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) 25




---



##### Table of Contents



DIGI INTERNATIONAL INC.Date:  May 8, 2007
    By:
    /s/ Subramanian KrishnanSubramanian KrishnanSenior Vice President, Chief Financial Officer
and Treasurer (Principal Financial and
Accounting Officer) 26




---



##### 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
    
    Filed Electronically4(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 Reference31(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
 27