##### 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, 2008
 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: 1-34033
 DIGI INTERNATIONAL INC.
  Delaware
    
    41-1532464(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 11001 Bren Road East
Minnetonka, Minnesota 55343
 (Address of principal executive offices) (Zip Code)
 (952) 912-3444
 (Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 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 six months ended March 31, 2008 and 2007
    
    
    3Condensed Consolidated Balance Sheets as of
March 31, 2008 and September 30, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for
the six months ended March 31, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial
Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    14Forward-looking Statements
    
    
    14ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22ITEM 4. Controls and Procedures
    
    
    23PART 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 Security Holders
    
    
    25ITEM 5. Other Information
    
    
    25ITEM 6. Exhibits
    
    
    26Exhibit 2(a)Exhibit 10(a)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 March 31,
    
    
    Six months ended March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands, except per common share data)Net sales
    
    $
    43,070
    
    
    $
    42,855
    
    
    $
    87,644
    
    
    $
    84,666Cost of sales (exclusive of amortization of
purchased
and core technology shown separately below)
    
    
    18,986
    
    
    
    19,215
    
    
    
    38,529
    
    
    
    37,865Amortization of purchased and core technology
    
    
    907
    
    
    
    1,129
    
    
    
    2,043
    
    
    
    2,277Gross profit
    
    
    23,177
    
    
    
    22,511
    
    
    
    47,072
    
    
    
    44,524Operating expenses:Sales and marketing
    
    
    9,034
    
    
    
    8,427
    
    
    
    17,720
    
    
    
    16,585Research and development
    
    
    6,529
    
    
    
    6,068
    
    
    
    13,118
    
    
    
    12,040General and administrative
    
    
    3,960
    
    
    
    3,302
    
    
    
    7,982
    
    
    
    6,880Total operating expenses
    
    
    19,523
    
    
    
    17,797
    
    
    
    38,820
    
    
    
    35,505Operating income
    
    
    3,654
    
    
    
    4,714
    
    
    
    8,252
    
    
    
    9,019Interest income, netInterest income
    
    
    1,020
    
    
    
    777
    
    
    
    2,074
    
    
    
    1,573Interest expense
    
    
    (12
    )
    
    
    (18
    )
    
    
    (26
    )
    
    
    (43
    )Total interest income, net
    
    
    1,008
    
    
    
    759
    
    
    
    2,048
    
    
    
    1,530Income before income taxes
    
    
    4,662
    
    
    
    5,473
    
    
    
    10,300
    
    
    
    10,549Income tax provision
    
    
    1,565
    
    
    
    1,876
    
    
    
    3,533
    
    
    
    3,150Net income
    
    $
    3,097
    
    
    $
    3,597
    
    
    $
    6,767
    
    
    $
    7,399Net income per common share:Basic
    
    $
    0.12
    
    
    $
    0.14
    
    
    $
    0.26
    
    
    $
    0.29Diluted
    
    $
    0.12
    
    
    $
    0.14
    
    
    $
    0.26
    
    
    $
    0.28Weighted average common shares, basic
    
    
    25,714
    
    
    
    25,186
    
    
    
    25,666
    
    
    
    25,131Weighted average common shares, diluted
    
    
    26,312
    
    
    
    25,959
    
    
    
    26,479
    
    
    
    25,976
   3




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DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 March 31,
    
    
    September 30,2008
    
    
    2007(in thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    27,135
    
    
    $
    18,375Marketable securities
    
    
    58,020
    
    
    
    67,111Accounts receivable, net
    
    
    25,344
    
    
    
    21,022Inventories
    
    
    26,804
    
    
    
    26,130Other
    
    
    4,769
    
    
    
    4,961Total current assets
    
    
    142,072
    
    
    
    137,599Marketable securities, long-term
    
    
    15,682
    
    
    
    2,081Property, equipment and improvements, net
    
    
    15,472
    
    
    
    19,987Identifiable intangible assets, net
    
    
    21,032
    
    
    
    24,214Goodwill
    
    
    67,320
    
    
    
    66,817Other
    
    
    1,462
    
    
    
    1,128Total assets
    
    $
    263,040
    
    
    $
    251,826LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Capital lease obligations, current portion
    
    $
    380
    
    
    $
    379Accounts payable
    
    
    8,929
    
    
    
    6,554Income taxes payable
    
    
    468
    
    
    
    3,156Accrued expenses:Compensation
    
    
    5,545
    
    
    
    7,080Other
    
    
    4,101
    
    
    
    4,727Total current liabilities
    
    
    19,423
    
    
    
    21,896Capital lease obligations, net of current portion
    
    
    179
    
    
    
    358Income taxes payable  long-term
    
    
    3,990
    
    
    
    Deferred gain on building sale  leaseback
    
    
    1,194
    
    
    
    Net deferred tax liabilities
    
    
    4,648
    
    
    
    6,667Total liabilities
    
    
    29,434
    
    
    
    28,921Stockholders 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;
28,323,513 and 28,153,763 shares issued
    
    
    283
    
    
    
    281Additional paid-in capital
    
    
    175,684
    
    
    
    172,156Retained earnings
    
    
    73,041
    
    
    
    66,782Accumulated other comprehensive income
    
    
    2,834
    
    
    
    2,121Treasury stock, at cost, 2,578,238 and 2,606,419 shares
    
    
    (18,236
    )
    
    
    (18,435
    )Total stockholders equity
    
    
    233,606
    
    
    
    222,905Total liabilities and stockholders equity
    
    $
    263,040
    
    
    $
    251,826
   4




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DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Six months ended March 31,2008
    
    
    2007(in thousands)Operating activities:Net income
    
    $
    6,767
    
    
    $
    7,399Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation of property, equipment and improvements
    
    
    1,293
    
    
    
    1,263Amortization of identifiable intangible assets and other assets
    
    
    3,499
    
    
    
    3,867(Gain) loss on sale of property, equipment and improvements
    
    
    (120
    )
    
    
    1Excess tax benefits from stock-based compensation
    
    
    (165
    )
    
    
    (155
    )Stock-based compensation
    
    
    1,776
    
    
    
    1,504Deferred income tax benefit
    
    
    (1,920
    )
    
    
    (722
    )Other
    
    
    152
    
    
    
    163Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,109
    )
    
    
    (162
    )Inventories
    
    
    (752
    )
    
    
    (1,737
    )Other assets
    
    
    237
    
    
    
    572Accounts payable and accrued expenses
    
    
    978
    
    
    
    (3,022
    )Income taxes payable
    
    
    697
    
    
    
    2,298Net cash provided by operating activities
    
    
    9,333
    
    
    
    11,269Investing activities:Purchase of held-to-maturity marketable securities
    
    
    (51,691
    )
    
    
    (40,387
    )Proceeds from maturities of held-to-maturity marketable securities
    
    
    47,181
    
    
    
    30,892Contingent purchase price payments related to business acquisitions
    
    
    (1,315
    )
    
    
    (781
    )Increase in noncurrent restricted cash
    
    
    (392
    )
    
    
    Proceeds from sale-leaseback and sale of other property,
equipment, improvements
    
    
    6,494
    
    
    
    4Purchase of property, equipment, improvements and certain
other intangible assets
    
    
    (1,908
    )
    
    
    (1,486
    )Net cash used in investing activities
    
    
    (1,631
    )
    
    
    (11,758
    )Financing activities:Payments on capital lease obligations
    
    
    (188
    )
    
    
    (198
    )Excess tax benefits from stock-based compensation
    
    
    165
    
    
    
    155Proceeds from stock option plan transactions
    
    
    1,636
    
    
    
    1,201Proceeds from employee stock purchase plan transactions
    
    
    348
    
    
    
    493Net cash provided by financing activities
    
    
    1,961
    
    
    
    1,651Effect of exchange rate changes on cash and cash equivalents
    
    
    (903
    )
    
    
    350Net increase in cash and cash equivalents
    
    
    8,760
    
    
    
    1,512Cash and cash equivalents, beginning of period
    
    
    18,375
    
    
    
    15,674Cash and cash equivalents, end of period
    
    $
    27,135
    
    
    $
    17,186
   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)
     7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    3,097
    
    
    $
    3,597
    
    
    $
    6,767
    
    
    $
    7,399Foreign currency translation gain
    
    
    18
    
    
    
    261
    
    
    
    713
    
    
    
    640Comprehensive income
    
    $
    3,115
    
    
    $
    3,858
    
    
    $
    7,480
    
    
    $
    8,039
    Three months ended March 31,
    
    
    Six months ended March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net income
    
    $
    3,097
    
    
    $
    3,597
    
    
    $
    6,767
    
    
    $
    7,399Denominator:Denominator for basic net income per common
share  weighted average shares outstanding
    
    
    25,714
    
    
    
    25,186
    
    
    
    25,666
    
    
    
    25,131Effect of dilutive securities:Employee stock options and employee
stock purchase plan
    
    
    598
    
    
    
    773
    
    
    
    813
    
    
    
    845Denominator for diluted net income per common
share  adjusted weighted average shares
    
    
    26,312
    
    
    
    25,959
    
    
    
    26,479
    
    
    
    25,976Net income per common share, basic
    
    $
    0.12
    
    
    $
    0.14
    
    
    $
    0.26
    
    
    $
    0.29Net income per common share, diluted
    
    $
    0.12
    
    
    $
    0.14
    
    
    $
    0.26
    
    
    $
    0.28
   8




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 March 31, 2008
    
    
    September 30, 2007Accounts receivable, net:Accounts receivable
    
    $
    25,856
    
    
    $
    21,501Less allowance for doubtful accounts
    
    
    512
    
    
    
    479$
    25,344
    
    
    $
    21,022Inventories:Raw materials
    
    $
    21,231
    
    
    $
    20,097Work in process
    
    
    653
    
    
    
    816Finished goods
    
    
    4,920
    
    
    
    5,217$
    26,804
    
    
    $
    26,130Other accrued expenses:Product warranty accrual
    
    $
    1,133
    
    
    $
    1,155Accrued professional fees
    
    
    844
    
    
    
    522Unearned revenue
    
    
    193
    
    
    
    190Deferred gain on building sale -
short-term
    
    
    299
    
    
    
    Other accrued expenses
    
    
    1,632
    
    
    
    1,910Contingent purchase price accrual
    
    
    
    
    
    
    950$
    4,101
    
    
    $
    4,727
    March 31, 2008
    
    
    September 30, 2007Gross
    
    
    
    
    
    
    
    
    
    
    Grosscarrying
    
    
    Accum.
    
    
    
    
    
    
    carrying
    
    
    Accum.amount
    
    
    amort.
    
    
    Net
    
    
    amount
    
    
    amort.
    
    
    NetPurchased and core technology
    
    $
    38,795
    
    
    $
    (28,819
    )
    
    $
    9,976
    
    
    $
    38,702
    
    
    $
    (26,689
    )
    
    $
    12,013License agreements
    
    
    2,440
    
    
    
    (2,440
    )
    
    
    
    
    
    
    2,440
    
    
    
    (2,290
    )
    
    
    150Patents and trademarks
    
    
    8,142
    
    
    
    (4,224
    )
    
    
    3,918
    
    
    
    7,925
    
    
    
    (3,818
    )
    
    
    4,107Customer maintenance contracts
    
    
    700
    
    
    
    (429
    )
    
    
    271
    
    
    
    700
    
    
    
    (394
    )
    
    
    306Customer relationships
    
    
    11,778
    
    
    
    (4,911
    )
    
    
    6,867
    
    
    
    11,613
    
    
    
    (3,975
    )
    
    
    7,638Total
    
    $
    61,855
    
    
    $
    (40,823
    )
    
    $
    21,032
    
    
    $
    61,380
    
    
    $
    (37,166
    )
    
    $
    24,214
   9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   2008 (six months)
    
    $
    2,2232009
    
    
    4,2022010
    
    
    3,6372011
    
    
    3,0762012
    
    
    2,5122013
    
    
    1,765
  Six months ended March 31,2008
    
    
    2007Beginning balance, October 1
    
    $
    66,817
    
    
    $
    65,841Purchase price adjustment  MaxStream
    
    
    
    
    
    
    (374
    )Foreign currency translation adjustment
    
    
    503
    
    
    
    143Ending balance, March 31
    
    $
    67,320
    
    
    $
    65,610
      10




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   Three months ended March 31,Balance at
    
    
    Warranties
    
    
    Settlements
    
    
    Balance atJanuary 1
    
    
    issued
    
    
    made
    
    
    March 312008
    
    $
    1,134
    
    
    $
    193
    
    
    $
    (194
    )
    
    $
    1,1332007
    
    $
    964
    
    
    $
    224
    
    
    $
    (182
    )
    
    $
    1,006
 Six months ended March 31,Balance at
    
    
    Warranties
    
    
    Settlements
    
    
    Balance atOctober 1
    
    
    issued (1)
    
    
    made
    
    
    March 312008
    
    $
    1,155
    
    
    $
    358
    
    
    $
    (380
    )
    
    $
    1,1332007
    
    $
    1,104
    
    
    $
    309
    
    
    $
    (407
    )
    
    $
    1,006
 (1)
    
    Warranties issued includes a decrease in estimate adjustment of $132,000 in the first quarter
of fiscal 2007.   Contingent obligations
  Legal Proceedings
   11




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   In re Initial Public Offering Securities Litigation en banc
    12




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
          13




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
    CRITICAL ACCOUNTING POLICIES
  OVERVIEW
   14




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
   
    
    Net sales of $43.1 million for the three months ended March 31, 2008 represented an
increase of $0.2 million, or 0.5%, compared to net sales of $42.9 million for the three
months ended March 31, 2007. Revenue in the Americas was $26.5 million in the second fiscal
quarter of 2008 compared to $28.8 million in the same period a year ago, a decrease of $2.3
million, or 8.2%, primarily due to the slowing of the U.S. economy and a decrease in revenue
from certain key customers. International revenue was $16.6 million in the second fiscal
quarter of 2008 compared to $14.1 million in the second fiscal quarter of 2007, an increase
of $2.5 million, or 18.4%.
    
    Gross profit margin increased to 53.8% compared to 52.5% for the three months ended
March 31, 2008 and 2007, respectively. Gross profit margin increased to 53.7% compared to
52.6% for the six months ended March 31, 2008 and 2007, respectively.
    
    Total operating expenses for the three months ended March 31, 2008 were $19.5
million, or 45.3% of net sales, compared to $17.8 million, or 41.5% of net sales, for the
three months ended March 31, 2007, an increase of $1.7 million. Total operating expenses
for the six months ended March 31, 2008 were $38.8 million, or 44.3% of net sales, compared
to $35.5 million, or 41.9% of net sales, for the six months ended March 31, 2007, an
increase of $3.3 million. Operating expenses increased by 9.7% and 9.3% for the three
months and six months ended March 31, 2008, respectively, compared to the same periods in
2007 due mostly to an increase in compensation-related expenses from increased headcount,
continued investments in our Drop-In Networking and international expansion, as well as the
unfavorable impact of translating expenses denominated in the Euro to U.S. dollars.
    
    Net income decreased $0.5 million to $3.1 million, or $0.12 per diluted share, for
the three months ended March 31, 2008, compared to $3.6 million, or $0.14 per diluted share,
for the three months ended March 31, 2007. Net income decreased $0.6 million to $6.8
million, or $0.26 per diluted share, for the six months ended March 31, 2008, compared to
$7.4 million, or $0.28 per diluted share, for the six months ended March 31, 2007. As a
result of the extension of the research and development credit for two additional years
beyond calendar 2005, a benefit for research and development credits earned during the last
three quarters of fiscal 2006 was recorded during the first quarter of fiscal 2007,
resulting in an additional tax benefit of $0.5 million or $0.02 per diluted share.
    
    Our net working capital position (total current assets less total current
liabilities) increased $6.9 million to $122.6 million during the six months ended March 31,
2008 and our current ratio was 7.3 to 1 as of that date. Cash and cash equivalents and
marketable securities, including long-term marketable securities increased $13.2 million to
$100.8 million during the period which includes 4.2 million Euros ($6.5 million) received
from the building sale in Dortmund, Germany. An additional 0.3 million Euros ($0.4 million)
were withheld by the buyer until certain obligations and documentation were completed, and
was received in April 2008. At March 31, 2008, we had no debt other than capital lease
obligations.
  15




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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,
    
    
    % increase2008
    
    
    2007
    
    
    (decrease)
    
    
    2008
    
    
    2007
    
    
    (decrease)Net sales
    
    $
    43,070
    
    
    
    100.0
    %
    
    $
    42,855
    
    
    
    100.0
    %
    
    
    0.5
    %
    
    $
    87,644
    
    
    
    100.0
    %
    
    $
    84,666
    
    
    
    100.0
    %
    
    
    3.5
    %Cost of sales (exclusive of amortization of purchased and core technology
shown separately below)
    
    
    18,986
    
    
    
    44.1
    
    
    
    19,215
    
    
    
    44.8
    
    
    
    (1.2
    )
    
    
    38,529
    
    
    
    44.0
    
    
    
    37,865
    
    
    
    44.7
    
    
    
    1.8Amortization of purchased and
core technology
    
    
    907
    
    
    
    2.1
    
    
    
    1,129
    
    
    
    2.6
    
    
    
    (19.7
    )
    
    
    2,043
    
    
    
    2.3
    
    
    
    2,277
    
    
    
    2.7
    
    
    
    (10.3
    )Gross profit
    
    
    23,177
    
    
    
    53.8
    
    
    
    22,511
    
    
    
    52.5
    
    
    
    3.0
    
    
    
    47,072
    
    
    
    53.7
    
    
    
    44,524
    
    
    
    52.6
    
    
    
    5.7Operating expenses:Sales and marketing
    
    
    9,034
    
    
    
    21.0
    
    
    
    8,427
    
    
    
    19.7
    
    
    
    7.2
    
    
    
    17,720
    
    
    
    20.2
    
    
    
    16,585
    
    
    
    19.6
    
    
    
    6.8Research and development
    
    
    6,529
    
    
    
    15.1
    
    
    
    6,068
    
    
    
    14.1
    
    
    
    7.6
    
    
    
    13,118
    
    
    
    15.0
    
    
    
    12,040
    
    
    
    14.2
    
    
    
    9.0General and administrative
    
    
    3,960
    
    
    
    9.2
    
    
    
    3,302
    
    
    
    7.7
    
    
    
    19.9
    
    
    
    7,982
    
    
    
    9.1
    
    
    
    6,880
    
    
    
    8.1
    
    
    
    16.0Total operating expenses
    
    
    19,523
    
    
    
    45.3
    
    
    
    17,797
    
    
    
    41.5
    
    
    
    9.7
    
    
    
    38,820
    
    
    
    44.3
    
    
    
    35,505
    
    
    
    41.9
    
    
    
    9.3Operating income
    
    
    3,654
    
    
    
    8.5
    
    
    
    4,714
    
    
    
    11.0
    
    
    
    (22.5
    )
    
    
    8,252
    
    
    
    9.4
    
    
    
    9,019
    
    
    
    10.7
    
    
    
    (8.5
    )Interest income and other, net
    
    
    1,008
    
    
    
    2.3
    
    
    
    759
    
    
    
    1.8
    
    
    
    32.8
    
    
    
    2,048
    
    
    
    2.3
    
    
    
    1,530
    
    
    
    1.8
    
    
    
    33.9Income before income taxes
    
    
    4,662
    
    
    
    10.8
    
    
    
    5,473
    
    
    
    12.8
    
    
    
    (14.8
    )
    
    
    10,300
    
    
    
    11.7
    
    
    
    10,549
    
    
    
    12.5
    
    
    
    (2.4
    )Income tax provision
    
    
    1,565
    
    
    
    3.6
    
    
    
    1,876
    
    
    
    4.4
    
    
    
    (16.6
    )
    
    
    3,533
    
    
    
    4.0
    
    
    
    3,150
    
    
    
    3.8
    
    
    
    12.2Net income
    
    $
    3,097
    
    
    
    7.2
    %
    
    $
    3,597
    
    
    
    8.4
    %
    
    
    (13.9)
    %
    
    $
    6,767
    
    
    
    7.7
    %
    
    $
    7,399
    
    
    
    8.7
    %
    
    
    (8.5)
    %
   Three months ended March 31,
    
    
    % increase
    
    
    Six months ended March 31,
    
    
    % increase($ in thousands)
    
    2008
    
    
    2007
    
    
    (decrease)
    
    
    2008
    
    
    2007
    
    
    (decrease)Non-embedded
    
    $
    21,358
    
    
    
    49.6
    %
    
    $
    24,445
    
    
    
    57.0
    %
    
    
    (12.6
    )%
    
    $
    45,215
    
    
    
    51.6
    %
    
    $
    49,611
    
    
    
    58.6
    %
    
    
    (8.9
    )%Embedded
    
    
    21,712
    
    
    
    50.4
    
    
    
    18,410
    
    
    
    43.0
    
    
    
    17.9
    
    
    
    42,429
    
    
    
    48.4
    
    
    
    35,055
    
    
    
    41.4
    
    
    
    21.0Total net sales
    
    $
    43,070
    
    
    
    100.0
    %
    
    $
    42,855
    
    
    
    100.0
    %
    
    
    0.5
    %
    
    $
    87,644
    
    
    
    100.0
    %
    
    $
    84,666
    
    
    
    100.0
    %
    
    
    3.5
    %
    16




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
    Three months ended March 31,
    
    
    $ increase
    
    
    % increase
    
    
    Six months ended March 31,
    
    
    $ increase
    
    
    % increase($ in thousands)
    
    2008
    
    
    2007
    
    
    (decrease)
    
    
    (decrease)
    
    
    2008
    
    
    2007
    
    
    (decrease)
    
    
    (decrease)Americas
    
    $
    26,420
    
    
    $
    28,794
    
    
    $
    (2,374
    )
    
    
    (8.2
    )%
    
    $
    55,312
    
    
    $
    58,365
    
    
    $
    (3,053
    )
    
    
    (5.2
    )%Europe
    
    
    12,630
    
    
    
    10,787
    
    
    
    1,843
    
    
    
    17.1
    
    
    
    23,775
    
    
    
    19,630
    
    
    
    4,145
    
    
    
    21.1Asia Pacific
    
    
    4,020
    
    
    
    3,274
    
    
    
    746
    
    
    
    22.8
    
    
    
    8,557
    
    
    
    6,671
    
    
    
    1,886
    
    
    
    28.3Total net sales
    
    $
    43,070
    
    
    $
    42,855
    
    
    $
    215
    
    
    
    0.5
    %
    
    $
    87,644
    
    
    $
    84,666
    
    
    $
    2,978
    
    
    
    3.5
    %
     Three months ended March 31,
    
    
    $ increase
    
    
    Six months ended March 31,
    
    
    $ increase($ in thousands)
    
    2008
    
    
    2007
    
    
    (decrease)
    
    
    2008
    
    
    2007
    
    
    (decrease)Operating expenses:Sales and marketing
    
    $
    9,034
    
    
    
    21.0
    %
    
    $
    8,427
    
    
    
    19.7
    %
    
    $
    607
    
    
    $
    17,720
    
    
    
    20.2
    %
    
    $
    16,585
    
    
    
    19.6
    %
    
    $
    1,135Research and development
    
    
    6,529
    
    
    
    15.1
    
    
    
    6,068
    
    
    
    14.1
    
    
    
    461
    
    
    
    13,118
    
    
    
    15.0
    
    
    
    12,040
    
    
    
    14.2
    
    
    
    1,078General and administrative
    
    
    3,960
    
    
    
    9.2
    
    
    
    3,302
    
    
    
    7.7
    
    
    
    658
    
    
    
    7,982
    
    
    
    9.1
    
    
    
    6,880
    
    
    
    8.1
    
    
    
    1,102Total operating expenses
    
    $
    19,523
    
    
    
    45.3
    %
    
    $
    17,797
    
    
    
    41.5
    %
    
    $
    1,726
    
    
    $
    38,820
    
    
    
    44.3
    %
    
    $
    35,505
    
    
    
    41.9
    %
    
    $
    3,315
  17




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




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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)
 Six months ended March 31,2008
    
    
    2007
    
    
    ChangeOperating activities
    
    $
    9,333
    
    
    $
    11,269
    
    
    $
    (1,936
    )Investing activities
    
    
    (1,631
    )
    
    
    (11,758
    )
    
    
    10,127Financing activities
    
    
    1,961
    
    
    
    1,651
    
    
    
    310Effect of exchange rate changes on cash
and cash equivalents
    
    
    (903
    )
    
    
    350
    
    
    
    (1,253
    )Net increase in cash and cash equivalents
    
    $
    8,760
    
    
    $
    1,512
    
    
    $
    7,248
 Reconciliation of Net Income to Cash Inflows (Outflows) from Operating Activities (in thousands)
 Six months ended March 31,2008
    
    
    2007
    
    
    ChangeNet income
    
    $
    6,767
    
    
    $
    7,399
    
    
    $
    (632
    )Deferred income taxes
    
    
    (1,920
    )
    
    
    (722
    )
    
    
    (1,198
    )Depreciation and amortization
    
    
    4,792
    
    
    
    5,130
    
    
    
    (338
    )Stock-based compensation
    
    
    1,776
    
    
    
    1,504
    
    
    
    272Excess tax benefits from stock-based compensation
    
    
    (165
    )
    
    
    (155
    )
    
    
    (10
    )(Gain) loss on sale of property, equipment and
improvements
    
    
    (120
    )
    
    
    1
    
    
    
    (121
    )Other reconciling items
    
    
    152
    
    
    
    163
    
    
    
    (11
    )Net income adjusted for non-cash expenses
    
    
    11,282
    
    
    
    13,320
    
    
    
    (2,038
    )Changes in working capital
    
    
    (1,949
    )
    
    
    (2,051
    )
    
    
    102Cash flows provided by operating activities
    
    $
    9,333
    
    
    $
    11,269
    
    
    $
    (1,936
    )
  19




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




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
      21




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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




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
         
 ITEM 4. CONTROLS AND PROCEDURES
    23




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ITEM 4. CONTROLS AND PROCEDURES
    24




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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 AuthorityJoseph T. Dunsmore
    
    
    22,273,572
    
    
    
    531,801Bradley J. Williams
    
    
    22,539,052
    
    
    
    266,321
 b)
    
    Proposal to ratify the appointment of PricewaterhouseCoopers LLP as our
independent registered public accounting firm for the fiscal year ending September 30,
2008. The proposal passed on a vote of 22,561,718 in favor, 227,058 against, 16,597
abstentions and no broker non-votes.
 
 ITEM 5. OTHER INFORMATION
   25




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PART II. OTHER INFORMATION
 
 ITEM 6. EXHIBITS
  Exhibit No.
    
    Description2(a)
    
    Share Purchase Agreement dated April 28, 2008 among Digi International Limited, a
subsidiary of Digi International Inc., and all of the shareholders of Sarian Systems
Limited (excluding schedules and exhibits which the Registrant agrees to furnish
supplementally to the Securities and Exchange Commission upon request)3(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, N.A. (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, N.A. (formerly
known as Norwest Bank Minnesota, National Association), as Rights Agent (4)4(c)
    
    Share Rights Agreement, dated as of April 22, 2008, between the Company and Wells
Fargo Bank, N.A., as Rights Agent (5)4(d)
    
    Form of Amended and Restated Certificate of Powers, Designations, Preferences
and Rights of Series A Junior Participating Preferred Shares (6)10(a)
    
    English Language Summary of Sale and Leaseback Agreement dated February 18,
2008 between Digi International GmbH and Deutsche Structured Finance GmbH & Co.
Alphard KG.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)(5)
    
    Incorporated by reference to Exhibit 4(a) to the Companys Registration Statement on Form 8-A
filed on April 25, 2008 (File No. 1-34033)(6)
    
    Incorporated by reference to Exhibit 4(b) to the Companys Registration Statement on Form 8-A
filed on April 25, 2008 (File No. 1-34033)  26




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##### Table of Contents



DIGI INTERNATIONAL INC.Date: May 8, 2008
    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 Filing2(a)
    
    Share Purchase Agreement dated
April 28, 2008 among Digi International
Limited, a subsidiary of Digi International
Inc., and all of the shareholders of Sarian
Systems Limited (excluding schedules and
exhibits which the Registrant agrees to furnish
supplementally to the Securities and Exchange
Commission upon request)
    
    Filed Electronically3(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, N.A. (formerly known
as Norwest Bank Minnesota, National
Association), as Rights Agent
    
    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, N.A. (formerly known as Norwest Bank
Minnesota, National Association), as Rights
Agent
    
    Incorporated by Reference4(c)
    
    Share Rights Agreement, dated as of April 22,
2008, between the Company and Wells Fargo
Bank, N.A., as Rights Agent
    
    Incorporated by Reference4(d)
    
    Form of Amended and Restated Certificate
of Powers, Designations, Preferences
and Rights of Series A Junior Participating
Preferred Shares
    
    Incorporated by Reference10(a)
    
    English Language Summary of Sale and
Leaseback Agreement dated February 18, 2008
between Digi International GmbH and
Deutsche Structured Finance GmbH & Co.
Alphard KG
    
    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