##### 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, 2006.
 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 East
Minnetonka, Minnesota
    
    55343(Address of principal executive offices)
    
    (Zip Code)
  
   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 six months ended March 31, 2006 and 2005
    
    
    3Condensed Consolidated Balance Sheets as of
March 31, 2006 and September 30, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for
the six months ended March 31, 2006 and 2005
    
    
    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
    
    
    21ITEM 4. Controls and Procedures
    
    
    22PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    23ITEM 1A. Risk Factors
    
    
    23ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23ITEM 3. Defaults Upon Senior Securities
    
    
    23ITEM 4. Submission of Matters to a Vote of Securities Holders
    
    
    23ITEM 5. Other Information
    
    
    23ITEM 6. Exhibits
    
    
    24Certification of Chief Executive OfficerCertification of Chief Financial OfficerSection 1350 Certification
  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 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except per common share data)Net sales
    
    $
    34,380
    
    
    $
    29,312
    
    
    $
    67,756
    
    
    $
    58,782Cost of sales
    
    
    14,894
    
    
    
    11,328
    
    
    
    28,904
    
    
    
    22,487Gross profit
    
    
    19,486
    
    
    
    17,984
    
    
    
    38,852
    
    
    
    36,295Operating expenses:Sales and marketing
    
    
    6,802
    
    
    
    6,411
    
    
    
    13,553
    
    
    
    12,854Research and development
    
    
    5,011
    
    
    
    3,820
    
    
    
    9,825
    
    
    
    8,072General and administrative
    
    
    4,461
    
    
    
    3,557
    
    
    
    9,383
    
    
    
    7,072Total operating expenses
    
    
    16,274
    
    
    
    13,788
    
    
    
    32,761
    
    
    
    27,998Operating income
    
    
    3,212
    
    
    
    4,196
    
    
    
    6,091
    
    
    
    8,297Interest income and other, net
    
    
    554
    
    
    
    312
    
    
    
    886
    
    
    
    502Income before income taxes
    
    
    3,766
    
    
    
    4,508
    
    
    
    6,977
    
    
    
    8,799Income tax provision (benefit)
    
    
    1,199
    
    
    
    (4,291
    )
    
    
    2,227
    
    
    
    (2,961
    )Net income
    
    $
    2,567
    
    
    $
    8,799
    
    
    $
    4,750
    
    
    $
    11,760Net income per common share:Basic
    
    $
    0.11
    
    
    $
    0.39
    
    
    $
    0.21
    
    
    $
    0.53Diluted
    
    $
    0.11
    
    
    $
    0.37
    
    
    $
    0.20
    
    
    $
    0.50Weighted average common shares, basic
    
    
    23,001
    
    
    
    22,477
    
    
    
    22,890
    
    
    
    22,277Weighted average common shares, diluted
    
    
    23,687
    
    
    
    23,645
    
    
    
    23,609
    
    
    
    23,473
  3




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DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 March 31, 2006
    
    
    September 30, 2005(in thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    15,690
    
    
    $
    12,990Marketable securities
    
    
    44,317
    
    
    
    37,184Accounts receivable, net
    
    
    18,040
    
    
    
    16,897Inventories
    
    
    18,793
    
    
    
    18,527Other
    
    
    5,272
    
    
    
    5,115Total current assets
    
    
    102,112
    
    
    
    90,713Property, equipment and improvements, net
    
    
    20,266
    
    
    
    20,808Identifiable intangible assets, net
    
    
    22,874
    
    
    
    26,342Goodwill
    
    
    38,530
    
    
    
    38,675Other
    
    
    913
    
    
    
    1,093Total assets
    
    $
    184,695
    
    
    $
    177,631LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Capital lease obligations, current portion
    
    $
    409
    
    
    $
    414Accounts payable
    
    
    4,430
    
    
    
    6,272Income taxes payable
    
    
    5,960
    
    
    
    3,306Accrued expenses:Compensation
    
    
    3,852
    
    
    
    5,308Other
    
    
    5,892
    
    
    
    5,048Deferred revenue
    
    
    56
    
    
    
    370Total current liabilities
    
    
    20,599
    
    
    
    20,718Capital lease obligations, net of current portion
    
    
    930
    
    
    
    1,181Net deferred tax liabilities
    
    
    816
    
    
    
    2,195Total liabilities
    
    
    22,345
    
    
    
    24,094Commitments 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;
23,072,459 and 25,456,755 shares issued
    
    
    258
    
    
    
    255Additional paid-in capital
    
    
    140,617
    
    
    
    136,513Retained earnings
    
    
    40,646
    
    
    
    35,896Accumulated other comprehensive income
    
    
    311
    
    
    
    639Treasury stock, at cost, 2,754,488 and 2,794,562 shares
    
    
    (19,482
    )
    
    
    (19,766
    )Total stockholders equity
    
    
    162,350
    
    
    
    153,537Total liabilities and stockholders equity
    
    $
    184,695
    
    
    $
    177,631
  4




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DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Six months ended March 31,2006
    
    
    2005(in thousands)Operating activities:Net income
    
    $
    4,750
    
    
    $
    11,760Adjustments to reconcile net income to net cash provided by operating activities:Depreciation of property, equipment and improvements
    
    
    1,272
    
    
    
    1,161Amortization of identifiable intangible assets and other assets
    
    
    3,825
    
    
    
    3,028Deferred income taxes
    
    
    (1,256
    )
    
    
    (3,060
    )Tax benefit related to the exercise of stock options
    
    
    
    
    
    
    1,986Stock-based compensation
    
    
    1,163
    
    
    
    37Other
    
    
    (533
    )
    
    
    (204
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (507
    )
    
    
    (2,089
    )Inventories
    
    
    (685
    )
    
    
    (169
    )Other assets
    
    
    (157
    )
    
    
    (1,035
    )Accounts payable and accrued expenses
    
    
    (2,375
    )
    
    
    (1,707
    )Income taxes payable
    
    
    2,674
    
    
    
    (5,283
    )Net cash provided by operating activities
    
    
    8,171
    
    
    
    4,425Investing activities:Purchase of held-to-maturity marketable securities, net
    
    
    (7,133
    )
    
    
    (5,496
    )Purchase of property, equipment, improvements and certain
other intangible assets
    
    
    (894
    )
    
    
    (333
    )Deposit on business acquisition
    
    
    
    
    
    
    (4,400
    )Net cash used in investing activities
    
    
    (8,027
    )
    
    
    (10,229
    )Financing activities:Payments on capital lease obligations
    
    
    (256
    )
    
    
    Tax benefit related to the exercise of stock options
    
    
    330
    
    
    
    Proceeds from stock option plan transactions
    
    
    2,673
    
    
    
    5,072Proceeds from employee stock purchase plan transactions
    
    
    359
    
    
    
    411Net cash provided by financing activities
    
    
    3,106
    
    
    
    5,483Effect of exchange rate changes on cash and cash equivalents
    
    
    (550
    )
    
    
    763Net increase in cash and cash equivalents
    
    
    2,700
    
    
    
    442Cash and cash equivalents, beginning of period
    
    
    12,990
    
    
    
    19,528Cash and cash equivalents, end of period
    
    $
    15,690
    
    
    $
    19,970
  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
   2.
    
    COMPREHENSIVE INCOME
   Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    2,567
    
    
    $
    8,799
    
    
    $
    4,750
    
    
    $
    11,760Foreign currency translation
(loss) gain, net of income tax
    
    
    (74
    )
    
    
    (72
    )
    
    
    (328
    )
    
    
    880Comprehensive income
    
    $
    2,493
    
    
    $
    8,727
    
    
    $
    4,422
    
    
    $
    12,640
    6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 3.
    
    NET INCOME PER COMMON SHARE (CONTINUED)
 Three months ended March 31,
    
    
    Six months ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Net income
    
    $
    2,567
    
    
    $
    8,799
    
    
    $
    4,750
    
    
    $
    11,760Denominator:Denominator for basic net income per common
share  weighted average shares outstanding
    
    
    23,001
    
    
    
    22,477
    
    
    
    22,890
    
    
    
    22,277Effect of dilutive securities:Employee stock options and employee
stock purchase plan
    
    
    686
    
    
    
    1,168
    
    
    
    719
    
    
    
    1,196Denominator for diluted net income per common
share  adjusted weighted average shares
    
    
    23,687
    
    
    
    23,645
    
    
    
    23,609
    
    
    
    23,473Net income per common share, basic
    
    $
    0.11
    
    
    $
    0.39
    
    
    $
    0.21
    
    
    $
    0.53Net income per common share, diluted
    
    $
    0.11
    
    
    $
    0.37
    
    
    $
    0.20
    
    
    $
    0.50
      7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 4.
    
    STOCK-BASED COMPENSATION (CONTINUED)
      Weighted Average
    
    
    Weighted Average
    
    
    AggregateAvailable
    
    
    Options
    
    
    Exercise Price per
    
    
    Contractual Term
    
    
    Intrinsicfor Grant
    
    
    Outstanding
    
    
    Common Share
    
    
    (in years)
    
    
    ValueBalances, September 30, 2005
    
    
    950
    
    
    
    4,511
    
    
    $
    9.98Granted
    
    
    (456
    )
    
    
    456
    
    
    
    12.36Exercised
    
    
    
    
    
    
    (370
    )
    
    
    7.22Forfeited
    
    
    92
    
    
    
    (92
    )
    
    
    10.14Expired
    
    
    24
    
    
    
    (24
    )
    
    
    22.96Balances, March 31, 2006
    
    
    610
    
    
    
    4,481
    
    
    $
    10.38
    
    
    
    5.79
    
    
    $
    10,208Exercisable at March 31, 2006
    
    
    
    
    
    
    3,418
    
    
    $
    9.90
    
    
    
    4.78
    
    
    $
    9,257
 8




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 4.
    
    STOCK-BASED COMPENSATION (CONTINUED)
  Risk free interest rate
    
    4.28% - 4.52%Expected option holding period
    
    3 - 5 yearsExpected volatility
    
    50% - 60%Weighted average volatility
    
    55%Expected dividend yield
    
    0
  Weighted AverageGrant DateNumber of
    
    
    Fair Value perOptions
    
    
    Common ShareNonvested at September 30, 2005
    
    
    967
    
    
    $
    4.81Granted
    
    
    456
    
    
    
    5.80Vested
    
    
    (268
    )
    
    
    2.62Forfeited
    
    
    (92
    )
    
    
    5.55Nonvested at March 31, 2006
    
    
    1,063
    
    
    $
    5.72
  Three months ended
    
    
    Six months endedMarch 31, 2005
    
    
    March 31, 2005Net income as reported
    
    $
    8,799
    
    
    $
    11,760Add: Total stock-based compensation
expense included in reported net
income,
net of related tax effects
    
    
    37
    
    
    
    37Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects
    
    
    (383
    )
    
    
    (733
    )Pro forma net income
    
    $
    8,453
    
    
    $
    11,064Net income per common share:Basic  as reported
    
    $
    0.39
    
    
    $
    0.53Basic  pro forma
    
    $
    0.38
    
    
    $
    0.50Diluted  as reported
    
    $
    0.37
    
    
    $
    0.50Diluted  pro forma
    
    $
    0.36
    
    
    $
    0.48
 9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 4.
    
    STOCK-BASED COMPENSATION (CONTINUED)
  5.
    
    ACQUISITIONS
 Rabbit Semiconductor Inc.
    Three months ended
    
    Six months endedMarch 31, 2005
    
    March 31, 2005Net sales
    
    $
    36,484
    
    
    $
    72,921Net income
    
    $
    7,885
    
    
    $
    10,271Net income per common share, basic
    
    $
    0.35
    
    
    $
    0.46Net income per common share, diluted
    
    $
    0.34
    
    
    $
    0.44
  FS Forth-Systeme GmbH/Sistemas Embebidos S.A.
  10




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
      March 31,
    
    
    September 30,2006
    
    
    2005Raw materials
    
    $
    15,080
    
    
    $
    15,074Work in process
    
    
    871
    
    
    
    569Finished goods
    
    
    2,842
    
    
    
    2,884$
    18,793
    
    
    $
    18,527
   March 31, 2006
    
    
    September 30, 2005Gross
    
    
    
    
    
    
    
    
    
    
    Grosscarrying
    
    
    Accum.
    
    
    
    
    
    
    carrying
    
    
    Accum.amount
    
    
    amort.
    
    
    Net
    
    
    amount
    
    
    amort.
    
    
    NetPurchased and core technology
    
    $
    41,086
    
    
    $
    (28,938
    )
    
    $
    12,148
    
    
    $
    41,086
    
    
    $
    (26,517
    )
    
    $
    14,569License agreements
    
    
    2,440
    
    
    
    (1,690
    )
    
    
    750
    
    
    
    2,440
    
    
    
    (1,490
    )
    
    
    950Patents and trademarks
    
    
    5,857
    
    
    
    (2,383
    )
    
    
    3,474
    
    
    
    5,691
    
    
    
    (1,956
    )
    
    
    3,735Customer maintenance contracts
    
    
    700
    
    
    
    (289
    )
    
    
    411
    
    
    
    700
    
    
    
    (254
    )
    
    
    446Customer relationships
    
    
    7,808
    
    
    
    (1,717
    )
    
    
    6,091
    
    
    
    7,803
    
    
    
    (1,161
    )
    
    
    6,642Total
    
    $
    57,891
    
    
    $
    (35,017
    )
    
    $
    22,874
    
    
    $
    57,720
    
    
    $
    (31,378
    )
    
    $
    26,342
  11




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   2006 (six months)
    
    $
    3,6002007
    
    
    5,8402008
    
    
    3,9462009
    
    
    2,6662010
    
    
    2,4752011
    
    
    2,188
  Six months ended March 31,2006
    
    
    2005Beginning balance, October 1
    
    $
    38,675
    
    
    $
    5,816Purchase price adjustment  FS Forth
    
    
    (147
    )
    
    
    Foreign currency translation adjustment
    
    
    2
    
    
    
    Ending balance, March 31
    
    $
    38,530
    
    
    $
    5,816
       12




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Three months ended March 31,Fiscal
    
    Balance at
    
    Warranties
    
    Settlements
    
    Balance atYear
    
    December 31
    
    issued
    
    made
    
    March 312006
    
    $
    1,068
    
    
    $
    109
    
    
    $
    (127
    )
    
    $
    1,0502005
    
    $
    870
    
    
    $
    171
    
    
    $
    (141
    )
    
    $
    900
 Six months ended March 31,Balance at
    
    Warranties
    
    Settlements
    
    Balance atOctober 1
    
    issued
    
    made
    
    March 312006
    
    $
    1,187
    
    
    $
    108
    (1)
    
    $
    (245
    )
    
    $
    1,0502005
    
    $
    855
    
    
    $
    336
    
    
    $
    (291
    )
    
    $
    900
 
 (1)
    
    Warranties issued includes a change in estimate adjustment of $117,000 in the first
quarter of fiscal 2006.      13




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
         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)
 OVERVIEW (CONTINUED)
         16




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
               (CONTINUED)
 OVERVIEW (CONTINUED)
   CONSOLIDATED RESULTS OF OPERATIONS
  Three months ended March 31,
    
    
    % increase
    
    
    Six months ended March 31,
    
    
    % increase2006 (1)
    
    
    2005
    
    
    (decrease)
    
    
    2006 (1)
    
    
    2005
    
    
    (decrease)Net sales
    
    $
    34,380
    
    
    
    100.0
    %
    
    $
    29,312
    
    
    
    100.0
    %
    
    
    17.3
    %
    
    $
    67,756
    
    
    
    100.0
    %
    
    $
    58,782
    
    
    
    100.0
    %
    
    
    15.3
    %Cost of sales
    
    
    14,894
    
    
    
    43.3
    
    
    
    11,328
    
    
    
    38.7
    
    
    
    31.5
    
    
    
    28,904
    
    
    
    42.7
    
    
    
    22,487
    
    
    
    38.3
    
    
    
    28.5Gross profit
    
    
    19,486
    
    
    
    56.7
    
    
    
    17,984
    
    
    
    61.3
    
    
    
    8.4
    
    
    
    38,852
    
    
    
    57.3
    
    
    
    36,295
    
    
    
    61.7
    
    
    
    7.0Operating expenses:Sales and marketing
    
    
    6,802
    
    
    
    19.8
    
    
    
    6,411
    
    
    
    21.9
    
    
    
    6.1
    
    
    
    13,553
    
    
    
    20.0
    
    
    
    12,854
    
    
    
    21.9
    
    
    
    5.4Research and development
    
    
    5,011
    
    
    
    14.6
    
    
    
    3,820
    
    
    
    13.0
    
    
    
    31.2
    
    
    
    9,825
    
    
    
    14.5
    
    
    
    8,072
    
    
    
    13.7
    
    
    
    21.7General and administrative
    
    
    4,461
    
    
    
    13.0
    
    
    
    3,557
    
    
    
    12.1
    
    
    
    25.4
    
    
    
    9,383
    
    
    
    13.9
    
    
    
    7,072
    
    
    
    12.0
    
    
    
    32.7Total operating expenses
    
    
    16,274
    
    
    
    47.4
    
    
    
    13,788
    
    
    
    47.0
    
    
    
    18.0
    
    
    
    32,761
    
    
    
    48.4
    
    
    
    27,998
    
    
    
    47.6
    
    
    
    17.0Operating income
    
    
    3,212
    
    
    
    9.3
    
    
    
    4,196
    
    
    
    14.3
    
    
    
    (23.5
    )
    
    
    6,091
    
    
    
    8.9
    
    
    
    8,297
    
    
    
    14.1
    
    
    
    (26.6
    )Interest income and other, net
    
    
    554
    
    
    
    1.7
    
    
    
    312
    
    
    
    1.1
    
    
    
    N/M
    *
    
    
    886
    
    
    
    1.4
    
    
    
    502
    
    
    
    0.9
    
    
    
    N/M
    *Income before income taxes
    
    
    3,766
    
    
    
    11.0
    
    
    
    4,508
    
    
    
    15.4
    
    
    
    (16.5
    )
    
    
    6,977
    
    
    
    10.3
    
    
    
    8,799
    
    
    
    15.0
    
    
    
    (20.7
    )Income tax provision (benefit)
    
    
    1,199
    
    
    
    3.5
    
    
    
    (4,291
    )
    
    
    (14.6
    )
    
    
    N/M
    *
    
    
    2,227
    
    
    
    3.3
    
    
    
    (2,961
    )
    
    
    (5.0
    )
    
    
    N/M
    *Net income
    
    $
    2,567
    
    
    
    7.5
    %
    
    $
    8,799
    
    
    
    30.0
    %
    
    
    (70.8
    )%
    
    $
    4,750
    
    
    
    7.0
    %
    
    $
    11,760
    
    
    
    20.0
    %
    
    
    (59.6)
    %
 
 *
    
    N/M means not meaningful(1)
    
    As a result of adopting FAS No. 123R as of October 1, 2005 on a modified prospective basis,
stock-based compensation expense is included in the consolidated results of operations
for the three and six months ended March 31, 2006 as follows (in thousands): Three months ended
    
    
    Six months endedMarch 31, 2006
    
    
    March 31, 2006Cost of sales
    
    $
    23
    
    
    $
    43Sales and marketing
    
    
    193
    
    
    
    319Research and development
    
    
    142
    
    
    
    269General and administrative
    
    
    274
    
    
    
    532Totals
    
    $
    632
    
    
    $
    1,163
 17




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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 (CONTINUED)
          18




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##### Table of Contents



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




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
               (CONTINUED)
  Six months endedMarch 31, 2005Income tax benefit as reported
    
    $
    (2,961
    )Impact of favorable tax settlement
    
    $
    5,689Income tax provision excluding favorable tax settlement
    
    $
    2,728Net income as reported
    
    $
    11,760Net income excluding favorable tax settlement
    
    $
    6,071Effective income tax rate on pretax income as reported
    
    
    -33.7
    %Effective income tax rate on pretax income excluding favorable tax settlement
    
    
    31.0
    %Net income per common share, basic, as reported
    
    $
    0.53Net income per common share, diluted, as reported
    
    $
    0.50Net income per common share, basic, excluding favorable tax settlement
    
    $
    0.27Net income per common share, diluted, excluding favorable tax settlement
    
    $
    0.26
      20




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##### 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
    
    $
    5,873
    
    
    $
    2,013
    
    
    $
    2,244
    
    
    $
    844
    
    
    $
    772Capital leases
    
    
    1,639
    
    
    
    560
    
    
    
    839
    
    
    
    240
    
    
    
    Total contractual cash obligations
    
    $
    7,512
    
    
    $
    2,573
    
    
    $
    3,083
    
    
    $
    1,084
    
    
    $
    772











ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


21




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##### Table of Contents





ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)



















ITEM 4. CONTROLS AND PROCEDURES


22




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALE OF SECURITIES AND USE OF PROCEEDS
   
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  a)
    
    Proposal to elect two directors: Kenneth E. Millard and William N. Priesmeyer,
for a three year-term. Mr. Millard was elected on a vote of 20,140,610 in favor and
196,649 shares withholding authority to vote. Mr. Priesmeyer was elected on a vote of
20,148,011 in favor and 189,248 shares withholding authority to vote.b)
    
    Proposal to ratify the appointment of PricewaterhouseCoopers LLP as the Companys
independent registered public accounting firm for fiscal year 2006. The proposal passed
on a vote of 20,158,106 in favor, 74,425 against, 104,728 abstentions and no broker
non-votes.
 
 ITEM 5. OTHER INFORMATION
 23
    Table of Contents  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, as amended (2)4(a)
    
    Form of Rights Agreement, dated as of June 10, 1998 between Digi International
Inc. and Wells Fargo Bank Minnesota, 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 Minnesota, National
Association (formerly known as Norwest Bank Minnesota, National Association), as
Rights Agent (4)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-K for the year ended
September 30, 2001 (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) 
 24
    Table of Contents  DIGI INTERNATIONAL INC.Date: May 8, 2006
    By:
    /s/ Subramanian KrishnanSubramanian KrishnanChief Financial Officer
(duly authorized officer and Principal Financial Officer) 25




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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 reference to
the corresponding exhibit number to the
Companys Form 10-K for the year ended
September 30, 2001
(File No. 0-17972))
    
    Incorporated by Reference4(a)
    
    Form of Rights Agreement, dated as of
June 10, 1998 between Digi International Inc.
and Wells Fargo Bank Minnesota, 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 Minnesota, 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
 26