Good Day Ladies and Gentlemen, and welcome to the Second Quarter 2008 Digi International Earnings Conference Call. My name is Katie, and I’ll be your coordinator for today. At this time, all participants will be in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. If at any time during the call, if you require assistance, please key * followed by 0, and an operator will be happy to assist you. I would like to now turn the call over to your host for today, Mr. Krishnan, Senior Vice President. Sir, you may proceed.

Good afternoon, and thank you for joining us today. Before we start, I need to go over a few details. First, if you do not have a copy of our earnings release, you may access it through the press release section of the Digi web site at www.digi.com. Second, I’d like to remind our listeners that our remarks may contain forward-looking statements and involve risk and uncertainties. These forward-looking statements are not a guarantee of the company’s future performance. The important that may cause actual results to differ materially include but are not limited to the following: Rapid changes in technologies that may displace products sold by Digi, the business environment in which Digi operates, Digi’s reliance on distributors, declining prices of networking products and changes in the company’s level of profitability, changes in the economic conditions in the US or other key markets or geographic areas, the ability to achieve the anticipated benefits and synergies associated with the Sarian acquisition, and the risks that the combined businesses will not be integrated successfully. As you are aware, we are holding this conference call only a short time after the issuance of press release which announced these transactions. Therefore, in according with Regulation FD, the information provided on this call must not include material information that is not included within the text of the press release. Thank you for your understanding. Finally certain of the financial information disclosed on this call includes non-GAAP measures. The information required to be disclosed about these measures including reconciliation to the most comparable GAAP measures are included in the earnings release or in the Form 8-K that we filed before this call. The Form 8-K can also be accessed through the SEC filing section of our investor relations website at www.digi.com. Now, I would like to introduce Mr. Joe Dunsmore, our Chairman, President, and CEO.

Thank you Kris. Welcome to the call everyone. During my opening comments of the conference call, I will focus on the financial and performance highlights of the fiscal Q2, key takeaways from the quarter, an update on why we are bullish about long-term growth projections for the company, a discussion of the Sarian acquisition, and our guidance for the balance of fiscal 2008. We achieved revenue of $43.1 million for the second fiscal quarter of 2008, compared with $42.9 million for the second fiscal quarter of 2007, an increase of $0.2 million, or 0.5%. Revenue in Europe was $12.6 million, or 29.3% of the total for the quarter, an increase of 17.1% year over year. Revenue in the Asia Pacific region was $4.0 million, or 9.3% of the total for the quarter, and increased by 23% year over year. Revenue in the Americas was $26.5 million, or 61.2% of the total for the quarter and decreased year over year by 8.2%. While I’m not satisfied with Q2 results, I believe the very robust international growth is indicative of our core growth strategy that continues to gain momentum despite the softness that we’re currently seeing in the US. Gross profit 53.8% of sales and increased $0.7 million year over year. Net income was $3.1 million in the second fiscal quarter of 2008, or $0.12 per diluted share, and we increased our cash and marketable securities position by $13.2 million to just over $100 million by the end of the quarter. As has been the case a few times over the past 8 years, whenever we see an issue that seems to impact our business momentum, we carefully and introspectively assess it, use it as an opportunity for accelerated improvement, and move forward to achieve even stronger business momentum and results. This…

Thank you Joe. Revenue for the second quarter of 2008 was $43.1 million, an increase of $200,000 million, or 0.5% over the second quarter revenue a year ago. Revenue in the Americas was $26.5 million in the second quarter of 2008, compared to $28.8 million in the comparable period last year, a decrease of $2.3 million or 8.2%, reflecting the current weakness in the US economy. Revenue in Europe was $12.6 million in the second quarter of 2008, compared to $10.8 million in the comparable quarter a year ago, an increase of $1.8 million or 17.1%. Revenue in the Asia Pacific region was $4.0 million in the second quarter of 2008, compared to $3.3 million in the second quarter of 2007, an increase of $700,000, or 22.8%. Revenue from embedded products in the second quarter of 2008 was $21.7 million, compared to $18.4 million in the second quarter of 2007, an increase of $3.3 million, or 17.9%. Revenue from non-embedded products was $21.4 million in the second quarter of 2008, compared to $24.5 million in the second quarter of 2007, a decrease of $3.1 million, or 12.6%. Revenue from embedded products increased by $2.4 million or 36.1% in Europe and Asia Pacific Region and by $900,000 or 7.6% in the Americas for the second quarter of 2008 compared to the same period a year ago. Revenues from the non-embedded products increased by $200,000 or 2.5% in Europe and Asia Pacific Region and decreased by $3.3 million or 19.2% in the Americas for the second quarter of 2008 compared to the second quarter of 2007. The strengthening of the Euro had a favorable impact on revenue of $700,000 in the second quarter of 2008 compared to the second quarter of 2007. Gross profit increased 3% or $700,000 in the second quarter…

(Instructions). Your first question comes from the line of Jeff Evanson from Dougherty & Company. Please proceed. Jeff Evanson - Dougherty & Company LLC: Good afternoon gentlemen. Thanks for taking my questions.

Hi Jeff. Jeff Evanson - Dougherty & Company LLC: Congratulations on the acquisition. It sounds like a very compelling fit. Could you guys talk a little bit about where Sarian’s GMs will be this year and what your thoughts are on those GMs going into 2009?

Yes. We believe that the gross margin range percent will be somewhere in the 45% to 50% ballpark in the short term, and then long run, as we are able to get some purchasing power behind some of the volume, we’ll be able to drive that probably up above 50%, so my expectation would be over the long run, we could potentially drive it up into the mid 50s, but from a plan perspective, I’d say that we’re kind of looking at right now 45% to 50%. Jeff Evanson - Dougherty & Company LLC: Okay, and Joe you mentioned your areas of sales that will turn around when the economy turns around are wireless and drop-in networking I think you said. Is that the reason for the revenue shortfall this quarter?

No, what I was saying was once we get into that time period where the economy gets back to normal GDP levels in the 3% to 4% range, that I would expect overall revenue to organically—not including Sarian—but organically to be in the 10% to 20% ballpark, and that the real big swinger in terms of whether we are at the lower end of that range or the high end of that range is going to be kind of the take rate on the wireless drop-in networking initiative and how quickly that deploys. But my expectation would be that once we get back to normal levels, we will see organic growth rates in the 10% to 20% range, and for your purposes Jeff, as you think about how you kind of look at the business, the way I would guide on that is generally speaking if we see the economy remain in kind of the recession that it is in today—if you listen to the economists and the Bush administration and even Warren Buffet today, they are saying that—the expectation in this kind of situation would be that our growth rates should probably be somewhere in the 0% to 5% range plus or minus. Now, once as we return, we’ll see it bump up to 10% to 20% with general Digi execution determining it is at the low end or high end of that range, and certainly the wireless drop-in networking piece being the most significant variable. Jeff Evanson - Dougherty & Company LLC: Okay. A little bit more on the quarter. You are clearly indicating that non-embedded in Americas was the weakness in the quarter, correct?

That’s right. Jeff Evanson - Dougherty & Company LLC: Is there anything specific that you can point to, any verticals or product lines?

Yes. What we saw was those product lines in non-embedded that are highly US leveraged got hit the hardest. As an example, we saw that the terminal server product line, the USB product line, and the cellular product line are all highly leveraged in terms of the US versus international mix, and as a result of that, they got hit pretty hard. In addition to that, on the terminal server product line, we had one big customer that moved away. Our customer’s customer actually moved away from them, so we had a 1-customer hit there, and then in the USB area, it’s even more severe because I’d say the segment in the US side I think that’s been hit the hardest probably by the recession is the retail point of sale segment, and that’s a segment that we focus on with our USB product line. Jeff Evanson - Dougherty & Company LLC: Okay, and Kris, just a couple of housekeeping questions. I missed the embedded increase in the EU in the quarter.

In the EU, we said that on the embedded side, it increased by $2.4 million, or 36.1%. Jeff Evanson - Dougherty & Company LLC: And then APAC was a really…how did that filter in there?

It was combined EU and APAC, so we didn’t break it out from an embedded/non-embedded breakup. Again, that was $2.4 million. Jeff Evanson - Dougherty & Company LLC: APAC was up 2.4?

No, no. I said Europe and APAC combined was up $2.4 million or 36.1%, a significant component of that would have been Europe. Jeff Evanson - Dougherty & Company LLC: Sure, okay.

Overall, when you look at international versus the Americas, international overall grew about 18.4% and the Americas was down about 8.2%. Jeff Evanson - Dougherty & Company LLC: And then last on the effective tax rate, did you say it was going to go to 37% to 39% for the remainder of the year?

Yeah, that’s where on an annualized basis it would end up being, Jeff, because we have this in-process R&D, and when you have that and it’s a nondeductible item, it tends to drive your effective tax rate for the quarter that you have that to a high number, but on an annualized basis for the year of 2008, we’ll end up between 37% to 39%. Jeff Evanson - Dougherty & Company LLC: So, that’s for the full year?

That’s for the full year, correct. Jeff Evanson - Dougherty & Company LLC: Are you going to have a charge related to this acquisition?

Yes. We said that the in-process R&D is approximately $2.1 million. That would be the charge that we would take during Q3. Jeff Evanson - Dougherty & Company LLC: Alright, and that’s included in the earnings guidance?

And then there is some acquisition-related expense, so the total charge would be about $2.5 million for this quarter. Jeff Evanson - Dougherty & Company LLC: Alright, great! I just have to ask the question because of the way you described your marketable securities. Should we be concerned that there might be some unrecorded loss, and I know this is accounting here, not cash, but what have you found in your analysis there?

Well, as I said, we intend to hold all our marketable securities in our portfolio to maturity, and we believe that realization of any unrealized holding losses is not likely at this time and are therefore not recorded, so clearly we believe it’s not likely. Jeff Evanson - Dougherty & Company LLC: One must assume though that there are some mark-to-market losses if you are to account for it that way.

No. Jeff Evanson - Dougherty & Company LLC: Okay. Alright, thank you.

(Instructions). Your next question comes from the line of Michael Ciarmoli from Boenning & Scattergood Inc. Michael Ciarmoli - Boenning & Scattergood Inc: Hi guys, can you give us a breakdown in terms of what MaxStream-related products did in the quarter?

Yes. MaxStream grew at about 17.9% year over year. MaxStream was another one where it’s highly leveraged in the US. If you look at the US versus international breakdown, it’s improved actually over the last year, but it’s still about 85% US and 15% international, so highly leveraged on the US side and therefore, we think, impacted by the recession. We feel pretty good about the fact that we expect that growth rate to improve over the next couple of quarters. Michael Ciarmoli - Boenning & Scattergood Inc: Okay, and Joe, we talked I guess on the last conference call, and you guys seemed like you weren’t experiencing any major headwind and didn’t change your guidance, so this all came since February-March timeframe? I mean what really changed? I mean the economy at that point on your last call was pretty much in the tank then. I mean I’d imagine you saw some weakening at that point. Were you thinking there’d be a rebound and then you didn’t adjust your guidance at that point, or can you give us any real major headwinds that cropped up?

Yes. If you remember in the call last quarter, when you asked this question, the point I made was that one of the reasons why we didn’t have great internal visibility at that point was that we had just gone through an ERP transition, so one of the challenges that we had was we just didn’t have as much information as we would typically have at that point, and so I’d say that in general what we saw was just a real softness throughout the quarter. From a backlog perspective, we started the quarter pretty strong, but then we just saw softness occur throughout the quarter. As we inspect that, we see that the North American 2-tier distribution channel was real soft. As we inspect that further and talk to them about what they saw from the broader networking category, the feedback we got from major players in the channel that we deal with was that they saw broad-based softness. We track our share position on a weekly basis through the channel, and we saw that our position was holding firm, so clearly what we saw softness in the channel. The other thing we saw in the quarter was especially led by, as I said earlier, retail point of sale vertical segment, we saw several customers pushing out orders, and so the retail point of sale is probably the most significant, but we saw that in other vertical markets as well, and so obviously generally speaking we saw international going gangbusters at 18.4% and then Americas pulling back, and obviously a result of the overall recession and the impact on our business. Generally speaking, our business this quarter was 61% Americas and 39% international. As I mentioned, those companies that have the inverse of that—if it’s 60:40 or better—obviously fared much better, and we see that as a challenge on us to create that inverse situation where it’s 60:40 and where we insulate ourselves from regional dynamics like this. If we had done that coming into this quarter and if you apply the same growth rates, we would have had double digit growth, so if we were 60:40 international, applying that 18.4% would have been a whole different dynamic, and that’s what some other companies saw. So that’s the big challenge we have. We have done a good job I think of driving toward a majority of our revenue coming from what we call growth products over the last several years, which has put us in a position to grow, and what we need to do a little bit job of going forward is really driving that international mix. Michael Ciarmoli - Boenning & Scattergood Inc: Right, and what’s been your exposure to the automated metering market? How’s the opportunities in that space looking?

Very good for us. We sell tens of thousands of units into that market, and have several key customers that we’re shipping to today and have some very large prospects out there that we’re working on, so it’s a very attractive segment for us, not only for the mesh networking endpoint product, but we have gateway opportunities and we have other opportunities in that space, so we see that as a very attractive opportunity going forward. Michael Ciarmoli - Boenning & Scattergood Inc: It’s just the retail point of sale the one vertical that’s really dominating the revenue mix right now?

No, I’d say that that certainly is the one that’s most impacted. I would say in general most verticals are impacted in North America by this dynamic. I’d say the drop in networking space where we have customers who are doing things that are more revolutionary, I think, it does tend to delay things a little bit. It does tend to push to push out trials and pilots a little bit, and so it does have a bit of an impact on that sales cycle, so we have to be realistic about that, but we feel pretty good that we’ve gotten now visibility to what’s happening. We’ve analyzed it and we feel pretty good about the guidance that we’ve put out there for the rest of the year, and the more general guidance that while we are in this situation, we’re going to be looking at lower growth rate of 0% to 5% plus or minus a point or two, and then when we get back to more normal times, that we should be able to bounce back organically to the 10% to 20% kind of ballpark, and then we’ll add Sarian on top of that. That’s the organic Digi piece. Michael Ciarmoli - Boenning & Scattergood Inc: Okay, great! Thanks guys.

Thank you Michael.

Your next question comes from the line of Jay Meier from Feltl & Company. Sir, your may proceed. Jay Meier - Feltl & Company: Thank you. Kris or Joe, would you please go over your operating metric targets once again? You continue to introduce acquisitions that seem to have lower and lower gross margins and I’m trying to get a sense of how this model is going to leverage over time. Would you give us an idea of where you anticipate your gross and operating margins are going?

Yes. We mentioned that our gross margins were 53.8%. If you look at what’s happened with that over the last year, that’s actually up about a point, so it’s been trending slightly up. What I said, however, is over the 3- to 5-year time horizon, I would expect to see higher top line growth opportunity in the market, and I would expect to see more competitive intensity and some pressure on gross margins—a little bit more price elasticity. So I would expect a slight degradation in that over the long run. To that point on Sarian, what I was saying earlier was that while the gross margins are in the 45% to 50% ballpark today, we think there’s opportunity for us to drive that up to at least 50%, and likely into the mid 50s, so that’ll be a big focus. In terms of the other operating metrics, really haven’t changed. The expectation is that over the next 3 to 5 years, we will be able to drive our EBITDA right now which is in the 15% to 20% ballpark up into the 20% to 25% range, and I said earlier in previous calls is the goal would be to get to 25% EBITDA. The way we’ll do that is by driving again into higher growth market opportunities and by driving down our E to R over time faster than any gross margin degradation that we might see, so my perspective on the 3- to 5-year kind of timeframe on the overall operating model really hasn’t changed. Jay Meier - Feltl & Company: And what’s your view of the trajectories over recent years of the historical legacy products? Are you still anticipating that those are going to dry up at around a 20% reduction per year or has that accelerated now, or is that maybe even stalled out as customers try and refresh their existing infrastructure rather than upgrade?

Our expectation is that it’s going to be in that 20% decline, plus or minus about 5% ballpark. This last quarter, I think it was right in that wheelhouse, right around 19% to 20% decline, so my expectation is that we’ll continue on that kind of trajectory. Jay Meier - Feltl & Company: Okay, and you mentioned that you anticipate your gross margin for 2008 will be, I think you said, 50% to 54% for the year, and that is a GAAP number, correct? Historically, you’ve always said that you anticipate 50% to 55% gross margin—is that still in the ballpark for you?

I think we said for this year 52% to 54%/ Jay Meier - Feltl & Company: Yeah, so that’s still in the ballpark, and that’s a GAAP number?

GAAP number, and that’s after the intangible amortization. Jay Meier - Feltl & Company: Okay.

That’s about 1.5% or thereabouts. If you take that out, that shows a higher percentage on gross margin without the amortization. Jay Meier - Feltl & Company: Okay. Thank you.

Thanks, Jay.

Your next question comes from the line of John Vinh from Collins Stewart. Please proceed.

I hopped on a little bit late, so I apologize if this question has already been asked, but Joe, you had always talked about previously kind of a strong back half ramp of MaxStream drop-in networking kind of base on the pipeline. Obviously the slowness of the economy has kind of pushed some of this out. How should we be thinking about this pipeline that you’ve been talking about? Is this just going to get pushed out several quarters, and if so, what’s the timing of that, or does it become more of a subdued ramp and do you have any sort of visibility on when you’d expect things to start recovering in terms of MaxStream/drop-in networking?

Good question, John. In that wireless drop-in networking pipeline, we continue to see growth. We continue to see growth in significant customers, and we’ve got tracking in place in terms of identified large customers that we call 650,000 and above in terms of revenue. We track them through pilots or deployment, and we’ve got metrics that we’re tracking. In terms of large customers identified, we’re doing very well, and what we’re saying is some of those customers are actually moving through pilot into production. We’re seeing a couple moving and others are moving, I think, a bit slower than we would otherwise have expected in a normal economic situation. When we put our plan together and looked at that ramp back in last July, I think our GDP was about 4.9% that quarter, so we were feeling some pretty good wind behind ourselves at that point, and so the expectation would be that the customers are sticking with it. We’re not seeing people back away. They are just not moving quite as aggressive in that space, and the expectation would be that that sales cycle will be longer and the ramp will delay a bit. We’re seeing ramp; we just won’t see it as aggressively this year. We’ll see more hopefully if we see the market come back in fiscal ’09. We will see that to the extent that the market comes back and we execute well, and then we’ll start to see once again double-digit growth rates and hopefully higher double digit, but that’s about as much as I can give you right now, John. I mean we still feel very good, very enthusiastic about the customers we are lining up and the level of differentiation that we have within this customer base and the fact that they will be deploying; it’s just a timing question.

Got it. You talked about large and small customers. Can you quantify—what percentage of your revenue does the $650,000 and above customers make up, and are you able to identify the differences in ordering trends between the large and the small customers? I guess what I’m trying to get at is were the smaller customers more heavily impacted by the slowdown you think based on what you are seeing?

We tend to see the small to medium-sized customers—one of the places we see them is through our 2-tier channel—and certainly we’ve seen softness there, so I believe that they certainly have been impacted by the recession, and I think I commented on the large customers—the drop-in networking business. I think that that holds to other product areas where the sales cycles are just a little bit longer and pushing out, and we’re not seeing customers dropping the program, but we are seeing them push out. It is taking longer.

And roughly what’s your split between your larger customer and your small to medium-sized?

I don’t have that number in front of me right now. We don’t break it out.

Okay. Last question for you is you seem to continue to be pretty optimistic about your growth prospects in Europe. We’ve been hearing about some indications of slowness impacting Europe as well—not as much as North America. Is there any risk there? Do you think that some of that slowdown could impact you or are you starting to see any of that in your Europe numbers, or are you still pretty confident with your European exposure at this point?

We’re not seeing any slowdown as of yet, but obviously what we saw in this quarter was a bit of a surprise at the level of impact, so there’s always risk, but we’re not seeing it in Europe. We’re seeing robust growth opportunity in Europe as well as in Asia Pacific.

European backlog this quarter compared to last—was it up or down?

I can’t break down European, but I can say that overall the backlog coming into the quarter was higher.

Great! Okay, thanks a lot guys.

Thank you.

Your final question comes from the line of Ali Motamed from Boston Partners. Sir, you may proceed. Ali Motamed – Boston Partners: Hi, on the Sarian acquisition, I think you said 6 to 8 cents in ’09. Is that GAAP EPS? I assume there’s probably a good amount of amortization there, so what’s cash EPS?

That is GAAP EPS, and there’s a fair amount of amortization, and Kris is looking for the number. At the top of my head, it was another 8 to 10 cents. Ali Motamed – Boston Partners: Wow! And then you’re expecting $30 million in revenues. That seems a little aggressive. Can you talk about that? Can you talk about what may be different about their business and your current business that’s allowing them to sort of triple revenues—I know there are a lot smaller obviously—but over the course of a 2- or 3-year period?

I am not sure of the $30 million. What we said for fiscal 2009 is $23 to $27 million. Ali Motamed – Boston Partners: Excuse me, $23 to $27 million, but that’s off of what $10 million trailing or less than that even? How does that grow so fast? What leads to that?

Yes. The piece we didn’t give you was how they are tracking this year.

The last 12 months as of December ’07, they are about $12.5 million run rate. Ali Motamed – Boston Partners: So, you basically expect them to double going into next year.

Correct. Ali Motamed – Boston Partners: And now, looking at also, I think you spoke of a $500 million number. I don’t know what year you put on that?

Five years. Five years out. Ali Motamed – Boston Partners: Five years out from now. Okay. Thank you very much.

Thank you.

Any other questions?

Actually, you have a follow-up from Jay Meier. Sir, you may proceed. Jay Meier - Feltl & Company: Regarding the acquisition, did you compete against them at all? Is there any cannibalization of business?

We did compete against them; however, for the most part, they were focused on vertical segments and they had optimized their product strategy to be effective in vertical segments where we had not focused, so they were focused on the ATM area, lotteries, gaming, and wireless backup, and we were focused on remote device networking and telemetry kinds of applications, so there was some overlap there where we competed with them in Europe, and we don’t expect to see… We expect to see just a lot of incremental growth opportunity. We expect to take their products, bring them into the US, get them certified on the US carriers, and aggressively go after those same verticals in the US, so we see upside synergies. We don’t see any real problem. Jay Meier - Feltl & Company: If you guys had similar products to theirs but you were targeting different verticals, and now you are going to bring their products here and get them certified on the carriers, I was under the impression your products were already certified on the carriers, so how does that become additive?

In pursuing those vertical markets, first of all they’ve got really strong routing protocols and routing competencies. In fact, they have a patent in that area that’s very strong, and they have a very strong set of heritage protocols that they support that are well optimized. For instance, synchronized protocols in the banking and ATM environment like BiSync and others are really important, and those are things that we just didn’t do, and so they compete and they target those segments with similar products to the product that we have, but with a very unique feature set that effectively competes in that segment. Jay Meier - Feltl & Company: Alright, so let’s assume for a minute hypothetically that this economic headwind ends on September 30, 2008. Should we assume that in best case scenario, your core business will grow 10% to 20% organically and then we can start throwing on the Sarian revenue target on top of that?

If that’s what occurs, then that’s what you should assume. Jay Meier - Feltl & Company: Okay.

Thank you, Jay. I wanted to give you the guidance in a way that you guys could make your assumptions. Everybody has different assumptions on the economy. I wanted to give you some guidance to help with that part. Jay Meier - Feltl & Company: Yes, that was helpful. Thanks.

Thank you, Jay.

At this time, you have no further questions. I’d like to now turn the call back over to management for closing remarks.

Thank you very much for attending the call. I looking forward to talking to you again in 3 months.

Thank you.

Ladies and Gentlemen, thank you for your participation in today’s conference. This concludes the presentation, and you may now disconnect. Have a wonderful day!