##### 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, 2010
 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 
incorporation or organization)
    
    (I.R.S. Employer
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
 Yes
o No o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company 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, 2010 and 2009
    
    
    3Condensed Consolidated Balance Sheets as of

March 31, 2010 and September 30, 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for

the six months ended March 31, 2010 and 2009
    
    
    5Notes to Condensed Consolidated Financial
Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    17Forward-looking Statements
    
    
    17ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24ITEM 4. Controls and Procedures
    
    
    25PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    26ITEM 1A. Risk Factors
    
    
    26ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26ITEM 3. Defaults Upon Senior Securities
    
    
    26ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    27ITEM 5. Other Information
    
    
    27ITEM 6. Exhibits
    
    
    28Exhibit 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 31,2010
    
    
    2009
    
    
    2010
    
    
    2009(in thousands, except per common share data)Net sales
    
    $
    45,076
    
    
    $
    40,085
    
    
    $
    88,044
    
    
    $
    81,446Cost of sales (exclusive of amortization of purchased
and core technology shown separately below)
    
    
    21,254
    
    
    
    19,908
    
    
    
    41,417
    
    
    
    38,977Amortization of purchased and core technology
    
    
    1,074
    
    
    
    1,008
    
    
    
    2,166
    
    
    
    2,052Gross profit
    
    
    22,748
    
    
    
    19,169
    
    
    
    44,461
    
    
    
    40,417Operating expenses:Sales and marketing
    
    
    9,603
    
    
    
    8,976
    
    
    
    18,843
    
    
    
    18,601Research and development
    
    
    7,078
    
    
    
    6,196
    
    
    
    13,564
    
    
    
    13,170General and administrative
    
    
    4,224
    
    
    
    3,398
    
    
    
    8,382
    
    
    
    7,281Restructuring
    
    
    (352
    )
    
    
    
    
    
    
    (352
    )
    
    
    Total operating expenses
    
    
    20,553
    
    
    
    18,570
    
    
    
    40,437
    
    
    
    39,052Operating income
    
    
    2,195
    
    
    
    599
    
    
    
    4,024
    
    
    
    1,365Other income, net:Interest income
    
    
    90
    
    
    
    404
    
    
    
    183
    
    
    
    984Interest expense
    
    
    (32
    )
    
    
    (50
    )
    
    
    (84
    )
    
    
    (135
    )Other income (expense)
    
    
    301
    
    
    
    41
    
    
    
    263
    
    
    
    (195
    )Total other income, net
    
    
    359
    
    
    
    395
    
    
    
    362
    
    
    
    654Income before income taxes
    
    
    2,554
    
    
    
    994
    
    
    
    4,386
    
    
    
    2,019Income tax provision
    
    
    868
    
    
    
    279
    
    
    
    1,501
    
    
    
    288Net income
    
    $
    1,686
    
    
    $
    715
    
    
    $
    2,885
    
    
    $
    1,731Net income per common share:Basic
    
    $
    0.07
    
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.07Diluted
    
    $
    0.07
    
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.07Weighted average common shares:Basic
    
    
    24,816
    
    
    
    24,953
    
    
    
    24,758
    
    
    
    25,169Diluted
    
    
    25,213
    
    
    
    25,195
    
    
    
    25,072
    
    
    
    25,439
   3




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##### Table of Contents



DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 March 31,
    
    
    September 30,2010
    
    
    2009(in thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    29,433
    
    
    $
    48,434Marketable securities
    
    
    47,290
    
    
    
    22,311Accounts receivable, net
    
    
    22,996
    
    
    
    19,032Inventories
    
    
    25,987
    
    
    
    26,619Other
    
    
    6,065
    
    
    
    6,259Total current assets
    
    
    131,771
    
    
    
    122,655Marketable securities, long-term
    
    
    4,267
    
    
    
    5,063Property, equipment and improvements, net
    
    
    16,506
    
    
    
    16,678Identifiable intangible assets, net
    
    
    22,895
    
    
    
    26,877Goodwill
    
    
    85,587
    
    
    
    86,558Other
    
    
    970
    
    
    
    1,117Total assets
    
    $
    261,996
    
    
    $
    258,948LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    8,583
    
    
    $
    5,567Accrued compensation
    
    
    5,098
    
    
    
    3,275Accrued warranty
    
    
    965
    
    
    
    970Deferred payment on acquisition
    
    
    
    
    
    
    2,966Restructuring
    
    
    225
    
    
    
    721Other
    
    
    3,062
    
    
    
    3,035Total current liabilities
    
    
    17,933
    
    
    
    16,534Income taxes payable
    
    
    4,922
    
    
    
    4,893Deferred tax liabilities
    
    
    3,408
    
    
    
    4,331Deferred payment on acquisition
    
    
    2,862
    
    
    
    2,812Other noncurrent liabilities
    
    
    626
    
    
    
    792Total liabilities
    
    
    29,751
    
    
    
    29,362Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value; 2,000,000 shares authorized;
none issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 60,000,000 shares authorized;
28,573,894 and 28,409,198 shares issued
    
    
    286
    
    
    
    284Additional paid-in capital
    
    
    183,470
    
    
    
    181,282Retained earnings
    
    
    85,593
    
    
    
    82,708Accumulated other comprehensive loss
    
    
    (9,392
    )
    
    
    (6,527
    )Treasury stock, at cost, 3,649,216 and 3,708,302 shares
    
    
    (27,712
    )
    
    
    (28,161
    )Total stockholders equity
    
    
    232,245
    
    
    
    229,586Total liabilities and stockholders equity
    
    $
    261,996
    
    
    $
    258,948
   4




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##### Table of Contents



DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Six months ended March 31,2010
    
    
    2009(in thousands)Operating activities:Net income
    
    $
    2,885
    
    
    $
    1,731Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation of property, equipment and improvements
    
    
    1,334
    
    
    
    1,203Amortization of identifiable intangible assets and other assets
    
    
    3,869
    
    
    
    3,662Stock-based compensation
    
    
    1,824
    
    
    
    1,842Excess tax benefits from stock-based compensation
    
    
    (39
    )
    
    
    (42
    )Deferred income tax benefit
    
    
    (848
    )
    
    
    (1,540
    )Restructuring
    
    
    (352
    )
    
    
    Other
    
    
    (3
    )
    
    
    40Changes in operating assets and liabilities
    
    
    285
    
    
    
    (7,694
    )Net cash provided by (used in) operating activities
    
    
    8,955
    
    
    
    (798
    )Investing activities:Purchase of marketable securities
    
    
    (28,510
    )
    
    
    (7,647
    )Proceeds from maturities of marketable securities
    
    
    4,334
    
    
    
    32,063Deferred cash payout for acquisition of Spectrum Design Solutions, Inc.
    
    
    (3,000
    )
    
    
    Purchase of property, equipment, improvements and certain other intangible assets, net of proceeds from sale
    
    
    (1,469
    )
    
    
    (1,666
    )Net cash (used in) provided by investing activities
    
    
    (28,645
    )
    
    
    22,750Financing activities:Payments on capital lease obligations
    
    
    (7
    )
    
    
    (139
    )Excess tax benefits from stock-based compensation
    
    
    39
    
    
    
    42Proceeds from stock option plan transactions and other
    
    
    1,032
    
    
    
    120Proceeds from employee stock purchase plan transactions
    
    
    445
    
    
    
    529Purchase of treasury stock
    
    
    
    
    
    
    (6,150
    )Net cash provided by (used in) financing activities
    
    
    1,509
    
    
    
    (5,598
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (820
    )
    
    
    (1,989
    )Net (decrease) increase in cash and cash equivalents
    
    
    (19,001
    )
    
    
    14,365Cash and cash equivalents, beginning of period
    
    
    48,434
    
    
    
    14,176Cash and cash equivalents, end of period
    
    $
    29,433
    
    
    $
    28,541
   5




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##### Table of Contents



DIGI INTERNATIONAL INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  Basis of Presentation
   Recently Issued Accounting Pronouncements
     6




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
      Three months ended March 31,
    
    
    Six months ended March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Numerator:Net income
    
    $
    1,686
    
    
    $
    715
    
    
    $
    2,885
    
    
    $
    1,731Denominator:Denominator for basic net income per common
share  weighted average shares outstanding
    
    
    24,816
    
    
    
    24,953
    
    
    
    24,758
    
    
    
    25,169Effect of dilutive securities:Employee stock options and employee
stock purchase plan
    
    
    397
    
    
    
    242
    
    
    
    314
    
    
    
    270Denominator for diluted net income per common
share  adjusted weighted average shares
    
    
    25,213
    
    
    
    25,195
    
    
    
    25,072
    
    
    
    25,439Net income per common share, basic
    
    $
    0.07
    
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.07Net income per common share, diluted
    
    $
    0.07
    
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.07
   7




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   Three months ended March 31,
    
    
    Six months ended March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    1,686
    
    
    $
    715
    
    
    $
    2,885
    
    
    $
    1,731Other comprehensive income (loss):Change in foreign currency translation adjustment
    
    
    (2,136
    )
    
    
    (1,713
    )
    
    
    (2,846
    )
    
    
    (9,614
    )Change in unrealized gain (loss) on investments
    
    
    (52
    )
    
    
    10
    
    
    
    7
    
    
    
    (3
    )Less income tax (provision) benefit
    
    
    20
    
    
    
    (4
    )
    
    
    (3
    )
    
    
    1Reclassification of gain included in net income
    
    
    (36
    )
    
    
    
    
    
    
    (36
    )
    
    
    Less income tax (provision) benefit
    
    
    14
    
    
    
    
    
    
    
    14
    
    
    
    Comprehensive income (loss)
    
    $
    (504
    )
    
    $
    (992
    )
    
    $
    21
    
    
    $
    (7,885
    )
  (in thousands)
    
    March 31, 2010
    
    
    September 30, 2009Accounts receivable, net:Accounts receivable
    
    $
    23,512
    
    
    $
    19,656Less allowance for doubtful accounts
    
    
    516
    
    
    
    624$
    22,996
    
    
    $
    19,032Inventories:Raw materials
    
    $
    22,173
    
    
    $
    21,359Work in process
    
    
    594
    
    
    
    452Finished goods
    
    
    3,220
    
    
    
    4,808$
    25,987
    
    
    $
    26,619Other accrued expenses:Accrued professional fees
    
    $
    529
    
    
    $
    696Deferred gain on building sale  short-term
    
    
    254
    
    
    
    276Other accrued expenses
    
    
    2,279
    
    
    
    2,063$
    3,062
    
    
    $
    3,035
   MobiApps Holdings Private Limited
   8




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     Amortized
    
    
    Unrealized
    
    
    UnrealizedAt March 31, 2010 (in thousands)
    
    Cost (1)
    
    
    Gains
    
    
    Losses (2)
    
    
    Fair Value (1)Current marketable securities:Corporate bonds
    
    $
    25,574
    
    
    $
    198
    
    
    $
    (214
    )
    
    $
    25,558Certificates of deposit
    
    
    13,543
    
    
    
    10
    
    
    
    (13
    )
    
    
    13,540Government municipal bonds
    
    
    8,194
    
    
    
    3
    
    
    
    (5
    )
    
    
    8,192Current marketable securities
    
    
    47,311
    
    
    
    211
    
    
    
    (232
    )
    
    
    47,290Non-current marketable securities:Corporate bonds
    
    
    2,157
    
    
    
    
    
    
    
    (12
    )
    
    
    2,145Government municipal bonds
    
    
    2,131
    
    
    
    
    
    
    
    (9
    )
    
    
    2,122Non-current marketable securities
    
    
    4,288
    
    
    
    
    
    
    
    (21
    )
    
    
    4,267Total marketable securities
    
    $
    51,599
    
    
    $
    211
    
    
    $
    (253
    )
    
    $
    51,557
 (1)
    
    Included in amortized cost and fair value is purchased and accrued interest of $538,085.(2)
    
    The aggregate related fair value of securities with unrealized losses as of March 31, 2010 was $26,555,744.  9




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Amortized
    
    
    Unrealized
    
    
    UnrealizedAt September 30, 2009 (in thousands)
    
    Cost (1)
    
    
    Gains
    
    
    Losses (3)
    
    
    Fair Value (1)Current marketable securities:Corporate bonds (2)
    
    $
    4,236
    
    
    $
    18
    
    
    $
    
    
    
    $
    4,254Certificates of deposit
    
    
    10,022
    
    
    
    4
    
    
    
    (1
    )
    
    
    10,025Government municipal bonds
    
    
    8,023
    
    
    
    11
    
    
    
    (2
    )
    
    
    8,032Current marketable securities
    
    
    22,281
    
    
    
    33
    
    
    
    (3
    )
    
    
    22,311Non-current marketable securities:Corporate bonds
    
    
    5,107
    
    
    
    
    
    
    
    (44
    )
    
    
    5,063Total marketable securities
    
    $
    27,388
    
    
    $
    33
    
    
    $
    (47
    )
    
    $
    27,374
 (1)
    
    Included in amortized cost and fair value is purchased and accrued interest of $263,883.(2)
    
    The Lehman Brothers Bond is included in amortized cost at a fair value of $134,100.(3)
    
    The aggregate related fair value of securities with unrealized losses as of September 30, 2009 was $9,009,428.    
    
    Level 1  Inputs are quoted prices in active markets for identical assets or liabilities.
    
    Level 2  Inputs include quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities in markets that
are not active, and inputs (other than quoted prices) that are observable for the asset
or liability, either directly or indirectly.
    
    Level 3  Inputs are unobservable for the asset or liability. See the section below
titled Level 3 Valuation Techniquesfor further discussion of how we determine fair
value for investments classified as Level 3.
 Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
   10




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   Fair Value Measurements at March 31, 2010 Using:Total carrying
    
    
    Quoted price in
    
    
    Significant other
    
    
    Significantvalue at
    
    
    active markets
    
    
    observable inputs
    
    
    unobservable inputsMarch 31, 2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash equivalents:Money market
    
    $
    12,780
    
    
    $
    12,780
    
    
    $
    
    
    
    $
    Available-for-sale marketable securities:Corporate bonds
    
    
    27,703
    
    
    
    
    
    
    
    27,703
    
    
    
    Certificates of deposit
    
    
    13,540
    
    
    
    
    
    
    
    13,540
    
    
    
    Government municipal bonds
    
    
    10,314
    
    
    
    
    
    
    
    10,314
    
    
    
    Total cash equivalents and marketable securities measured at fair value
    
    $
    64,337
    
    
    $
    12,780
    
    
    $
    51,557
    
    
    $
    
   Level 3 Valuation Techniques
   Balance at December 31, 2009
    
    $
    134Sale of security
    
    
    (170
    )Realized gain recorded in other income (expense)
    
    
    36Balance at March 31, 2010
    
    $
    
  11




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     March 31, 2010
    
    
    September 30, 2009Gross
    
    
    
    
    
    
    
    
    
    
    Grosscarrying
    
    
    Accum.
    
    
    
    
    
    
    carrying
    
    
    Accum.amount
    
    
    amort.
    
    
    Net
    
    
    amount
    
    
    amort.
    
    
    NetPurchased and core technology
    
    $
    46,186
    
    
    $
    (36,829
    )
    
    $
    9,357
    
    
    $
    46,583
    
    
    $
    (34,893
    )
    
    $
    11,690License agreements
    
    
    2,840
    
    
    
    (2,501
    )
    
    
    339
    
    
    
    2,840
    
    
    
    (2,464
    )
    
    
    376Patents and trademarks
    
    
    9,495
    
    
    
    (6,054
    )
    
    
    3,441
    
    
    
    9,292
    
    
    
    (5,536
    )
    
    
    3,756Customer maintenance contracts
    
    
    700
    
    
    
    (569
    )
    
    
    131
    
    
    
    700
    
    
    
    (534
    )
    
    
    166Customer relationships
    
    
    17,288
    
    
    
    (8,099
    )
    
    
    9,189
    
    
    
    17,607
    
    
    
    (7,334
    )
    
    
    10,273Non-compete agreements
    
    
    1,028
    
    
    
    (590
    )
    
    
    438
    
    
    
    1,041
    
    
    
    (425
    )
    
    
    616Total
    
    $
    77,537
    
    
    $
    (54,642
    )
    
    $
    22,895
    
    
    $
    78,063
    
    
    $
    (51,186
    )
    
    $
    26,877
   2010 (six months)
    
    $
    3,7182011
    
    
    6,6072012
    
    
    4,5672013
    
    
    3,0422014
    
    
    2,2882015
    
    
    1,240
  Six months ended March 31,2010
    
    
    2009Beginning balance, October 1
    
    $
    86,558
    
    
    $
    86,578Foreign currency translation adjustment
    
    
    (971
    )
    
    
    (3,456
    )Ending balance, March 31
    
    $
    85,587
    
    
    $
    83,122
  12




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     Uncertain tax positions as of December 31, 2009
    
    $
    4,121Decreases related to:Settlements
    
    
    (32
    )Expiration of the statute of limitations
    
    
    (13
    )Uncertain tax positions as of March 31, 2010
    
    $
    4,076
        13




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   Three months ended March 31,Balance at
    
    
    Warranties
    
    
    Settlements
    
    
    Balance atFiscal year
    
    January 1
    
    
    issued
    
    
    made
    
    
    March 312010
    
    $
    952
    
    
    $
    229
    
    
    $
    (216
    )
    
    $
    9652009
    
    $
    1,230
    
    
    $
    123
    
    
    $
    (210
    )
    
    $
    1,143
 Six months ended March 31,Balance at
    
    
    Warranties
    
    
    Settlements
    
    
    Balance atFiscal year
    
    October 1
    
    
    issued
    
    
    made
    
    
    March 312010
    
    $
    970
    
    
    $
    425
    
    
    $
    (430
    )
    
    $
    9652009
    
    $
    1,214
    
    
    $
    344
    
    
    $
    (415
    )
    
    $
    1,143
   Contingent obligations
 In re Initial Public Offering Securities
Litigation
    14




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     EmployeeTerminationCosts
    
    
    Other
    
    
    TotalBalance at September 30, 2009
    
    $
    620
    
    
    $
    101
    
    
    $
    721Restructuring charge
    
    
    75
    
    
    
    
    
    
    
    75Payments
    
    
    (208
    )
    
    
    (11
    )
    
    
    (219
    )Write-downs
    
    
    (352
    )
    
    
    
    
    
    
    (352
    )Balance at March 31, 2010
    
    $
    135
    
    
    $
    90
    
    
    $
    225
    15




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##### Table of Contents



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
       16




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
 OVERVIEW
        17




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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,
    
    
    % increase2010
    
    
    2009
    
    
    (decrease)
    
    
    2010
    
    
    2009
    
    
    (decrease)Net sales
    
    $
    45,076
    
    
    
    100.0
    %
    
    $
    40,085
    
    
    
    100.0
    %
    
    
    12.5
    %
    
    $
    88,044
    
    
    
    100.0
    %
    
    $
    81,446
    
    
    
    100.0
    %
    
    
    8.1
    %Cost of sales (exclusive of amortization of purchased and core technology
shown separately below)
    
    
    21,254
    
    
    
    47.1
    
    
    
    19,908
    
    
    
    49.7
    
    
    
    6.8
    
    
    
    41,417
    
    
    
    47.0
    
    
    
    38,977
    
    
    
    47.9
    
    
    
    6.3Amortization of purchased and
core technology
    
    
    1,074
    
    
    
    2.4
    
    
    
    1,008
    
    
    
    2.5
    
    
    
    6.5
    
    
    
    2,166
    
    
    
    2.5
    
    
    
    2,052
    
    
    
    2.5
    
    
    
    5.6Gross profit
    
    
    22,748
    
    
    
    50.5
    
    
    
    19,169
    
    
    
    47.8
    
    
    
    18.7
    
    
    
    44,461
    
    
    
    50.5
    
    
    
    40,417
    
    
    
    49.6
    
    
    
    10.0Operating expenses
    
    
    20,553
    
    
    
    45.6
    
    
    
    18,570
    
    
    
    46.3
    
    
    
    10.7
    
    
    
    40,437
    
    
    
    45.9
    
    
    
    39,052
    
    
    
    47.9
    
    
    
    3.5Operating income
    
    
    2,195
    
    
    
    4.9
    
    
    
    599
    
    
    
    1.5
    
    
    
    N/M
    
    
    
    4,024
    
    
    
    4.6
    
    
    
    1,365
    
    
    
    1.7
    
    
    
    N/MInterest income and other, net
    
    
    359
    
    
    
    0.8
    
    
    
    395
    
    
    
    1.0
    
    
    
    (9.1
    )
    
    
    362
    
    
    
    0.4
    
    
    
    654
    
    
    
    0.8
    
    
    
    (44.6
    )Income before income taxes
    
    
    2,554
    
    
    
    5.7
    
    
    
    994
    
    
    
    2.5
    
    
    
    N/M
    
    
    
    4,386
    
    
    
    5.0
    
    
    
    2,019
    
    
    
    2.5
    
    
    
    N/MIncome tax provision
    
    
    868
    
    
    
    2.0
    
    
    
    279
    
    
    
    0.7
    
    
    
    N/M
    
    
    
    1,501
    
    
    
    1.7
    
    
    
    288
    
    
    
    0.4
    
    
    
    N/MNet income
    
    $
    1,686
    
    
    
    3.7
    %
    
    $
    715
    
    
    
    1.8
    %
    
    
    N/M
    %
    
    $
    2,885
    
    
    
    3.3
    %
    
    $
    1,731
    
    
    
    2.1
    %
    
    
    66.7
    %
    Three months ended March 31,
    
    
    % increase
    
    
    Six months ended March 31,
    
    
    % increase($ in thousands)
    
    2010
    
    
    2009
    
    
    (decrease)
    
    
    2010
    
    
    2009
    
    
    (decrease)Non-embedded
    
    $
    24,910
    
    
    
    55.3
    %
    
    $
    22,715
    
    
    
    56.7
    %
    
    
    9.7
    %
    
    $
    49,807
    
    
    
    56.6
    %
    
    $
    46,055
    
    
    
    56.5
    %
    
    
    8.1
    %Embedded
    
    
    20,166
    
    
    
    44.7
    
    
    
    17,370
    
    
    
    43.3
    
    
    
    16.1
    
    
    
    38,237
    
    
    
    43.4
    
    
    
    35,391
    
    
    
    43.5
    
    
    
    8.0Total net sales
    
    $
    45,076
    
    
    
    100.0
    %
    
    $
    40,085
    
    
    
    100.0
    %
    
    
    12.5
    %
    
    $
    88,044
    
    
    
    100.0
    %
    
    $
    81,446
    
    
    
    100.0
    %
    
    
    8.1
    %
 Non-embedded
   18




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
  Embedded
   Three months ended March 31,
    
    
    $ increase
    
    
    % increase
    
    
    Six months ended March 31,
    
    
    $ increase
    
    
    % increase($ in thousands)
    
    2010
    
    
    2009
    
    
    (decrease)
    
    
    (decrease)
    
    
    2010
    
    
    2009
    
    
    (decrease)
    
    
    (decrease)North America (1)
    
    $
    26,515
    
    
    $
    20,724
    
    
    $
    5,791
    
    
    
    27.9
    %
    
    $
    52,040
    
    
    $
    43,869
    
    
    $
    8,171
    
    
    
    18.6
    %EMEA (2)
    
    
    12,347
    
    
    
    14,934
    
    
    
    (2,587
    )
    
    
    (17.3
    )
    
    
    23,368
    
    
    
    28,262
    
    
    
    (4,894
    )
    
    
    (17.3
    )Asia countries
    
    
    5,238
    
    
    
    3,776
    
    
    
    1,462
    
    
    
    38.7
    
    
    
    10,573
    
    
    
    7,610
    
    
    
    2,963
    
    
    
    38.9Latin America
    
    
    976
    
    
    
    651
    
    
    
    325
    
    
    
    49.9
    
    
    
    2,063
    
    
    
    1,705
    
    
    
    358
    
    
    
    21.0Total net sales
    
    $
    45,076
    
    
    $
    40,085
    
    
    $
    4,991
    
    
    
    12.5
    %
    
    $
    88,044
    
    
    $
    81,446
    
    
    $
    6,598
    
    
    
    8.1
    %
 (1)
    
    Includes Satellite net sales of $0 and $100,605 for the three and six months ended March 31, 2010, respectively.(2)
    
    Includes Satellite net sales of $360,497 and $841,632 for the three and six months ended March 31, 2010, respectively.       19




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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
    
    
    Six months ended March 31,
    
    
    $ increase($ in thousands)
    
    2010
    
    
    2009
    
    
    (decrease)
    
    
    2010
    
    
    2009
    
    
    (decrease)Sales and marketing
    
    $
    9,603
    
    
    
    21.3
    %
    
    $
    8,976
    
    
    
    22.4
    %
    
    $
    627
    
    
    $
    18,843
    
    
    
    21.4
    %
    
    $
    18,601
    
    
    
    22.8
    %
    
    $
    242Research and development
    
    
    7,078
    
    
    
    15.7
    
    
    
    6,196
    
    
    
    15.4
    
    
    
    882
    
    
    
    13,564
    
    
    
    15.4
    
    
    
    13,170
    
    
    
    16.2
    
    
    
    394General and administrative
    
    
    4,224
    
    
    
    9.4
    
    
    
    3,398
    
    
    
    8.5
    
    
    
    826
    
    
    
    8,382
    
    
    
    9.5
    
    
    
    7,281
    
    
    
    8.9
    
    
    
    1,101Restructuring
    
    
    (352
    )
    
    
    (0.8
    )
    
    
    
    
    
    
    0.0
    
    
    
    (352
    )
    
    
    (352
    )
    
    
    (0.4
    )
    
    
    
    
    
    
    0.0
    
    
    
    (352
    )Total operating expenses
    
    $
    20,553
    
    
    
    45.6
    %
    
    $
    18,570
    
    
    
    46.3
    %
    
    $
    1,983
    
    
    $
    40,437
    
    
    
    45.9
    %
    
    $
    39,052
    
    
    
    47.9
    %
    
    $
    1,385
      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)
          22




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
       Six months ended March 31,
    
    
    % increase2010
    
    
    2009
    
    
    (decrease)Euro
    
    
    1.4326
    
    
    
    1.3141
    
    
    
    9.0
    %British Pound
    
    
    1.5985
    
    
    
    1.5087
    
    
    
    6.0
    %Yen
    
    
    0.0111
    
    
    
    0.0106
    
    
    
    5.0
    %
   23




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##### Table of Contents



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




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  We are
investigating potential violations gifts, travel and entertainment policy, as well as corresponding internal control issues, including any possible violations law, such as the Foreign
Corrupt Practices Act. The outcome and impact this investigation are unknown at this time.
  
 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 Authority
    
    
    Broker Non-VoteGuy C. Jackson
    
    
    9,879,923
    
    
    
    8,760,181
    
    
    
    3,252,897Ahmed Nawaz
    
    
    10,068,360
    
    
    
    8,571,744
    
    
    
    3,252,897
 b)
    
    Proposal to approve the Digi International Inc. 2000 Omnibus Stock Plan, as
Amended and Restated as of December 4, 2009. The proposal passed on a vote of 9,820,744
in favor, 8,730,774 against, 88,586 abstentions and 3,252,897 broker non-votes.
 c)
    
    Proposal to approve the Digi International Inc. Employee Stock Purchase Plan, as
Amended and Restated as of December 4, 2009. The proposal passed on a vote of
18,277,562 in favor, 336,573 against, 25,969 abstentions and 3,252,897 broker non-votes.
 d)
    
    Proposal to ratify the appointment of PricewaterhouseCoopers LLP as our
independent registered public accounting firm for the fiscal year ending September 30,
2010. The proposal passed on a vote of 21,764,364 in favor, 108,870 against, 19,767
abstentions and no broker non-votes.
  
  25




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##### Table of Contents



ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 Exhibit No.
    
    Description3
    (a)
    
    Restated Certificate of Incorporation of the Company, as amended (1)3
    (b)
    
    Amended and Restated By-Laws of the Company (2)4
    (a)
    
    Share Rights Agreement, dated as of April 22, 2008, between the Company and Wells
Fargo Bank, N.A., as Rights Agent (3)4
    (b)
    
    Form of Amended and Restated Certificate of Powers, Designations, Preferences and
Rights of Series A Junior Participating Preferred Shares (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 Corporate Controller and Acting Principal 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
June 30, 2008 (File No. 1-34033)(3)
    
    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)(4)
    
    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 10, 2010
    By:

/s/
Brenda MuellerBrenda MuellerCorporate Controller and Acting Principal Financial Officer(Principal Financial and
Accounting Officer)  27




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##### Table of Contents



Exhibit Number
    
    Document Description
    
    Form of Filing3(a)
    
    
    Restated Certificate of Incorporation of
the Company, as Amended (incorporated by
reference to the corresponding exhibit
number to the Companys Form 10-K for the
year ended September 30, 1993 (File No.
0-17972))
    
    Incorporated by
Reference3(b)
    
    
    Amended and Restated By-Laws of the Company
    
    Incorporated by
Reference4(a)
    
    
    Share Rights Agreement, dated as of April
22, 2008, between the Company and Wells
Fargo Bank, N.A., as Rights Agent
    
    Incorporated by
Reference4(b)
    
    
    Form of Amended and Restated Certificate
of Powers, Designations, Preferences and
Rights of Series A Junior Participating
Preferred Shares
    
    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
Corporate Controller and Acting Principal Financial Officer
    
    Filed Electronically32
    
    
    Section 1350 Certification
    
    Filed Electronically
  28