##### 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, 2009
 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
 o 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, 2009 and 2008
    
    
    3Condensed Consolidated Balance Sheets as of March 31, 2009 and September 30, 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2009 and 2008
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Forward-looking Statements
    
    
    19ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28ITEM 4. Controls and Procedures
    
    
    29PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    29ITEM 1A. Risk Factors
    
    
    29ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29ITEM 3. Defaults Upon Senior Securities
    
    
    30ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    30ITEM 5. Other Information
    
    
    30ITEM 6. Exhibits
    
    
    31Exhibit 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 31,2009
    
    
    2008
    
    
    2009
    
    
    2008(in thousands, except per common share data)Net sales
    
    $
    40,085
    
    
    $
    43,070
    
    
    $
    81,446
    
    
    $
    87,644Cost of sales (exclusive of amortization of
purchased
and core technology shown separately below)
    
    
    19,908
    
    
    
    18,986
    
    
    
    38,977
    
    
    
    38,529Amortization of purchased and core technology
    
    
    1,008
    
    
    
    907
    
    
    
    2,052
    
    
    
    2,043Gross profit
    
    
    19,169
    
    
    
    23,177
    
    
    
    40,417
    
    
    
    47,072Operating expenses:Sales and marketing
    
    
    8,976
    
    
    
    9,034
    
    
    
    18,601
    
    
    
    17,720Research and development
    
    
    6,196
    
    
    
    6,529
    
    
    
    13,170
    
    
    
    13,118General and administrative
    
    
    3,398
    
    
    
    3,941
    
    
    
    7,281
    
    
    
    7,982Total operating expenses
    
    
    18,570
    
    
    
    19,504
    
    
    
    39,052
    
    
    
    38,820Operating income
    
    
    599
    
    
    
    3,673
    
    
    
    1,365
    
    
    
    8,252Other income (expense):Interest income
    
    
    404
    
    
    
    1,020
    
    
    
    984
    
    
    
    2,074Interest expense
    
    
    (50
    )
    
    
    (12
    )
    
    
    (135
    )
    
    
    (26
    )Other income (expense)
    
    
    41
    
    
    
    (19
    )
    
    
    (195
    )
    
    
    Total other income (expense)
    
    
    395
    
    
    
    989
    
    
    
    654
    
    
    
    2,048Income before income taxes
    
    
    994
    
    
    
    4,662
    
    
    
    2,019
    
    
    
    10,300Income tax provision
    
    
    279
    
    
    
    1,565
    
    
    
    288
    
    
    
    3,533Net income
    
    $
    715
    
    
    $
    3,097
    
    
    $
    1,731
    
    
    $
    6,767Net income per common share:Basic
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.07
    
    
    $
    0.26Diluted
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.07
    
    
    $
    0.26Weighted average common shares:Basic
    
    
    24,953
    
    
    
    25,714
    
    
    
    25,169
    
    
    
    25,666Diluted
    
    
    25,195
    
    
    
    26,312
    
    
    
    25,439
    
    
    
    26,479
   3




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##### Table of Contents



DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 March 31,
    
    
    September 30,2009
    
    
    2008(in thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    28,541
    
    
    $
    14,176Marketable securities
    
    
    32,589
    
    
    
    59,337Accounts receivable, net
    
    
    20,762
    
    
    
    24,310Inventories
    
    
    34,212
    
    
    
    30,240Income taxes receivable
    
    
    608
    
    
    
    Other
    
    
    4,750
    
    
    
    5,106Total current assets
    
    
    121,462
    
    
    
    133,169Marketable securities, long-term
    
    
    2,507
    
    
    
    179Property, equipment and improvements, net
    
    
    16,304
    
    
    
    16,255Identifiable intangible assets, net
    
    
    28,293
    
    
    
    34,032Goodwill
    
    
    83,122
    
    
    
    86,578Other
    
    
    1,191
    
    
    
    1,203Total assets
    
    $
    252,879
    
    
    $
    271,416LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Capital lease obligations, current portion
    
    $
    204
    
    
    $
    267Accounts payable
    
    
    8,033
    
    
    
    10,343Income taxes payable
    
    
    
    
    
    
    182Accrued expenses:Compensation
    
    
    3,840
    
    
    
    5,981Warranty
    
    
    1,143
    
    
    
    1,214Deferred payment on acquisition
    
    
    2,913
    
    
    
    Other
    
    
    2,910
    
    
    
    2,946Total current liabilities
    
    
    19,043
    
    
    
    20,933Capital lease obligations, net of current portion
    
    
    2
    
    
    
    78Income taxes payable
    
    
    4,780
    
    
    
    4,358Deferred tax liabilities
    
    
    5,387
    
    
    
    7,582Deferred payment on acquisition
    
    
    2,762
    
    
    
    5,575Other noncurrent liabilities
    
    
    791
    
    
    
    956Total liabilities
    
    
    32,765
    
    
    
    39,482Commitments 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;
28,367,265 and 28,335,876 shares issued
    
    
    283
    
    
    
    283Additional paid-in capital
    
    
    179,394
    
    
    
    177,614Retained earnings
    
    
    80,356
    
    
    
    78,625Accumulated other comprehensive loss
    
    
    (11,513
    )
    
    
    (1,897
    )Treasury stock, at cost, 3,738,034 and 2,960,457 shares
    
    
    (28,406
    )
    
    
    (22,691
    )Total stockholders equity
    
    
    220,114
    
    
    
    231,934Total liabilities and stockholders equity
    
    $
    252,879
    
    
    $
    271,416
   4




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DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Six months ended March 31,2009
    
    
    2008(in thousands)Operating activities:Net income
    
    $
    1,731
    
    
    $
    6,767Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation of property, equipment and improvements
    
    
    1,203
    
    
    
    1,293Amortization of identifiable intangible assets and other assets
    
    
    3,662
    
    
    
    3,499Excess tax benefits from stock-based compensation
    
    
    (42
    )
    
    
    (165
    )Stock-based compensation
    
    
    1,842
    
    
    
    1,776Deferred income tax benefit
    
    
    (1,540
    )
    
    
    (1,920
    )Other
    
    
    40
    
    
    
    32Changes in operating assets and liabilities
    
    
    (7,694
    )
    
    
    (1,949
    )Net cash (used in) provided by operating activities
    
    
    (798
    )
    
    
    9,333Investing activities:Purchase of held-to-maturity marketable securities
    
    
    (7,647
    )
    
    
    (51,691
    )Proceeds from maturities of held-to-maturity marketable securities
    
    
    32,063
    
    
    
    47,181Contingent purchase price payments related to business acquisitions
    
    
    
    
    
    
    (1,315
    )Increase in noncurrent restricted cash
    
    
    
    
    
    
    (392
    )Proceeds from sale-leaseback and sale of other property,
equipment, improvements
    
    
    
    
    
    
    6,494Purchase of property, equipment, improvements and certain
other intangible assets
    
    
    (1,666
    )
    
    
    (1,908
    )Net cash provided by (used in) investing activities
    
    
    22,750
    
    
    
    (1,631
    )Financing activities:Payments on capital lease obligations
    
    
    (139
    )
    
    
    (188
    )Excess tax benefits from stock-based compensation
    
    
    42
    
    
    
    165Proceeds from stock option plan transactions
    
    
    120
    
    
    
    1,636Proceeds from employee stock purchase plan transactions
    
    
    529
    
    
    
    348Purchase of treasury stock
    
    
    (6,150
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (5,598
    )
    
    
    1,961Effect of exchange rate changes on cash and cash equivalents
    
    
    (1,989
    )
    
    
    (903
    )Net increase in cash and cash equivalents
    
    
    14,365
    
    
    
    8,760Cash and cash equivalents, beginning of period
    
    
    14,176
    
    
    
    18,375Cash and cash equivalents, end of period
    
    $
    28,541
    
    
    $
    27,135
   5




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DIGI INTERNATIONAL INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1.
    
    BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
   Changes in Presentation
  Recently Issued Accounting Pronouncements
   6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1.
    
    BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
      7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1.
    
    BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  2.
    
    COMPREHENSIVE INCOME
  Three months ended March 31,
    
    
    Six months ended March 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    715
    
    
    $
    3,097
    
    
    $
    1,731
    
    
    $
    6,767Other comprehensive (loss) income:Change in foreign currency translation (loss) gain
    
    
    (1,713
    )
    
    
    18
    
    
    
    (9,614
    )
    
    
    713Change in unrealized gain (loss) on investments,
net of tax
    
    
    6
    
    
    
    
    
    
    
    (2
    )
    
    
    Comprehensive (loss) income
    
    $
    (992
    )
    
    $
    3,115
    
    
    $
    (7,885
    )
    
    $
    7,480
 3.
    
    NET INCOME PER COMMON SHARE
   8




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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 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Numerator:Net income
    
    $
    715
    
    
    $
    3,097
    
    
    $
    1,731
    
    
    $
    6,767Denominator:Denominator for basic net income per common
share  weighted average shares outstanding
    
    
    24,953
    
    
    
    25,714
    
    
    
    24,169
    
    
    
    25,666Effect of dilutive securities:Employee stock options and employee
stock purchase plan
    
    
    242
    
    
    
    598
    
    
    
    270
    
    
    
    813Denominator for diluted net income per
common
share  adjusted weighted average shares
    
    
    25,195
    
    
    
    26,312
    
    
    
    24,439
    
    
    
    26,479Net income per common share, basic
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.07
    
    
    $
    0.26Net income per common share, diluted
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.07
    
    
    $
    0.26
  4.
    
    ACQUISITIONS
 Sarian Systems, Ltd.
     9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 4.
    
    ACQUISITIONS (CONTINUED)
  Three months ended March 31, 2008
    
    
    Six months ended March 31, 2008Pro forma
    
    
    As Reported
    
    
    Pro forma
    
    
    As ReportedNet sales
    
    $
    45,943
    
    
    $
    43,070
    
    
    $
    94,530
    
    
    $
    87,644Net income
    
    $
    918
    
    
    $
    3,097
    
    
    $
    4,650
    
    
    $
    6,767Net income per common share, basic
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.18
    
    
    $
    0.26Net income per common share, diluted
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.18
    
    
    $
    0.26
  Spectrum Design Solutions, Inc.
  5.
    
    SELECTED BALANCE SHEET DATA
(in thousands)
 March 31, 2009
    
    
    September 30, 2008Accounts receivable, net:Accounts receivable
    
    $
    21,286
    
    
    $
    25,007Less allowance for doubtful accounts
    
    
    524
    
    
    
    697$
    20,762
    
    
    $
    24,310Inventories:Raw materials
    
    $
    26,882
    
    
    $
    20,979Work in process
    
    
    1,437
    
    
    
    981Finished goods
    
    
    5,893
    
    
    
    8,280$
    34,212
    
    
    $
    30,240Other accrued expenses:Accrued professional fees
    
    
    621
    
    
    
    507Deferred gain on building sale  short-term
    
    
    250
    
    
    
    273Unearned revenue
    
    
    61
    
    
    
    353Other accrued expenses
    
    
    1,978
    
    
    
    1,813$
    2,910
    
    
    $
    2,946
   10




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 6.
    
    MARKETABLE SECURITIES
     Amortized
    
    
    Unrealized
    
    
    UnrealizedCost (1)
    
    
    Gains
    
    
    Losses
    
    
    Fair Value (1)Corporate bonds
    
    $
    23,675
    
    
    $
    17
    
    
    $
    (196
    )
    
    $
    23,496Government
municipal bonds
    
    
    3,663
    
    
    
    16
    
    
    
    
    
    
    
    3,679$
    27,338
    
    
    $
    33
    
    
    $
    (196
    )
    
    $
    27,175
 (1)
    
    Included in amortized cost and fair value is purchased and accrued interest of $416,507.  11




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 6.
    
    MARKETABLE SECURITIES (CONTINUED)
  Amortized
    
    
    Unrealized
    
    
    UnrealizedCost (1)
    
    
    Gains
    
    
    Losses
    
    
    Fair Value (1)Corporate bonds (2)
    
    $
    4,285
    
    
    $
    5
    
    
    $
    (1
    )
    
    $
    4,289Government
municipal bonds
    
    
    3,477
    
    
    
    
    
    
    
    (8
    )
    
    
    3,469$
    7,762
    
    
    $
    5
    
    
    $
    (9
    )
    
    $
    7,758
 (1)
    
    Included in amortized cost and fair value is purchased and accrued interest of $101,969.(2)
    
    The Lehman Brothers security is included in amortized cost at a fair value of $179,100,
net of the impairment charge of $1,014,900 recorded in the fourth quarter of fiscal 2008.  Amortized
    
    
    Unrealized
    
    
    UnrealizedCost (1)
    
    
    Gains
    
    
    Losses
    
    
    Fair Value (1)Corporate bonds (2)
    
    $
    55,807
    
    
    $
    12
    
    
    $
    (2,771
    )
    
    $
    53,048Government municipal bonds
    
    
    3,709
    
    
    
    
    
    
    
    (10
    )
    
    
    3,699Total marketable securities
    
    $
    59,516
    
    
    $
    12
    
    
    $
    (2,781
    )
    
    $
    56,747
 (1)
    
    Included in amortized cost and fair value is purchased and accrued interest of $967,258.(2)
    
    The Lehman Brothers security is included in amortized cost at a fair value of $179,100,
net of the impairment charge of $1,014,900 recorded in the fourth quarter of fiscal 2008.  7.
    
    FAIR VALUE MEASUREMENTS
    12




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 7.
    
    FAIR VALUE MEASUREMENTS (CONTINUED)
  
    
    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
  Fair Value Measurements at March 31, 2009 Using:Total carrying
    
    
    Quoted price in
    
    
    Significant other
    
    
    Significantvalue at
    
    
    active markets
    
    
    observable inputs
    
    
    unobservable inputsMarch 31, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash equivalents:Money market
    
    $
    14,585
    
    
    $
    14,585
    
    
    $
    
    
    
    $
    Available-for-sale marketable
securities:Corporate bonds
    
    
    7,758
    
    
    
    7,579
    
    
    
    
    
    
    
    179Total cash equivalents and
marketable
securities measured at fair value
    
    $
    22,343
    
    
    $
    22,164
    
    
    $
    
    
    
    $
    179
  Level 3 Valuation Techniques
   13




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 7.
    
    FAIR VALUE MEASUREMENTS (CONTINUED)
  8.
    
    GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
  March 31, 2009
    
    
    September 30, 2008Gross
    
    
    
    
    
    
    
    
    
    
    Grosscarrying
    
    
    Accum.
    
    
    
    
    
    
    carrying
    
    
    Accum.amount
    
    
    amort.
    
    
    Net
    
    
    amount
    
    
    amort.
    
    
    NetPurchased and core technology
    
    $
    45,035
    
    
    $
    (32,518
    )
    
    $
    12,517
    
    
    $
    46,660
    
    
    $
    (30,745
    )
    
    $
    15,915License agreements
    
    
    2,440
    
    
    
    (2,440
    )
    
    
    
    
    
    
    2,440
    
    
    
    (2,440
    )
    
    
    Patents and trademarks
    
    
    9,132
    
    
    
    (5,166
    )
    
    
    3,966
    
    
    
    8,906
    
    
    
    (4,682
    )
    
    
    4,224Customer maintenance contracts
    
    
    700
    
    
    
    (499
    )
    
    
    201
    
    
    
    700
    
    
    
    (464
    )
    
    
    236Customer relationships
    
    
    17,056
    
    
    
    (6,218
    )
    
    
    10,838
    
    
    
    18,137
    
    
    
    (5,472
    )
    
    
    12,665Non-compete agreements
    
    
    1,014
    
    
    
    (243
    )
    
    
    771
    
    
    
    1,075
    
    
    
    (83
    )
    
    
    992Total
    
    $
    75,377
    
    
    $
    (47,084
    )
    
    $
    28,293
    
    
    $
    77,918
    
    
    $
    (43,886
    )
    
    $
    34,032
   2009 (six months)
    
    $
    3,8502010
    
    
    7,2532011
    
    
    5,3622012
    
    
    3,9522013
    
    
    2,9622014
    
    
    2,648
  Six months ended March 31,2009
    
    
    2008Beginning balance, October 1
    
    $
    86,578
    
    
    $
    66,817Foreign currency translation adjustment
    
    
    (3,456
    )
    
    
    503Ending balance, March 31
    
    $
    83,122
    
    
    $
    67,320
  14




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 9.
    
    INCOME TAXES
    Six months ended March 31,2009
    
    
    2008Effective tax rate before impact of discrete tax benefits
    
    
    34.8
    %
    
    
    34.3
    %Impact of discrete tax benefits
    
    
    -20.5
    %
    
    
    0.0
    %Effective tax rate
    
    
    14.3
    %
    
    
    34.3
    %
  Uncertain tax positions as of December 31, 2008
    
    $
    3,851Increases related to current year income tax positions
    
    
    150Uncertain tax positions as of March 31, 2009
    
    $
    4,001
      15




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 10.
    
    FINANCIAL GUARANTEES
  Three months ended March 31,Balance at
    
    
    Warranties
    
    
    Settlements
    
    
    Balance atFiscal year
    
    January 1
    
    
    issued
    
    
    made
    
    
    March 312009
    
    $
    1,230
    
    
    $
    123
    
    
    $
    (210
    )
    
    $
    1,1432008
    
    $
    1,134
    
    
    $
    193
    
    
    $
    (194
    )
    
    $
    1,133
 Six months ended March 31,Balance at
    
    
    Warranties
    
    
    Settlements
    
    
    Balance atFiscal year
    
    October 1
    
    
    issued
    
    
    made
    
    
    March 312009
    
    $
    1,214
    
    
    $
    344
    
    
    $
    (415
    )
    
    $
    1,1432008
    
    $
    1,155
    
    
    $
    358
    
    
    $
    (380
    )
    
    $
    1,133
  11.
    
    CONTINGENCIES
 Contingent obligations
    16




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 11.
    
    CONTINGENCIES (CONTINUED)
 In
re Initial Public Offering Securities Litigation en banc
    12.
    
    SALE AND LEASEBACK OF BUILDING
   17




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 12.
    
    SALE AND LEASEBACK OF BUILDING (CONTINUED)
  13.
    
    SUBSEQUENT EVENT
   18




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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
      Goodwill
   19




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##### Table of Contents



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




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##### Table of Contents



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,
    
    
    % increase2009
    
    
    2008
    
    
    (decrease)
    
    
    2009
    
    
    2008
    
    
    (decrease)Net sales
    
    $
    40,085
    
    
    
    100.0
    %
    
    $
    43,070
    
    
    
    100.0
    %
    
    
    (6.9
    )%
    
    $
    81,446
    
    
    
    100.0
    %
    
    $
    87,644
    
    
    
    100.0
    %
    
    
    (7.1
    )%Cost of sales (exclusive of amortiza-
tion of purchased and core technology
shown separately below)
    
    
    19,908
    
    
    
    49.7
    
    
    
    18,986
    
    
    
    44.1
    
    
    
    4.9
    
    
    
    38,977
    
    
    
    47.9
    
    
    
    38,529
    
    
    
    44.0
    
    
    
    1.2Amortization of purchased and
core technology
    
    
    1,008
    
    
    
    2.5
    
    
    
    907
    
    
    
    2.1
    
    
    
    11.1
    
    
    
    2,052
    
    
    
    2.5
    
    
    
    2,043
    
    
    
    2.3
    
    
    
    0.4Gross profit
    
    
    19,169
    
    
    
    47.8
    
    
    
    23,177
    
    
    
    53.8
    
    
    
    (17.3
    )
    
    
    40,417
    
    
    
    49.6
    
    
    
    47,072
    
    
    
    53.7
    
    
    
    (14.1
    )Operating expenses:Sales and marketing
    
    
    8,976
    
    
    
    22.4
    
    
    
    9,034
    
    
    
    21.0
    
    
    
    (0.6
    )
    
    
    18,601
    
    
    
    22.8
    
    
    
    17,720
    
    
    
    20.2
    
    
    
    5.0Research and development
    
    
    6,196
    
    
    
    15.4
    
    
    
    6,529
    
    
    
    15.1
    
    
    
    (5.1
    )
    
    
    13,170
    
    
    
    16.2
    
    
    
    13,118
    
    
    
    15.0
    
    
    
    0.4General and administrative
    
    
    3,398
    
    
    
    8.5
    
    
    
    3,941
    
    
    
    9.2
    
    
    
    (13.8
    )
    
    
    7,281
    
    
    
    8.9
    
    
    
    7,982
    
    
    
    9.1
    
    
    
    (8.8
    )Total operating expenses
    
    
    18,570
    
    
    
    46.3
    
    
    
    19,504
    
    
    
    45.3
    
    
    
    (4.8
    )
    
    
    39,052
    
    
    
    47.9
    
    
    
    38,820
    
    
    
    44.3
    
    
    
    0.6Operating income
    
    
    599
    
    
    
    1.5
    
    
    
    3,673
    
    
    
    8.5
    
    
    
    (83.7
    )
    
    
    1,365
    
    
    
    1.7
    
    
    
    8,252
    
    
    
    9.4
    
    
    
    (83.5
    )Interest income and other, net
    
    
    395
    
    
    
    1.0
    
    
    
    989
    
    
    
    2.3
    
    
    
    (60.1
    )
    
    
    654
    
    
    
    0.8
    
    
    
    2,048
    
    
    
    2.3
    
    
    
    (68.1
    )Income before income taxes
    
    
    994
    
    
    
    2.5
    
    
    
    4,662
    
    
    
    10.8
    
    
    
    (78.7
    )
    
    
    2,019
    
    
    
    2.5
    
    
    
    10,300
    
    
    
    11.7
    
    
    
    (80.4
    )Income tax provision
    
    
    279
    
    
    
    0.7
    
    
    
    1,565
    
    
    
    3.6
    
    
    
    (82.2
    )
    
    
    288
    
    
    
    0.4
    
    
    
    3,533
    
    
    
    4.0
    
    
    
    (91.8
    )Net income
    
    $
    715
    
    
    
    1.8
    %
    
    $
    3,097
    
    
    
    7.2
    %
    
    
    (76.9
    )%
    
    $
    1,731
    
    
    
    2.1
    %
    
    $
    6,767
    
    
    
    7.7
    %
    
    
    (74.4
    )%
  21




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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)
    
    2009
    
    
    2008
    
    
    (decrease)
    
    
    2009
    
    
    2008
    
    
    (decrease)Non-embedded
    
    $
    22,715
    
    
    
    56.7
    %
    
    $
    21,358
    
    
    
    49.6
    %
    
    
    6.4
    %
    
    $
    46,055
    
    
    
    56.5
    %
    
    $
    45,215
    
    
    
    51.6
    %
    
    
    1.9
    %Embedded
    
    
    17,370
    
    
    
    43.3
    
    
    
    21,712
    
    
    
    50.4
    
    
    
    (20.0
    )
    
    
    35,391
    
    
    
    43.5
    
    
    
    42,429
    
    
    
    48.4
    
    
    
    (16.6
    )Total net sales
    
    $
    40,085
    
    
    
    100.0
    %
    
    $
    43,070
    
    
    
    100.0
    %
    
    
    (6.9
    )%
    
    $
    81,446
    
    
    
    100.0
    %
    
    $
    87,644
    
    
    
    100.0
    %
    
    
    (7.1
    )%
 Non-embedded
  Embedded
   Three months ended March 31,
    
    
    $ increase
    
    
    % increase
    
    
    Six months ended March 31,
    
    
    $ increase
    
    
    % increase($ in thousands)
    
    2009
    
    
    2008
    
    
    (decrease)
    
    
    (decrease)
    
    
    2009
    
    
    2008
    
    
    (decrease)
    
    
    (decrease)North America (1)
    
    $
    20,724
    
    
    $
    23,959
    
    
    $
    (3,235
    )
    
    
    (13.5
    )%
    
    $
    43,869
    
    
    $
    52,083
    
    
    $
    (8,214
    )
    
    
    (15.8
    )%EMEA (2)
    
    
    14,934
    
    
    
    12,785
    
    
    
    2,149
    
    
    
    16.8
    
    
    
    28,262
    
    
    
    23,929
    
    
    
    4,333
    
    
    
    18.1Asia Pacific
    
    
    3,776
    
    
    
    4,621
    
    
    
    (845
    )
    
    
    (18.3
    )
    
    
    7,610
    
    
    
    9,150
    
    
    
    (1,540
    )
    
    
    (16.8
    )Latin America
(including Mexico)
    
    
    651
    
    
    
    1,705
    
    
    
    (1,054
    )
    
    
    (61.8
    )
    
    
    1,705
    
    
    
    2,482
    
    
    
    (777
    )
    
    
    (31.3
    )Total net sales
    
    $
    40,085
    
    
    $
    43,070
    
    
    $
    (2,985
    )
    
    
    (6.9
    )%
    
    $
    81,446
    
    
    $
    87,644
    
    
    $
    (6,198
    )
    
    
    (7.1
    )%
 (1)
    
    Includes Spectrum net sales of $1,143,047 and $2,191,457 for the three and six months ended
March 31, 2009, respectively.(2)
    
    Includes Sarian net sales of $4,996,951 and $8,107,598 for the three and six months ended
March 31, 2009, respectively.  22




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##### Table of Contents



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)
    
    2009
    
    
    2008
    
    
    (decrease)
    
    
    2009
    
    
    2008
    
    
    (decrease)Sales and marketing
    
    $
    8,976
    
    
    
    22.4
    %
    
    $
    9,034
    
    
    
    21.0
    %
    
    $
    (58
    )
    
    $
    18,601
    
    
    
    22.8
    %
    
    $
    17,720
    
    
    
    20.2
    %
    
    $
    881Research and development
    
    
    6,196
    
    
    
    15.4
    
    
    
    6,529
    
    
    
    15.1
    
    
    
    (333
    )
    
    
    13,170
    
    
    
    16.2
    
    
    
    13,118
    
    
    
    15.0
    
    
    
    52General and
administrative
    
    
    3,398
    
    
    
    8.5
    
    
    
    3,941
    
    
    
    9.2
    
    
    
    (543
    )
    
    
    7,281
    
    
    
    8.9
    
    
    
    7,982
    
    
    
    9.1
    
    
    
    (701
    )Total operating expenses
    
    $
    18,570
    
    
    
    46.3
    %
    
    $
    19,504
    
    
    
    45.3
    %
    
    $
    (934
    )
    
    $
    39,052
    
    
    
    47.9
    %
    
    $
    38,820
    
    
    
    44.3
    %
    
    $
    232
   23




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ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
         24




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ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
   Consolidated Statement of Cash Flow Highlights (in thousands)
 Six months ended March 31,2009
    
    
    2008
    
    
    ChangeOperating activities
    
    $
    (798
    )
    
    $
    9,333
    
    
    $
    (10,131
    )Investing activities
    
    
    22,750
    
    
    
    (1,631
    )
    
    
    24,381Financing activities
    
    
    (5,598
    )
    
    
    1,961
    
    
    
    (7,559
    )Effect of exchange rate changes on cash
and cash equivalents
    
    
    (1,989
    )
    
    
    (903
    )
    
    
    (1,086
    )Net increase in cash and cash equivalents
    
    $
    14,365
    
    
    $
    8,760
    
    
    $
    5,605
 Reconciliation of Net Income to Cash Inflows (Outflows) from Operating Activities (in thousands)
 Six months ended March 31,2009
    
    
    2008
    
    
    ChangeNet income
    
    $
    1,731
    
    
    $
    6,767
    
    
    $
    (5,036
    )Deferred income tax benefit
    
    
    (1,540
    )
    
    
    (1,920
    )
    
    
    380Depreciation and amortization
    
    
    4,865
    
    
    
    4,792
    
    
    
    73Stock-based compensation
    
    
    1,842
    
    
    
    1,776
    
    
    
    66Excess tax benefits from
stock-based compensation
    
    
    (42
    )
    
    
    (165
    )
    
    
    123Other reconciling items
    
    
    40
    
    
    
    32
    
    
    
    8Changes in working capital
    
    
    (7,694
    )
    
    
    (1,949
    )
    
    
    (5,745
    )Cash flows (used in) provided by
operating activities
    
    $
    (798
    )
    
    $
    9,333
    
    
    $
    (10,131
    )
    25




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ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
          26




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ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
      27




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
           28




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ITEM 4. CONTROLS AND PROCEDURES
    
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Total
    
    
    Average
    
    
    Total Number of
    
    
    Maximum NumberNumber
    
    
    Price
    
    
    Shares Purchased
    
    
    of Shares that Mayof Shares
    
    
    Paid
    
    
    as Part of a Publicly
    
    
    Yet Be PurchasedFiscal Period
    
    Purchased
    
    
    per Share
    
    
    Announced Program
    
    
    Under the ProgramJanuary 1,
2009  January 31, 2009
    
    
    370,197
    
    
    $
    7.64
    
    
    
    370,197
    
    
    
    658,603February 1,
2009  February 28, 2009
    
    
    214,293
    
    
    $
    7.50
    
    
    
    214,293
    
    
    
    444,310March 1,
2009  March 31, 2009 (1)
    
    
    271,666
    
    
    $
    6.91
    
    
    
    271,666
    
    
    
    172,644Total
    
    
    856,156
    
    
    $
    7.38
    
    
    
    856,156
    
    
    
    172,644
 (1)
    
    Includes 21,966 shares purchased for $165,042 that were not settled by March 31, 2009. Share
repurchases are included within the Condensed Consolidated Statements of Cash Flows based on
settlement date.  29




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##### Table of Contents



PART II. OTHER INFORMATION (CONTINUED)
 
 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 AuthorityKenneth E. Millard
    
    
    10,121,566
    
    
    
    11,385,087William N. Priesmeyer
    
    
    10,032,941
    
    
    
    11,473,712
 b)
    
    Proposal to ratify the appointment of PricewaterhouseCoopers LLP as our
independent registered public accounting firm for the fiscal year ending September 30,
2009. The proposal passed on a vote of 21,312,237 in favor, 190,928 against, 3,488
abstentions and no broker non-votes.
  
 
 ITEM 5. OTHER INFORMATION
   30




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PART II. OTHER INFORMATION
 
 ITEM 6. EXHIBITS
 Exhibit No.
    
    Description2
    (a)
    
    Share Purchase Agreement dated April 28, 2008 among Digi International Limited, a
subsidiary of Digi International Inc., and all of the shareholders of Sarian Systems
Limited (excluding schedules and exhibits which the Registrant agrees to furnish
supplementally to the Securities and Exchange Commission upon request) (1)3
    (a)
    
    Restated Certificate of Incorporation of the Company, as amended (2)3
    (b)
    
    Amended and Restated By-Laws of the Company (3)4
    (a)
    
    Share Rights Agreement, dated as of April 22, 2008, between the Company and Wells
Fargo Bank, N.A., as Rights Agent (4)4
    (b)
    
    Form of Amended and Restated Certificate of Powers, Designations, Preferences
and Rights of Series A Junior Participating Preferred Shares (5)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 2(a) to the Companys Form 10-Q for the quarter ended
March 31, 2008 (File No. 1-34033).(2)
    
    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)(3)
    
    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)(4)
    
    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)(5)
    
    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)  31




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##### Table of Contents



DIGI INTERNATIONAL INC.Date: May 7, 2009
    
    By:
    
    /s/ Subramanian Krishnan

Subramanian KrishnanSenior Vice President, Chief Financial Officerand Treasurer (Principal Financial andAccounting Officer)
  32




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##### Table of Contents



Exhibit Number
    
    Document Description
    
    Form of Filing2
    (a)
    
    Share Purchase Agreement dated
April 28, 2008 among Digi International
Limited, a subsidiary of Digi International
Inc., and all of the shareholders of Sarian
Systems Limited (excluding schedules and
exhibits which the Registrant agrees to furnish
supplementally to the Securities and Exchange
Commission upon request)
    
    Incorporated by Reference3
    (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 Chief Financial Officer
    
    Filed Electronically32
    
    
    Section 1350 Certification
    
    Filed Electronically
  33