##### 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: December 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
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



PagePART I. FINANCIAL INFORMATIONITEM 1. Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Statements of Operations for the three

months ended December 31, 2010 and 2009
    
    
    3Condensed Consolidated Balance Sheets as of 

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

the three months ended December 31, 2010 and 2009
    
    
    5Notes to Condensed Consolidated Financial
Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    15Forward-looking Statements
    
    
    15ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21ITEM 4. Controls and Procedures
    
    
    22PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    23ITEM 1A. Risk Factors
    
    
    23ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23ITEM 3. Defaults Upon Senior Securities
    
    
    23ITEM 4. Reserved
    
    
    23ITEM 5. Other Information
    
    
    23ITEM 6. Exhibits
    
    
    23Exhibit 10Exhibit 31(a)Exhibit 31(b)Exhibit 32
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PART I. FINANCIAL INFORMATION
 
 ITEM 1.
    
    FINANCIAL STATEMENTS
 DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three months ended December 31,2010
    
    
    2009(in thousands, except per common share data)Net sales
    
    $
    48,334
    
    
    $
    42,968Cost of sales (exclusive of amortization of purchased and core
technology shown separately below)
    
    
    22,820
    
    
    
    20,163Amortization of purchased and core technology
    
    
    848
    
    
    
    1,092Gross profit
    
    
    24,666
    
    
    
    21,713Operating expenses:Sales and marketing
    
    
    9,798
    
    
    
    9,240Research and development
    
    
    7,808
    
    
    
    6,486General and administrative
    
    
    4,395
    
    
    
    4,158Total operating expenses
    
    
    22,001
    
    
    
    19,884Operating income
    
    
    2,665
    
    
    
    1,829Total other income, net
    
    
    19
    
    
    
    3Income before income taxes
    
    
    2,684
    
    
    
    1,832Income tax provision
    
    
    368
    
    
    
    633Net income
    
    $
    2,316
    
    
    $
    1,199Net income per common share:Basic
    
    $
    0.09
    
    
    $
    0.05Diluted
    
    $
    0.09
    
    
    $
    0.05Weighted average common shares, basic
    
    
    25,110
    
    
    
    24,701Weighted average common shares, diluted
    
    
    25,445
    
    
    
    24,979
   3




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DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 December 31,
    
    
    September 30,2010
    
    
    2010(in thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    64,206
    
    
    $
    50,943Marketable securities
    
    
    27,392
    
    
    
    36,634Accounts receivable, net
    
    
    23,177
    
    
    
    24,090Inventories
    
    
    27,124
    
    
    
    26,550Deferred tax assets
    
    
    3,346
    
    
    
    3,344Other
    
    
    2,568
    
    
    
    2,141Total current assets
    
    
    147,813
    
    
    
    143,702Property, equipment and improvements, net
    
    
    16,219
    
    
    
    16,396Identifiable intangible assets, net
    
    
    18,187
    
    
    
    19,851Goodwill
    
    
    85,752
    
    
    
    86,210Deferred tax assets
    
    
    2,718
    
    
    
    320Other
    
    
    478
    
    
    
    486Total assets
    
    $
    271,167
    
    
    $
    266,965LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    9,759
    
    
    $
    7,449Accrued compensation
    
    
    4,866
    
    
    
    5,850Deferred payment on acquisition
    
    
    2,940
    
    
    
    2,914Other
    
    
    5,145
    
    
    
    5,384Total current liabilities
    
    
    22,710
    
    
    
    21,597Income taxes payable
    
    
    2,312
    
    
    
    2,838Deferred tax liabilities
    
    
    1,196
    
    
    
    1,457Other noncurrent liabilities
    
    
    437
    
    
    
    517Total liabilities
    
    
    26,655
    
    
    
    26,409Commitments 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;
28,729,698 and 28,666,311 shares issued
    
    
    288
    
    
    
    287Additional paid-in capital
    
    
    188,824
    
    
    
    185,427Retained earnings
    
    
    93,965
    
    
    
    91,649Accumulated other comprehensive loss
    
    
    (11,601
    )
    
    
    (9,589
    )Treasury stock, at cost, 3,550,677 and 3,584,215 shares
    
    
    (26,964
    )
    
    
    (27,218
    )Total stockholders equity
    
    
    244,512
    
    
    
    240,556Total liabilities and stockholders equity
    
    $
    271,167
    
    
    $
    266,965
   4




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DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Three months ended December 31,2010
    
    
    2009(in thousands)Operating activities:Net income
    
    $
    2,316
    
    
    $
    1,199Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation of property, equipment and improvements
    
    
    713
    
    
    
    665Amortization of identifiable intangible assets
    
    
    1,697
    
    
    
    1,944Stock-based compensation
    
    
    871
    
    
    
    998Excess tax benefits from stock-based compensation
    
    
    (59
    )
    
    
    Deferred income tax benefit
    
    
    (584
    )
    
    
    (249
    )Other
    
    
    401
    
    
    
    (197
    )Changes in operating assets and liabilities
    
    
    (607
    )
    
    
    (445
    )Net cash provided by operating activities
    
    
    4,748
    
    
    
    3,915Investing activities:Purchase of marketable securities
    
    
    (2,174
    )
    
    
    (8,161
    )Proceeds from maturities of marketable securities
    
    
    11,409
    
    
    
    519Purchase of
property, equipment, improvements and certain other intangible assets, net of proceeds from sale
    
    
    (721
    )
    
    
    (904
    )Net cash provided by (used in) investing activities
    
    
    8,514
    
    
    
    (8,546
    )Financing activities:Payments on capital lease obligations
    
    
    
    
    
    
    (6
    )Excess tax benefits from stock-based compensation
    
    
    59
    
    
    
    Proceeds from stock option plan transactions
    
    
    443
    
    
    
    Proceeds from employee stock purchase plan transactions
    
    
    269
    
    
    
    Net cash provided by (used in) financing activities
    
    
    771
    
    
    
    (6
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (770
    )
    
    
    (344
    )Net increase (decrease) in cash and cash equivalents
    
    
    13,263
    
    
    
    (4,981
    )Cash and cash equivalents, beginning of period
    
    
    50,943
    
    
    
    48,434Cash and cash equivalents, end of period
    
    $
    64,206
    
    
    $
    43,453
   5




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DIGI INTERNATIONAL INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (UNAUDITED)
 1.
    
    BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
   Recently Issued Accounting Pronouncements
  2.
    
    COMPREHENSIVE INCOME
  Three months ended December 31,2010
    
    
    2009Net income
    
    $
    2,316
    
    
    $
    1,199Other comprehensive income:Change in foreign currency translation adjustment
    
    
    (2,008
    )
    
    
    (710
    )Change in unrealized (loss) gain on investments, net of income
tax benefit (provision) of $3 and ($23), respectively
    
    
    (4
    )
    
    
    36Comprehensive income
    
    $
    304
    
    
    $
    525
 3.
    
    NET INCOME PER COMMON SHARE
   6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 3.
    
    NET INCOME PER COMMON SHARE (CONTINUED)
  Three months ended December 31,2010
    
    
    2009Numerator:Net income
    
    $
    2,316
    
    
    $
    1,199Denominator:Denominator for basic net income per common
share  weighted average shares outstanding
    
    
    25,110
    
    
    
    24,701Effect of dilutive securities:Employee stock options and employee stock purchase plan
    
    
    335
    
    
    
    278Denominator for diluted net income per common
share  adjusted weighted average shares
    
    
    25,445
    
    
    
    24,979Net income per common share, basic
    
    $
    0.09
    
    
    $
    0.05Net income per common share, diluted
    
    $
    0.09
    
    
    $
    0.05
  4.
    
    SELECTED BALANCE SHEET DATA
 (in thousands)
    
    December 31, 2010
    
    
    September 30, 2010Accounts receivable, net:Accounts receivable
    
    $
    23,682
    
    
    $
    24,639Less allowance for doubtful accounts
    
    
    (505
    )
    
    
    (549
    )$
    23,177
    
    
    $
    24,090Inventories:Raw materials
    
    $
    21,829
    
    
    $
    21,678Work in process
    
    
    288
    
    
    
    418Finished goods
    
    
    5,007
    
    
    
    4,454$
    27,124
    
    
    $
    26,550Other accrued expenses:Accrued professional fees
    
    $
    742
    
    
    $
    838Accrued warranty
    
    
    840
    
    
    
    877Income taxes payable
    
    
    465
    
    
    
    564Deferred gain on building sale  short-term
    
    
    277
    
    
    
    289Other accrued expenses
    
    
    2,821
    
    
    
    2,816$
    5,145
    
    
    $
    5,384
   7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 5.
    
    MARKETABLE SECURITIES
      Amortized
    
    
    Unrealized
    
    
    UnrealizedCost (1)
    
    
    Gains
    
    
    Losses (2)
    
    
    Fair Value (1)Current marketable securities:Corporate bonds
    
    $
    16,967
    
    
    $
    7
    
    
    $
    (6
    )
    
    $
    16,968Certificates of deposit
    
    
    5,003
    
    
    
    
    
    
    
    
    
    
    
    5,003Government municipal bonds
    
    
    5,423
    
    
    
    
    
    
    
    (2
    )
    
    
    5,421Current marketable securities
    
    $
    27,393
    
    
    $
    7
    
    
    $
    (8
    )
    
    $
    27,392
 (1)
    
    Included in amortized cost and fair value is purchased and accrued interest of $363.(2)
    
    The aggregate related fair value of securities with unrealized losses as of December 31, 2010
was $19,136.  Amortized
    
    
    Unrealized
    
    
    UnrealizedCost (1)
    
    
    Gains
    
    
    Losses (2)
    
    
    Fair Value (1)Current marketable securities:Corporate bonds
    
    $
    26,163
    
    
    $
    7
    
    
    $
    (9
    )
    
    $
    26,161Certificates of deposit
    
    
    5,001
    
    
    
    6
    
    
    
    
    
    
    
    5,007Government municipal bonds
    
    
    5,463
    
    
    
    5
    
    
    
    (2
    )
    
    
    5,466Current marketable securities
    
    $
    36,627
    
    
    $
    18
    
    
    $
    (11
    )
    
    $
    36,634
 (1)
    
    Included in amortized cost and fair value is purchased and accrued interest of $451.(2)
    
    The aggregate related fair value of securities with unrealized losses as of September 30, 2010
was $18,909.  8




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 6.
    
    FAIR VALUE MEASUREMENTS
   
    
    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 and their fair values are
determined using pricing models, discounted cash flow methodologies or similar
techniques and at least one significant model assumption or input is unobservable.
Level 3 may also include certain investment securities for which there is limited market
activity or a decrease in the observability of market pricing for the investments, such
that the determination of fair value requires significant judgment or estimation.
   Fair Value Measurements at December 31, 2010 using:Total carrying
    
    
    Quoted price in
    
    
    Significant other
    
    
    Significantvalue at
    
    
    active markets
    
    
    observable inputs
    
    
    unobservable inputsDecember 31, 2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash equivalents:Money market
    
    $
    37,203
    
    
    $
    37,203
    
    
    $
    
    
    
    $
    Available-for-sale marketable securities:Corporate bonds
    
    
    16,968
    
    
    
    
    
    
    
    16,968
    
    
    
    Certificates of deposit
    
    
    5,003
    
    
    
    
    
    
    
    5,003
    
    
    
    Government municipal bonds
    
    
    5,421
    
    
    
    
    
    
    
    5,421
    
    
    
    Total cash equivalents and marketable
securities measured at fair value
    
    $
    64,595
    
    
    $
    37,203
    
    
    $
    27,392
    
    
    $
    
  9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 6.
    
    FAIR VALUE MEASUREMENTS (CONTINUED)
 Fair Value Measurements at September 30, 2010 using:Total carrying
    
    
    Quoted price in
    
    
    Significant other
    
    
    Significantvalue at
    
    
    active markets
    
    
    observable inputs
    
    
    unobservable inputsSeptember 30, 2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash equivalents:Money market
    
    $
    29,416
    
    
    $
    29,416
    
    
    $
    
    
    
    $
    Available-for-sale marketable securities:Corporate bonds
    
    
    26,161
    
    
    
    
    
    
    
    26,161
    
    
    
    Certificates of deposit
    
    
    5,007
    
    
    
    
    
    
    
    5,007
    
    
    
    Government municipal bonds
    
    
    5,466
    
    
    
    
    
    
    
    5,466
    
    
    
    Total cash equivalents and marketable
securities measured at fair value
    
    $
    66,050
    
    
    $
    29,416
    
    
    $
    36,634
    
    
    $
    
    7.
    
    GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
  December 31, 2010
    
    
    September 30, 2010Gross
    
    
    
    
    
    
    
    
    
    
    Grosscarrying
    
    
    Accum.
    
    
    
    
    
    
    carrying
    
    
    Accum.amount
    
    
    amort.
    
    
    Net
    
    
    amount
    
    
    amort.
    
    
    NetPurchased and core technology
    
    $
    46,301
    
    
    $
    (39,631
    )
    
    $
    6,670
    
    
    $
    46,484
    
    
    $
    (38,917
    )
    
    $
    7,567License agreements
    
    
    2,840
    
    
    
    (2,555
    )
    
    
    285
    
    
    
    2,840
    
    
    
    (2,537
    )
    
    
    303Patents and trademarks
    
    
    9,892
    
    
    
    (6,799
    )
    
    
    3,093
    
    
    
    9,753
    
    
    
    (6,522
    )
    
    
    3,231Customer maintenance contracts
    
    
    700
    
    
    
    (621
    )
    
    
    79
    
    
    
    700
    
    
    
    (604
    )
    
    
    96Customer relationships
    
    
    17,338
    
    
    
    (9,460
    )
    
    
    7,878
    
    
    
    17,481
    
    
    
    (9,096
    )
    
    
    8,385Non-compete agreements
    
    
    1,033
    
    
    
    (851
    )
    
    
    182
    
    
    
    1,039
    
    
    
    (770
    )
    
    
    269Total
    
    $
    78,104
    
    
    $
    (59,917
    )
    
    $
    18,187
    
    
    $
    78,297
    
    
    $
    (58,446
    )
    
    $
    19,851
   10




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 7.
    
    GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS (CONTINUED)
  2011 (nine months)
    
    $
    4,4482012
    
    
    4,2142013
    
    
    3,2032014
    
    
    2,8832015
    
    
    1,8552016
    
    
    657
  Three months ended December 31,2010
    
    
    2009Beginning balance, October 1
    
    $
    86,210
    
    
    $
    86,558Foreign currency translation adjustment
    
    
    (458
    )
    
    
    (58
    )Ending balance, December 31
    
    $
    85,752
    
    
    $
    86,500
 8.
    
    INCOME TAXES
    Unrecognized tax benefits as of September 30, 2010
    
    $
    2,265Increases related to:Prior year income tax positions
    
    
    30Decreases related to:Expiration of the statute of limitations
    
    
    (466
    )Unrecognized tax benefits as of December 31, 2010
    
    $
    1,829
    11




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 8.
    
    INCOME TAXES (CONTINUED)
   9.
    
    FINANCIAL GUARANTEES
  Three months ended December 31,Balance at
    
    
    Warranties
    
    
    Settlements
    
    
    Balance atOctober 1
    
    
    expensed
    
    
    made
    
    
    December 312010
    
    $
    877
    
    
    $
    118
    
    
    $
    (155
    )
    
    $
    8402009
    
    $
    970
    
    
    $
    196
    
    
    $
    (214
    )
    
    $
    952
   12




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 10.
    
    CONTINGENCIES
 Contingent obligations
 Initial Public Offering Securities Litigation
    Patent Infringement Lawsuit
   11.
    
    RESTRUCTURING
   13




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 11.
    
    RESTRUCTURING (CONTINUED)
  EmployeeTerminationCosts
    
    
    Other
    
    
    TotalBalance September 30, 2010
    
    $
    13
    
    
    $
    60
    
    
    $
    73Payments
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Reversals
    
    
    
    
    
    
    (50
    )
    
    
    (50
    )Balance December 31, 2010
    
    $
    10
    
    
    $
    10
    
    
    $
    20
  12.
    
    SUBSEQUENT EVENT
   14




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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
       15




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
 OVERVIEW
      16




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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 December 31,
    
    
    % increase2010
    
    
    2009
    
    
    (decrease)Net sales
    
    $
    48,334
    
    
    
    100.0
    %
    
    $
    42,968
    
    
    
    100.0
    %
    
    
    12.5
    %Cost of sales (exclusive of amortization of purchased
and core technology shown separately below)
    
    
    22,820
    
    
    
    47.2
    
    
    
    20,163
    
    
    
    46.9
    
    
    
    13.2Amortization of purchased and core technology
    
    
    848
    
    
    
    1.8
    
    
    
    1,092
    
    
    
    2.6
    
    
    
    (22.3
    )Gross profit
    
    
    24,666
    
    
    
    51.0
    
    
    
    21,713
    
    
    
    50.5
    
    
    
    13.6Operating expenses:Sales and marketing
    
    
    9,798
    
    
    
    20.3
    
    
    
    9,240
    
    
    
    21.5
    
    
    
    6.0Research and development
    
    
    7,808
    
    
    
    16.1
    
    
    
    6,486
    
    
    
    15.1
    
    
    
    20.4General and administrative
    
    
    4,395
    
    
    
    9.1
    
    
    
    4,158
    
    
    
    9.6
    
    
    
    5.7Total operating expenses
    
    
    22,001
    
    
    
    45.5
    
    
    
    19,884
    
    
    
    46.2
    
    
    
    10.6Operating income
    
    
    2,665
    
    
    
    5.5
    
    
    
    1,829
    
    
    
    4.3
    
    
    
    45.7Other income, net
    
    
    19
    
    
    
    0.1
    
    
    
    3
    
    
    
    0.0
    
    
    
    N/MIncome before income taxes
    
    
    2,684
    
    
    
    5.6
    
    
    
    1,832
    
    
    
    4.3
    
    
    
    46.5Income tax provision
    
    
    368
    
    
    
    0.8
    
    
    
    633
    
    
    
    1.5
    
    
    
    (41.9
    )Net income
    
    $
    2,316
    
    
    
    4.8
    %
    
    $
    1,199
    
    
    
    2.8
    %
    
    
    93.2
    %
     Three months ended December 31,($ in thousands)
    
    2010
    
    
    2009
    
    
    $ increase
    
    
    % increaseNon-embedded
    
    $
    27,224
    
    
    
    56.3
    %
    
    $
    24,897
    
    
    
    57.9
    %
    
    $
    2,327
    
    
    
    9.3
    %Embedded
    
    
    21,110
    
    
    
    43.7
    
    
    
    18,071
    
    
    
    42.1
    
    
    
    3,039
    
    
    
    16.8Total net sales
    
    $
    48,334
    
    
    
    100.0
    %
    
    $
    42,968
    
    
    
    100.0
    %
    
    $
    5,366
    
    
    
    12.5
    %
 Non-embedded
   17




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
  Embedded
   Three months ended December 31,($ in thousands)
    
    2010
    
    
    2009
    
    
    $ increase
    
    
    % increaseNorth America
    
    $
    27,751
    
    
    $
    25,525
    
    
    $
    2,226
    
    
    
    8.7
    %EMEA
    
    
    12,673
    
    
    
    11,021
    
    
    
    1,652
    
    
    
    15.0Asia countries
    
    
    6,142
    
    
    
    5,335
    
    
    
    807
    
    
    
    15.1Latin America
    
    
    1,768
    
    
    
    1,087
    
    
    
    681
    
    
    
    62.6Total net sales
    
    $
    48,334
    
    
    $
    42,968
    
    
    $
    5,366
    
    
    
    12.5
    %
       Three months ended December 31,($ in thousands)
    
    2010
    
    
    2009
    
    
    $ increase
    
    
    % increaseOperating expenses:Sales and marketing
    
    $
    9,798
    
    
    
    20.3
    %
    
    $
    9,240
    
    
    
    21.5
    %
    
    $
    558
    
    
    
    6.0
    %Research and development
    
    
    7,808
    
    
    
    16.1
    
    
    
    6,486
    
    
    
    15.1
    
    
    
    1,322
    
    
    
    20.4General and administrative
    
    
    4,395
    
    
    
    9.1
    
    
    
    4,158
    
    
    
    9.6
    
    
    
    237
    
    
    
    5.7Total operating expenses
    
    $
    22,001
    
    
    
    45.5
    %
    
    $
    19,884
    
    
    
    46.2
    %
    
    $
    2,117
    
    
    
    10.6
    %
   18




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
       Three months ended December 31,
    
    
    increase
    
    
    % increase2010
    
    
    2009
    
    
    (decrease)
    
    
    (decrease)Euro
    
    
    1.3600
    
    
    
    1.4780
    
    
    
    (0.1180
    )
    
    
    (8.0
    )%British Pound
    
    
    1.5815
    
    
    
    1.6337
    
    
    
    (0.0522
    )
    
    
    (3.2
    )Yen
    
    
    0.0121
    
    
    
    0.0112
    
    
    
    0.0010
    
    
    
    8.6Rupee
    
    
    0.0222
    
    
    
    0.0214
    
    
    
    0.0008
    
    
    
    3.7
      21




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
      22




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. RESERVED
 
 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)10
    
    
    Offer Letter Agreement, dated as of October 28, 2010, between the Company and
Steven E. Snyder*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
 
 *
    
    Management contract or compensatory plan or arrangement required to be filed as an exhibit to
this Form 10-Q.  23




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##### Table of Contents



ITEM
6. EXHIBITS (CONTINUED)
 (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 to the Companys Current Report on Form 8-K filed
January 21, 2011 (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)  24




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##### Table of Contents



DIGI INTERNATIONAL INC.Date:  February 9, 2011
    By:
    /s/ Steven E. SnyderSteven E. SnyderSenior Vice President, Chief Financial Officer
and Treasurer (Principal Financial and 
Accounting Officer)  25




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##### Table of Contents



Exhibit Number
    
    Document Description
    
    Form of Filing3
    (a)
    
    Restated Certificate of Incorporation of
the Company, as Amended (incorporated by
reference to the corresponding exhibit
number to the Companys Form 10-K for the
year ended September 30, 1993 (File No.
0-17972))
    
    Incorporated by
Reference3
    (b)
    
    Amended and Restated By-Laws of the Company
    
    Incorporated by 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
Reference10
    
    
    Offer Letter Agreement, dated as of
October 28, 2010, between the Company and
Steven E. Snyder
    
    Filed Electronically31
    (a)
    
    Rule 13a-14(a)/15d-14(a) Certification of
Chief Executive Officer
    
    Filed Electronically31
    (b)
    
    Rule 13a-14(a)/15d-14(a) Certification of
Chief Financial Officer
    
    Filed Electronically32
    
    
    Section 1350 Certification
    
    Filed Electronically
  26